KLR Business Blog - Providence, Rhode Island, Newport, Boston, Massachusetts

By John E. Surrette, Jr., CPA, CFE, MBA

Walmart has received some unwanted press since a recent article in The New York Times reported allegations of bribery within Walmart’s subsidiary operation in Mexico.  The allegations date back to 2005, when it came to management’s attention that the Mexican subsidiary may have been bribing local officials to obtain competitive advantages in building new stores (including, but not limited to, obtaining permits and zoning changes).  After an internal investigation, it is alleged that management was not able to corroborate the allegations that were brought forward and concluded their internal investigation with no repercussions for any of those involved.  It wasn’t until December 2011 that Walmart disclosed to the authorities that it was investigating its compliance with the Foreign Corrupt Practices Act (FCPA), which covers illegal payments made by American companies.

There are a host of issues raised here, many of which go well beyond routine compliance and reporting issues.  Whenever a company has operations in foreign countries it has to ensure compliance with all applicable laws and regulations, both domestic and foreign, including the FCPA.  The FCPA, in short, prohibits the payment (or promise of payment) of money or anything of value to a foreign official for influencing that person’s action to obtain business.  The FCPA also addresses the accounting issues (mainly for publicly traded and other registered companies) related to making these payments, requiring companies to keep books and records that accurately reflect all of the transactions of the company and that appropriate accountability can be established.  Depending on what section of the FCPA is violated, significant fines and potentially incarceration for individuals involved could result.

The FCPA expands beyond the direct actions of the company itself and also covers service providers and other third party consultants (including, but not limited to, sales representative, consultants, and distributors).  In addition to ensuring your company is in compliance, you have to hold your vendors to the same standards.  This can pose significant challenges for those choosing to operate abroad, and can certainly result in some significant due diligence issues if you are looking to eventually sell your company to a private equity firm or other strategic investor.

This case also highlights some issues related to the internal control environment and how the structuring of your control systems can impact the value of that critical internal function.  One of the key elements of an effective internal control environment is what I like to call the “tone at the top”.  Senior management plays a critical role in any control environment and their perceived propensity to accept risks generally impacts the entire organization.  Companies that are experiencing periods of extreme growth may not dedicate (or consciously decide) to ignore how that growth is being achieved in order to please investors and other stakeholders.  This can obviously have a significant impact if any improprieties, and related financial consequences, are publicized.

Now that your year-end financial statements are now complete and your tax returns have been filed (or properly extended), it’s a good time to take a fresh look at your internal control policies and procedures, and, if doing business abroad, your compliance with the FCPA.  If you have any questions as you evaluate these systems, please contact me.

By By Kristen Rose

The most important part of any meeting takes place prior to the actual introduction.  Do your research to make sure your meeting is a success.  Knowing yourself and knowing the company that you are meeting with are two elements that provide proof that you are a good fit and bring value.

Knowing yourself and communicating your value.
When communicating your value, tell people what you do and how you can provide value.  Do you know what the most valuable attributes you bring to a company are?  Be prepared to share examples where you have demonstrated leadership and creativity.  Tell a story about your successes to demonstrate your abilities.

It starts with passion.
It is essential to be able to talk about things that you are excited about.  In some cases, passion can trump qualifications. In preparing for interviews, you should be looking for every opportunity to talk about things that you are excited about.  Learn as much as you can about the company or the individual before your meeting.

Practice and be ready.
Once you know yourself, what your passion is and the value you bring, you will need to practice delivering the message.  Practice in front of a mirror or with a friend.  Practice can be the single most important thing you do.  Have your elevator pitch ready at all times; you never know when you will be asked a question.  Every question is an opportunity to shine. 

A sister company of one of the largest CPA firms in Boston, KLR Executive Search Group uses its proven search process, industry knowledge and worldwide network to successfully place candidates in senior management roles in major organizations. Its industry reach as Boston executive recruiters stretches from healthcare to technology to life sciences, with permanent placements as well as contract placements and HR consulting.

By John E. Surrette, Jr., CPA, CFE

As we continue to fight high unemployment levels, the demand to increase the nation’s job market is at an all-time high. A rare case of compromise between Republicans and Democrats in the House may result in a new law. The JOBS Act (the Act), short for Jumpstart Our Business Startups, was passed through the House on March 8, 2012, with a vote of 390-23, and has strong support from President Obama.

