Sunday, 01 September 2013 04:51

The changing SOX landscape

A subtle, but very significant, change is underway in the world of Sarbanes-Oxley compliance, specifically audits of Internal Control over Financial Reporting (ICFR). As a result of this change, many public companies will face additional compliance burdens and new exposures, even if they believe they have a well-established and stable system of internal control.

“Some public businesses may be completely unaware that even though they’ve had effective ICFR for years, this year may be a different animal,” says Eric Miles, a partner in Business Risk Services 
at Moss Adams LLP. “We’re seeing that controls or approaches that were fine in the past are now getting much more scrutiny from external auditors.”

If you have not yet had discussions with your external auditors about your 2013 ICFR compliance efforts, you may have a little time to get out in front these changes, he says. Many companies are already experiencing these changes in expectations and have found compliance to be very frustrating.

Smart Business spoke with Miles about why there’s activity change in ICFR compliance expectations and what you can do about it.

Why is there increased focus on ICFR compliance?

Over the last two years, the Public Company Accounting Oversight Board (PCAOB) has drastically increased its inspection focus on audits of internal control over financial reporting (ICFR) and as a result, virtually every major accounting firm has received reports indicating deficiencies in their audits of ICFR. The PCAOB was concerned about the pervasiveness of the findings, so much so that it published a special supplementary report in December 2012 detailing the most pervasive deficiencies identified in firms’ auditing of internal control over financial reporting during the 2010 inspections, and also including information on the potential root causes of the deficiencies.

The SOX ICFR compliance pendulum has swung back and forth over the years. When the SOX ICFR assessment requirement was first implemented, it yielded very rigorous and costly audits.  In response to the litany of criticism, the PCAOB issued a new audit standard in 2007 (Audit Standard No. 5) to clarify expectations and ultimately to focus SOX ICFR efforts on areas of the most importance. What we are currently seeing is the PCAOB’s reaction to the mis-implementation of that standard.  It appears that from the PCAOB’s perspective, the pendulum swung too far.  As a result the PCAOB is trying to put more rigor into audits of internal control over financial reporting.

What is the biggest internal control problem?

Although the PCAOB noted several pervasive deficiencies, the issue currently causing the most consternation with companies is the design and testing of ‘Management Review Controls.’ These are controls, such as account reconciliations, budget to actual, etc., that theoretically allow several key risks to be mitigated with a single control. The PCAOB noted that the auditors’ evaluation of the design and operation of these controls has typically been cursory at best, such as an examination of a document for signature and date. As a result, many firms are now asking companies to be very detailed in the explanation of these controls, explaining aspects such as what triggers management’s attention, what management does when an item for investigation is identified, and how resolution of review items is documented.  Further, firms are expecting management to maintain much more evidence of operation than in the past.

If your company has management review control problems, what can result?

There’s a real risk that organizations that heavily rely on management review controls are going to be surprised, even if their auditor has said for years the controls are fine.

With the new scrutiny, some external auditors may conclude there’s a material weakness. Ultimately that impacts the value of the organization. In any case, it takes a lot of time and effort to update documentation to get back in sync with your external auditor.

What should organizations be doing now?

The first step should be to have a proactive conversation with your auditor to understand whether their expectations have changed or are expected to change. There is a real risk that companies will substantially complete their own internal control assessment activities before fully understanding the scope of needed changes with their external auditors. As a result, companies may need to go back and update their already completed testing to comply with the auditor’s new approach. That’s far from ideal.

Once you have a better understanding of the external auditor’s needs, you need to understand what controls are considered to be ‘review controls.’ By taking an inventory of your controls, you may find that you have just a handful of management review controls, however, organizations that really embraced Audit Standard No. 5 will likely have more concerns.

For the identified controls, make sure your control descriptions include specific investigation criteria such as dollar or percent variance or other qualitative considerations, with clear precision thresholds. There needs to be evidence of control performance that can be tested through re-performance, not just through a review of signatures. If you can update your documentation in advance of external auditors coming in, it will save you trouble later.

Overall, be prepared for increased auditor activity, particularly with respect to walkthroughs and management review controls.

Eric Miles is a Partner in Business Risk Services at Moss Adams LLP. Reach him at (650) 808-0699 or

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Published in Northern California
Sunday, 30 June 2013 20:27

How to manage excess liquidity

A company’s liquidity and cash needs are like a river. The short-term immediate needs flow pretty fast as cash moves in and out of the business. But the further you go down in the water — down to cash that’s only needed for a rainy day — the slower it moves. In fact, it can be too idle.

