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4 Critical Reasons Startups and Smaller Organizations Need Internal Control

Post author By FFC
Post date November 15, 2016

4 Critical Reasons Startups and Smaller Organizations Need Internal Control

I often hear from practitioners that many of their small business and startup clients lack an adequate and effective system of internal control. In fact, the Association of Certified Fraud Examiners’ recent Report of the Nations on Occupational Fraud and Abuse found that small organizations implemented anti-fraud controls much more sparingly than larger organizations. Additionally, the report found that the median loss incurred by small and large organizations due to fraud was the same, but that the impact on smaller organizations was much greater due to their smaller size. Since small companies such as startups are often hit hardest by fraud, it is critical that they develop adequate anti-fraud controls at their organizations. Outlined below are a few of the many significant benefits of a strong internal control system.

Internal control can help prevent fraud. Of all the advantages, implementing anti-fraud measures is among the most important steps for startups and other small organizations. The typical organization is estimated to lose 5% of revenues annually to fraud, according to the Association of Certified Fraud Examiners’ Report of the Nations on Occupational Fraud and Abuse. The median loss for frauds covered in the study was $150,000. At the same time, undetected issues in processes can mean product losses or lead to product errors. Proper internal controls can prevent fraud from happening or raise red flags when it does. They can also help spot unintended errors that may have costly consequences down the line or simply reduce efficiency.

Internal control can protect your reputation. Organizations with strong reputations that are known for quality operations and products or services benefit in many ways, including enhanced customer and employee loyalty and higher brand equity, to name just a few. Conversely, those that experience embarrassing internal thefts, recalls or legal or regulatory compliance issues can suffer from sales and market declines and other consequences. Preventive controls head off these and similar problems before they occur, while controls designed to detect issues can spotlight where problems are happening.

Internal control is good for profits. Suitable internal control helps ensure that processes are performed correctly, and if they’re done right the first time, there’s no need to repeat them or address the problems caused when they failed initially. Greater efficiency and productivity inevitably lead to higher profits, as does the chance to spot and address quality issues throughout a company’s processes.

Internal control helps business owners and managers understand where they stand. Internal control is a process that management uses to design and operate controls to provide reasonable assurance that their identified objectives will be met. When those objectives are met, the organizations have greater assurance that they can rely on their financial reporting for a fair picture of how their business is performing. Without that internal control process supporting their financial reporting, they will also be less likely to spot threats and weaknesses within their organizations, identify and harness opportunities and feel confident they have the information they need for successful strategic planning.

Internal control is at the center of the work of Committee of Sponsoring Organizations (COSO), an organization that, among other things, develops frameworks and guidance on enterprise risk management, internal control and fraud deterrence. You can find the COSO Internal Control—Integrated Framework and numerous other tools in the guidance section of COSO’s website. You may be interested in the COSO’s Fraud Risk Management Guide, that recommends ways governing boards, senior management, staff at all levels and internal auditors can deter fraud in their organizations. You can also review a free executive summary.

The AICPA Enhancing Audit Quality initiative also offers a variety of tools that can help improve audit performance, which includes a consideration of an organization’s internal control. In addition, the AICPA COSO Internal Control certificate program, consisting of self-paced learning and live interactive training, can help organizations and individuals reinforce their knowledge in this important area.

Chuck Landes, Vice President- Professional Standards and Services, American Institute of CPAs.

Employees at startup image courtesy of Shutterstock

6 Ways to Ease Audit Workload Compression during Busy Season

Post author By FFC
Post date November 14, 2016

6 Ways to Ease Audit Workload Compression during Busy Season

With the start of busy season just around the corner, planning is on most practitioners’ minds. I have recently spoken with many professionals about ways they jumpstart their upcoming audits. Outlined below are some activities to begin now that will make your busy season a little less hectic.

Ask your clients to fill out background information forms. If there have been changes to their management, ownership structure or board of directors, ask clients to document them before busy season begins. Also, if your client has entered a new market, they should note these changes as well. You can provide your clients with the prior year documentation and transfer information to the new form as soon as it is available.

Start your walkthroughs early. Ask your clients to update their memos on processes before busy season begins. Then set up or modify walkthroughs based on this new information. Schedule these as soon as possible since they can be performed with data from any time of the year under audit and don’t rely on final year-end information.

Complete audit confirmations now. Compile your clients’ bank account information including addresses, account numbers and the names of contacts at various banks ahead of time. If your firm uses the traditional paper confirmation process, input this information into the templates once they are ready. If your firm uses an online audit confirmation system, upload the bank information onto the platform at this stage. Also review prior year returned confirmations to see if there were any issues noted with the specific bank so any conflicts can be avoided in the current year.

Take a look at your client’s most recent financial statements. Review their balance sheet and income statement to see if you notice anything that may require additional audit procedures. Keep high risk areas such as revenue and accounts receivable in mind. Be aware of increased deposits or liabilities which may indicate that significant agreements or contracts were entered into during the year.

