How to navigate the financial risks and exposures of a product recall

You make your products with the best of intentions. You work hard to provide consumers with newer, better, higher quality products. What happens when a problem arises with a product that is already on the market? Products that malfunction or pose a danger to consumers can be a very real threat to any company.

For most manufacturers, product recalls are taboo even in casual conversation. Yet if you are in business long enough, it is likely that you will face at least one product recall. Will your recall be a bump in the road or a fatal accident for your company?

Smart Business spoke with Karen Burns, assurance partner at Sensiba San Filippo LLP, to learn how to manage product recalls, mitigating immediate financial losses while preserving the brand of the organization.

What financial exposures can result from a product recall?

There are many direct costs associated with a recall, such as shipping, storing, replacing or destroying defective products. Expenses for managing public relations can add up quickly as well.

Beyond direct expenses, other less obvious costs can loom even larger. Business interruption and lost profits are often the greatest cost of a product recall. Product liability from products that cause bodily harm to consumers or damage to property can also increase risk exponentially.

Finally, don’t overlook potential damage to your reputation and loss of brand equity. Product recalls aren’t simple or inexpensive, but costs and potential risks can be managed with proper planning.

What pre-emptive strategies can help manage risk and financial exposure?

There are three strategies that companies use to manage recall risk: reduce it, assume it or transfer it.

Reducing risk involves taking strategic actions to avoid recalls and the costs that come with them. Creating a ‘culture of quality’ that spans your entire business and supply chain can reduce the occurrence of recalls, while establishing crisis-management procedures can help you minimize the effects of any recalls that do occur.

Companies may choose to assume the risk of a product recall by carrying high insurance deductibles or self-insuring. This strategy is best utilized only by very large companies because the cost of a single recall could be catastrophic for mid-cap and small companies.

Finally, transferring risk is a good idea for any organization. Suppliers and insurers can help you recover the cost of a recall. Before a recall event occurs, ensure that you are carrying the right kind and amount of insurance. Obtain coverage for all the risks you may face during a recall. Multiple insurance policies may be applicable. Additionally, insist that key suppliers carry product recall insurance, including third party coverage.

How should companies strategically approach a recall?

It is important when facing a recall to be proactive and to act quickly. Don’t wait for your hand to be forced. Voluntary recalls are easier to manage and generally less costly than mandatory recalls. By being proactive, you can better control the situation and the conversation surrounding it.

Take a long-term view of the situation. Don’t try to cover-up a problem. Communicate honestly. Consumers are more forgiving when you acknowledge a problem quickly and take corrective action.

Don’t underestimate the time, effort and expense required. Place your financial survival and the protection of your brand at the top of your priority list.
Finally, don’t try to tackle the problem alone. You will need legal, insurance and financial assistance to get through a recall. Your lenders and investors may have to bear some of the financial burden, and your CPA can help steer those conversations.

Insights Accounting is brought to you by Sensiba San Filippo LLP

How forensic accounting can help snuff out fraud and mismanagement

With increased regulatory demands and constant threats of fraud and misconduct, businesses have to watch their backs, especially when it comes to finances.

In many cases, having a traditional accountant is not enough. You may need instead someone who has not only accounting skills, but investigative and analytical skills as well. In other words, you need a forensic accountant.

“Forensic accounting enables business owners to get control over possible financial fraud and mismanagement and, more importantly, to deter it before it occurs,” says James P. Martin, CMA, CIA, CFE, managing director at Cendrowski Corporate Advisors LLC.

Martin says forensic accountants can help companies design effective antifraud controls and mitigate the risks of future lawsuits. They also might be used to quantify economic damages in instances where value and/or profits might be lost, or in cases of business valuations to uncover reported income or expenses.

Smart Business spoke with Martin to learn more about the role of forensic accounting.

How does a forensic accounting engagement differ from an audit?

First, forensic accounting engagements are nonrecurring and are only conducted at the request of a firm’s management.

Audits, conversely, are recurring activities.  Forensic accounting engagements are targeted assessments of specific areas of a business; they are not general assessments of the business as a whole or its financial statements.

The methodology employed in an audit is also quite different from that used in forensic accounting engagements. Audits are conducted primarily by examining financial data, whereas forensic accounting analyses are conducted by examining a wide variety of documents and interviews.