“Often, there is this big pool of excess cash for the off chance they need liquidity,” says John Whiting, CFP, principal at Moss Adams Wealth Advisors. “But what they give up in that scenario, by keeping that money highly liquid, is less yield and return on those dollars. It can grow to be a fairly significant amount of money that potentially, year-after-year, is pooling up in unproductive ways.”

Smart Business spoke with Whiting about maximizing your business’s treasury management to make assets as productive as possible.

Why is treasury management critical?

Treasury management is the strategic management of a company’s working capital and excess liquidity. By maximizing this, given the specific business needs, the company is more competitive with better earning potential through properly deployed assets.

Today, businesses have accumulated a lot of cash and may not deploy those assets with the economic uncertainty. Even in this low-yield environment, companies that have built cash over the past three to five years could be getting an extra 20 to 30 basis points. And by deploying excess liquidity, you not only can get an extra return, but also, with low interest rates, can use working capital lines to address unexpected needs.

Why do treasury functions not get the same scrutiny as inventory control, capital budgeting and accounts receivable?

It can be an afterthought, as it may initially start so small it doesn’t feel like it warrants a lot of attention. Typically, a controller or CFO is charged with making sure the liquid assets are positioned, but there isn’t anything defining the objective.

What’s a better approach?

You need to be disciplined, looking out over the horizon and anticipating company cash needs to a better extent.

The business should have a written investment policy statement that defines expectations and is used to segment liquid assets into different buckets based on the time horizon for the business’s needs. The statement also would say exactly what investments are appropriate for each bucket, including the necessary credit quality.

Further, the investment policy statement should help set up controls to monitor risk.

How should the guidelines for how funds are invested be structured?

Start with assessing the risk and the needs of the company. Then, look at the next business cycle or more to see possible cash flow needs. You can time assets to ensure the liquidity is there when you need it.

Let’s say, a business is sitting on $10 million in liquid assets and is anticipating either an acquisition or significant capital improvements that might take $3 million or $4 million of that in 18 months or two years. Understanding that allows you to position the assets by buying municipal bonds or high-quality corporate fixed income that would mature three months before the assets might be needed. Now, you’re getting the best and highest yield possible, given that expected need.

What’s important to know about monitoring these treasury functions?

It’s important to understand the real return on investments by having a reporting mechanism, which then determines your success. For example, many CFOs or controllers use multiple financial institutions in order to mitigate risk. However, they need to aggregate all of the information to really assess and score the overall management process.

The cost of management is not terribly opaque, even with the effort to create more transparency. With fixed income, you need an understanding of who is negotiating on your behalf and how are they going about procuring that fixed income for you.

Half the battle is asking the questions and getting straight answers. An outside adviser is often the best management choice, but be sure to have an open discussion about the fee structure and associated costs. In fact, it can be a line item on your investment report because understanding the real cost of managing assets is key.

John Whiting, CFP® is a principal at Moss Adams Wealth Advisors. Reach him at (707) 535-4167 or

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Published in Northern California

Additional Medicare taxes went into effect Jan. 1, 2013, for high-income earners, but many may not consider these taxes until they start filing their 2013 returns — and writing the checks.

“You want to take the time to go through this now, and lay the groundwork, because the decisions you make will have ramifications for next year,” says Chris Paris, regional tax leader of the Greater Bay Area at Moss Adams LLP.

“We’re spending a considerable amount of time dealing with this. People are asking: How is this going to impact us? Is there anything we can do to structure around it?”

Smart Business spoke with Paris about the impact of these taxes and what you need to know.

What are the new Medicare surtaxes?

The Unearned Income Medicare Contributions Tax (UIMCT) is a 3.8 percent tax on net investment income for higher income individuals. The other surtax is a 0.9 percent tax increase on wages and self-employment earnings for higher income individuals, for a combined employer/employee tax rate of 3.8 percent.

The taxes are designed to help cover about half the cost of the Patient Protection and Affordable Care Act, passed in 2010.

How does the IRS define higher income individuals?

Both taxes apply to individuals that meet an income threshold of $200,000 or more, or those married and filing jointly that meet a threshold of $250,000 or more.

If a taxpayer earns wages in excess of $200,000, his or her employer is required to withhold the 0.9 percent, in addition to the 2.9 percent previously taken out (1.45 percent for the employer and 1.45 percent for the employee). However, the 3.8 percent on net investment income is a new type of tax that may take some by surprise.

What’s so unusual about the UIMCT?

This is the first time the government has taxed net investment income to pay for the cost of Medicare. Net investment income includes interest income, dividends, royalties, rental income, and income flowing through passive investments like private equity funds, hedge funds and venture capital funds.

Rental income is going to be a big factor because many higher income earners own a lot of real estate, don’t qualify as real estate professionals and will be subject to this tax. It also could impact middle market companies where the owner of the business owns the real estate, although there may be ways of grouping activities together to reduce the impact of the tax. Further guidance regarding these issues is anticipated in the final version of the tax regulations.