Obtain the agreements your client entered into during the year. If the agreements are significant, summarize them for your permanent file. Additionally, if your client entered into a complicated rental, management, franchise agreement or other agreements that are monetarily significant, set up work papers with expectation recalculations before busy season.

Review recent changes to standards. Are you familiar with the updates that were made to compilation and review standards and the clarified statements on auditing standards? Peer review results continue to indicate there are outstanding issues with the standards not being properly implemented. Now would be a good time to assess these changes so you aren’t scrambling to do so in the midst of busy season. Check out the AICPA Private Companies Practice Section’s Invigorate the Quality on Focus toolkit with peer review information and more.

Busy season can be stressful, but with thoughtful planning you can take steps to manage the workload in advance. What steps are you taking to prepare for busy season?

Kari Hipsak, Manager- Firm Services, American Institute of CPAs.

Accountants working image courtesy of Shutterstock

Thank a Veteran Today, Help Veterans Year Round

Post author By FFC
Post date November 10, 2016

Thank a Veteran Today, Help Veterans Year Round

It is relatively easy to take time out of your day to acknowledge our veterans—in person or on social media—and say thanks to those who bravely and proudly served our nation. There are some CPAs who have found ways to give even more to our veterans. AICPA Insights recently spoke with former AICPA Chairman Ernie Almonte, CPA, CGMA, who has volunteered extensively with Operation Stand Down Rhode Island, a veteran’s organization in his home state of Rhode Island, about his experiences.

AICPA Insights: Why did you get involved in working with veterans?

Ernie Almonte: I have always been interested in history. The more I learned about history the more I realized the important role veterans play in our freedom. As a participant of the Marine Corps ROTC program in high school, as a son of a U.S. Marine veteran from the Korean War and a member of a family that has lost relatives and friends in various wars fighting for our freedom, I felt an overwhelming need to give back.

When I was the Chairman of the AICPA, there were three occasions where my flight to or from an event was also a final flight for one of our veterans returning to their final resting place. There have been so many signs in my life to remind me of the great price that some pay for our freedom.

AI: Why is this work important to you?

EA: I feel it is important to give back to those that gave so much for our freedom. Whether it is the veterans themselves, their families that also make sacrifices in their lives as they support the family while the veteran is deployed and the gold star moms who have lost their sons or daughters that have given the ultimate sacrifice.

I once heard the definition of a veteran as a person who at one point in their life made out a blank check to the United States of America for an amount up to and including their life. This is something I always remember, along with personal friends who made the ultimate sacrifice.

AI: How can others get involved with Operation Stand Down?

EA: Operation Stand Down Rhode Island is a Rhode Island-based organization. The website is www.osdri.org. Its mission is to help veterans secure housing and employment as well as other assistance according to individual needs including case management, basic human needs, referrals and education and training services.

Editor’s Note: There is another chapter of Operation Stand Down in Tennessee and there are opportunities to volunteer to help veterans in all 50 states and territories.

Another way CPAs can help this Veterans Day is to volunteer five hours of free financial advice to veterans looking to start or grow their own business. The AICPA and SCORE have joined forces in the Veteran Fast Launch Initiative to connect veterans with CPAs across the country. Sign up by emailing pcps@aicpa.org and access a toolkit of resources to get started.

Lauren J. Sternberg, Communications Manager, American Institute of CPAs.

American Flag courtesy of Shutterstock.

Top 3 Takeaways on FASB’s New Not-for-Profit Standard

Post author By FFC
Post date November 9, 2016

Top 3 Takeaways on FASB’s New Not-for-Profit Standard

Are you nervous about implementing the Financial Accounting Standards Board’s new not-for-profit standard? At 270 pages in length, it is understandable that one would find it daunting and would be unsure of where to begin. Even though the standard does not go into effect until 2018 for most not-for-profits, you and your clients need to be thinking about the standard and your implementation plan now.

To start my education, I reviewed this AICPA Insights blog post from FASB member Larry Smith that provides an overview of the new standard. I also recently attended the webcast, “Applying FASB’s New Not-for-Profit Financial Statement Standard,” which was hosted by the AICPA’s Not-for-Profit Section team. I learned some practical tips and received information I can share with my clients.

Here were my top three takeaways from an implementation perspective:

The new liquidity and availability disclosures will require robust information not currently tracked by not-for-profits. Going forward, not-for-profits will disclose quantitative and qualitative information regarding liquidity and availability of resources. For organizations that rely on contributions and grants that often come with restrictions, these quantitative disclosures, in particular, can paint a stark picture of a not-for-profits’ financial position. For example, the webcast discussed an organization with $229,200 of financial assets at year-end, and the tabular disclosure showed only $859 in financial assets available to meet cash needs within one year. Additionally, there is a new requirement to disclose qualitative information on how the not-for-profit manages its liquid resources to meet cash needs for general expenditures as of and within one year, respectively, of the statement of financial position date. With that in mind, organizations need to ensure the level of detail in the notes provide appropriate context for the readers of the financial statements.

