When times are tough, the temptation for employees to dupe the system and steal cash or assets increases. The economy is a key driver in fraud activity, and over the last several years, organizations of all sizes have been victimized.
So is the fraud environment improving now that there’s news of an uptick in the economy? Not yet, says Jason Buhlinger, a supervisor in financial advisory services at Brown Smith Wallace LLC, St. Louis, Mo.
“While there may be signs of the economy getting a little better, people still feel uncertain — and as long as that feeling is in the back of their minds, there is motivation and a rationalization to steal,” Buhlinger says.
Companies are running leaner, which means there is less management oversight at some firms, and others have eliminated internal audit personnel. One person may be doing the job of two or more employees, so the work force is spread thin. And that may mean that no one is watching should an employee decide to commit fraud.
“Imposing internal controls becomes harder to accomplish with less staff,” Buhlinger says.
Now is not the time to let your guard down as a business owner.
“The longer the economy trickles along, we’ll continue to see people who are looking for easy ways to get cash,” Buhlinger says.
Smart Business spoke with Buhlinger about the types of fraud being committed and how to establish strong internal controls to protect your business.
What specific economic factors drive individuals to commit fraud?
The recession began in December 2007, and at one point, the Dow Jones Industrial Average was down as much as 50 percent. People had to become more frugal. Those who planned on retiring early had to re-examine that goal as they watched their investment savings dwindle. And home prices dropped significantly in some areas of the country.
All of a sudden, the asset values that many people counted on were gone and they had to figure out a way to supplement that. This is where the fraud triangle comes into play — opportunity, rationalization and pressure. All three of these stress points have increased in the past several years, and this continues to be the case.
As long as people feel a sense of economic uncertainty, that can evolve into rationalization and pressure to find more money somehow. When the opportunity to commit fraud presents itself, rather than taking the higher moral road, as they might in better times, they justify the act and take that opportunity. Your organization can’t realistically eliminate all rationalizations and pressures, but it can manage the opportunity side of the triangle.
What types of fraud are most common today?
Asset misappropriation remains the most common type of fraud. That includes, but isn’t limited to, cash theft, payroll schemes and inventory theft, to name a few. A worker might file false expense reports and pocket the cash, or take product from a warehouse and sell it for a profit.
Stealing from cash registers $20 at a time can go unnoticed if proper controls aren’t in place. Asset misappropriation tends to involve smaller amounts of money, but those dollars add up over time.
What are the components of an effective fraud awareness program?
Organizations need to take a proactive approach to prevent fraud. Owners need to be involved in the financial aspect of the business rather than passing that role off entirely to a manager. For example, we recently handled a fraud case in which a CFO had complete financial control of the company and could take whatever he wanted. If their company had implemented the critical concept of segregation of duties, it would have been more difficult for him to pull off fraud.
Segregation of duties is critical to prevent fraud, and this can be a challenge in small businesses. That’s why owner involvement is critical at every level of a business, from reviewing financial statements to checking in at the cash registers. It also helps if organizations provide a way for employees to anonymously report fraud through a tip line or even a simple suggestion box.
By keeping fraud at the forefront of your business, you will discourage those who are teetering on the edge of committing fraud. And with internal controls in place, you will be more likely to catch fraud early before it causes significant damage to the business.
How can a business be proactive about creating a culture of honesty?
It’s important to create a fraud prevention program and talk about it regularly with employees. Hold quarterly meetings to discuss fraud and internal controls. Let everyone know your organization has a zero tolerance policy. By making employees aware that fraud is on the radar and no one is going to get away with it, you decrease the rationalization and opportunity for fraud to occur.
Begin a fraud prevention program to learn what areas of your business are susceptible to fraud. A risk assessment will help you zero in on entry points for fraud so you can watch those areas carefully.
A certified fraud examiner (CFE) can help you get that fraud policy on paper, and it’s a good idea to incorporate it into your employee handbook. Secure a commitment in writing from every employee that they understand the policy and the ramifications if fraud is committed.
Jason Buhlinger, CFE, AVA, is a supervisor in financial advisory services at Brown Smith Wallace, St. Louis, Mo. Reach him at (314) 983-1310 or email@example.com.
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The remainder of 2012 presents a significant opportunity to gift assets and take advantage of unprecedented tax benefits. With the increase in the gift tax and generation-skipping tax (GST) exemptions to $5,120,000, wealthy individuals should be having serious discussions about whether it makes sense to take advantage of this window of opportunity.
There’s no time like right now to make small to large gifts, without shouldering a gift tax burden, and time is of the essence because the window may be closing. The gift and GST exemptions are set to expire on Dec. 31, 2012 — and no one is sure what 2013 and beyond hold, given the uncertainty of an election year. It is possible that gifting opportunities at this level will not be available after the New Year.
“We know what the law is today and what we expect the law to be for the balance of 2012, but next year, after the election, today’s gifting opportunities could go away,” says David Heilich, principal, tax services, Brown Smith Wallace, St. Louis, Mo.
Smart Business spoke with Heilich about estate tax planning tools that wealthy individuals should consider before the increased exemptions potentially expire at year end.
What gifting tools are advantageous for wealthy individuals right now?
In 2011, there was an increase in the gift exemption from $1 million to $5 million, which was adjusted for inflation in 2012 to $5,120,000. This is a significant increase, since in 2010, the gift limitation was $1 million.