How can those affected by these taxes plan?

First, be cognizant of the fact that it’s happening, so you can factor it into your 2013 tax planning. Estimated taxes are usually based on what you owed the prior year, so your figures may now be too low.

Secondly, you can potentially reduce the impact of the UIMCT by recharacterizing passive income subject to the 3.8 percent tax to ‘Trade or Business’ income, which is not subject to the surtax. For example, an individual who owns multiple businesses or rental properties may be able to group the multiple activities into a single activity by making an election pursuant to Revenue Procedure 2010-13. However, the activities must also rise to the level of a trade or business, a requirement that currently lacks clarity in the proposed regulations. Further guidance may be provided when the final tax regulations are released. The grouping election is particularly attractive if you haven’t filed your 2012 extended return because you can put the IRS on notice now to be in a better position to potentially reduce the UIMCT next year.

Questions also remain about whether certain people qualify as a real estate professional — whose rental income may not be subject to the UIMCT— which is another reason to reach out to your advisers now.

In addition, it may be time to discuss choice of entity, how you operate your business. An LLC with two active owners in the maximum tax bracket could be looking at a combined 43.4 percent federal tax rate on income, whereas a C corporation has a maximum tax rate of 35 percent. However, any dividends from the C corporation would also be taxed, hence there could be double taxation. Further, tax consequences alone may not be enough of a reason to switch, and exit alternatives such as asset sales need to be considered.

Some taxpayers are exploring alternative investments, such as tax-exempt interest income like municipal securities, non-dividend paying equities in certain rapid growth companies, tax-deferred annuities and investments, as well as considering capital gain planning, loss harvesting, installment sales and more.

Whatever strategy you decide to undertake to help control what you pay, don’t wait to plan — or you may not have the most desirable result.

Chris Paris is Regional tax leader, Greater Bay Area, at Moss Adams. Reach him at (415) 677-8352 or

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Published in National

It’s not easy to keep a company going for 100 years — there are going to be a lot of challenges to address along the way.

“There has to be a willingness to change and take chances,” says Roger Weninger, Southern California regional managing partner at Moss Adams LLP. “When I think of longevity, I think of growth. Not purely as it relates to size but also ingenuity, the willingness to change and remain relevant. The company that can continue doing the same thing and remain successful is the exception.”

Smart Business spoke with Weninger about common characteristics of companies that stand the test of time.

What are the keys to longevity for companies?

It’s very important to develop leaders, plural. Companies, no matter how successful they are, get to a point where they need to provide opportunities to others. That can be hard for an individual in charge to understand — the concept that he or she can do less and it will result in more. By allowing others to make decisions and feel a part of the success of the organization, you create a strong culture of growth and change. People thrive in these settings, and so will the business.

You also need to have leaders and decision-makers at all levels. To think that leadership takes place only at the highest levels within any organization is a mistake. Instill a culture of risk taking and empowerment where people at all levels feel they can make a difference and aren’t afraid they’ll be punished for making a mistake. You’ll be amazed at the ideas and the level of ownership people will take when they’re asked, and even expected, to contribute to organizational change and success.

Every organization should have strategic plans and goals that have application to every employee. In addition, each employee should know what contribution he or she can make to reach those goals.

How can a company stay relevant in changing times?

It sounds trite, but it goes back to your mission and focus — self-awareness of your strengths and weaknesses, as well as how you fit into the needs of your clients and customers. Creating this awareness within your organization will provide a clear decision-making and prioritization path for your people. If there’s doubt as to what your value proposition is, or what it isn’t, you can waste a lot of time and send confusing messages to your people and to existing and prospective clients. Being the best at something is always a good goal.

What poses the biggest threat to longevity?

Complacency. When things are going well, there’s a tendency to become satisfied and convince yourself that things will never change. The willingness to listen and actually hear what’s being said, rather than simply assuming you already have all the answers, is crucial. Again, you must have multiple decision-makers and leaders, and this highlights the need for ongoing succession analysis. Succession isn’t something that should be dusted off and practiced when the owner is ready to retire.

People want to see the opportunity to grow into leadership positions from the time they walk in the door. That doesn’t mean they want to take over the top spot in the organization within their first year of employment, but it does mean they want to feel relevant, appreciated and impactful. If they have to wait for someone to die or move on, they may not stick around very long. New leaders bring different ideas and knowledge, and not having that will restrict your ability to grow and sustain the organization through good times and bad.

There’s no such thing as staying flat — you’re either on an incline or decline. You have to always be working to get better. If you’re willing to listen, your people and your clients will tell you how.