Some not-for-profits will need to re-visit their policies and practices around internal designations of net assets. Under the new standard, not-for-profits will report the nature and amounts of board designations of net assets. In the past, those internal designations were reported as unrestricted net assets. Under the new standard, they will be reported as “net assets without donor restrictions.” Although the underlying accounting does not change, the presentation of such amounts and disclosures are changing. Some not-for-profits may need to revisit their policies and ensure they are properly tracking those amounts so they are ready when the time comes.

The new standard changes the reporting of investment expenses. The new standard requires the netting of investment expenses against investment return. These include both internal and external investment expenses, so this will be another area requiring additional analysis by the not-for-profits’ management team. What stood out to me was the definition of internal investment expenses, which “involves the direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return.” For not-for-profits and especially foundations with large investment portfolios (where a lot of the strategic function is internal), the analysis and allocation of salaries, benefits and travel will require thought and judgment on the part of the not-for-profit’s management team. Additionally, organizations may need to review the timesheets or other tracking methodology to capture time to aid in this process.

Overall, I feel better prepared to implement the new standard after participating in the webcast. I am advising my clients to be proactive now and start making an implementation plan. If you missed it, the AICPA is rebroadcasting the CPE-eligible webcast on November 16 from 3 – 5 p.m. ET. Before you know it, 2018 will be here, and it is important to start contemplating the changes from the standard sooner rather than later.

Paul Preziotti, CPA, Principal, Johnson Lambert LLP. Paul is responsible for providing audit, consulting services, and engagement management to not-for-profit entities and employee benefit plans. He has significant experience serving as an advisor for organizations on a variety of issues including risk assessment, governance, compliance and internal control considerations.

Man reviewing document image courtesy of Shutterstock

An Election Like No Other

Post author By FFC
Post date November 3, 2016

An Election Like No Other

“What do you make of the presidential campaign, Barry?” That’s the question I’m often asked by fellow CPAs and CGMA designation holders.

I have a simple refrain: It is an election like no other. And it may well matter more than any U.S. election before it for one reason. It comes at a time when the country is the most polarized it’s been in modern political history. People on both sides of the ideological spectrum feel distrust and anger at large institutions and government officials. So it’s fair to wonder if the new President and new Congress will choose to build bridges—or burn them.

Regardless of your own political preferences, the outcome is likely to have a significant bearing on the accounting profession in the U.S. and beyond, our advocacy agenda, and our ability to shape legislation and regulation for at least the next four years.

By the way, eight CPAs are running for re-election to the House, and a current House member is making a Senate bid. If victorious, he will be the first CPA Senator since the 1980s. There’s also another accountant, who is not a CPA, up for re-election in the Senate.

When the post-balloting dust has settled, our advocacy program will again switch into high gear. A lame-duck session of Congress is scheduled, and we’re hopeful it will be an opportunity to gain Senate passage of the mobile workforce legislation we’ve fought to see become law.

Then, after Inauguration Day, the new President and new Congress will get down to business.

The new President’s appointments will include a chair of the Securities and Exchange Commission (SEC), who in turn will decide who takes the helm of the Public Company Accounting Oversight Board (PCAOB). The President also will appoint a new Internal Revenue Service (IRS) Commissioner. More broadly, the next occupant of the White House will establish a federal regulatory framework that determines how issues of interest to the profession are handled. At the moment, we’re monitoring the Department of Labor’s pending overtime rule and proposed revisions to the Equal Employment Opportunity Commission’s pay data collection requirement, both of which will burden the nation’s accounting firms, not-for-profit organizations and businesses.

On Capitol Hill, there will be changes in the leadership of committees that have primary jurisdiction over key CPA profession issues—and even more if Democrats take control of the Senate.

Tax reform is likely to be a dominant issue under any scenario. Thirty years after the passage of the last major overhaul of the tax code, the House Ways and Means Committee is expected to move tax reform legislation in 2017. The AICPA will continue to inform the process on both sides of Capitol Hill and guard against the inclusion of language mandating the use of accrual accounting for tax purposes, which would unfairly harm accounting firms and other service companies.

The collaborative effort we have begun with legislators and other stakeholders to improve IRS taxpayer service will remain a priority during the 115^th Congress, as will a targeted approach to tax preparer regulation favored by the CPA profession.

The new Congress will also hold sway over recurring profession priorities, including the effort to clamp down on patent trolls and our work to add accounting to the math component of the Science, Technology, Engineering and Math (STEM) program to aid in global recruitment and retention efforts.