Lastly, the goals of forensic accounting engagements are yet again very different from audits. The goal of the latter is to detect the presence of material misstatements, irrespective of their cause.  Audit activities are in no way designed to help an organization deter fraud, though they may detect such activity.

Since many frauds begin on a small scale, they may go undetected by auditors if the size of the fraud is below the auditor’s threshold for materiality. In addition, even if the magnitude of a fraud is greater than the auditor’s threshold for materiality, a fraud may remain undetected by the auditor if it is well-concealed.

Forensic accounting engagements can be specifically tailored to deter fraud and potentially prevent it.

Can forensic accounting techniques be applied proactively?

Forensic accounting techniques can be used on a proactive basis in many instances, including the deterrence of fraud. More specifically, forensic accountants can proactively analyze an organization’s internal control process to determine areas of weakness and help the organization remediate these issues.

How can organizations use forensic accountants to help deter fraud?

Fraud deterrence focuses on removing one or more of the three causal factors of fraud: motive, opportunity and rationalization.

Only when each of these factors is present can a fraud occur. Motive and rationalization are generally dependent on personal situations over which the organization may have little control. This is why the opportunity for fraud is often the prime target of fraud deterrence engagements, as this factor can be controlled by an organization.

How can forensic accounting techniques be used in cases of business valuation?

Valuation professionals who are trained in forensic accounting may have significant experience in data mining and analysis, affording them the ability to supplement typical valuation techniques with information uncovered as a result of forensic accounting activities.

This additional information could result in a markedly different valuation from that which might have been calculated without the use of forensic accounting techniques, as valuations are extremely sensitive to underlying assumptions. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

A new certification process has made it much easier to get an ITIN

The Individual Taxpayer Identification Number (ITIN) was created to ensure that non-U.S. residents and other individuals who do not have, and are not eligible to obtain, a Social Security number can pay the taxes they are legally required to pay.

The application process can take a significant amount of time and requires documentation that may be difficult to obtain.

The good news is an ITIN does come with some benefits, says Stephen Rickert, CPA, a Partner in the International Tax Services Group at RBZ.

“It can lower withholding taxes on interest and dividends paid to the nonresident,” Rickert says. “It can also be used to track withholding payments made on behalf of those nonresidents, to file U.S. and state tax returns and to receive refunds. The IRS won’t refund any excess taxes without an ITIN or a Social Security number.”

An ITIN holder is not eligible for Social Security benefits or the earned income tax credit. However, if that person becomes eligible for Social Security in the future, the earnings reported with an ITIN may be counted toward the amount he or she is eligible to receive.

Smart Business spoke with Rickert about ITINs and what business owners should know about them.

Why are ITINs necessary?

An ITIN is formatted in the same manner as a Social Security number and is used for federal tax reporting only.

It is not intended to serve any other purpose. The IRS issues ITINs to help individuals comply with U.S. tax laws and to provide a means to efficiently process and account for tax returns and payments for those not eligible for Social Security numbers.

The number does not authorize work in the U.S. or provide eligibility for Social Security benefits or the earned income tax credit. ITINs are geared for nonresidents who have income from the U.S. from passive investments in the U. S. such as from real estate or other U.S. businesses.

It’s a tool for the IRS, which needs to track the individual’s U.S. income and payment history and can’t effectively do so via just a name.

What makes getting an ITIN difficult?

Since 2012, the IRS requires ITIN applicants to provide either original documents such as passports, ID cards, and birth certificates or certified copies to accompany the ITIN application. Notarized copies are not acceptable.

A certified document is one that the original issuing agency (i.e. a foreign country’s agency which issues passports) stamps with that agency’s official seal. Applicants must visit their home country’s embassy, consulate or other agency that is responsible for issuing passports, which obviously can become quite time-consuming.

How did the IRS make the process easier?

The IRS has allowed certain Certified Acceptance Agents (CAAs) to verify on behalf of the IRS the authenticity of underlying documentation required to be submitted with the ITIN application. So instead of being required to travel overseas to obtain this verification, it can be gained through a CAA, either through face-to-face or live video interviews.

