The Small Business Investor Tax Deduction, new this tax season, allows individuals to save thousands of dollars in taxes on business income — if their tax preparer knows it’s available.

“Your CPA can help you with this deduction, but they may need to do some research since it’s new. The software used by many tax preparers is not yet fully functional in terms of this deduction, so it’s more dependent on what individual CPAs know,” says Joseph Popp, J.D., LLM, manager of tax at Rea & Associates.

Smart Business spoke with Popp about the purpose of the deduction and who can take advantage of it.

Why was the deduction established?

In Ohio, C corporations pay a commercial activities tax, and that’s it. There is no other income tax paid on earnings. But if you have a partnership, LLC, S corporation or some other pass-through entity, individuals also pay personal income tax on earnings. So for those entity types, there are two layers of tax.

One of the reasons for the small business deduction is to reduce that double layer of tax. This is in keeping with Gov. John Kasich’s other initiatives to make Ohio a better business environment.

What is the amount of the deduction and who can apply for it?

It’s a 50 percent deduction on up to $250,000 of Ohio source business income. It’s called a small business deduction, but that’s not really an accurate description. It’s really a small deduction for someone who has Ohio business source income.

As long as you have business income, the source doesn’t matter. It could come from a partnership, S corporation or a sole proprietorship. It could even come from an oil and gas well you hold interest in or a rental property, if they are business income sources for you.

The deduction isn’t tied to any types of business entities, or even owning a business. It’s more about the character of the income, whether it’s business income or nonbusiness income like capital gains on a stock sale, for example.

It was passed as part of Ohio’s budget last summer. It’s a permanent addition to the tax code; there’s no sunset date set. So the deduction will be available again next year unless the legislature decides to remove it.

Is it worth the effort required to file for the deduction?

Tax rates of individual investors vary, but Ohio’s rate is in the 5 percent range, so savings would be a little more than $6,000 if you get the maximum benefit. Most people would be happy with $6,000 more in their pocket.

But there are challenges to filing, one being that software companies haven’t fully implemented it yet, especially if you have more complex facts — there isn’t a button to push and get a calculation. Calculations have to be made manually, so it takes more time and costs the taxpayer more. In addition, some people might not have the data required to take the deduction or decide it’s too burdensome or impossible to get it.

The form itself is one page. If you have 10 or 20 K-1 partnerships that you’re using to get to that $250,000 of income, however, you have to fill out a separate form for each.

It’s also a challenge to fill the form out completely. If you’re a multistate business, Ohio uses an algebraic calculation (an apportionment) to determine the portion of income that should be taxed here. That formula is based on property, payroll and sales. When you add those together using the formula, the idea is that you get an accurate picture of how much Ohio should be able to tax. As an investor, you might not have this data from your business, but you need it for the form.  

If you’ve already filed your taxes or don’t have time to take this deduction before the April 15 filing deadline, you can always request a filing extension or amend your filed return. This could mean an extra few thousand dollars in cash, which would make it worth another visit to your CPA.

Joseph Popp, J.D., LLM, is a manager of Tax at Rea & Associates. Reach him at (614) 889-8725 or joseph.popp@reacpa.com.

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Published in Columbus

Big data can reveal many opportunities for improving your business, but extracting the precise information you need can be a struggle.

“Some companies today have more than 30 years worth of data. Their databases are so large that it’s difficult to get a handle on them,” says Joe Welker, CISA, IT audit manager at Rea & Associates.

Using data analytics software, auditors can analyze the data and prepare reports that enable companies to improve inventory, billing and other processes.

“It allows us to be more efficient, which means lower cost for companies because less time is spent on the audit,” says Michaela McGinn, CPA, principal and director of audit services at Rea & Associates.

Smart Business spoke with Welker and McGinn about how the software functions and the benefits it can provide.

How does the software work and what information does it allow you to find?

McGinn: It’s designed for auditing and is used to find missing vendor address information, vendor payment summaries, duplicated invoices and payments made to vendors with missing address information, to name a few. Reports given to us by a client are imported and converted, allowing us to see the data field by field. For example, we can look at inventory numbers of what the company has now compared to what it had three years ago.