Further, lawmakers of both parties will be on point for oversight of the SEC, PCAOB and the Financial Accounting Standards Board. The CPA profession wants to prevent further erosion of the Sarbanes-Oxley Act, seeks preservation of the independence of accounting standard-setting, and opposes the premature disclosure of PCAOB enforcement proceedings, knowing that the publication of unproven charges can end an auditor’s career.

And while our primary focus is the nation’s capital, it’s important to note that voters in 12 states will select governors. Additionally, 3,400 state legislative seats are up for grabs. The outcome will help determine states’ legislative agendas, which may include efforts to tax professional services such as those provided by CPAs, as well as consideration of full CPA firm mobility.

You’ve heard it said that the only poll that matters is the one that happens on Election Day. There’s no denying that wall-to-wall media coverage and non-stop polling have contributed to voter fatigue. But it’s still important that you exercise your civic duty on November 8. Whether you back Democrats, Republicans or a third party, I urge you to cast a ballot. There’s a lot riding on the outcome…for the accounting profession, the nation and the world.

Want to learn more? Join us for one or more of AICPA’s post-election webcasts or online conferences, with insights into the impacts the incoming leadership will have on the regulatory environment, tax accounting and personal financial planning.

Barry C. Melancon, CPA, CGMA, President and CEO, American Institute of CPAs.

Election 2016 courtesy of Shutterstock.

Source: AICPA

News

5 Essential Controls for Charities during the Holiday Giving Season

Post author By FFC
Post date November 2, 2016

5 Essential Controls for Charities during the Holiday Giving Season

For not-for-profit leaders, strong controls for fraud are especially important during this time of year. The unofficial kickoff of the charitable giving season occurs on Giving Tuesday, which takes place the Tuesday following Thanksgiving, Black Friday and Cyber Monday here in the United States. In my state, Minnesota, we have a “Give to the Max Day” to encourage giving to nonprofits and schools before Thanksgiving. A 2015 Charitable Giving Report produced by Blackbaud noted that of the not-for-profits surveyed, 17% of their contributions were received in December.

Here are five things small organizations can do to protect themselves and ensure that the influx of contributions received this holiday season support programs, not fraudsters:

Perform a risk assessment before Giving Tuesday. Managing the sudden increase in donations requires careful planning with regard to controls. Employees find themselves working overtime and may feel pressured to compromise internal controls for the sake of expediency. Fraud is often a crime of opportunity; someone makes an honest mistake, and no one notices. So when they embezzle, there is no one to notice that either. In order to protect the financial and physical assets of the organization, directors of not-for-profits should consider risks such as working conditions that could lead to staff burnout and lapses in judgment.

Have a person other than the check-writer receive and open bank statements. This scenario has two independent people reviewing and monitoring all banking activity. Oftentimes, it is disclosed that the perpetrator makes deposits, writes checks, receives bank statements and reconciles the account. There is little or no oversight over this person, and this allows too much responsibility for one individual, leaving the organization vulnerable.

Separate duties as much as possible. The check writer and the person receiving bank statements should not be the same person. Keep in mind, however, that checks can be manipulated for amounts that don’t seem unusual, thus not raising any red flags. A good risk assessment discussion among directors should address any processes that could contribute to the loss of financial assets. Management and accounting controls should be established to provide optimal protection for the organization.

Receive copies of cancelled checks. A recent banking trend is to eliminate sending cancelled checks and/or copies of cancelled checks with bank statements and provide them online instead. What used to be a simple task is made more difficult by requiring the person to log onto the bank’s website and click on each individual check image. Since this takes additional time, this step is often skipped. As a result, checks have been forged or manipulated without being caught because nobody reviews the cancelled checks.

Focus on safeguarding cash. There are many other steps that can be taken to safeguard cash, including setting up an approved vendor list, limiting wire transfers or requiring secondary approval and requiring board approval for certain types of expenditures. Each organization must decide what works for them based on their size and staffing.

Although the biggest threats generally are related to cash, other risks for not-for-profit organizations include misuse of funds by not following donor restrictions, cybersecurity and protection of confidential donor data.

The Association of Certified Fraud Examiners 2016 Global Fraud Study, Report to the Nations on Occupied Fraud and Abuse, analyzed 2,410 occupational fraud cases. The study estimated that a typical organization loses 5% of total revenue to fraud and the median loss was $150,000. The study found that 10% of these losses were applicable to not-for-profit organizations with a median loss of $100,000. It’s worth noting that organizations whose fraud was uncovered through detective methods such as account monitoring and reconciliations sustained less of a loss than those detected through passive methods such as notification from an outside party. The most common weakness that contributed to fraud was lack of internal controls.