Roger Weninger is the Southern California regional managing partner at Moss Adams LLP. Reach him at (949) 221-4047 or

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Published in National

Employee benefit plans are an important part of your company, and participating executives have just as much at stake as anyone else. With continually evolving fiduciary roles, the last thing you want is to fail in your responsibility, lose money and possibly face penalties or a lawsuit. That’s why employee benefit plan audits are conducted to identify potential problem areas. But only by closely managing the plan with fiduciary governance can you be ready for an audit.

“It’s prudent to have the board delegate to someone that is closely managing the plan — an oversight committee,” says Bertha Minnihan, national practice leader, Employee Benefit Plan Services, at Moss Adams LLP. “There’s so much to know, you can’t possibly know it all. It’s great to have this committee working with people who have expertise in this area to make sure they are meeting their fiduciary responsibilities.”

Smart Business spoke with Minnihan about areas of concern in employee benefit plan audits.

How do these plans come to be audited?

There are two types of employee benefit plan audits. If you have more than 100 eligible plan participants at the beginning of the plan year, you generally need an independent financial statement audit attached to your plan’s annual tax Form 5500. Eligible participants not only include employees eligible to participate, whether they do or not, but also those with plan account balances who are no longer employees. However, if you have between 80 and 120 eligible participants, the Department of Labor (DOL) allows you to file the same as the year prior.

The other type is when the DOL decides to audit the plan. Most of the time the DOL says its audits are random. But, for example, if you’ve reported late deposits on your Form 5500, sometimes that causes the DOL to want to look further. Another trigger is an anonymous employee phone call. The DOL also has different levels of inquiry — sometimes it just asks for supporting documentation from the independent plan auditors or the company, and sometimes goes directly to auditing the plan as far back as three to five years.

What are some areas of noncompliance, correction and deficiency you’ve come across when auditing these plans?

The DOL hot buttons remain similar to what they’ve always been. The top ones, on the regulatory and compliance side, are:

  • Timeliness of getting all employee contributions into the trust. The DOL has said small plans, with 100 eligible participants or less, need to get everything in the trust within seven days. However, there’s no hard-and-fast rule for large plans, just as soon as administratively possible. This leaves a lot of room for judgment.
  • Eligible compensation. What are the compensation components that are eligible for deferral and match?
  • Operational defects, like not following eligibility requirements as noted in Plan documents or auto enrollment that isn’t kicking in when it should.

What developments are auditors following?

The accounting and auditing world has gotten more complex, especially on the investment side. Auditors are waiting for additional guidance on disclosure requirements for investments for certain plan types. For example, the Financial Accounting Standards Board hasn’t ruled on whether employee stock ownership plans are exempt from certain quantitative investment disclosures about the valuation of private company stock. Another issue is what exactly makes a plan public or nonpublic, and how that impacts the benefit plan disclosure requirements. Additionally, auditors continue to follow the convergence of U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards.

How should plan sponsors handle their plans?

Generally, sponsors need to stay educated. Things are moving fast, but companies have many service and investment providers at their fingertips. Call on them to educate your board and oversight committees.

When making a change in your plan, document it. Have an oversight committee, no matter how big the company, following and documenting the plan operations and plan investment decisions. The committee would, for instance, know the participant demographic trends or how auto-enrollment is unfolding. In the end, you’ll always be better for whatever is going on if you have that structure and a solid governance foundation.

Bertha Minnihan is national practice leader, Employee Benefit Plan Services, at Moss Adams LLP. Reach her at (408) 916-0585 or

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Published in National

The Financial Accounting Standards Board (FASB) has not-for-profit financial reporting on its horizon. The board is expected to propose new guidance on non-profit financial reporting standards in the second half of 2013.

“It’s exciting because the FASB is actively working to make the financial statements more understandable for the user and more comparable across the varying types of not-for-profit organizations, which will allow these organizations to better tell their story to donors.” says Liz Dollar, a partner in the Not-For-Profit and Government group at Moss Adams LLP.

Smart Business spoke with Dollar about how these changes originated and what they could mean for the not-for-profit world.

What is the FASB’s Not-For-Profit Advisory Committee?

This 17-member committee was established in 2009 to act as a standing resource for the FASB. The various users and preparers of not-for-profit financial statements now have a formal process to give input that guides the FASB on the impact of the current standards, and provides feedback on proposed updates. The committee also can assist in outreach activities to the sector.

How is the committee filling a need in the not-for-profit world?

The most impactful financial reporting standards for not-for-profits were statements on Financial Accounting Standards 116 and 117, but these standards were written almost two decades ago in the mid-90s. The committee has focused on determining whether these standards still make sense in the current financial environment. The committee also considers overall financial trends such as the convergence of international and U.S. standards as well as increased emphasis on reporting and transparency of financial information.