Welker: I just finished an audit in which we imported accounts payable and payroll check registers into the software. We went through that data to see if there were any gaps in check numbers or duplicate checks. We also profiled the data in order to give the company a summary of payroll check registers. This allowed management to see how many times a person was paid and their net pay for the year. It was a new way for them to analyze the data.

So the software makes it’s easier to locate the specific data you want?

Welker: Yes, because you’re reviewing 100 percent of the data rather than picking a sample. In one instance, a company had 8,000 vendor accounts built into their system. How do you control that? What if the same invoice is paid to two different vendors, either accidentally or intentionally?

Ultimately, we found that they had 900 duplicate vendors. The software was utilized to look at the check register to see if any payments were made to both vendors — through the main account and the duplicate. Since names don’t have to be spelled exactly, anything that is close came up. That helped the company identify anything that was out of line or looked like it shouldn’t be paid.

How do you know what to look for?

McGinn: It a good rule of thumb to look for the worst. Not everyone is embezzling or committing fraud, but it happens. The best way to stop that behavior is to let everyone know that someone is watching. Controls sometimes become lax and you never know when someone will get into a situation where they’ll do something they might not otherwise do.

Welker: As a result of audits, controls are usually tightened and we’ll provide suggestions. In the case of the client with 8,000 vendors, it was important they heard about potential problems that can result from that scenario. Data analytic software was able to provide a list of the vendors they had transactions with in the last five years so they could clean up the master file.

What types of businesses can benefit from an audit using this software?

McGinn: It can be used in small- to medium-sized businesses of every type. The benefits go beyond just identifying fraud — finding inefficiencies and areas of cost savings are two big reasons for an audit. Many larger companies have their own internal audit departments to analyze data, but most other businesses don’t have access to this type of analytics.

Welker: A statistical analysis of data for things like increasing costs, missing inventory and invoicing can help a business substantially. And once a company’s data is inserted into the software, the process is easier the next time. Results are produced in minutes, saving time and money.

Joe Welker, CISA, is an IT audit manager at Rea & Associates. Reach him at (330) 339-6651 or joe.welker@reacpa.com.

Michaela McGinn, CPA, is a principal/director of audit services at Rea & Associates. Reach her at (614) 889-8725 or michaela.mcginn@reacpa.com.

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Published in Columbus
Thursday, 30 January 2014 23:20

How benchmarking can grow your bottom line

Benchmarking your business to see how it stacks up against industry competitors helps you learn about your company and where operations can be improved.

“If you focus on just sales or profits, you miss other variables and expenses that, with some tweaking, can make a substantial difference in your profit and cash flow,” says Dave Cain, vice president of operations at Rea & Associates.

Smart Business spoke with Cain about the benchmarking process and how to utilize the data that is produced.

Can the benchmarking process be applied to any business in any industry?

Benchmarking compares you to your industry. I’m not aware of any industry where it wouldn’t work — one service we use has a database of 10,000 different entity types that can be used for comparisons. Dental, medical, construction and manufacturing all have some type of benchmarking tools. Software programs are available that allow you to find real-time data and develop benchmarks based on immediate industry information rather than information that might have been accumulated a year ago.

What data should be benchmarked?

Net profit margin and liquidity ratios are two general ones that can be used for any business. If you’re in manufacturing or retail and have accounts receivable, one good benchmark is turnover ratio — how quickly do you collect receivables in comparison to other businesses of the same type?

Industry comparisons have substantial value because you can understand what’s going on in the industry and improve your company’s performance. For example, a manufacturer of plastic bags would be able to find information specifically about plastic bag manufacturers, not just the plastics industry as a whole. If that manufacturer has a sales percentage of revenue ratio of 10 percent, compared to 15 percent elsewhere, it would be worth investigating why competitors can operate at a lower margin.

Who should be involved in the benchmarking process?

Involve your accountant, your internal accounting department and members of senior management. Determine what ratios and analysis are important to your business. If accounts receivable turnover ratio is an area of priority, the person in charge of accounts receivable should be included.

Companies can do benchmarking themselves, depending on the level of experience within the accounting staff and the resources available to them. However, it also takes expertise to determine how to use the information. That’s where a CPA can work with your accounting team and senior management to develop a strategic plan.

Do you need to decide in advance how the benchmarking information will be used?