The most common detection method was tip-offs. In other words, the organization provides a mechanism whereby individuals with concerns can report problems without fear of retaliation. The AICPA’s Not-for-Profit Section offers a number of resources, including a sample whistleblower policy, exclusive savings on an ethics hotline service and a white paper “An Ounce of Prevention: Combatting Fraud in Not-for-Profit Organizations” available in its resource library.

It’s important for not-for-profit organizations to regularly review their risks and implement policies and controls to ensure they continue to operate effectively and perform their charitable mission. I encourage you to use this giving season as an opportunity to take a fresh look at your organization’s controls.

About the author

Marc Kotsonas, CPA, Officer, Mahoney Ulbrich Christiansen Russ in St. Paul, Minnesota. Marc specializes in audit services for not-for-profit organizations. He is a member of the American Institute of Certified Public Accountants’ Not-for-Profit Section and has completed the Not-for-Profit Certificate II training program.

Donate image courtesy of Shutterstock

5 Scary Tax Characters to Watch Out For

Post author By FFC
Post date October 30, 2016

5 Scary Tax Characters to Watch Out For

Halloween is my favorite holiday, bar none. Once a year, we all have license to use our imagination and be someone or something else. And beyond the goblins, pumpkins, ghosts and black cats, there is the absurd amount of candy floating around the stores and office.

The late Vincent Price, an actor who unquestionably had the best horror movie voice in the world, said, “It’s as much fun to scare as to be scared.” Vincent, wherever he is, may be pleased to know something can spook the unwary taxpayer in the same way his voice could invoke fear and trembling: tax creatures like the ones listed below. The good news is that you can avoid or at least minimize these horrors if you start thinking about these things now.

Count AMT (aka Line 45 on Form 1040) – Dracula could not have devised a better way to suck the money or refund out of your life than the alternative minimum tax. If your income reaches a certain amount, you must recalculate the tax you owe based on a higher income, one that does not have some of the deductions that helped to lower it. Devised as a tool to ensure that wealthy taxpayers could not use loopholes to avoid paying taxes entirely, the AMT now preys on taxpayers who are not so wealthy. The current AMT exemption is $59,900 for single taxpayers and $83,800 for joint filers. Talk to your CPA about ways to soften the impact and be aware that certain deductions act as triggers for the AMT.

Overstatement Ogre – are you truly a real estate professional? If not, best not to go overboard in claiming your rental income losses. When the head of the IRS Office of Preparer Responsibility is warning tax professionals to ask questions about this, that’s a good sign to be cautious.

To get around the passive loss rules that prohibit the immediate write-off of rental real estate losses, some taxpayers have been pushing the limits in saying they “materially participate” in the property rental; only those who spend more than 50% of their working hours and 750 or more hours each year can meet that bar. If you can honestly say you “actively participate” in the rental, you can deduct up to $25,000 of loss if your income is under $100,000. (You can still claim the losses when you sell the related property.)

Taxable Income Troll – The smaller the amount on your W-2 or 1099, the less you will owe in April (generally). Sounds simple, right? Well, some of it is. Bumping up your retirement plan contributions, taking larger deductions out of your pay for a flexible spending account or exercising stock options can all help to lower your income in a way that directly enriches you. Start taking action now and you can take that troll down!

The Creatures from Schedule C – The IRS pays close attention to small business returns, in particular, they scrutinize things like vehicle, entertainment and business meal expenses and home office deductions. When it comes to justifying these items, proper documentation is critical. In particular, the IRS wants to see contemporaneous documents, i.e., receipts or other records that were produced at the time you incurred the expense. If cash tips play a large role in your profession (hair stylist, cab driver, etc..), that can also trigger an audit.

Ghosts of Returns Past – Sometimes our mistakes (or others’), no matter how small, can come back to haunt us. I remember the shock of receiving a letter from a state comptroller’s office about a return filed years earlier – they had the wrong address so it took quite a while to arrive. Did I still have the related information? No, that would have made it too easy. Fortunately, my brother put me in touch with a great CPA who helped me resolve it.

While state rules vary, for federal returns, the IRS typically goes back 3 years in auditing returns (6 years for suspected large underpayments); there is no statute of limitations for a return that was never filed. And if you are feeling queasy about a previous return, perhaps you forgot you had a foreign asset that should be reported, be upfront with your CPA. Like your doctor, he or she is not there to judge and sharing information makes it easier for them to help you.

Tax is not most people’s favorite subject but it is an important one to think about now – waiting until the month before your return is due will be too late to ward off some of those characters! The AICPA’s consumer tax website – 360Degrees of Financial Literacy – has resources such as calculators and FAQs to get you started. And if you are looking to hire a tax preparer, this short video offers tips on what to look for.

Ann Marie Maloney, Communications Manager-Tax, American Institute of CPAs.

Zombie courtesy of Shutterstock.