Additionally, there is the GST exemption of $5,120,000 that allows an individual to transfer wealth to generations beyond children, to grandchildren and future generations. Essentially, the GST exemption protects those assets for a longer period of time before the IRS can assess an estate transfer tax. The ability to make large gifts without paying gift tax to a trust for the benefit of future generations is a significant opportunity that could expire after Dec. 31, 2012. After this point, the exemption will ‘sunset’ because the Tax Reform Act of 2010 only changed the law for 2010-12, and the estate, gift and GST tax laws could revert back to the 2001 law of $1 million estate, gift and GST exemptions with a maximum tax rate of 55 percent, compared to today’s 35 percent.
Who should consider taking advantage of gifting before year end?
Anyone with assets worth $5 million or more, depending on their age and type of assets, should be having serious discussions about their current estate and their motivations and desires for their wealth. Other factors to take into account are potential inheritances, small business appreciation, earnings potential and charitable intentions. Consider both your net worth today and your potential net worth in the future. Make sure you know how to best use today’s estate and gift tax vehicles.
What steps are necessary to execute a gift before the close of 2012?
The critical first step is — don’t wait to act. It’s not too late, but time is of the essence with estate planning. It’s not an overnight process, although it is possible to accelerate planning in order to get gifts in place before Dec. 31, 2012.
When you meet with a qualified estate planning adviser, he or she will first provide education about the laws. From there, a snapshot of the net worth of the estate is gathered, boiling it down to a one-page summary of assets and liabilities. Many times, individuals do not realize how much they are really worth until going through this exercise.
During this time, the adviser will review the current estate plan and the assets of the estate. It is important to understand all trusts (revocable and irrevocable) and entities that are in place, along with a review of any current life insurance policies, and to make sure your health care directives, durable powers of attorney and beneficiary designations are in line with your wishes.
After you create an estate plan, it is important to review your estate plan annually, as well as upon any important ‘life events,’ and update the plan as necessary. This is all part of the process of determining how and what to gift before the end of 2012 and creating an estate plan that accomplishes your goals and desires.
What is an example of how gifting can work if planned properly?
For those who have not taken full advantage of their life exemptions and for whom it makes sense to make a lifetime gift, a wise gifting vehicle is an Irrevocable Trust. This vehicle allows the client to make gifts to a trust and allocate the GST exemption.
In essence, there are two pieces to the gifting puzzle: a gift to the trust, and if the trust includes grandchildren, the potential to apply the GST tax exemption when filing the gift tax return. Ultimately, this means the client is able to transfer the assets today without paying current gift tax and move all of the appreciation out of their estate. If the succeeding generation leaves the assets in trust, those trust assets could potentially be free of estate tax in perpetuity. However, keep in mind that this is just an example of how gifting can work, and it is important to understand a client’s assets and goals before creating a plan.
What other gifting tools can relieve tax burdens at this time?
Another component of gifting is the annual exclusion — think of this as a ‘freebie’ from the IRS. You can give $13,000 individually to anyone (and married couples who consent to gift split can gift up to $26,000 to anyone). The annual exclusion gifts are not added back to your estate and are a simple way to transfer assets to the next generation.
No one knows what 2013 will bring, but we do know that right now the window is open, and it is a great time to review and update your estate plan and consider taking advantage of these unprecedented opportunities.
David Heilich is Principal, Tax Services at Brown Smith Wallace in St. Louis, Mo. Reach him at firstname.lastname@example.org or (314) 983-1273.
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The only sure thing with health care reform is that things are changing. No one is sure how, exactly, those changes will play out as current reform legislation is reviewed in the Supreme Court, or what will happen following the presidential election.
That uncertainty makes planning for the significant and steadily escalating cost of health care a real challenge for businesses. As costs increase, how can employers continue to provide benefits that attract and retain quality workers while managing their expenses?
“One of the things that employers should be doing now is reviewing their health care costs to begin to identify ways to control their costs, regardless of what happens with health care reform,” says Ron Present, principal, health care advisory services, Brown Smith Wallace, St. Louis, Mo.
Smart Business spoke with Present about what employers should know about the current state of health care reform and how they can begin to prepare for the future.
What are employers’ greatest concerns surrounding health care reform?
The biggest fear is that their health care costs will increase significantly, and that is a valid fear. Then there is the question of how to manage expenses while continuing to offer quality benefits to employees. In today’s market, companies must begin to view health care as more than just an employee benefit — it’s a recruiting and retention tool that provides companies with a competitive advantage.
Employers must look at benefits from a strategic perspective and consider how they can position their health insurance offering as an incentive. At the same time, they must manage the bottom line, and that won’t be easy. In addition, there is widespread confusion about health care benefits in light of the uncertainty in health care reform. In the end, it is the responsibility of — and perhaps opportunity for — employers to clearly communicate to their employees about the company’s benefits.
How could the individual mandate affect employers?
The individual mandate is a law requiring that all individuals purchase health care insurance or pay a penalty that will phase in during 2014. The individual mandate, as part of the health care reform legislation, is currently being reviewed by the Supreme Court, and it’s a sticky issue.
Is it constitutional to mandate that all citizens have health insurance? Is it fair to charge a penalty to employers for not offering health care benefits? And because the mandate has been written into the tax code — and the Supreme Court cannot rule on tax code issues unless there has been harm done — will the court be able to rule on the individual mandate before it is set to go into effect in 2014? A key related question is how the upcoming presidential election will impact the legislation.