Benchmarking results will dictate what actions you take. If your inventory cycles through every 90 days, you might think that’s good. But having inventory sitting for three months could be why you have no cash flow. If you find competitors collect receivables in 45 days, you would look at how you can cut down that period and improve cash flow.

The whole idea of benchmarking is to discover areas where you can make an impact. It’s learning about your business to determine best practices. So many businesses only look at sales and profits, which are the basic indicators, but there are always other areas to review. One client increased his revenue by $200,000 and kept focusing on that top line, but it cost him $225,000 in payroll to get that boost.

Is the process different with internal benchmarks?

Yes, because then you’re measuring against yourself to ensure consistency. Whether by department or location, you look at the revenue and expenses, as well as the contribution margin to the rest of the organization. Then those metrics are applied to outside data information to see how you compare against your industry.

Benchmarking is usually done at year-end, although you might do an interim report to analyze if adjustments you’ve made are having the desired impact on your business.

Benchmarking is really learning about your market and your business, and helping you determine best practices.

Dave Cain is a vice president of operations at Rea & Associates. Reach him at (614) 889-8725 or dave.cain@reacpa.com.

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Although the employer mandate of the Affordable Care Act has been delayed until 2015, now’s the time to consider your company’s strategy regarding health insurance benefits for employees.

“Regardless of the mandate, you have an opportunity now to change what you’re doing in terms of employee benefits,” says Joseph R. Popp, J.D., LLM, tax manager at Rea & Associates.

Smart Business spoke with Popp about what he refers to as the SHOP, drop, roll or self-insure approaches employers can take regarding benefits.

What companies are good candidates for the Small Business Health Options Program (SHOP)?

In Ohio, SHOP is only available to companies with fewer than 50 employees; in a few years, it will be extended to 100 and under. SHOP is the business portal to the health insurance exchange. Businesses can contribute as much as they want toward premiums, including a zero contribution. Employees can then use pretax deductions to pay for premiums. Under SHOP, individuals cannot get federal subsides to help pay for premiums.

SHOP is exchange insurance, so it differs from traditional plans insurance companies offer. For example, Anthem traditional plans include the Cleveland Clinic as a network hospital, but it is not a network hospital with Anthem exchange coverage.

This option is best for companies with employee groups that would not generally get premium subsides and may save money compared to a traditional insurance product.

When does it make sense to drop health insurance benefits?

Drop, which means you’re not offering any health benefits to employees, can be a good option when you have an employee group that is largely entitled to subsidies.

For example, one company provided $400 a month for family coverage, with the employee paying an additional $1,250. Most employees were single-breadwinner type families and would be entitled to premium subsides on the exchange. If the company dropped insurance, the family would go from paying $1,250 to about $700 a month on the exchange for an equivalent level of coverage, even without premium subsides that could take it down further to about $250 a month.

Dropping was the most attractive option for the company because it would save $400 a month per family employee, and most employees would save money on premiums. In addition, the company can use the money it paid toward benefits to provide wage increases for those individuals who would be paying more for insurance.

Even though companies with 50 employees or more that drop insurance will have to pay a $166 a month penalty per employee starting in 2015, the penalty and some wage increases for people harmed by going to the exchange may be less. Both the business and individuals could have a large net financial benefit, and the employer could save more since it won’t have to use resources to address benefits questions.

What is the ‘roll’ option?

That refers to rolling with your current insurance. Many companies are waiting to see how the exchanges work and are taking the roll approach to wait another year.

To manage increasing premiums, companies are raising deductibles, co-pays and/or the share employees pay. Others are instituting wellness programs. Premiums might increase, but discounts are offered if employees participate in the wellness program, which is usually tied to some activity that might promote health. Employees can lessen or eliminate the increase if they participate.

When does self-insurance make sense?

If you have a relatively healthy employee group, it may be a good option. Unlike the exchange products, stop-loss policies are still medically underwritten (and the relative health of the group matters). You may pay the first $25,000 in claims per employee and purchase stop-loss coverage from an insurance company to pay claims above that amount. Savings can be substantial, but the drawback is that as you get deeper into the insurance industry — you’re taking on risk and functioning like an insurance company.

Companies should sit down with an insurance adviser and review all four options, because one may offer great cost savings or better benefits for employees.

