On February 3rd the web site CreditCards.com published an article entitled Charitable Charging Comes Under Scrutiny.

The article indicated that shortly after the earthquake in Haiti the major credit card processors all agreed to waive their interchange fees (ranging from 1% to 3%) on each donation directed to Haitians in need. Some charity watchdog groups and other interested parties called for credit card issuers to waive fees on charitable donations permanently. The political action group MoveOn.org started a petition which it will deliver to the CEOs of the major credit card processors.

This is not the first time that the credit card processors waived or cut their transaction fees. They waived fees in 2004 after the tsunami struck Southeast Asia. Capital One has been waiving transaction fees on charitable donations since the fall of 2008. Capital One operates a website called No Hassle Giving or the Network for Good and it processes transactions to almost any charity without a fee (of course, using your Capital One credit card). I am sure this is part marketing effort and part charitable giving on Capital One’s part and I applaud it.

However, before we all jump on the bandwagon and rush off to sign the MoveOn.org petition, I would like to have you think about a few concepts. We can think of the credit card processing fee as additional fee income for the credit card company and subconsciously think of the millions of dollars that this generates, or we can think of the costs involved in processing credit card transactions and realize that these costs are as low as they are because every transaction is sharing in the payment of those costs. We realize that costs may increase for the remainder if some are exempted.

We could think of the processing fee as a cost the charity is willing to pay to facilitate the receipt of donations from millions of people. The credit card facilitates the donor’s effort (no check writing, mailing, stamp costs, etc.) and facilitates the charity’s donation deposit (no mail opening, endorsing, bank clearing time, internal control issues, etc.) and the charity is more than willing to pay for all this assistance and service.

In certain circumstances and in certain disasters, the credit card industry is willing to take a temporary cut in revenue as their way of contributing to the cause. They do this to provide an added incentive to the donor while assisting the charity at the same time. Added incentives work – think of how often you shop a “sale”.

So I applaud the credit card companies for their processing fee elimination in response to the Haitian crisis. And I applaud Capital One’s marketing/charitable giving plan and wish them success. I am not rushing to sign the MoveOn.org petition. What do you think?


By Frank Monti, CPA
Not-for-Profit Group

Labels: Accounting, Charitable Donations, Credit Card Processing Fees, Haiti Donations, Waved Transaction Fees

In my last post, I discussed some interesting facts about who is most likely to steal from your company and how much it is likely to cost you. (In case you missed it, here’s the link: http://www.kahnlitwin.com/blog/2010/01/can-you-identify-whos-going-to-steal_06.html.)

The cost of fraud to an organization can be devastating, yet many people don’t want to hear about it until it’s too late. You don’t have to be a financial expert to implement controls to prevent fraud, but you do need, at a minimum, a basic understanding of the different types of fraud in order to know what you are trying to prevent.

With that, I wanted to take some time now to highlight some of the common areas that are susceptible to fraud and the types of theft related to them.

• Cash theft schemes – these can include the obvious to the not so obvious. Under this category you will find theft of cash payments, theft of all or part of a daily deposit, skimming from a daily deposit, voided sales and/or revenue transactions, and the theft of petty cash funds.
• Accounts receivable schemes – receivables schemes are directly related to the theft of cash. These can be a bit more complicated, and can include the lapping of receivables (which involves shifting receipts amongst customer balances to cover up theft), the unauthorized crediting of customer accounts, and the re-aging of receivables in order to hide misappropriations.
• Inventory schemes – these can include the theft of inventory and supplies, as well as the scrapping and subsequent resale of inventory.
• Fixed asset schemes – these schemes can come in a variety of different forms. They can include the theft of equipment and other assets held for use, the personal use of company assets, over-purchasing schemes, as well as the recording of fictitious assets (which in turn can conceal other thefts).
• Payables and disbursement schemes – these schemes are also directly related to the theft of cash. Payables schemes can include payments made on false or inflated invoices (including those to shell companies), excess purchasing as well as duplicate payment schemes. In addition, you can have situations where the employee is brazen enough to write the check directly to themselves or a family member, as well as the stealing of check stock for future use. 
• Payroll schemes – payroll schemes can be some of the easier schemes to detect, yet they often fly under the radar. These can include payments to fictitious employees, overpaying/double paying current employees, paying terminated employees, the diversion of tax and/or employee benefit plan payments, and various expense report reimbursement schemes.