The health care reform plan could be tossed aside completely, altered or kept fully intact.
What decisions will employers be forced to make regarding health care legislation?
Concerning the individual mandate, employers must determine whether it’s more financially prudent and culturally sensible to offer benefits to employees or to pay the penalty for not doing so. A discussion with an experienced tax professional who is well-versed in health care reform legislation can help employers consider the financial impact of this decision and determine the right course of action.
Meanwhile, companies will need to heighten their monitoring of hourly employees because those who work 130 or more hours per month will be automatically eligible for company health care benefits if the current legislation stands. If employers do not abide by this and exclude those employees, they will pay a steep penalty. This becomes particularly complicated with part-time and shift workers and in situations in which workers are picking up additional shifts, which may push them over 130 hours in a given month. Employers will need to carefully monitor employees time on a real-time basis and manage employees in terms of their monthly/hourly workloads. Currently most systems track data on a pay period basis (weekly, bi-weekly, semi-monthly). Companies will need to ensure they have systems in place to be able to track hours on a monthly basis.
What should business owners be emphasizing in their communications with employees?
According to an ADP HR/Benefits Pulse Survey on Employee Benefit Tools, 40 percent of employees do not understand their current benefits plan. It is critical to drive home to employees the value of the health care benefits that you offer. Communicate often, and reach out to employees in face-to-face meetings, through e-newsletters, mailers that go home to spouses and dependents, and via the company intranet.
Emphasize the importance of wellness and enforce employee accountability, communicating that the healthier they are, the less they could pay for their monthly health insurance premium. Be proactive by implementing wellness programs including incentives for better nutrition or exercise.
What should employers be doing right now in light of the current uncertainty?
Now is the time to get discerning input on the strategic and cost differentials of offering health insurance versus paying a penalty for not doing so. You should explore ways to reduce cost, without sacrificing benefit and identify systems to put in place that will improve real-time reporting.
The keys to success will be having sound knowledge of the current situation and a strong framework in place before you need to make the upcoming changes and decisions you face as health care reform is implemented. With these two essential procedures under your belt, you will be in a position to make wise strategic decisions for the ongoing health of your business.
Ron Present, CALA, CNHA, LNHA, is principal, health care advisory services, at Brown Smith Wallace, St. Louis, Mo. Reach him at (314) 983-1358 or email@example.com.
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Fraud floods the news these days, and any organization that lacks anti-fraud controls places itself at an increased risk of trying to plug leaks after the fact.
Many companies assume the greatest risks come from those outside the company, but oftentimes, fraud is committed by longtime employees who know how to work the system and disguise the financial leak, or by disgruntled workers who feel the company owes them something. Creating an anti-fraud policy is not enough; you also need to build an anti-fraud program and conduct regular assessments to truly mitigate the risk.
“The main type of fraud we are seeing today is asset misappropriation, which happens quite often,” says Ron Steinkamp, principal, risk advisory services, Brown Smith Wallace LLC, St. Louis, Mo.
Smart Business spoke with Steinkamp about common fraud red flags and how businesses can effectively implement anti-fraud tools to mitigate risk.
How prevalent is fraud?
The Association of Certified Fraud Examiners (ACFE) 2010 Global Fraud Survey found that a typical organization loses 5 percent of annual revenue to fraud, with the average fraud occurring for 18 months before being detected. While any business is a potential target, the industries most commonly victimized are banking/financial, manufacturing, and government and public administration. Generally, there are three types of fraud: asset misappropriation, corruption and financial reporting. Asset misappropriation includes fraudulent disbursements, theft of cash receipts and other activities in which individuals steal or misuse resources. These frauds are the most frequent, with a median loss of $135,000, according to the ACFE.
With corruption — in which an employee uses influence in a business transaction to obtain personal benefit — there is a median loss of $250,000. The least frequent form of fraud is financial statement fraud, the intentional misstatement or omission of material information in an organization’s financial report. However, its median loss exceeds $4 million.
What are some common red flags for fraud?
Incentive, opportunity and rationalization are the three characteristics that form the fraud triangle and are the red flags of fraud. Typically, fraud occurs where there is incentive or need, such as personal debt, living beyond one’s means or job frustration. Second, there is an opportunity, such as access to cash or inventory, weak internal controls, close relationships with suppliers or vendors or weak management. An individual may rationalize the fraud, feeling as if he or she is not being fairly compensated, or justify stealing money with the intention of paying it back. The fact is, this payback never happens.
How can an organization prevent fraud in a cost-effective manner?
The key is to create an anti-fraud culture, which begins by setting the tone at the top. Leaders must set the example by behaving ethically and openly communicating expectations to employees. There must be a formalized code of conduct founded on integrity that is communicated to all employees, and all employees must be treated equally.
Many businesses establish anti-fraud policies but fail to follow through with the key step of educating employees. Fraud prevention begins during hiring, when companies should conduct thorough background checks on potential employees. Upon hiring, employees should be trained on company policies and procedures, including the anti-fraud code of conduct. To foster an ongoing ethical environment, refresher training should be conducted regularly. By creating an environment where fraud is not tolerated and attempts at fraud are promptly dealt with, a business sends the message to employees, vendors and clients that dishonest behavior will not be tolerated.
What are the best ways to detect fraud?