Joseph R. Popp, J.D., LLM, is a tax Manager at Rea & Associates. Reach him at (614) 923-6577 or joseph.popp@reacpa.com.

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Top earners may be surprised at all the additional taxes they’re paying when they file in April.

Christopher Axene, CPA, a principal in Tax Services at Rea & Associates, says many people could have exactly the same income as they had the previous year, but experience a 6 percent increase in their tax rate nonetheless.

“If they’re not doing tax planning or getting some idea where they stand, it might be a shock for some people,” he says.

Smart Business spoke to Axene about tax changes for 2013 that could sneak up on filers who haven’t accounted for the additional liability.

What are the key tax changes top earners can expect for 2013?

The increase in tax rates is the most significant change, going to a new top rate of 39.6 percent compared to the 35 percent rate in the past for couples with an annual income of more than $450,000.

There’s also a 3.8 percent surtax on net investment income. That applies to individuals with $200,000 or more in adjusted gross income (AGI) and couples with $250,000 or more.

Rates are increasing for capital gains and dividends, going from 15 to 20 percent. The AGI threshold for the 20 percent rate is $400,000 for individuals and $450,000 for couples.

Couples with W-2 income over $250,000 will also see an additional 0.9 percent Medicare tax this year.
Because of all of these changes, it’s important to start doing tax planning now.

Are there things that can be done to lessen the tax burden?

It’s not so much about getting away from these taxes; it’s a matter of being aware of their impact. It doesn’t make sense to take a pay cut just to pay less tax.

Most people will be withholding enough for the 39.6 percent tax rate, so that’s not likely to cause surprises. But the 3.8 percent surtax on investment income isn’t being withheld, and there’s no withholding tax associated with dividends. People might be making estimated payments, but payments based on prior year tax rates won’t be sufficient come April.

While there aren’t any major loopholes or tax havens, making the maximum contributions to a retirement plan continues to be a powerful tax deferral tool both for employees as well as the self-employed. Another thing to consider is the IRA distribution available to people who are over 70½ years old. As long as they are charitably inclined, they can take a distribution up to $100,000 from their IRAs and give that directly to a qualified charity. Those dollars won’t be included as taxable income, but they don’t get a tax deduction for the contribution either. For those who don’t need the money, it can be a useful tool to satisfy the yearly minimum distribution requirement and fulfill charitable goals.

Other than that, you could save on taxes by manipulating when income is earned or when deductions are paid. If you own a business and have control over your income, it might make sense to spread income over multiple years or bunch deductions into one year in order to maximize lower tax rates.

Should people who expect to owe more make additional tax payments now?

Run projections, get estimates and figure out what will be your tax liability. If you need to make up a difference, perhaps withhold more out of a bonus check in December or make an estimated payment in January to lessen the hit in April.

It’s more important this year than any recent year to run projections, particularly for high-income earners. About 90 percent of taxpayers probably don’t need to worry about this, but that top 10 percent could see tax rates going up 6 to 8 percent because of the new add-ons and new top tax rate. Income tax surprises usually aren’t a good thing. Start planning now for what will be coming in April 2014.

Christopher Axene, CPA, is a Principal in Tax Services at Rea & Associates Reach him at (614) 889-8725 or chris.axene@reacpa.com.

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Your company doesn’t need to have laboratories filled with beakers to be eligible for tax credits provided for research and development (R&D) activities.

“Many people don’t think they’re doing the type of research that qualifies. But in this context, research is a tax definition. And while there may be similarities to the laboratory sense of the word, it covers a wider range of activities,” says Christopher E. Axene, CPA, a principal in tax services at Rea & Associates, Inc.

Smart Business spoke to Axene about activities that qualify for credits and the application process.

What is the credit?

It’s an income tax credit available to U.S. companies for R&D activities within the U.S. While companies conducting research are already deducting those expenses, the credit is better because it’s a dollar-for-dollar reduction in their tax liability.

The credit has been around since the early 1980s, but has expired many times and continues to be extended by Congress every year. It’s set to expire again at the end of 2013 unless Congress takes action.

There are three main categories of credits:

  • Labor or the wages of people involved in R&D activities.

  • Supplies expended as part of the process.

  • Costs relating to hiring an outside company to assist with research, provided that the company paying for the services is at risk regarding the success or failure of the work.

For most companies, only the first two categories would apply.