What has the committee recommended to FASB?

The committee and its three subcommittees, Reporting Financial Performance, Liquidity and Financial Health, and Telling a Story, recommended:

  • Focusing transparency on operating and non-operating activities in the statement of activities.

  • Suggestions for improving the cash flow statement, better linking it to the operating measures.

  • Reducing the net asset classes from three to two — unrestricted and restricted — in an effort to make financial statements easier to prepare and use, while adding some subcategories into the new net asset classes. Streamlining and improving the footnote disclosures, which have gotten long and can be unclear to many users.

  • Requiring some sort of management discussion and analysis in the financial statement that tells a story of what happened during the year. This could enhance the understanding of donors about the financial health and performance of the organization.

What is the FASB doing with these recommendations?

The FASB is currently working on a project entitled Not-for-Profit Financial Reporting: Financial Statements, which is focused on net asset classifications and the information provided in the footnotes about liquidity, financial performance and cash flow. An exposure draft is expected in the second half of 2013. After the comment period, changes likely would be implemented around 2015.

The FASB also added a research project looking at other financial communications, which could include requiring a management discussion and analysis in the financial statements.

Why should not-for-profit organizations be excited about these potential changes?

Not-for-profit organizations often need an audited financial statement because of a donor, statutory or lender requirement. However, they will tell you that most people don’t look at or understand these financial statements. When using a document to tell a story and solicit funds, the 990-tax form is often a more useful tool and something that is comparable among all not-for-profit organizations. The hope is that with the current project the FASB changes will simplify the financial statements, making them in turn more user friendly and useful to the reader.

What does this mean for business owners?

Not-for-profit financial statements typically are very different from for-profit financial statements. So, someone from a public company who serves on a not-for-profit board or who is a potential donor could have trouble reading the statement. With potential changes to the net asset classifications, focus on liquidity and streamlined disclosures, the not-for-profit financial statements should more clearly reflect an organization’s financial position and be more usable to those with a for-profit background.

Liz Dollar is a partner, Not-For-Profit and Government group, at Moss Adams LLP. Reach her at (415) 677-8247 or


Upcoming live webcast: Register now for “Legislation with Social Purpose: Examining Regulations on International Activities and Social Purpose Corporations in the Context of Today’s Economy.” The webcast will be held from 10 to 11 a.m. PST Tuesday, March 12.


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As sustainability continues to gain momentum, business leaders need to address how this movement will influence the way they run their organizations. Doing so can lead to immediate savings in power and other costs, and boosts the market value of the property.

“It’s a change in culture versus something that’s just an on-and-off switch,” says Greg Martin, partner and National Real Estate & Hospitality Practice leader at Moss Adams.

Smart Business spoke with Martin about what’s happening in the field of sustainability and how an accountant or adviser can help.

What’s happening with sustainability today?

Sustainability and Leadership in Energy and Environmental Design (LEED)-certified buildings have been talked about for some time. Early sign of sustainability in practice started out simply with hotel properties putting out signs about reusing towels or unplugging phone chargers. Then, many moved on to using low-flow showerheads or locally sourcing food. That sentiment has crossed over into the expectations of commercial building tenants, many of whom got the idea, at least in part, from attending conferences in energy-efficient hotels.

From a real estate perspective, more and more tenants in a commercial office building want to see sustainable practices followed in their workplaces. Those companies that can show they are concentrated on green living can use that as a competitive advantage. Eventually, sustainability will be part of our everyday psyche, so you want to take advantage of these competitive strengths when you can.

How does going green translate to the bottom line and profits?

It’s expensive to put energy-efficient measures in place, such as those that limit water or power consumption. But in doing so, you can significantly reduce your operating costs from day one and possibly attract sources of capital — some investment groups will only invest in properties or companies that have sustainability policies and procedures in place.

A number of studies found increased operating incomes and higher market values and returns for sound sustainable properties versus non-sustainable properties. A green label such as LEED or Energy Star raised market rents and values of commercial space, including a 16 percent increased sale price, according to a 2010 University of California, Berkeley study of 10,000 U.S. office buildings. A Davis Langdon study estimated upfront costs for high-sustainability design can be $1.50 to $3 per square foot, but those outlays also can bring up to 14 percent reductions in energy costs. In addition, PNC Bank put together a study of their LEED-certified branches compared to non-LEED branches, and found LEED branches had more income, deposit accounts opened and consumer loans.

As more data becomes available on the returns, cash flow and market appreciation of sustainability, we’ll likely see more and more benefits from following these types of policies and practices.

How can an accountant or adviser help with sustainability reports and programs?