The best way is to leverage your employees who are often the first to detect fraud. That’s why it’s very important to have an anonymous method of providing tips, such as a phone system or web-based tool. This should be available to customers and vendors, as well. Such a reporting system builds awareness of the anti-fraud culture and gives individuals a way to safely and effectively report suspicions. Other effective ways to detect fraud are by identifying fraud risks and by management’s implementation and monitoring of appropriate internal controls. Periodic internal audits are also a strong detection method.
What are some anti-fraud tools that can be used?
The foundation of an anti-fraud workplace is a formalized company code of conduct, which should include detailed guidance on permissible and prohibited behaviors and actions. The code should outline employees’ responsibilities in the prevention and detection of fraud, and explain the process for communicating concerns about potential fraudulent activities. It’s also important to have a clear, accurate picture of your fraud risks. Where are your weak spots? Are you unintentionally providing opportunities for fraud to occur?
A fraud prevention checkup will help frame the picture. This high-level assessment of an organization’s fraud health focuses on fraud risk oversight, ownership and assessment. It includes reviewing fraud policy, controls and detection efforts. A more detailed fraud risk assessment includes identifying how fraud could occur within critical processes and who might be in a position to commit it. Fraud monitoring involves using data analytics to highlight red flags and potential errors, fraud, inefficient operations and targets.
A formal fraud review/investigation is best directed by a Certified Fraud Examiner (CFE), who can conduct a thorough, independent, objective review and provide solutions. Don’t wait until you’re under water to stem the tide. Proactive measures can prevent fraud and well designed detection programs can uncover existing abuses.
Ron Steinkamp, CPA, CIA, CFE, is principal, risk advisory services at Brown Smith Wallace, St. Louis, Mo. Reach him at (314) 983-1238 or firstname.lastname@example.org.
For more information on this topic, please see: Fraud Prevention Checkup
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Insurance is purchased in a confusing marketplace. There’s no sticker price on property and casualty (P&C) insurance and the cost structure can be difficult to comprehend. P&C insurance prices are based on complex market fluctuations and numbers that make it difficult for many to understand.
That can be frustrating to those used to having control over the costs in a business, says Bill Goddard, director of insurance consulting at Brown Smith Wallace LLC, St. Louis, Mo.
“Insurance pricing is cyclical and difficult to predict, causing unexpected budget surprises,” says Goddard.
Over the last several years, the cost of property and casualty insurance has been decreasing. With this gradual decline in cost, companies have gotten comfortable with their insurance premiums and, as a result, may be paying less attention to loss claims and best practices that can help mitigate insurance costs.
This is about to change because 2012 is bringing price increases to property and casualty insurance — another reason why CFOs will now hate this unpredictable cost.
Smart Business spoke with Goddard about why insurance pricing is difficult to understand and how businesses can better prepare to manage the cost.
Why is insurance a difficult area?
First, insurance has its own language. Who has time to learn it? Second, it’s not a logical marketplace in terms of pricing. You can’t simply compare costs apples-to-apples and choose a plan. There are variables because of the actuarial pros working behind the scenes. Third, you get calls from salespeople all the time, which can be overwhelming.
Also, the insurance world is very short on ideas about how to control costs. If your insurance prices are going up, you need innovative ideas to help you control the cost. That’s why bringing in a professional consultant with insurance experience is so valuable.
Finally, there is a lack of good benchmarking data in property and casualty insurance. You can’t compare the cost of insurance at one business to another and can’t determine if what you are paying is higher or lower than average because there are so many factors involved.
What is causing prices to increase this year?
Insurance is cyclical in nature, and the cost is impacted by many factors, one of which is the availability of capital. When the stock market is an unappealing place to invest, investors instead may choose to infuse capital into the insurance industry, where they could potentially see a better risk-reward result.
For example, those who invested in writing earthquake insurance would have earned sizable profit in the last seven years or so because there have not been any major earthquake events in the United States. These investments in insurance increase the supply, which decreases the price for businesses that need policies.
The dynamic behind rising property and casualty insurance pricing is that, with the stock market loosening up and investors making other choices besides insurance for their capital, there is less supply in the insurance market, resulting in a greater cost for those who demand the product.
What kinds of companies are going to feel the most pain from increased insurance prices, and what can they do about it?
Businesses with a bad loss history will be the first to feel the insurance cost increases. For example, take a company that pays $300,000 for workers’ compensation insurance and maintained that premium for years despite losses of $320,000. Because the insurance market was soft, the insurer didn’t want to lose that company’s business, and the company continued paying the same premium despite losses that exceeded this dollar amount.
Now, that company could hear differently from its insurance company, which may increase costs to $390,000 to make up for past years’ losses and net a profit this year. The key is to watch your losses: Does your history make you a risky business for an insurer?
If the answer is yes, you should work to position your company to earn a better premium by putting in place safety programs or improving claims procedures.
A consultant who specializes in insurance can help you identify ways to work with your broker to reduce your premium despite industrywide price increases.
What will the impact be on companies that have a good loss history?
There is an opportunity for these companies to save money on insurance rather than absorb cost increases if they choose to take on more risk. This could be accomplished by increasing their deductible and, as a result, paying a lower premium.
This can be risky for companies that do not have a firm grasp on their loss history — you must know your numbers before you take on more risk. Otherwise, you’ll watch more money go out the door, because if you increase your deductible, pay less premium, but have several loss claims, you’ll cancel out any savings. Perform a risk analysis and then determine whether your company can afford to take on more risk.
How can CFOs get a handle on their companies’ insurance?