CPAs with Clients in the Marijuana Industry Need to Consider Risks

Post author By FFC
Post date October 27, 2016

CPAs with Clients in the Marijuana Industry Need to Consider Risks

On Tuesday, voters in nine states will consider ballot initiatives to legalize marijuana – a move that could create new businesses that will need CPA services. However, conflicting federal and state laws mean that CPAs have to carefully consider the risks of providing services to these businesses. The AICPA spoke with Stan Sterna, vice president for Aon Insurance Services, the national administrator of the AICPA Professional Liability Insurance Program, and Mike Komoll, assistant vice president of professional service claims for CNA, the underwriter of the AICPA Program, to discuss key considerations for CPAs providing services to the expanding marijuana industry.

Which states are considering legalizing marijuana in November, and why might CPAs be interested?

Sterna: Five states – Arizona, California, Maine, Massachusetts and Nevada – will vote whether or not to legalize recreational marijuana, while four states – Arkansas, Florida, Montana and North Dakota – will consider legalizing medicinal marijuana. In the 26 states and jurisdictions where marijuana is already sold legally, businesses in this industry have increasingly sought out accounting and tax services. CPAs in any states that pass marijuana initiatives next week will likely start seeing similar requests, which makes sense when you consider the size of the industry.

The market is projected to exceed $7 billion in 2016, and could exceed $44 billion by 2020. In its 2014-15 fiscal year, Colorado collected $28 million more in revenue from marijuana taxes than it did from alcohol taxes. With that as a backdrop, it is not surprising that there are growth opportunities for all kinds of professional services, including an increased need for accounting services. Of course, CPAs also should consider the potential risks involved in working with businesses in this industry.

If a state has legalized marijuana either medically or recreationally, why does a CPA still need to consider potential legal risks for providing services to a marijuana business?

Sterna: While marijuana is considered “legal” to some degree in more than half of the states, it remains unquestionably illegal at the federal level. Under federal law, any entity that supports illegal activity or knowingly accepts fees derived from illegal sources arguably engages in federal racketeering and stands in violation of a host of federal laws. This presents obvious risks for banks, financial institutions, insurance companies and accounting firms.

At the same time, a U.S. appeals court ruled in August that the federal government cannot prosecute people who grow and distribute medical marijuana under state laws – a decision that rested in part on the fact that Congress has banned the Department of Justice from spending money in ways that prevent states from implementing their own medical marijuana statutes.

With the dichotomy between state and federal laws – and even sometimes within the federal government itself – CPAs are looking at how they can mitigate risk. Professional liability insurance is a key part of that. CPAs need to know what is specifically included and excluded in their policies.

If a CPA firm chooses to offer services to a business in the marijuana industry, could this impact coverage with CNA?

Komoll: Generally, the profession or business of an insured’s client is not relevant to our coverage determinations.

How would CNA respond to a claim that arose due to a CPA providing services to a marijuana-related business?

Komoll: If a professional liability claim or an inquiry arises under the AICPA program, coverage will be considered on a case by case basis, according to the facts of each claim, the relevant policy terms and conditions, as well as applicable laws, regulations and professional association guidelines. The provision of such services will be reviewed within this framework.

What other steps do you recommend a CPA take to help mitigate risk?

Sterna: A CPA should adhere to the standard client selection process. They should have an engagement letter that details what services are to be provided, what services will not be provided and how much those services will cost. The CPA should obtain a management representation letter in which the principals of the marijuana-related business clearly say that they understand state law requirements and that they intend to fully comply with those requirements at all times. The CPA should also document all work and communication with the client, even if the communication takes place in an informal setting.

We also recommend that the CPA inquire as to whether the marijuana business has conducted criminal background checks of its employees, and, if so, review those checks to ensure there are no past drug or fraud convictions.

In addition to these steps, the CPA should also check with their state board of accountancy to determine if the board has issued any guidance for licensees.

How have state boards of accountancy been responding to the issue?

Sterna: Only eight state boards of accountancy have issued official guidance thus far: Arizona, Colorado, Connecticut, Florida, Maryland, Nevada, Oregon and Washington. For the most part, each of those state boards has said that providing accounting services to state-legal marijuana businesses is not itself an act discreditable, and that those boards will not pursue independent disciplinary action against a licensee solely for providing such services. However, a board could pursue disciplinary action against a licensee found guilty of a criminal act, and state boards are recommending that CPAs consult with their legal counsel to discuss all possible risks.

Where else can CPAs find more information on risk control related to providing accounting services to marijuana businesses?

Sterna: CPAs should review the AICPA whitepaper, An Issue Brief on State Marijuana Laws and the CPA Profession, and other resources available on a webpage the AICPA has dedicated to the issue.

This information is provided for general informational purposes only and is not intended to provide individualized business, insurance or legal advice. You should discuss your individual circumstances thoroughly with your legal and other advisors before taking any action with regard to the subject matter of this article. Only the relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured.