CPAs are getting involved in reporting on whether companies are meeting sustainability policies and procedures. Often, an independent and objective CPA will look at the data provided by the management of the company on what they have done in the area of sustainability, referring it back to the company’s policies and procedures. The CPA basically concludes whether they are in agreement or not with management’s assertions. It lends another level of credence and credibility by generating a report based on benchmarks.

Another value-added service that’s gaining momentum is our sustainability consulting group, which consults with companies on setting up green policies and procedures as well as a process to monitor how companies are doing against their goals.

Is this a newer aspect of sustainability — showing that you are accountable?

It’s catching on. Is there some set of rules that say, ‘Thou shalt,’ like the SEC says that public companies shall present audited financial statements? Not really — it’s a best practice. It shows how the company is serious enough that they are going to bring in a credible, objective, independent party to verify what they have represented to others.

Sustainability is not a fad. Ignoring it is not going to make it go away. And because it’s here to stay, it will only continue to gain importance.

Greg Martin is a partner, National Real Estate & Hospitality Practice leader at Moss Adams. Reach him at (415) 677-8277 or

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Entrepreneurial companies are facing headwinds going into 2013, including fiscal cliff uncertainty, the prospect of higher taxes, more regulation and continued slow economic growth, says Tullus Miller, Bay Area partner-in-charge at Moss Adams.

“Having a trusted business adviser to help navigate these uncertainties and measure the impact on your key business decisions is most important,” he says.

Smart Business spoke with Miller about how a trusted business adviser gives you the information you need to know — not what you want to hear.

What should entrepreneurial companies consider in a trusted business adviser?

Entrepreneurial companies are very dynamic and have various business needs during their life cycle, including, but not limited to, expanding business offerings nationally or internationally, developing new revenue sources and restructuring operations. These types of activities are generally complex and require substantial capital investment, so trusted business advice can help make decisions simpler, while shortening the timeline. For example, with a growing startup company, an entrepreneur can get advice on what kind of systems to use; how many people to have in the back office; or what kind of tax structure to implement, e.g. a pass-through or corporation.

In considering a trusted business adviser, weigh a few key questions:

  • Does the adviser understand your business and how the activities might fit into your long-term goals?
  • Does the adviser have insight into complex areas such as tax consequences and how it affects profitability?
  • Has the adviser provided sound, practical advice over time that helped the business?
  • Does the adviser have your best interest at heart and tells you what you need to hear as opposed to what you want to hear?
  • Does the adviser have a deep network of professionals from which to help provide you with appropriate counsel, including legal, banking, etc.?

Having appropriate business advice — based on your medium- to long-term goals and objectives — from an unbiased, trustworthy and experienced source is, and should be, an important part of any decision-making process.

What mistakes do some entrepreneurs make when seeking an adviser?

A lot of times entrepreneurs are impatient, just by nature, as they are go-getters who want things to happen. Therefore, they need to guard against not taking the appropriate time to vet the business adviser. It’s critical to talk to two or three different advisers to ensure you find the right fit, looking at your personality and their knowledge base and reputation, etc. And, then it’s going to come down to pretty much a judgment call. There’s very little science in this. It’s mostly art.

You want to get as much information, even in a dynamic environment, as possible because you must minimize capital-intensive mistakes in an entrepreneurial company.

Do you have any tips on how to organize your adviser(s)?

Depending where you are in your business life cycle, the more nascent you are, the more external advisers you want to use, while making sure you control their costs, too. As you move up the business life cycle curve to maturity — even in a high growth mode — you have to decide at some point to bring experts in-house, and there’s no bright line on how to do that.

A trusted adviser with integrity will tell you what you need to hear, even at the short-term expense of his or her own business. Someone who says, ‘It looks like you’re spending a lot of money here, and you’re starting to grow. You either need to upgrade your staffing, getting people who are more experienced, or expand the number of folks to help you do what you need to do.’

Once advisers are in place, what can be done to maximize the relationship?

Before you close a deal — even if you’re anxious to move ahead on an expansion, re-organization or a new compensation plan with more performance indicators — you allow your trusted adviser to look at the agreements being drawn up. It may not be in the adviser’s area of expertise, but he or she, or others in that firm, could see something that needs to be changed, allowing you to avoid unintended consequences.

Tullus Miller is Bay Area partner-in-charge at Moss Adams. Reach him at (415) 956-1500 or

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A unique opportunity exists to grow market share and profitability when competitors take a passive and “survival mode” approach to doing business. In addition, many manufacturers may be focusing solely inward on increasing profits through production efficiency.