The best solution is to bring in an independent adviser who has deep experience in the insurance industry and who can carefully analyze your risk, benchmark your business, help choose the best insurance provider based on your size and scope, and act as a consultant working with your broker to protect your bottom line.
Many companies do not have in-house insurance experts. An independent consultant with insurance industry expertise can provide real value on an as-needed basis. The consultant can act as your part-time risk manager, representing you in this difficult marketplace.
Bill Goddard, CPCU, is director of insurance consulting at Brown Smith Wallace in St. Louis, Mo. Reach him at (314) 983-1253 or email@example.com.
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Outsourcing accounting services is a proven, cost-effective solution for businesses of all sizes, even those that have dedicated accounting personnel.
It’s a popular trend in the current economy. When companies decide to streamline operations, staff reduction is an obvious consideration. Business owners may figure they can handle cutting checks, or they disperse various accounting responsibilities among managers. But these tasks can be time-consuming and take leaders away from their primary roles.
“In the past few years, companies have reduced their staffs,” says Karen Stern, member in charge of BSW Small Business Services LLC, an affiliate of Brown Smith Wallace LLC in St. Louis, Mo. “Often, they seek to downsize personnel who can only do one job, such as a bookkeeper, who only handles payroll.”
An outside firm can provide a valuable third-party perspective and the experienced, licensed and trained personnel to complete mission-critical tasks. You can outsource payroll, analysis and preparation of special documents such as property tax returns, or any other accounting function.
Smart Business spoke with Stern about what accounting services can be outsourced and how it saves valuable time and money.
What types of companies can benefit by outsourcing the accounting function?
Any company from a mom-and-pop shop to a Fortune 500 corporation can utilize outsourced accounting services. Depending on the size of the company and its accounting workload and demands, a business might decide to leverage a single task, such as payroll, to an accounting/tax services provider. A Fortune 500 company might hire a firm to manage all back office work. Another company might require a professional to analyze its property tax reports.
On the other hand, a business might want the firm to act as the bookkeeper and take on all accounting duties. Keep in mind, firms that provide a full range of accounting services have the ability to look at a company’s financials from a tax perspective, as well.
What types of services can be outsourced?
Any and all accounting services can be outsourced, whether it’s receivables, payables or payroll — anything that is considered a bookkeeping task. And delegating these duties to a professional accounting/tax services firm will not compromise your security. Payroll is password protected, and there is complete anonymity.
Accounts are never discussed outside of the company, nor are they discussed with those inside the company who are not directly involved in those accounting processes.
What are the benefits of outsourcing?
First, there is the time management benefit. For example, in a smaller company, perhaps the owner’s spouse is managing payroll and keeping the books when that person could instead be selling or analyzing financials — responsibilities that are important to the growth of the company. Larger companies can farm out aspects of accounting such as payroll and free up their staff accountants’ workloads.
Second, the outsourced firm performs more efficiently. When a business outsources accounting tasks, the firm taking on those responsibilities does not require benefits or vacation time. The firm won’t call in sick, and there aren’t phone calls to answer, meetings to attend or other distractions.
The ease of transitioning to an outsourced firm is surprising for many clients. A professional accounting/tax services firm can quickly drop in and analyze company financials, clean up books, set up processes and procedures, and train employees to read financial statements.
What is a typical delivery model?
Outsourced services can be provided electronically or in person. Some clients prefer to have professionals in the office physically writing checks and managing other accounting tasks. It’s important for them to have the personal contact. Other clients like the convenience of a professional who works remotely and performs accounting tasks electronically.
These days, it’s easy to outsource services by using cloud computing, where information can be shared in real time. Many clients rely on a combination of personal and electronic services to meet their accounting service needs.
How does outsourced accounting help decrease a company’s risk?
The main risk with accounting services is safeguarding one’s assets. A company is exposed to innumerable risks when there is a single bookkeeper or one back-office clerk who makes all the deposits, writes the checks, pays the bills and reconciles the bank accounts.
These risks can be alleviated by involving a third party, a professional accounting/tax services firm that brings separation of duties to the financial process at the company. Perhaps the payroll clerk still writes checks and makes deposits, and the outsourced firm reconciles bank accounts so there is another party reviewing the work. Or, the outsourced firm might take over the check writing and bank reconciliation, or any combination of duties.
The key is to split those duties so that all of a company’s financial information isn’t managed by one person. For this reason alone, it’s a good idea to include an outside professional in the company’s accounting practices — and the efficiencies and cost savings the company will realize are an added bonus.
Karen Stern, CPA, is member in charge of BSW Small Business Services LLC, an affiliate of Brown Smith Wallace LLC in St. Louis, Mo. Contact her at (314) 983-1204 or firstname.lastname@example.org.
Economic stress is impacting organizations of all shapes and sizes, particularly state governments.
Missouri, like most states, is aggressively enforcing tax laws to increase revenue. However, there is some light on the horizon, and scattered pockets of opportunity dotting the scene. Unlike the governors of some states, Missouri’s governor has not proposed any state tax increases to balance the budget. Instead, the governor is focused on reducing government spending by $1.8 billion in 2011.
And legislative efforts appear to follow suit. There are two proposed bills that support taxpayers: The first is a tax amnesty program and the second is a bill to repeal the Missouri franchise tax over a five-year period.
In addition, a recent Missouri Supreme Court decision held in favor of the taxpayer. The issue involved the application of a sales tax exemption on materials purchased and used by a real property contractor. The decision is very favorable for certain qualifying businesses.