Please keep in mind that the above is just the tip of the iceberg, and some of these schemes (and others not mentioned above) can be occurring in your organization right now. Fraudsters have been getting more and more sophisticated and are continuing to utilize advancements in technology to further their efforts. You need to be proactive in not only understanding the different ways these criminals can steal from your organization, but how to best protect yourself.

In my next post, I will begin to explore these areas in greater detail, highlighting the various opportunities for internal theft and what you can start to do to protect yourself. Until then, remember, it will always be more economical to implement measures to prevent fraud than it will be to detect it.

By John Surrette, Jr., CPA, CFE, MBA
Senior Audit Manager

Labels: Accounting, CPA, Different Types of Fraud, Fraud, Fraud to an Organization, Fraudsters., How to Detect Fraud, Inflated Invoices, Petty Cash Funds, Resale of Inventory, Theft of Cash Deposits

Labels: Accounting, CPA, Cutting Costs, Economic Downturns, Economy, Fixed Costs, Fixed Spending, Government Spending, KLR, LeBlanc, Projected Revenue, Tax, Tax Collections, Tax Planning, Tax Revenue 2010

One theme that has been in the news over the past several months is the fact that accounting fraud has risen significantly over the past couple of years. Who didn’t see that one coming? Increased unemployment, the resetting of interest rates on adjustable rate mortgages, and the loss of personal wealth (mainly from declines in home values) are all reasons why we have seen a spike in this type of fraud.

At the end of my last post, I had mentioned that I was going to start to discuss some of the different types of fraud. As I think it’s important to understand who might be perpetrating the fraud, we’ll get into that topic next time.

So, you ask, what type of person is most likely to commit fraud? According to the 2008 Report to the Nation on Occupational Fraud & Abuse report (the Report) published by the ACFE, research shows that:

• Fraud is a man’s world. According to the survey, males are more than twice as likely to commit fraud as their female colleagues. Significantly, the median loss of fraud by men is more than twice as great as frauds perpetrated by women, according to the study.

• Many fraudsters are in their forties. The highest percentage of fraudsters in the study were between the ages of 41-50 (in more than half of all cases, the perpetrator was over 40). Generally speaking, older professionals often occupy positions with authority and more access to company resources. The Report finds that the median loss from fraud rose as the age of the fraudster increased. Schemes perpetrated by individuals in their 50s resulted in a median loss of $500,000, twice as high as any age bracket below them.

• The ‘lone wolf’ versus cooperative crooks. In nearly two-thirds of the fraud schemes covered by the study, the perpetrator acted alone. Yet when the scheme did involve collusion of two or more parties, the results were much more costly. Cases of collusion resulted in a median loss over four times higher than the amount lost to fraudsters acting alone. This might mean that collusion enables employees to better circumvent controls that might stop a single perpetrator.

• Education and position. Most perpetrators have attended or graduated from college.
About 11 percent have obtained a post-graduate degree. In general, the higher the education level, the more costly the fraud. Furthermore, the highest percentage of fraudsters worked in the accounting department when they executed their scheme. Because these employees handle financial transactions, they normally have the easiest access to fiscal assets and the most opportunity to conceal a fraud. Executives and upper management made up the second-most common category of fraudsters. The least common perpetrators? Internal auditors.

• Living the fraud life. According to the Report, there are several behaviors that serve as red flags displayed by perpetrators. The two most common traits are a tendency to live beyond one’s means, and a struggle with financial difficulties. More than a third of those identified displayed at least one of the aforementioned behaviors, and about 20 percent had either a “wheeler-dealer attitude,” control issues (unwillingness to share duties), or personal problems, such as a divorce. Other red flags might include irritability or defensiveness, addiction problems, past legal problems, refusal to take vacation and complaining about inadequate pay.

If you’d like to learn more about the findings in the Report, you can download online at the ACFE’s web site: www.ACFE.com/RTTN.

There are several other studies out there that have come up with similar conclusions. I don’t think there is anything too surprising in the results, but don’t be fooled. I’ve seen frauds committed by men and women much younger and much older. However, the one theme that you should focus on is the fact that these people are in positions of power and influence within their respective organizations. If those positions are appropriately monitored, your exposure can be reduced significantly. Remember, it’s much easier (and cheaper) to prevent fraud than it is to detect it and recoup your losess.

The ability to appropriately monitor these positions is predicated on the fact that you know what risks your company are exposed to, and how you can appropriately mitigate them. Having an understanding of the different types of frauds and how they can be perpetrated can be very helpful in assessing your exposure. We will start to explore these areas in my next post.