Firms go through mandatory IRS training and background checks to gain this endorsement. Once it’s complete, the IRS will accept certifications from these firms.

What do business owners need to know?

If you have non-U.S. investors, whether you are a corporation, a partnership or a limited liability corporation, you need to be aware that these investors will be pulled into the U.S. and/or state tax systems and be required to obtain ITINs.

You are required to comply with the tax withholding and reporting obligations on payments made to non-U.S. investors. ITINs are required for withholding. To facilitate this process, you should advise your investors to obtain these ITINs in advance of receiving any funds from the investment to avoid any unnecessary withholding.

Advise individuals to get at least three copies of everything to protect themselves against documents being lost in transit. The process can be cumbersome, so it’s best to only have to go through it once. ●


Insights Accounting is brought to you by RBZ

Santa Claus brings an extra SBD, with some fine print included

Ohio’s small business income tax deduction (SBD) is just one of the ways legislators have sought to further stimulate the state’s economy. As the New Year approaches and taxpayers look toward the 2014 tax year filing season, even more relief is on the way.

Smart Business spoke with Joe Popp, JD, LLM, tax manager, Rea & Associates, to find out about what changes are in store for the small business income tax deduction.

Who can claim a SBD?

In October, the Department of Taxation reported that only half the number of small business owners who were expected to claim the 2013 deduction actually did. Maybe the owners — and their CPAs — weren’t up-to-speed on what kind of things qualify for the deductions. Or maybe they weren’t even aware of the deduction at all.

The SBD is available to a wide range of individual taxpayers who have Ohio-sourced business income, which can come from many different sources such as a residential rental property or select owner wages. As a good rule of thumb, if a taxpayer received a K-1 from a company that has locations, property or payroll in Ohio, the taxpayer is eligible. The same is true if the taxpayer has an activity in Ohio reported on personal schedule C or F. Investment income in a trust or pass-through entity, where investing is the business activity of that entity, can also qualify for the SBD if the income is passed through to an individual taxpayer.

What can small business owners expect when they file their 2014 personal income tax returns?

The SBD already allows individual taxpayers with Ohio-sourced business income to claim a 50 percent deduction on the first $250,000 of Ohio-sourced business income that they have. For the 2014 tax year, however, taxpayers are eligible to claim an additional deduction on this income.

How much more? Where is the matter at the state government level?

Legislation authorized up to an additional 25 percent deduction for a total of 75 percent on the first $250,000.

But there was a set pool of money to fund that, the legislation didn’t mandate an additional 25 percent (it just set a cap not to exceed), and Ohio retains the ability after Jan. 1, 2015, to draw funds from that pool to pay for budget shortfalls in several other departments.

So it’s possible you might not know just how much additional deduction you could get for some time. For now, think of this deduction as 50 percent, plus a “mystery bonus” of up to 25 percent more.

Stay tuned for more guidance on this from Ohio.

How does this deduction affect business owners who want to retire or sell their businesses?

This deduction provides an interesting opportunity for more mature companies that are currently structured as C corporations. Generally speaking, it is easier to produce great tax outcomes on the sale of a pass-through entity than a C corporation.

The SBD is also denied to owners of C corporations on their wages and on the income coming from the C corporation.

The SBD can help ease the pain of a C to S partnership conversion by providing an annual cash savings as large as $6,000 to $10,000 per owner.

While this might not be a strong enough reason to do the conversion on its own, if a business owner has a mature company that is not retaining profits to grow, and is thinking about selling the company soon, this is a great time to do the C to S partnership conversion.

Who knows how long the SBD might be on the books? The savings opportunities now make this a great time to consider accelerating a move from a C corporation structure if that was in the plans down the road.

Insights Accounting is brought to you by Rea & Associates

How to get started on a risk-based approach to third-party management

Companies interact with thousands of third parties. Even small companies have connections outside their walls with vendors, joint venture partners, customers, licensed distributors, royalty owners, supply chain intermediaries and even competitors that can impact their achievement of objectives.

“The number of third parties can be astounding and those relationships carry risk. So, a risk-based approach is needed ensure the most critical risks are considered,” says Jody Allred, partner in Risk Advisory Services at Weaver.

Smart Business spoke with Allred about how organizations can get started on assessing and managing third-party risks.