There are two types of credits, a regular credit and a simplified credit. The regular credit is often referred to as a 20 percent credit, which is something of a misnomer because there’s an adjustment to prevent double dipping. Since companies are already deducting the expenses on their tax returns, the net credit given is 13 percent. Few companies claim this credit because of the detail required with the filing. The simplified credit is more common and is 4.5 percent of every R&D dollar spent.

Is the credit just for manufacturers?

No, it has wide potential applicability because it’s not limited to a particular industry. It’s truly about whether a business is performing qualified research. Lean manufacturing and Six Sigma certainly qualify, but so do other activities. For example, a software company that averages $10 million in annual revenues routinely gets $80,000 a year in credits because it continually upgrades and enhances its products.

There’s a four-part eligibility test for the credit:

  • There must be some uncertainty that the activity is undertaken to eliminate. If you know the result before you start a process, it wouldn’t qualify.

  • It must be for a permitted purpose, such as to develop or improve a product or process.

  • There has to be a process of experimentation. Failure is a good thing — it shows a process.

  • It must be technological in nature, which means it relies on a hard science. It’s physical, biological or computer engineering rather than one of the social sciences.


Why don’t more companies apply for the credit?

Many aren’t aware of the credit because advisers haven’t informed them or they don’t use advisers. Others don’t think they do R&D because they don’t have employees wearing lab coats.

There also are owners of pass-through entities who don’t bother applying because the tax credit is not available to individuals who are subject to the alternative minimum tax (AMT). If it were allowed as a credit against AMT, the percentage of people taking the credit would skyrocket.

Keep an open mind, have a conversation and determine whether the benefit is worth the time and effort to file the necessary paperwork. Also explore the state-level R&D incentives that can apply regardless of whether or not the federal credit is claimed.

Christopher E. Axene, CPA, is a principal in Tax Services at Rea & Associates, Inc. Reach him at (614) 889-8725 or chris.axene@reacpa.com.

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Lean and Six Sigma were developed for manufacturing, but are gaining momentum within service industries.

“Both Lean and Six Sigma have been used almost exclusively in manufacturing. Now you’ll see black belts in all fields, from IT to financial services to health care,” says Chris Liebtag, a Lean Six Sigma Black Belt with Rea & Associates.

Smart Business spoke with Liebtag about Lean Six Sigma, a program that melds the two disciplines for maximum benefit.

What are the origins of Lean and Six Sigma?

Six Sigma originated at Motorola, but its roots can be traced through the Quality Circle Movement of the ’70s to the Total Quality Management teaching of the ’50s. It is a project-based methodology seeking quality and consistency. Lean, on the other hand, has a very complete toolkit and is mostly concerned with identifying and eliminating waste or non-value-added steps.

Lean Six Sigma combines the basic tenants of both to look at ways to remove non-value-added steps in a process and improve quality.

What types of businesses can be improved by implementing Lean Six Sigma?

It’s been very strong in health care and financial services. An emergency room might want to look at the process of admitting patients, or a medical billing organization that sends bills to multiple entities might want to determine how long it takes and ways to accelerate the process.

There must always be a business rationale; clients define the value and you’re looking to satisfy their needs and remove wasteful steps.

Should everyone in the company be trained?

It’s important to at least be exposed to the concepts. It does involve a cultural change within an organization, so implementation will require everyone to adopt the mindset of always looking for ways to continuously improve. Select employees should be trained as facilitators, but everyone should be thinking about how to better serve clients.

The results likely will be increased customer satisfaction, an enhanced business reputation and a competitive advantage. If you can deliver your product or service faster than competitors at a higher quality or even a lower price because of operational efficiency, it provides an enormous advantage.

Does that require Lean Six Sigma?

Efficiency and customer satisfaction initiatives can be tackled without Lean and Six Sigma. However, these techniques have been proven to be very effective when it comes to controlling costs and improving satisfaction among clients and employees. Employees are empowered to better their work environment, which eliminates turnover and produces a happier workforce. In turn, that leads to improved customer satisfaction. Lean Six Sigma provides a framework to generate these gains.

Does Lean Six Sigma need to be adjusted to fit the company?