However, collection efforts are on the rise in Missouri. The state has increased audit activities and the quantity and type of tax notices it is issuing.
According to Susan Nunez, principal, and Pam Huelsman, manager, in the Tax Services practice at Brown Smith Wallace LLC, more than ever, all states — including Missouri — are cracking down on state income and sales tax compliance.
“Although the Missouri Department of Revenue is increasing its collection efforts, there are still opportunities for taxpayers in both the state income tax and sales tax areas,” says Nunez.
Smart Business spoke with Nunez and Huelsman about the types of income tax elections and sales tax exemptions available to Missouri taxpayers that could present tax benefits for businesses.
What is the current tax climate in Missouri?
Missouri has been experiencing a sharp decline in revenue collections and the result is an increase in taxpayer notices and ramped-up collection efforts. For instance, the state is matching the data within its own system to identify taxpayers who might be registered for one type of tax but not another.
The state is also partnering with other states’ departments of revenue, the IRS and Customs to receive information regarding tax filings, residency and shipments made into the state. With the expansion of tax collection tools, taxpayers are more likely to receive some type of correspondence from the state.
These notices typically require a response within a given time period, and an untimely response may result in severe financial penalties. Although it may seem stressful and complicated, the key is for taxpayers to realize that they have rights. They should discuss such notices with a tax professional and respond to any notice received in a timely manner.
Taxpayers should also keep in mind that they may have opportunities to offset these increasing assessments. Consult with a tax professional to keep abreast of new rules and partner with someone who will help you advocate for your rights in the event of a notice, audit and/or assessment.
What notable income tax elections are available for Missouri taxpayers?
For Missouri income tax purposes, a couple of elections are available. First, a corporation that is a member of a federal consolidated group can choose to file as a separate legal entity in Missouri, or as part of the entire federal group. Depending on each taxpayer’s specific fact pattern, one election is likely more advantageous than the other.
Factors that generate tax differences include tax base and property, payroll and sales within and without the state.
Additionally, Missouri offers a ‘three factor’ apportionment election and a ‘single factor’ (sales only) apportionment election. The single factor calculation is unique and, again, depending on a taxpayer’s specific facts and circumstances, may prove to be beneficial.
Keeping up with these details can be burdensome for business owners, thus, taxpayers should consult with a state tax professional to assist in analyzing the various Missouri filing options.
What are some of the sales tax exemptions that present opportunities for taxpayers?
There are several exemptions in Missouri. The manufacturing exemptions apply to manufacturers of tangible property. There are very specific factors that a taxpayer must meet for these exemptions to apply, some of which are not obvious.
However, once these factors are met, the exemptions can provide substantial state and local tax benefits to qualifying taxpayers.
Missouri provides another exemption that applies to manufacturers and processors of product. The application of this exemption is similar to, but somewhat broader than the manufacturing exemptions discussed above. Qualifying taxpayers may reap tax benefits under this exemption as well; however, it should be noted that, unlike the manufacturing exemptions, this exemption does not apply to local sales tax.
So, while the tax traffic sign in Missouri might read ‘proceed with caution,’ the benefits gained from the proper application of Missouri’s income tax elections and sales tax exemptions can offset the overall rise in tax assessments.
SUSAN NUNEZ is principal, State and Local Tax, Brown Smith Wallace in St. Louis, Mo. Reach her at (314) 983-1215 or email@example.com.
PAM HUELSMAN is manager, State and Local Tax, Brown Smith Wallace in St. Louis, Mo. Reach her at (314) 983-1392 or firstname.lastname@example.org.
If a tornado struck your business, or a lightning strike caused you to lose data, do you have a plan in place to make sure that your company can continue operating?
Disaster can strike at any time, and it is critical for every company to have a business continuity or disaster recovery plan in place to ensure the business can sustain operations. Some organizations may opt not to invest the time and resources required to develop a business continuity strategy, but it is simply not wise to operate without a backup plan, says Larry Newell, manager, risk services, and IT infrastructure practice leader at Brown Smith Wallace LLC, St. Louis, Mo.
“Business continuity planning is essentially succession planning,” says Newell. “You never know when a business disruption will take place, and companies need to be prepared. The cost of a business disruption will generally far outweigh this type of investment.”
Developing a plan for business continuity or disaster recovery involves asking lots of what-ifs, gaining buy-in from key managers and business unit leaders, and developing an all-encompassing plan so that the organization can continue operating seamlessly.
Smart Business spoke with Newell about why businesses should invest in business continuity and disaster recovery strategies and what to include in these mission-critical plans.
What is the difference between a business continuity plan and a disaster recovery plan?
The two overlap somewhat, but there is a fine line between how these plans function. The focus of a business continuity plan is to create a backup that mimics the critical business processes a company has in place and the tools needed to support those processes.
The business identifies what those critical processes are. For instance, an accounting firm might need to ensure that software programs containing client data are up and running, and the associates can always communicate with their clients. So data and communication are critical to business continuity.
A disaster recovery plan is IT-centric, focusing on IT services that support the business and designing preventive controls and recovery techniques. This is where high-availability systems really come into play — the speed and ease with which a company can shift to the alternate site.
Why should a company invest in a business continuity or disaster recovery plan?