Why is this becoming more important?

As globalization and outsourcing have expanded so that companies can stay competitive, it’s become more evident that companies can be responsible for the actions of the third parties they work with. Companies need to take ownership even in an outsourced environment, especially consumer products companies and retailers concerned about reputation management.

There is also the issue of higher corporate visibility due to new regulatory requirements. One example of this is the SEC’s conflict minerals disclosure rule that requires companies to disclose the origin of certain metals from Central Africa.

What can happen if these risks aren’t managed?

Several incidents in the news highlight the need for third-party risk management. For example, Apple has faced significant concerns over the labor practices of its primary supplier of iPhone and iPad assembly in China. While this issue came to light in 2011, it continued in the news throughout 2013 and still lingers today.

In another instance, an HVAC contractor had access to Target’s internal network for billing and project communication. In 2012, the contractor’s account was leveraged to gain access to the network and plant malware that resulted in 40 million stolen credit cards, a 46 percent drop in fourth quarter profit in 2013 and the removal of the company’s CEO.

Do companies typically take the time to manage third-party risk?

The largest, first-class organizations and those in highly regulated industries like banking and insurance may have third-party risk management programs, but the average manufacturer or oil and gas company likely has not fully dealt with this issue.

How can organizations get started?

The biggest hurdle is obtaining the information needed to evaluate third-party risk because most companies don’t capture and collect the necessary data to build risk profiles. In order to properly evaluate their vendors and other external relationships, organizations must consider:

  • Financial stability.
  • Control environment.
  • Technology environment.
  • Dependency.
  • Access to information and intellectual property.
  • Items critical in the supply chain.
  • Regional risk.
  • Operational characteristics.
  • Regulatory and compliance interaction.

If you don’t have this information on-hand, you can build processes to capture the data over time. You have to start somewhere. So, consider what information you do have, and rate your third parties based on the financial, regulatory, operational and reputational risks. You cannot tackle thousands of vendors at once, but you can focus on those that present the most risk using your initial risk-based scoping.

Once you establish more formal protocols, you can build an evolving third-party risk management function to identify and respond to all risks on an ongoing basis. This may include auditing a vendor, implementing a compliance program, establishing corporate guidelines and/or better communicating your expectations.

Do you have any other recommendations?

Third-party risk management requires communication and collaboration across the organization — business units, senior management, operations and administration. It cannot be a siloed responsibility of a compliance group. Organizations that spend time to identify, understand, manage and navigate risk benefit from insights into risk influences that are strategic to business success.

Insights Accounting is brought to you by Weaver

Learning what your organization is really worth can bring dividends

The value of a business is commonly a large portion of its owner’s net worth.

Understanding what the business is really worth, or could be worth, allows an owner to make important decisions regarding key issues like retirement, estate planning and choosing a business successor.

A frequent question owners ask is, “What is my business worth?” The answer is not necessarily what the assets would sell for — a common misunderstanding of owners.

Smart Business spoke with James F. Schultz, principal at Cendrowski Corporate Advisors LLC, about how the sale value of a business is properly determined.

How is the value of a business determined?

The first step is to hire an independent valuator to determine the realistic sales price of the business.

This important step should be done by a professional experienced in merger and acquisition processes and in valuation analyses. The valuator will look at the business and use the standard valuation approaches of asset, income and market to estimate the enterprise value of the business.

For most operating businesses, the income and/or market approach will have the most influence in estimating the sale value of the business. Research is needed into the industry of the business to find trends and key economic factors driving profitability.

Next, a look at sales of comparable businesses in the industry can provide various multipliers of income factors that can be applied to the business. If comparable sales are not available, estimating proper investment returns on income based on risk/reward analysis will estimate value.

When applying the income approach, it may be necessary to identify synergies/cost savings created from the sale. This will enable the valuator to establish investment value (to an acquirer) rather than fair market value (to a hypothetical purchaser).

In cases where the return on investment is low and/or little labor is involved, the asset method may be more applicable.

What happens after the enterprise value is estimated?

The next step is to estimate what the purchaser will actually receive from the seller.

Most sale transactions today are structured as asset sales rather than stock sales. In an asset sale transaction, specifically identified assets and liabilities of the selling company will be transferred to the purchaser. The purchaser will require all the fixed assets necessary to run the business, which can range from computer systems to manufacturing machinery.