The legislation would, among other things, make it easier for startup companies to raise money from investors by extending the amount of time that certain new public companies have to begin compliance with certain requirements. Some of the provisions and amendments in the House bill include:

• Allow an increased number of shareholders a company may have before being required to register its common stock with the SEC
• Allow small businesses to sell stock to non-accredited investors in amounts up to $10,000 or 10% of their annual income (whichever is less)  (similar to crowd funding)
• Allowing small companies to publicly advertise for investors

Supporters of this bill include many of those in the technology and entrepreneurship fields, especially startups and the National Venture Capital Association. These supporters claim that the Act will modernize regulations that were established almost a century ago. These modern provisions will allow the use of Twitter and other social media platforms. Although the bill seems to “cut the red tape for growing companies” the Act, however, faces scrutiny from both parties in the Senate as well as the SEC.

Other issues that have arisen as a result of the Act relate to the impact passage would have on rolling back some of the restrictions initially imposed by the Sarbanes-Oxley Act of 2002 (SOX).  It would create a new category for public companies known as “emerging growth companies” for companies with less than $1 billion in revenue. For the first five years after going public, these companies would be exempt from some of the more onerous aspects of SOX.  Many think this revenue threshold is too high, but many others expect a significant uptick in IPO activity if this were to pass.  This could lead to some significant exit opportunities for venture capital and private equity investors.

It’s too early to tell what kind of changes will come as the Act makes it was through the Senate, but it seems clear that certain changes are needed to help continue to encourage investment in small business. 

We are here to help.  Our experienced team of professionals is well versed in all aspects of a business’ life cycle, from providing guidance on business plans, building and structuring your team, expanding operations and finding funding sources.  Please contact me with any questions.

By Bradford C. Taylor, ASA, AVA

The Securities and Exchange Commission has begun an informal inquiry into how private equity firms value their investment assets and how they are “marked to market”.  A listing of the firms that received the inquiry letter has not been released but thus far, it appears the inquiry has focused on smaller firms as publicly traded firms already provide quite a bit of information in quarterly and annual filings. 

One of the main areas of concern for the SEC is the valuation of the private equity firm’s investment portfolio.  Often, these investments are marked to market using complex valuation methodologies and intricate financial models.  Additionally, business valuation is as much an art as it is a science and that has led to different valuations being reported for the same portfolio company.  The chief concern is whether private equity firms have been overstating the values of the portfolios in order to generate more attention and attract new potential investors.

In order to remove themselves from some level of scrutiny, some firms have turned to valuation specialists in order to help with the process.  After receiving these third party valuations, some private equity firms discuss the valuations, methodologies employed and assumptions utilized with their auditors and other advisors.  Additionally, many private equity firms also contend that interim valuations are less important to investors as private equity funds earn profits only when they sell a holding, not on an annual basis like many other investment vehicles. 

Since the SEC is at the beginning of their inquiry, it’s hard to tell what may come of it, but it certainly looks like valuations are going to be getting more attention going forward.  Our business valuation team is here to help should you have any questions or concerns on your own valuations or the valuations of companies you are looking to invest in.  Please contact me (btaylor@kahnlitwin.com) or any other member of our team for further assistance.

KLR is one of the largest accounting firms in Boston that offers business valuation services including ESOP valuations, small business valuations, fair market value reports, estate and gift tax preparation and acquisition assistance. Litigation support services such as marital dissolution (divorce) and shareholder and partnership buyouts and disputes are also offered.

By Peri Ann Aptaker, Esq., CPA/PFS, CFP®, CBA

The 60 year old son in a family business walks into his 90 year old father’s office on a Friday afternoon.  The conversation is as follows:

Son: Dad, I came in here to tell you that my wife and I are retiring and moving to Florida.

Father: What do you mean?  Don’t you know that the business will be yours someday when I retire?

Twenty years ago this conversation might have seemed ludicrous.  Today, however, people are healthier and more active than they ever have been.  Many successful entrepreneurs cringe at the thought of leaving their businesses at age 65 faced with the prospect of another 25 years of life “doing nothing.”

For a family business to endure past the first or second generation, a succession plan must be put into place that clearly defines the transition of power from one generation to the next.  The most successful multi-generational family businesses had a plan.  They did not make it by accident.  Succession planning is a process that takes many years to accomplish.  It is never too early to start.  It involves a plan for the business, a plan for the retiring family member, and a plan for the successor.

Do not be in a position of having your children retire before you! Questions? Contact me and stay tuned for my next blog in my family business series “Does your family business need an outside board of directors?”

Peri Ann Aptaker is the chair of the KLR Women CPA’s Business Exchange. This Exchange reinforces the firm’s ongoing strategy to retain the best and brightest talent in the industry. The KLR Women CPA’s Business Exchange fosters connecting women CPA’s with other successful women business leaders. Visit our website to learn more about the KLR Women’s Business Exchange or check out our group page on LinkedIn where you can stay up to date on the latest WBE news, events and information.