Like any component of succession planning, business continuity or disaster recovery plans answer the question, ‘What’s next?’ No business can anticipate the types of disasters that can disrupt daily business or shut down their operations entirely. But once disaster strikes, whether that is a weather incident, data loss or power outage, all you can do is react.
Businesses that have sound disaster and continuity plans in place are least impacted by tragedies and interruptions. You don’t want to become a statistic. It’s important to protect your company assets by thinking about alternatives to your current processes.
An adviser with experience in risk management and IT protection can be a great resource, as most plans center on IT and accessing/resuscitating data.
How do you develop a business continuity or disaster recovery plan?
First, there must be support from executive management and participation from business unit leaders, who can provide insight on the processes that must be protected and duplicated to continue business-as-usual in case of disaster. And there must be a plan champion who will take ownership of the planning process.
Creating a plan takes time: It requires a thorough analysis of the company’s operations and asking tough questions about processes and procedures. Essentially, a company must identify the back-end operations that enable it to service customers, and then devise a plan to protect those operations. Knowledge from an IT administrator is critical during this process.
How in-depth should a plan be?
The depth of your plan will depend on your client or customer dependencies and regulations, such as the Financial Institution Regulatory Authority or Federal Financial Institution Examination Council.
Basically, a plan should mitigate the highest risk and impact across the enterprise.
Also keep in mind that a plan has diminishing returns at some point. Treat it like a living document that is regularly updated as your business changes.
What common mistakes do businesses make when developing a plan?
The biggest mistake is not having a plan at all. Also, many organizations fail to think big picture when they create the plan. They may focus on a particular business unit that is considered high impact, when there are other vulnerabilities in the organization that should be addressed. Including business unit leaders will help you tease out the critical processes that require protection throughout your organization.
Ideally, you should include a crisis management plan, identify critical business processes to develop the business continuity plan and then create a disaster recovery plan that is IT-centric. You should test these plans at least annually to be sure that they work effectively for your organization.
Consulting with an adviser who can help you identify risky areas of your business that should be protected with a business continuity or disaster recovery plan will give you an important outside perspective to make sure your plan is tight.
Larry Newell is manager, risk services, and IT infrastructure practice leader at Brown Smith Wallace, St. Louis, Mo. Reach him at (314) 983-1218 or email@example.com.
After some challenging years in a recessionary economy, businesses aren’t the only ones feeling the crunch.
States — including Illinois — are hurting, and to regain strength, they are more closely enforcing tax law and, in some cases, increasing taxes.
According to Pam Huelsman and Susan Nunez from Brown Smith Wallace LLC’s Tax Services Practice, the state of Illinois is in a difficult financial position. The state currently imposes a multitude of taxes, and recent legislation increased the personal income tax rate by 67 percent, increased the corporate income tax rate by 46 percent and suspended the net operating loss carryover deduction for taxable years ending after Dec. 31, 2010, and prior to Dec. 31, 2014.
Senate Bill 2505 was signed into law by Gov. Pat Quinn on Jan. 13, 2011. The tax rate for individuals, trusts and estates will increase from 3 percent to 5 percent for taxable years beginning on or after Jan. 1, 2011, and prior to Jan. 1, 2015, with reductions thereafter. The corporate income tax rate will increase from 4.8 percent to 7 percent for taxable years beginning on or after Jan. 1, 2011, and prior to Jan. 1, 2015, with reductions occurring thereafter. The personal property replacement tax remains unchanged.
In addition to the income taxes on both personal and corporate income, the state imposes a Retailers’ Occupation Tax on sales of tangible personal property and a Service Occupation Tax on transfers of tangible personal property incidental to a sale of a service. Retailers and servicemen collect these taxes at rates which range from 6.25 percent to 9.75 percent, including both state and local taxes.
Both the Retailers’ Occupation Tax and Service Occupation Tax have a compensating use tax applied to tangible personal property acquired from out-of-state vendors. Certain exemptions from these taxes are available to qualifying taxpayers. But despite this foreboding tax climate, there are still opportunities for businesses to earn tax credits.
Smart Business spoke with Huelsman and Nunez about Illinois taxes and how your business can benefit from sound tax planning.
What is the current business tax climate in Illinois?
The financial situation in the state is serious. Illinois isn’t paying bills, and everyone is feeling the pain. The state imposes many taxes and, as shown by the rate increase for both personal and corporate income taxes, it will likely continue to look for ways to raise revenue through taxes.
What tax credit opportunities are available for businesses in Illinois?
The good news is that, despite heightened audit activity and increased taxes, there are tax breaks for businesses that qualify. An example is the Manufacturer’s Purchase Credit. Qualifying manufacturers earn a state sales tax credit of 50 percent of the state sales tax that would be paid on purchases of exempt manufacturing equipment. This credit can be applied toward the sales/use tax imposed on production-related purchases that do not qualify for the exemption.
Let’s say a manufacturing company purchases a $100,000 piece of manufacturing equipment, which would incur a state sales tax of $6,250 if not for the exemption. The company would earn a credit of half that amount, which is $3,125. It’s a win-win for companies: They are able to utilize the exemption and earn a credit to apply to tax owed on purchases of production-related equipment.
What opportunities are available for businesses to help them create jobs?
Effective June 30, 2010, businesses with 50 or fewer employees can take advantage of Small Business Job Creation Tax Credits. Every new job created and retained for one year earns credits against the state withholding tax.
The maximum credit is $2,500 per employee, and businesses must meet certain salary thresholds to qualify. The credit will be available beginning July 1, 2011, for those qualifying companies that have, since June 30, 2010, hired and retained new employees.