The most successful projects are tailored specifically to address industry- or business-specific circumstances. The 30,000-foot view concepts and methodologies can be applied almost universally — define a problem, measure the variety of steps within that problem or process, and then analyze and improve it. However, the best results are produced by combining the tools and methods of Lean and Six Sigma with industry expertise. That industry expertise component also helps generate buy-in among employees.

How important is it to set goals for improvement?

You should always start with the end in mind, even if that goal might not be immediately achievable. If you want to reduce costs by 10 percent, process changes are designed to produce that result. You might only get to 8 percent — that doesn’t mean it wasn’t a worthwhile enterprise, it just presents an opportunity to continually improve toward that goal.

The idea behind Lean Six Sigma is continuous improvement. It isn’t designed to be a ‘one-and-done’ initiative. It’s a change in culture whereby employees embrace the mindset that the business needs to get a little better each year and sustain the gains. Lean Six Sigma is more than a technique or a process, it’s a discipline and approach to running your business.

Chris Liebtag is a Lean Six Sigma black belt at Rea & Associates. Reach him at (614) 923-6586 or chris.liebtag@reacpa.com.

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Published in Columbus

The U.S. Department of Labor (DOL) has increased its compliance enforcement efforts and is expected to conduct more benefit plan audits to determine if the companies that sponsor them are meeting those requirements.

“This is an area of focus for the DOL. A lot of time was spent preparing fee disclosure regulations, and follow up is likely to ensure plan sponsors are using that information. An increase in audits hasn’t been announced, but more auditors are being added to the ranks,” says Andrea McLane, manager, Benefit Plan Services, at Rea & Associates.

Smart Business spoke with McLane about what the DOL expects of plan sponsors and how to meet those expectations.

Do fee disclosure regulations cover all benefit plans?

The primary area of concern is with retirement plans since so many accumulated assets and safeguards are needed to ensure the plans provide income to employees when they retire. The DOL is also looking at welfare plans to make sure those with 100 participants or more are filing Form 5500s.

But the emphasis in the fee disclosure regulations is on fiduciary or other compliance issues regarding retirement plans. The regulations were meant to simplify the explanation of fees so that plan sponsors, with assistance from consultants, can better understand fee structures and evaluate when services were necessary and fees were reasonable.

What can plan sponsors do to document that plan fees are reasonable?

There are two approaches that can be taken to help you meet fiduciary responsibilities:

  • Request for proposal (RFP).
  • Benchmarking.


You can issue an RFP every three to five years and compare the responses to current provider costs to determine whether fees are competitive. However, it’s difficult for the average plan sponsor to review RFPs because there’s no format for disclosures, making an apples-to-apples comparison challenging.

It’s much easier for plan sponsors to benchmark their fees. You can do this using data from your current service provider only. This method isn’t objective and is of a lower quality. It also may not meet fiduciary responsibilities when it comes to the process of choosing a provider. The best solution is to find a good, independent benchmarking service. While not a requirement, the DOL set an expectation that plan sponsors will benchmark and at least check the reasonableness of their fees.

An investment policy statement (IPS) can help you select and monitor plan investments. An IPS isn’t required, but it’s tough to monitor investments without one. It will also help ease DOL anxiety concerning the level of governance provided. Many investment advisers supply an IPS as part of their services.

Is a benchmarking report enough to satisfy plan sponsor fiduciary responsibilities?

It goes a long way, particularly regarding record keeping fees, but you still have to make sure you have proper oversight and aren’t relying too much on provider assurances. Most high-profile cases the DOL has undertaken have dealt with fees at the fund level. For example, Wal-Mart wasn’t using the best possible share class of funds in its plan — it was using retail-class funds. In this case, the retail giant relied on its trusted advisers too much and didn’t ask enough questions. An independent benchmarking report would have identified that fund fees were too high for a plan of such magnitude, giving Wal-Mart the opportunity to make changes.

Demonstrating that you have a process in place to monitor the investment decision-making of your plan should suffice. The DOL will not second-guess the success, or lack thereof, of the investment decisions within the plan. But it can identify when there is no documented process to monitor service providers, preventing you from meeting your fiduciary responsibility. Without documentation, the DOL will conclude de facto that the fees are unreasonable and the plan is not compliant, resulting in enforcement actions and penalties. It also leaves you open to participant lawsuits for breach of fiduciary duty.