Lindsay Patterson, Senior Communications Manager-State Regulatory and Legislative Affairs, American Institute of CPAs.

Marijuana courtesy of Shutterstock.

3 Potential Financial Reporting Errors Found at Not-for-Profit Organizations

Post author By FFC
Post date October 26, 2016

3 Potential Financial Reporting Errors Found at Not-for-Profit Organizations

As a CPA who has been in public practice for many years, I know the challenges that not-for-profit organizations face in financial reporting, and, more specifically, in applying generally accepted accounting principles.

Financial statements provide a compelling picture of the not-for-profit entity’s activities. However, in my experience, there are potential financial reporting concerns not-for-profit organizations need to be aware of to make sure that picture is conveyed properly. Here are three errors that come to mind.

Gross Reporting of Revenues and Expenses Related to Fund-Raising Activities.

GAAP generally requires that an organization report gross amounts of revenues and expenses in its statement of activities. However, there are situations where the not-for-profit may receive proceeds from fundraising activities net of related fees. In these instances, the entity would not report the net amount as contribution revenue; rather, the amount of the donor’s contribution would be reported as contribution revenue, and the fees would be reported as fundraising expenses. Consider the following:

A charity works with an outside provider such as an online service that markets and sells tickets or a telemarketing firm that solicits contributions on the not-for-profit’s behalf. The processing fee that the online ticketing service or telemarketing firm collects would be reported as a fundraising expense while the gross ticket sales or contributions received would be recorded as contribution revenue.

In contrast, a charity may receive the net proceeds of a fundraising activity in which it had minimal involvement in the planning or conduct of the event. In this case, the charity is not required to report the gross proceeds of the event since the net check is the donation from the individual or organization who conducted the event.

Reporting Promises to Give at Fair Value.

Contributions are to be reported at fair value. This includes donors’ pledges to give. When a donor promises to provide cash or other assets at a future date, the charity should estimate the fair value of the amounts that will be received. Oftentimes, present value techniques incorporating risk-adjusted discount rates reflecting the assumptions market participants would use in pricing the asset are used.

If the donation is expected to be received within one year, the charity should report the contribution at net realizable value (the amount expected to be collected) and may forgo the calculation of the discount in accordance with FASB ASC 958-605-30-6, which indicates that net realizable value is a reasonable estimate of fair value.

For example, a charity conducts an annual phone-a-thon fundraising appeal and receives promises to give of $100,000. The charity has been able to collect 85% of promised donations from similar appeals in past years. In this instance, the charity should report contribution revenue of $85,000. Should actual collections exceed this original value, the excess amount should be reported as additional contribution revenue. If amounts received fall short of the original estimate, the promised donations should be written off to bad debt expense.

In the above example, some organizations would report $100,000 of contribution revenue, and bad debt expense for any amounts not collected. This overstates both revenue and bad debts expense. In order to avoid these overstatements, not-for-profit organizations should record promises to give at their net realizable values.

Reporting Program Services.

A surprising number of not-for-profits report only one category of program services in their financial statements or in their IRS Form 990, Return of Organization Exempt from Income Tax. This not only may be at odds with GAAP, but is definitely a lost opportunity to tell your story and make the case that your programs are worthy of volunteer and financial support.

Preparing financial statements requires the proper balance of summarization and disaggregation. Too much detail can be confusing; too little can be misleading. Most organizations accomplish their mission by conducting more than one distinct program. For example, an organization dedicated to feeding the hungry may have a year-round food distribution program as well as a program to feed school-aged children during the summer. These two programs should be displayed separately.

Conclusions

Common financial reporting errors typically conjure fears of audit adjustments and findings. But in many cases, correcting these errors leads to improved financial reporting and a more favorable picture of the organization and its activities.

The AICPA’s Not-for-Profit Section has relevant resources and learning opportunities available including a Common Financial Statement Errors tool. Additionally, you may be interested in attending a webcast on “Avoiding Common Errors in Not-for-Profit Financial Reporting”, taking place on November 3 at 1 p.m. ET.

Stephen Kattell, CPA, Managing Shareholder, Kattell and Company. He founded Kattell and Company in 2004 to provide assurance, tax and consulting services exclusively for not-for-profits. Kattell served on several committees of the Florida Institute of Certified Public Accountants and the AICPA, including serving as Chair of the Not-for-Profit Industry Expert Panel from 2003 to 2007. He has spoken extensively on accounting, auditing and tax related topic at local, state and national venues.

Make a donation image courtesy of Shutterstock

Tax Due-Diligence Checklist for Sharing-Economy Clients

Post author By FFC
Post date October 24, 2016

Tax Due-Diligence Checklist for Sharing-Economy Clients

People have been sharing services and property, and generating money from it, for years. For example, someone with a spare bedroom might have posted a note on a bulletin board at the local grocery store or advertised in the local paper to find a tenant. But do we understand the tax implications of the shared economy? That’s where CPAs come in.