What are enterprise zones, and what benefits do those in Illinois provide?
The Illinois Enterprise Zone Program is designed to stimulate economic growth and neighborhood revitalization in economically depressed areas of the state. Illinois’ enterprise zones offer a multitude of tax benefits for businesses located in the zones, including sales and use tax exemptions for building materials, property tax abatements and investment tax credits for business income taxes.
To illustrate, Madison County has three enterprise zones and St. Clair County has four. You should consult your tax professional regarding these zone benefits.
What are some tax compliance issues that businesses should be aware of?
Many businesses understand and collect sales tax but are unaware of a compensating use tax due on purchases made from out-of-state vendors.
Given the current environment, it’s a particularly good idea to consult with a knowledgeable tax accountant to determine your potential use tax liability and avoid costly state audit liabilities.
Also, businesses should keep current with the applicable sales tax rates in their local jurisdictions. Businesses that do not collect the proper rate will be required to furnish additional taxes not collected from customers.
It’s definitely a case of pay now, or you’ll really pay later.
Pam Huelsman is manager, State and Local Tax, at Brown Smith Wallace in St. Louis, Mo. Reach her at (314) 983-1392 or firstname.lastname@example.org. Susan Nunez is principal, State and Local Tax, at Brown Smith Wallace in St. Louis, Mo. Reach her at (314) 983-1215 or email@example.com.
As technology makes doing business overseas an option for more and more companies, American firms are exploring their international options.
Once a business decides to open operations in one or more countries outside the United States, the tax hurdles crop up and executives are faced with complicated decisions concerning acquisitions, hiring employees, tax structure and transfer pricing. Getting it right is critical to protect a business from multiple layers of taxes and fines as both the federal government and foreign governments focus on enforcing complex international tax laws, says Doug Eckert, member and international tax practice leader, Brown Smith Wallace LLC, St. Louis, Mo.
“U.S. businesses with international operations should develop a tax strategy in conjunction with international expansion to minimize tax costs from the beginning,” Eckert says.
Smart Business spoke with Eckert about what businesses should consider when expanding their operations beyond U.S. borders.
What should a business know when venturing beyond U.S. borders for the first time?
The greatest challenges a company faces are personnel hiring outside of the U.S. where human resource laws are significantly different, managing foreign customer expectations and managing cross-border tax consequences, including transfer pricing, an area where significant penalties can arise for companies that do not transfer goods at ‘arm’s length pricing.’
The initial business plan needs to take into account each of these areas.
What key tax issues do companies face when expanding internationally?
Once a company makes the decision to expand outside of the U.S., it first has to determine how it will distribute its products or services, and whether to use third-party distributors or its own employees to manage its foreign operations.
The initial determination of whether a U.S. company needs its own foreign subsidiary is often determined by its customers. This usually occurs when the customer requests that import taxes, duties and VAT (value added tax) are managed by the U.S. seller. At this point, a foreign subsidiary is generally required to manage these taxes within the local country.
Then several key questions arise. Should the company be a corporation or branch (income or loss is subject to immediate U.S. taxation) of the U.S. parent? How should the company be funded, whether through debt or equity? How can profits be transferred tax efficiently to the U.S. parent?
The U.S. has the second-highest corporate tax rate in the world. Careful international tax planning is required in order to repatriate overseas profits to the U.S. to avoid paying the disparity between the U.S. and foreign tax rates, or even more. Governments are ready and willing to take your money if you don’t plan carefully.
What challenges does a business face when making an international acquisition?
The ultimate challenge is how to repatriate earnings to the U.S. to service the acquisition debt in a tax-efficient manner and avoid paying the incremental U.S. tax in the process. This process is managed by setting up a tax-efficient acquisition structure and, in many cases, pushing acquisition debt into the overseas operations. Managing foreign currency risk as part of this process is also an important consideration.
An example of what not to do is to enter into a structure in which cross-border payments, dividends and interest will be subject to withholding taxes. In some situations, this could cause the overall rate of tax to exceed the U.S. statutory tax rate of 35 percent. To avoid this, it is important to design an acquisition structure that will allow cash to be flexibly managed within the structure in a tax-efficient manner.
What new legislation could impact a company’s international tax position in the next year?
In 2010, Congress enacted several new tax laws that impede the ability of U.S. multinational corporations to credit foreign taxes paid. The most significant of these laws are the ‘foreign tax credit splitter rules’ and the ‘covered asset acquisition rules.’
The foreign tax credit splitter rules preclude foreign taxes from offsetting U.S. taxes until the related foreign earnings are subject to U.S. taxation. The covered asset acquisition rules deny U.S. companies from taking a portion of their foreign tax credits in cases where the value of the foreign assets is stepped up to fair market value. This generally occurs in the context of an acquisition.
Both of these rules narrow the options available to U.S. corporations to avoid paying the difference between foreign tax rates and the U.S. tax rate when repatriating funds to the U.S.
Essentially, these rules will likely increase U.S.-based multinationals’ U.S. tax liability. Given this legislation and the current complexity of U.S. international tax law, companies should talk with a professional to understand how these tax rules interplay.
Ultimately, all these rules come down to a large modeling exercise to minimize your global taxes.
Doug Eckert is a member and international tax practice leader at Brown Smith Wallace. Reach him at (314) 983-1268 or firstname.lastname@example.org.