By. John Surrette, Jr., CPA, CFE, MBA
Senior Audit Manager

Labels: Accounting, CPA, Fraud, KLR, Surrette

There are only a few weeks left before the year ends and your 2009 tax life is sealed in stone. However, there is still time for considering a few tax-wise moves that could save you money now or in the future.

On involves making gifts to others. A person can give any other person up to $13,000 in 2009 without incurring any gift tax. The annual exclusion amount increases to $26,000 per donee if the donor's spouse joins in making a gift. Anyone who expects eventually to have estate tax liability and who can afford to make gifts to family members should do so. In addition to avoiding a gift tax today, if the property you are gifting (such as stock) increases in value, that increase in value is also out of your estate. With today’s deflated stock prices, this may be worth considering a bit more carefully than in prior years.

Double check your potential tax liability for 2009 and compare it to amounts paid in via withholding or estimated taxes. If you think you may be underpaid – perhaps you missed an estimated tax payment earlier in the year – you can increase your withholding for the last one or two pay periods in the year. All amounts paid via withholding count as if they were paid evenly throughout the year. So if you missed an estimated payment and face a penalty for the late payment of the amount, you may be able to eliminate that penalty by increasing your withholding before year-end.

If you have a health flexible spending account (FSA) at work and you must use the account before year-end, check to see if you have any unused funds in your account. If you have unused funds that you are in danger of losing, consider expenditures such as eyeglasses, contact lenses, etc. And, don’t forget that nonprescription drugs like antacid, allergy medicine, pain relievers or cold medicines qualify for FSA reimbursement. You need to make the purchase prior to year-end even if you are not able to submit the reimbursement until after the first of the new year.

While I am not expecting anyone to go out and buy a new car because of my blog, it is worth noting that depending on meeting certain conditions you can deduct qualified motor vehicle taxes paid on the purchase of a car in 2009 that you will not be able to deduct in 2010 (unless Congress changes the law). There are also tax credits available for the purchase of a qualifying fuel efficient car. The most widely available type of these vehicles is the hybrid.We don’t want you to miss any of these opportunities. If you have any questions, call your KLR tax advisor today.

By. Frank Monti, CPA
Not For Profit Group

Labels: Accounting, CPA, KLR, Monti, Tax

In these troubling times every business seems to have one major goal -- cut costs. Unfortunately this happens most often as a knee jerk reaction with across the board cuts in payroll and everything that even smells non-essential. But what if there was a better way? And you could learn about it for FREE??

One of our clients has grabbed the Toyota concept of efficiency (lean) and taken it to an art form – and they are so passionate about it that the President of the company has felt the call to duty and is hosting a daily radio show on AM790 from 4 – 5pm. There is also a local website dedicated just to the war on waste (LeanRI.org). The show and site focuses on efficiency and cost cutting without using the all too common slash and burn process. If you can’t tune in, the show streams live from the 790 website and there are other tips you can read online. Here are some links to get you started.

http://www.790business.com/sectional.asp?id=35739
http://www.leanri.org/
http://www.facebook.com/pages/K-Dubs-Lean-Nation-Radio-Show/205913446176

What is lean anyway?
Lean is eliminating the 7 deadly wastes that are in every corner of our businesses, homes, and government.

1. Waiting - people or goods idle while a process finishes
2. Over production – making more than you need now
3. Over processing – doing more work than is necessary (too many steps)
4. Motion – reaching, turning, bending, or walking to your resources
5. Transportation – moving product around
6. Defects – we all know this one
7. Inventory – do you need more than you could have on-hand tomorrow?

I know these sound like they only apply to manufacturing but don’t be fooled. They apply to everything and anything that involves a process resulting in a finished product (even making toast has a process to it). What I’m saying is: everything is manufacturing when you think about it. For example (and I’ll pick a tough one) - an insurance agent. They might not have a machine shop but they do go through the process of obtaining leads, researching, quoting, revising, and ultimately binding coverage - all which results in the finish product of an insurance policy. Their equipment is a computer, printer, and fax machine instead of drill presses and grinding machines - but they still go through a process - and that process is burdened with the 7 wastes above.

You will never reach the perfection of a totally waste free environment but the idea is to continuously improve towards that goal. For a lot more on this topic check out one of the links above. You’ve got nothing to lose and it will make you look at your business in a whole new way.