“You need to make sure you keep looking out the window, so you can see what’s happening with the marketplace, competitors and customers,” says Brent Meyers, partner and the practice leader for Manufacturing & Consumer Products Consulting at Moss Adams. “If you just focus on production efficiency, you’ll find ultimately that you are the best and lowest cost producer of something that no one wants to buy.”

Smart Business spoke with Meyers about how to successfully use lean manufacturing processes to position your company for future growth.

What keeps manufacturers from seizing opportunity during tepid growth and uncertainty?

During a recession, slow growth or economic uncertainty, there’s a strong desire to contain costs and hoard cash in a ‘bunker mentality,’ waiting for market recovery or more rapid macroeconomic growth. It can be a viable survival strategy but doesn’t position a company for increased growth or profitability once the market recovers or uncertainty diminishes. It’s passive and essentially puts a company in stasis.

Additionally, the present recovery hasn’t been hockey stick-style where there’s strong post-recession growth. Gross Domestic Product growth is at a modest 2 percent and looks to stay there for the next few years. The bunker approach may not be sustainable for that length of time, and does not provide a platform for increased growth when the market’s trajectory improves.

What are the risks associated with focusing solely on internal cost reductions?

There are significant risks to long-term enterprise value and competitiveness. No company is going to shrink itself to success and increased enterprise value. An internally focused cost containment approach also carries the assumption that competitors are doing the same thing, or less. Despite internal improvements, this passive strategy can result in a relatively lower performing organization consigned to following in the marketplace.

This is a critical area for traditional manufacturing, as well as some in food and beverage and consumer package goods. These companies often tend to focus or are pulled into producing at the lowest possible price, forgetting about potential premiums for value added products and services, new and unique products, and innovation. For example, a food and beverage company lands a grocery store customer with a private label, which triples volume and brings in needed revenue, but pulls them toward a production focus rather than continued  growth, branding or innovation. Technology companies and aerospace and medical device manufacturers tend to invest more heavily in new product development and innovation but could move too far away from production efficiency.

How can companies improve current performance and position themselves for future growth?

The most successful adopt a growth-focused mindset and strike a balance between capitalizing on existing resources to pursue internal cost reduction and efficiency improvements, while making intelligent investments to enable top-line growth. Most find the low-hanging fruit fairly quickly, before turning to lean manufacturing tools and techniques to eliminate or re-engineer activities that don’t add value. That’s the right direction to start, but there are some potential landmines to be avoided:

  • Companies may leverage lean tools and techniques but don’t implement the most critical component — continuous improvement. They approach process improvement as a discrete event, or series of events, rather than as a cultural shift that seeks sustained performance.
  • Probably most overlooked is remembering that lean is designed to eliminate waste — non-value added activities — beginning with the ‘pull of the customer.’ That value, or lack thereof, is by definition something only the customer can define and determine. Knowing what has value or does not, therefore, requires outward visibility rather than internal focus. There’s also an underlying presumption that there actually is demand, which isn’t necessarily true.

In an economic environment absent the ‘rising tide that lifts all boats,’ a company needs to increase outward visibility, understand the market environment and position itself to take advantage of it. Lean manufacturing can create scalable, flexible and cost-effective operations that enable improved market and financial performance, but it cannot create core demand by itself.

How can a company create demand and leverage lean manufacturing?

Creating demand requires an overarching business strategy driven by market, customer and competitor realities. Once you have that information and synthesize it, develop a strategy by starting with where you want and need to be, rather than with where you are. This forces a market-driven strategy rather than an incremental approach to performance improvement that’s anchored in the present and, therefore, inward-facing.

Next, determine points of differentiation in the marketplace. Remember that differentiation and competitive advantage can be attained in ways other than being the low-cost provider — product superiority and service superiority chief among them.

Companies also need to mitigate market and customer concentration risk by avoiding the temptation to focus exclusively on just one or two large customers.

How can you create a diversified portfolio, especially when market demand isn’t growing rapidly?

Companies sometimes forget that growth can be generated internally or through acquisition. Actively consider organic and acquisitive growth strategies, including identifying value-added products and services and points of differentiation beyond cost; entering adjacent markets; developing complementary products; acquiring intellectual property, technologies, products and distribution channels; and leveraging efficiencies in rollups and combinations.

In this economy, you cannot make money by accident and mistakes can put you out of business. When approached, implemented and managed well, the parallel revenue and lean initiatives are highly complementary and can generate short-term return on investment to free up cash and capital to invest in further growth and innovation. This in turn creates a sustainable competitive advantage, market leadership, profitability, and enterprise and shareholder value.

Brent Meyers is a partner and the practice leader for Manufacturing & Consumer Products Consulting at Moss Adams. Reach him at (415) 677-8366 or

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Published in Northern California

As your company experiences increasing global commercialization of products, services and technologies, you may face new tax challenges and uncertainties.