By Sandy F. Ross, CPA

Compliance with the rules and regulations will not only keep you out of trouble, it might also keep you in business.  The U.S. Department of Housing and Urban Development (HUD) recently suspended a Philadelphia company from doing business with the US Government.  The Philadelphia Company ran afoul of the regulations as they withdrew over $300,000 from the reserves along with several other actions that led to their immediate suspension. 

There are several things you can do that will help you do business with the US Government:

1. Financial Review Process
• Year end is the perfect time to review your compliance and make sure your financial house is in good order.  As part of a good financial review process we recommend that you put together a list of reporting and compliance requirements (i.e. Insurance, Bonding, Debt to Equity, Net worth, Liquidity, Deposits, etc.) and review it at various times during the year.
2. Be aware of important deadlines
• December year-end—a number of compliance issues are fast approaching.  The HUD Annual Financial Statement (AFS) is due 90 days after year-end.
• December fiscal year—the March 31st deadline is fast approaching.
• In addition to other year-end requirements, the surplus cash deposit is due 90 days after fiscal year-end.
3. Keep up with changes
• HUD has also made some changes to the electronic input forms for the Lender Assessment SubSystem which will affect the supplemental information in your financial statements.

KLR has experience with HUD programs, FHA Fillings, REAC Fillings, all agreed upon procedures and electronic submissions. We also have extensive cost certification and Section 811 experience and are familiar with all related compliance requirements.  If you have worked with any of these programs and want to share your experiences, please comment below.  If you have specific questions and would like to discuss, please email me at SRoss@Kahnlitwin.com.

Like this blog? You can find related information for your business on the KLR Business Blog.

By Richard LaCross, CPA/PFS, CFP®, MST

For those who are married and who are nearing retirement in the coming years where one spouse is a higher earner and the other spouse is not, there is retirement benefit strategy to keep in mind, especially if it is one of the spouse’s intention is to continue working to age 70 to maximize Social Security benefits. 

Here’s how it works by example. Assume the husband is currently 66 at full retirement age for Social Security purposes and the wife is 62 (the youngest age for this strategy) who worked off and on over the years and was the main caregiver for the family. The husband wishes to work to age 70 and the wife would like to retire.  The wife’s choices for Social Security benefits are $400 based on her work history or a spousal benefit of $1,250 which is 50% of the husband’s work history ($2,500 x 50% =$1,250). Since the wife is not at full retirement age, her spousal benefit will be reduced to $937.50 ($1,250 x 75%).  This spousal benefit even on a reduced basis is over twice as much as the benefit based on the wife’s own work history.

How can the wife receive the spousal benefit if her husband wants to continue to work to age 70? This is where the “file and suspend strategy” comes into play.  Since the husband is at full retirement age, the husband files for Social Security benefits, the wife applies for a spousal benefit, and then the husband has Social Security suspend his benefits.  At age 70, the husband re-applies for Social Security benefit.

The Outcome:

• The wife receives spousal benefits while the husband continues to work to age 70 that are twice as much as the benefit would have been under her own work history.
• The husband is guaranteed a Social Security benefit of at least 132% of the benefit of full retirement age when he files for Social Security at age 70.
• The husband can continue to work and accrue delayed benefits when he re-applies for Social Security benefits at age 70.
• At the Husband’s death, the wife’s survivor benefit will be increased to 100% of the husband’s benefit determined at age 70, if the husband predeceases the wife.

Keep in mind that this strategy is not for all married couples and should be part of your discussion with a Certified Professional.  Please contact me if you have any questions, I have experience with these types of situations and am happy to help.

By Paul Oliveira, CPA

The treatment of success-based fees has been the subject of much controversy between IRS and taxpayers for some time. The argument over whether a portion of such fees can be deducted, or at least amortized, centers on the type and extent of documentation that is required to establish an allocation of the fees to activities that do not facilitate the transaction. Some new developments in 2011 that have not gotten a lot of attention may offer taxpayers a bit more flexibility on the question.

First let’s understand what types of fees are at issue here. Success-based fees are amounts that are considered contingent on the successful completion of a transaction. Usually, that would encompass the investment banker or other financial advisory fee that is only payable after a successful closing. These fees are generally presumed to be facilitative to the completion of the transaction, and thus capitalizable, unless it can be documented that the fee encompassed other activities during the course of the engagement that turned out to be non-facilitative. Amounts paid for non-facilitative activities are generally deductible (or amortizable in a start up situation).