By. Norman LeBlanc, CPA
Tax Services Group

Labels: Accounting, efficiency, KLR, LeanRI, LeBlanc

How would you like another 7% to drop to the bottom line? Of course you would, right? Well, according to the Association of Certified Fraud Examiners 2008 Report to the Nation on Occupational Fraud & Abuse, that is the amount participants in the survey estimated was lost annually due to fraud. There are several other interesting statistics that came out of the survey, including the fact that the median loss was $175,000, and more than a quarter of the more than 959 cases studied suffered losses of over $1 million. With the economy continuing to decide on a direction, would you even want to suffer a loss of $10,000? I didn’t think so.

Now I know what you’re saying to yourself, my accountant is on the lookout for fraud so I have nothing to worry about. If you think that is the case, you may be in for a surprise. Bernie Madoff had an accountant too, who audited his company’s financial statements and issued a “clean” opinion on them. Remember Arthur Andersen? I know it’s been several years, but they were responsible for auditing Enron (and went out of business as a result of Enron’s collapse). I know these are two high profile examples, but the fact is, most frauds are uncovered by tips, and not by auditors.

So what does this all mean for you? What can you do to make sure your company is not the next to grace the front page with a story of financial malfeasance? There are a lot of different ways you can protect your assets, and it starts with taking a fresh look at your internal controls and evaluating where your exposure lies. In my next post I will start to explore the different types of internal fraud. Until then, remember, it’s always cheaper to prevent fraud than to try and recoup your loses after its been detected.

By. John Surrette, Jr., CPA, MBA
Senior Audit Manager

Labels: Accounting, Audit, Fraud, KLR, Surrette

Cost Segregation – Why use a Engineering Aproach?
Approximately eight years ago, we were approached by a Cost Segregation Engineering firm. We knew about cost segregation studies; but, we had never worked with an engineering firm. They emphasized the fact they specialized in “Engineering Approach”. So what’s the big deal? Before I continue, let me explain what a cost segregation study is.

How Does it Work?
Building costs are generally classified for tax purposes into three categories. Each has a different depreciation recovery period over which the cost of that category must be depreciated (i.e., expensed).

Tangible Personal Property- 5 or 7 years
Land Improvements- 15 years
Real Property- 27½ or 39 years

In addition to shorter depreciation periods, the first two categories can be depreciated on an accelerated basis while the last cannot. The term accelerated in this content, means more depreciation expense can be taken in the earlier years of the asset’s assigned life than in later years. This is a big deal. It can save taxpayers a lot of money!

A cost segregation study identifies assets that should be properly classified as tangible personal property or land improvements, rather than real property subject to a 39 year (non-accelerated) depreciation life.

For example, a taxpayer that owns a manufacturing facility could classify (or reclassify) such assets as security systems, ventilation systems, equipment foundations, loading dock equipment, etc.

Why an Engineering Approach?
Less than a year before meeting the engineering firm, we had moved into a new location. Most of the building at that time was basically a shell. We did our own build-out of the “raw” space. We diligently kept track of all expenses incurred. We classified the expenditures as personal property, land improvements or real property, keeping in mind the benefits of depreciating assets over shorter lives.

We decided to “test” these engineers by asking them to do a cost segregation study on our new building. We were sure what, if any, reclassifications would be small and insignificant.

Several weeks later, after visiting us and touring our building, their report was done. Much to our surprise, their engineering approach to the study had reclassified several hundred thousand dollars worth of assets into either personal property or land improvements. This amounted to a total first year tax savings of close to $100,000. It has been a wonderful marriage of accounting and engineering firm ever since, which has benefited many of our clients.

By. Robert D'Andrea, CPA
Principal

Labels: Accounting, Cost Seg Studies, CPA, D'Andrea

There’s been some talk in Washington recently about simplifying the tax codes and there’s hardly anyone who wouldn’t agree -- our income tax system is too complicated. Why is that? Hasn’t congress simplified the system before?

The answer is: yes, the tax code has been rewritten many times. Sometimes to make sections of the code simpler and twice, in 1954 and 1986 the tax code was completely rewritten cover to cover. If that’s the case, why does the current code stand at 70,000 plus pages? The answer is simple… it has to be.

Every time congress makes the tax code less complicated, two things happen. One, savvy tax advisors find loopholes in the law and show their clients how to save money by structuring their transactions accordingly. There is nothing illegal about this, the tax code is there to be adhered to, whether that helps or hurts. Congress then reacts by modifying the law and closing the loophole. The second phenomena we see is congress realizing that many things can be accomplished quickly by putting a monetary incentive to it. This tool can really rack up the page count.