“Even the smallest of companies are experiencing some interaction with global suppliers or customers,” says George Koutouras, partner, international and transaction tax, at Moss Adams. “So that means they have the need to consider certain tax aspects associated with global transactions, on one end of the supply chain or the other.”

With a U.S. tax system based on global income, it may make sense for a company — transforming from predominantly domestic to global — to keep earnings offshore to reinvest in new growth for foreign jurisdiction subsidiaries, as opposed to taking U.S.-sourced capital and committing it to offshore operations, he says. However, you must have an economic or legal justification to organize your business that way, as solely tax-motivated transactions are not available in today’s environment.

Smart Business spoke with Koutouras about businesses experiencing increasing growth globally and the potential tax problems.

When migrating capital offshore, why are bank debt covenants important?

When a company decides to go offshore, setting up operations or buying facilities, the first question is not what does that do from a tax perspective, but what are the restrictions on your bank covenants? Lenders may place restrictions on a company’s ability to use lent funds offshore, recognizing the difficulty associated with returning that capital to the U.S.

Review your bank’s financing restrictions. If they limit your ability to migrate cash or capital, determine if you can re-negotiate some of the bank notes, which is not always easy. A company may need to replace certain financing with other debt financing — it’s not a matter to be taken lightly.

Ultimately, whenever sending capital offshore, businesses and their advisers need to understand the intended end result. Do they need to repatriate it at some point to service debt, or do they intend to keep that cash offshore indefinitely to finance offshore growth? The answers will influence the structure that is created from the outset.

How seriously should a company consider local financing options?

If a company migrates some activities offshore, you might need to obtain local financing to expand operations. However, certain jurisdictions, particularly in Europe, are experiencing a credit crisis and, as a result, bank financing is not readily available. Without local financing, question whether there is any ability to service U.S. bank debt, or will you need a mechanism for intercompany financing? Often cash-rich companies use intercompany loans to more freely transfer extra cash between jurisdictions.

But an inevitable hurdle with related-party transactions is the need for a secondary analysis to ensure those transactions are at arms length. Otherwise, the jurisdictions involved, such as the U.S. and Ireland, may attempt to re-characterize or re-price payments to be more consistent with market turns, creating some unanticipated tax consequences.

What intellectual property (IP) will you need within a foreign region?

IP is a relatively broad category of assets that not only consists of patents and trademarks but can also include know-how and processes, and companies should match the commercialization of IP with the development of the IP.

Often businesses take U.S.-developed IP and parse it up among various global commercial centers. However, if IP is being sold in Europe, there may be a need to manipulate or develop that IP in a European-centric way. Companies should identify centers of activity for offshore endeavors, including the development of IP. Areas, such as Ireland for Europe and Singapore for Asia, have a skilled work force, good technology infrastructure for research and development, and a relatively low tax rate when compared to the U.S.

IP is an area where the U.S. is vigilant about establishing policies to restrict companies’ ability to migrate assets offshore, so outright sales of IP offshore aren’t without their accompanying tax costs. Often, property, including IP, in its earliest stages of development and/or recently purchased is the easiest to convey offshore without the inclusion of taxes. To the extent IP and other U.S.-owned assets are needed offshore, consider both sides of related-party pricing to avoid unsupportable accumulations of income or loss in the relevant jurisdictions.

How should you quantify the support needed from domestic management, sales force, technical help or home office systems?

The cost for headquarter-support services needs to be chargebacked by the offshore entity. Companies that aren’t charging for management services and/or systems that go offshore are vulnerable. For example, the U.S. might assert that the foreign entity should be paying more back to the U.S. for the use of the U.S.-based management, thereby creating more potential U.S. tax income. This is something that needs to be reviewed periodically; the management chargebacks existing today might not be the chargebacks needed in a year’s time.

What tax considerations are important for how you sell goods within a region?

Pay attention to how your company conducts sales within the jurisdiction. Sending your domestic sales force into a foreign country will extend the taxable presence to that other jurisdiction. To avoid that, a company can compartmentalize sales by setting up a separate company or using a third-party, such as distributors, already within the country’s marketplace. Another mitigation is to avoid signing sales contracts within market and thereby creating a taxable presence. Ideally, in such cases, all sales are negotiated and executed remotely, and the salesperson is merely demonstrating the product with no authority to sell on behalf of company.

Also, when selling inventory, the placement of property within a jurisdiction could create a taxable presence. The U.S. will tax the income, and the foreign jurisdiction may assert tax liability for sales within its borders, creating the possibility that the same dollar could be taxed twice.

George Koutouras is a partner, international and transaction tax, at Moss Adams. Reach him at (415) 677-8212 or

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