On April 8, 2011, IRS issued guidance in Revenue Procedure 2011-29 which permits taxpayers to elect to treat 70% of success-based fees as non-facilitative. Taxpayers would then have to capitalize the remaining 30% as an amount that facilitates the transaction. This revenue procedure is effective for all success-based fees paid or incurred in tax years ending after April 7, 2011. The election is made by attaching a statement to the return and, once made, is irrevocable.

In addition to the revenue procedure, the IRS also issued a recent directive to its Large Business and International (LB&I) examiners not to challenge the treatment of success-based fees incurred or paid in tax years ending before April 8, 2011, as long as the taxpayer capitalized at least 30% of the total success-based fees incurred on the transaction on its originally filed return.

The net result from these new developments is an opportunity for affected taxpayers to take a very practical, and less time-consuming, approach to determining the deductibility to these types of fees. For some taxpayers, a 70-30% allocation is a better result than they may be able to support through documentation. For others, a 70-30% split may not be the optimum answer that a taxpayer could achieve if they had the opportunity to develop the documentation necessary to support a more aggressive allocation. Nonetheless, this latter group of taxpayers should weigh the additional time and cost necessary to develop the documentation, as well as the potential increased audit risk.

The directive to LB&I field examiners may also present an opportunity for companies to reassess their previous measurement of uncertain tax positions relating to success-based fees for financial reporting purposes.

If you have any questions, don’t hesitate to contact me or anyone directly involved on your engagement.

KLR is one of the largest CPA firms in Boston, and offers assistance to venture capital firms. These include internal audit assessments as well as international tax services and specialized tax services such as cost segregation, research and development and energy studies. Due diligence for buyers and preparedness for sellers can also be provided during the acquisition process.

By John E. Surrette, Jr., CPA, CFE

As we meet with prospects in the Private Equity/Venture Capital world, many times the conversation turns to what makes dealing with a regional firm different than a national or international firm.  With that in mind, I’ve developed a list of reasons why there should be no choice (in no particular order).

1. Low turnover rate - our employee turnover rate is lower than industry averages, meaning that the engagement team that works on your account this year will handle your work next year, and the year after that, and ….
2. No re-training of our staff - since our turnover rate is lower, you’ll spend less time training our staff and more time dealing with the needs of your company.
3. More competitive fees - lower firm overhead = lower fees.
4. Our clients are your targets - since we deal with middle market clients, our client base is most likely your target market, and may even include some of your portfolio companies.  This offers the opportunity for proprietary deal flow.
5. Worldwide reach - many regional firms are part of national and international networks, which gives you the same access to services in markets outside of the country that larger firms offer.
6. Local decision-making - complex issues and technical questions can get resolved much quicker since the ultimate decision is made locally, not by a central office somewhere else in the country.
7. Client service is our priority - we pride ourselves in client service – not just talking about it, but delivering it.
8. Understanding your business – we deal with pre-revenue start-ups to multi-billion dollar enterprises.  We have the resources to deliver solutions to all of your challenges.
9. Our people - we know that our people are our most valuable assets – once they are introduced to your account, they will become yours, too!
10. Growth - our firm doesn’t grow if yours doesn’t.  We are prepared to grow with your business, so we can meet your needs now and in the future.

Hopefully this gives you some insight as to what it’s like to use a regional accounting firm.  Please contact me directly at JSurrette@KahnLitwin.com or call 888-KLR-8557 to learn more about how we can help.

By Henry A. Silva, CPA, CFF, MBA, Director of Retirement Plan Services

On October 19, 2011, the IRS published the 2012 retirement plan limits.  The increases were greater than in the previous two years, when inflation was lower.  In fact, many of the limits will increase for the first time in 4 years.  Most of the limits are adjusted based on cost-of-living increases.  But with the economic slowdown over the last few years, the limits remained flat from 2009 through 2011.

The new limits are as follows:

Annual Salary:  Increases from $245,000 to $250,000
Social Security Wage Base:  Increases from $106,800 to $110,100
HCE Determination:  Compensation increases from $110,000 to $115,000
Key Employee:  Officer compensation increases from $160,000 to $165,000

Elective Deferrals

• 401(k)/403(b)/457:  Increases from $16,500 to $17,000
• Simple IRA:  No change from $11,500

Catch-Up Contributions

• 401(k)/403(b)/457:  No change from $5,500
• Simple IRA:  No change from $2,500

Annual Additions Limit

• Defined Benefit Plan:  Increases from $195,000 to $200,000
• Defined Contribution Plan:  Increases from $49,000 to $50,000

Please let us know if we can answer any questions about how these new limits may impact your plans for 2012.