These are just two of the reasons you probably will never see a simple tax system in the U.S. Another major factor is fairness. Believe it or not, our tax system is designed to allow taxpayers with the lowest incomes to pay the least tax (as a percentage of income). Despite all the commentary, high income earners pay a much higher percentage than their lower income counterpart and many of the deductions and credits afforded to lower bracket taxpayers are passed out or disallowed for higher earners. This is partially what complicates the tax code. There are countless triggers and mechanics to calculate and formalize who gets a deduction/exemption/ credit and who doesn’t.

So what are the alternatives? There’s always a flat tax, but is that the best way to administer a tax system considering the same total dollars need to be collected? Wouldn’t it shift the tax burden? If it doesn’t, how would it be different than what we have now? Many European countries have implemented a variation of a flat tax by using a value added tax. The disadvantages of a value added tax are: anyone who provides goods or services becomes the tax collector and, the tax is continuously rolled into the cost of the product so no one really knows how much tax they are paying. Ask a European how much tax they pay and many will respond with - I don’t pay tax. In the U.S. there have been proposals of a national sales tax. This, unfortunately, isn’t much different than a value added tax because tax is paid as part of the cost of goods and services.

There have also been proposals to have the IRS prepare income tax returns for all tax payers having simple sources of income like W2 wages and bank interest. Does this really help considering that the real complexities of the tax law don’t affect this category of taxpayer?
So what’s the solution? Do we continue with the system we have, do we opt for stealth taxes like the value added tax or do we have the IRS do tax returns for us? It’s likely that there is no easier solution than the tax code we have. For every gain in simplification, we lose in transparency, fairness, and administration. How about no tax at all? Oh yea, that doesn’t work either.

By Norman LeBlanc, CPA
Tax Services Group

Labels: Accounting, CPA, IRS, KLR, LeBlanc, Tax

Once upon a time not-for-profit organizations were left alone to devote as much of the resources they could marshal together on their mission. The board, comprised of individuals from the community, was the only oversight in place charged with making sure the organization did the right thing. This lack of regulation and red tape along with exemption from Federal and State income taxes was part of society’s “gift” to the not-for-profit organization as gratitude for their mission oriented work.

All of that is changing and changing rapidly. The IRS Form 990, annual information return, completed by most not-for-profit organizations has completely changed and is now a document that will consume 40 or more pages and contain information and disclosures never before seen by the general public. Throughout 2008 we conducted half-day seminars for our clients just to get ready for the requirements imposed by this new form. As our clients struggle with the preparation of this form, the learning continues as we both examine transactions and relationships that had not been subject to this level of scrutiny in the past.

The not-for-profit pension plan created under Section 403(b) of the Internal Revenue Code was once a pension plan with an unusual ease of creation and administration. Beginning in 2009 these pension plans come under new levels of regulation including a requirement that the plan be audited by independent accountants if the plan has more than 100 participants.

Executive Directors and board members who may have been identified as the plan administrators of these 403(b) plans are suddenly hearing about the potential of fiduciary liability that has suddenly been identified with these plans. How could I as a Treasurer of a not-for-profit organization have a liability in connection with an employee of the not-for-profit deciding to save for retirement? The organization withholds the money as directed by the employee from their pay and sends it along a few days later to the investment company for deposit into an investment vehicle selected by the employee. What could be easier than that? There is so much more to this simple transaction under the new regulations that we are conducting additional half-day seminars designed to get the information out in a timely manner. The next one is scheduled for October 21, 2009 in our Waltham office.

What is behind all of this increased interest in the not-for-profit organization? One factor is that the not-for-profit organization is much more prevalent in our society than it was 30 years ago. Some estimates have the not-for-profit sector accounting for as much as one third of the general economy. Some would say that the not-for-profit sector, which has always been important to society for the mission work that it does in that society, is now such a significant factor in the economy as a whole that it needs the same level of control, monitoring and oversight imposed on the rest of American business. Another factor may be that there have been some spectacular failures in not-for-profit organizations. By this I mean not-for-profit organizations that were engaged in activities or practices that they should not have been according to their not-for-profit mission. While these failures are really a failure of the Board oversight role, the response to the failures is additional oversight and regulation from the government sector rather than training and qualification standards for Board members.


Whatever the reason, the fact is that the landscape for the not-for-profit organization has changed and the prospects of returning to those days of yester-year are non-existent.


For further information or to register for our upcoming 403(b) seminar please RSVP to Ashley Levesque at: 888-557-8557 or email ALevesque@KahnLitwin.com

By. Frank Monti, CPA
Not For Profit Group

Labels: Accounting, CPA, KLR, Monti, Nonprofit, Not For Profit Group, Tax