Today’s technology allows for easier publishing and access to a wider pool of people for matching offers and acceptances. Using Airbnb or similar sharing websites, the owner with a spare bedroom will find that short-term rentals are relatively simple to arrange. Yet that same owner is unlikely to know the full tax consequences of this convenient rental, so it will be up to the tax preparer to ask the right questions.

It’s increasingly likely that one or more of your clients is participating in this new shared economy. Many companies have sprung up to provide network platforms that allow for sharing of real and personal property, loans or donations from strangers, as well as offering various personal services such as driving. These websites include Airbnb, Getaround, Uber, Lyft, TaskRabbit, Amazon Mechanical Turks, e-Tutoring and Lending Club, as well as eBay, which has matched buyers with sellers since 1995.

A growth market

The 24/7, multi-jurisdictional way of doing business is expected to grow. McKinsey & Co. projects that by 2025, labor-sharing platforms could increase world gross domestic product by almost $3 trillion. Airbnb states that about 60% of its users earn enough to be able to stay in their homes as a direct result of the added rental income they receive.

The barriers to entry for taking part in most sites are low, enabling almost anyone to set up an account and start selling, buying or renting. There are tax considerations for both parties, particularly the party receiving funds, yet users of these websites often have little understanding of the tax issues involved.

Tax considerations

Here are some of the key tax issues related to common sharing activities.

Activity

Tax Considerations

Rental of room in home

· Separate personal and rental expenses.

· Identify and apply the appropriate income/loss determination rule – §§162, 280A, or 469 (the answer can change from year to year).

· Determine local tax obligations, such as transient occupancy tax and business license tax.

Ride sharing (Uber, Lyft, etc.)

· Determine whether activity is a business or hobby (see Reg. §1.183-2). Some individuals engage in this activity part-time and only to generate cash rather than a profit.

· Is the worker (freelancer) optimizing tax benefits, such as retirement plans?

· Review IRS Audit Technique Guide for the cash intensive businesses, Chapter 17 on taxicabs.

Any sharing activity that generates cash (e.g, renting your personal auto)

· Be sure client has appropriate recordkeeping in place to identify income and expenses and to separate them from personal activities.

o Various apps exist to help with recordkeeping including ones using GPS to track personal versus business miles. See for example hurdlr and Everlance.

· Ask client if they received any 1099-MISC or 1099-K from the activity. If yes, help them reconcile it to actual receipts for the year.

o All clients should be asked whether they generate funds from any type of web-based activity because many will not receive a 1099. For example, network platform companies are only required to issue a 1099-K if more than $20,000 was processed and more than 200 transactions (see PLR 201604003 (1/22/16).

Below is a framework for asking clients about any web-based activities that could be incorporated into the yearly organizer:

CLIENT CHECKLIST

Do you engage in any of these online/Internet activities?	YES	NO
Selling goods or services
Buying goods online (use tax may be owed)
Online games or gambling
Receive advertising revenue connected with your website or blog
Lend or borrow money
Create a crowdfunding site for yourself or someone else (possible reporting or gift tax consideration)
Obtain funds from a third-party crowdfunding site
Rent out your property through a web platform
Find customers/work through a web platform
Own and use virtual currency (see Notice 2014-21 and 6/10/16 AICPA comment letter)
Engage in any other online/web-based activity that generated cash or revenue
Own digital assets (such as photos, financial records) and use cloud services (help client with data security and whether assets need to be identified in estate documents)

In September, the IRS created a Sharing Economy Tax Center with links to tax information to help freelancers and those renting property. This center offers general information primarily to help individuals understand related tax matters. But it’s not enough for practitioners, as it doesn’t cover all possible tax issues (such as state and local ones) or provide links to relevant law provisions.

The sharing economy is here to stay. It’s enticing to many as a way to generate quick cash or create a business venture. Your clients might may fail to mention that they are involved in some aspect of shared services and might not receive information reporting forms. It’s a good idea to be sure your client organizer asks questions, such as the suggested ones above, to ensure proper tax compliance. Talking about the tax implications of earning extra cash is also a great opportunity to assist clients with tax planning, asset protection and wealth optimization.

Annette Nellen, CPA, CGMA, Esq., Tax Professor and Director of the MST Program at San José State University. Annette is incoming chair of the AICPA’s Tax Executive Committee and an active member of the tax sections of the ABA and California State Bar. A recipient of the 2013 Arthur J. Dixon Memorial Award, the highest honor bestowed by the accounting profession in taxation, she offers analysis of current tax issues at 21st Century Taxation.

<a href=”https://feeds.feedblitz.com/~/t/0/0/aicpainsights/~MikeDotta / Shutterstock.com“>Uber courtesy of Mike Dotta/Shutterstock.