Andrea McLane is manager, Benefit Plan Services at Rea & Associates. Reach her at (614) 889-8725 or andrea.mclane@reacpa.com.

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Fraud costs companies about 5 percent of revenue, totaling about $3.5 trillion internationally, according to a 2012 report by the Association of Certified Fraud Examiners.

“It can have impact beyond the initial financial loss,” says Mark Van Benschoten, CPA, a principal at Rea & Associates. “Fraud damages the reputation of a business, which could lead to a loss of revenue and loss of jobs; there can be a spiral effect. Stopping fraud is about protection of the corporate entity.”

Smart Business spoke with Van Benschoten about fraud and how companies can protect themselves.

What are ways that employees commit fraud?

Some of the most common fraud happens because of inadequate segregation of duties, not communicating consequences, employee turnover, crisis conditions and poor communication. However, there are so many specific ways fraud is committed. Actually, employees who are determined to steal find new ways all the time to try and bypass a company’s systems.

What should a business tell its employees about fraud?

It’s important to set the tone about fraud from the top. Employees will react to the tone of the business owner. They may also read an owner not taking a stand on fraud as a signal that it’s OK. Business owners and management have to make it clear that they take fraud seriously and it will not be tolerated; they want to hear about what’s happening in the business. Consider putting an ethics hotline in place so your employees can anonymously report what they see.

A hotline sounds like Big Brother watching, is it?

An ethics hotline is one of the most cost-effective means of combatting fraud. In fraud cases where there is a hotline in place, the average loss is $100,000. Compare that to a company without a hotline and the amount rises to $180,000.

It’s not a matter of tattling on a co-worker. It’s about job creation. It’s about protecting the corporate image. The amount stolen from a company is one thing, but the potential losses that could happen from the negative impact on a business’ image could be devastating. This gives employees the opportunity to protect their jobs as well as those of the other honest people they work with.

There are other benefits, too. For example, if someone at a company uses a forklift in an unsafe manner, any employee that witnesses the situation can call the hotline to report it anonymously. Management can then rectify the situation and avoid a costly accident.

If a company has an audit, isn’t that enough to catch fraud?

Audits are not specifically designed to catch immaterial fraud. Audits do provide reasonable assurance about the presentation of the financial statements in coordination with Generally Accepted Accounting Principles. No auditor can, or will, guarantee that an audit will catch any case of fraud.

In most cases, someone has to speak up internally for fraud to be discovered. An outside auditor is only there once or twice a year, and his or her job is to ensure there is good financial reporting.

What other steps can companies take to prevent fraud?

It’s important that businesses have good internal controls in place. In situations where the owner is very involved with every aspect of the business, different checks and balances would be needed than in instances where the owner is hands off. With internal controls, you have to weigh costs versus benefits. It’s about how much you’re willing to pay to manage risk. You wouldn’t spend $11,000 to save $10,000.

It would be nice to say ‘do these three things and you’ll be protected,’ but there is no one-size-fits-all solution. Preventing fraud is about limiting opportunity, having good internal controls and making sure employees understand that fraud will not be tolerated by anyone — from the top down.

Mark Van Benschoten, CPA, is a principal at Rea & Associates. Reach him at (614) 889-8725 or mark.vanbenschoten@reacpa.com.

Learn more about implementing an ethics hotline at www.reacpa.com/red-flags.

Insights Accounting is brought to you by Rea & Associates

Published in Columbus
Friday, 19 July 2013 14:26

Healthcare Reform Seminar

2013 Healthcare Reform Seminar

In mid-July, Smart Business held the 2013 Healthcare Reform Seminar, presented by SummaCare, and sponsored by Rea & Associates, Sequent, Roetzel & Andress, The Greater Akron Chamber, and hosted by Firestone Country Club. More than 200 people heard insight, advice and strategy from a panel of experts on what employers need to know about healthcare reform.

Download a copy of the presentation

Contact these insightful panelists to learn more:

Kevin Cavalier, vice president of sales, SummaCare

Bill Hutter, founder & CEO, Sequent

Paul Jackson, partner, Roetzel & Andress 

Joseph Popp, tax supervisor, Rea & Associates

Marty Hauser, CEO, SummaCare (Panel Moderator)

 

 

 

 

Published in Akron/Canton