In addition to the fixed assets, the purchaser acquires various intangible assets and rights relative to trade names, patents, goodwill, occupancy/lease rights, client lists and vendor lists, to name a few. The more difficult item to quantify is the level of working capital that the purchaser will require as part of the sale transaction.

The purchaser is looking to acquire an operating business and the necessary liquidity to allow the business to continue to operate in a smooth fashion without requiring additional equity amounts.

The items typically included in working capital are accounts receivable, inventory and accounts payable.

The net value of those amounts need to provide a liquid cushion to continue business operations. The sale negotiations will normally determine the appropriate level of liquidity, and an adjustment of the purchase price may be required if the level is not met or if there is an excess when the sale closes.

In most cases, the purchaser will not assume liabilities other than trade payables.

After estimating the purchaser’s requirements, what are the final steps?

The final step is to analyze the existing balance sheet of the company for items that will not be transferred to the purchaser.

This typically consists of cash, investments and other non-operating assets on the asset side, and all liabilities excluding trade accounts payable on the liability side. The net value from the combination of the aforesaid items is then added to/subtracted from the enterprise value. The result of that computation is the estimated net sale proceeds of the business.

In order to determine what the owner will be able to put in the bank, an estimate of the income taxes related to the sale transaction should be calculated. That amount is subtracted from the estimated sale proceeds to determine the after-tax cash available to the owner. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

Three essential tips to help architects build a more profitable design firm

In the world of architecture, anything is possible on paper. Successful firms recognize, however, that designs need to be rooted in reality in order to both satisfy clients and remain a profitable business.

“Architects often live more on the artistic side,” says Jeff Ong-Siong, CPA, a partner in the real estate group at RBZ. “You come up with a concept and it looks great in your drawings. But sometimes, as great as it looks, you have to walk away from it because it’s just not feasible or because the cost will be more than what you are going to take out of the project. Eventually, your firm has to make money.”

The ability to balance artistic creativity with fiscal discipline can go a long way toward determining your firm’s future.

Smart Business spoke with Ong-Siong about the three keys to staying on top of your business in the architectural world.

Tip No. 1: Watch your costs

Let’s say you need two junior architects to help you with a certain phase of a project.

As you get into it, you realize you need a third person because the two of you aren’t able to get the job done. Now, your cost has gone up by a third. Unless you regularly monitor those costs and make changes, you would not know that.

It’s common for architectural firms to hire outside consultants like a landscape architect or an elevator engineer. You have to track those costs to make sure you are within the original budget. If they’re not, you need to look at adjusting the budget.

Without reliable data, it is difficult to say where you are on a project. You may continue thinking that you are within your budget or if you’re not, you’ll make it up at the end of the project. Without a strong accounting system to track information, you may already be losing money before you get there.

Start accumulating the costs. Every bill that is paid out is related to a project. If you get an invoice from a consultant for project A and you pay it, you have to make sure that invoice goes to project A. Someone has to be tracking that.

These are simple steps, but it’s obviously very easy to get sidetracked. That’s why it’s critical to have someone whose job is to monitor these details and make sure they are being managed responsibly.

Tip No. 2: Seek strong accounting expertise

You need a strong accounting person who can capture information on costs and budgets to allow owners and project managers to see where the money is going. What stage are you on for a particular project?

Are you on target based on the budget? Did you confirm the actual costs before you responded to a request for proposal?

You also need a good accounting system to capture all the data and information. Make sure the project managers and owners continue to monitor the project cost on a regular basis.

Create a system so at any point in time, you can pull up that system and find out where you are with the budget compared to the actual costs incurred.

Tip No. 3: Demand accountability

Make sure, as the president or key executive, you highlight the importance of filling out your time and tracking changes every time you meet.

It’s very easy to slip back into old habits. If one of the key architects in your firm is not tracking his or her time and metrics, other people are going to ask, ‘Why should I do it?’
You have to be out there leading the way.

One thing you can do is every Monday, print a list of everyone’s time and say, ‘Hey, these are the five people who did not submit their time at the deadline.’

If those people are called out, your leaders need your support at the very top to say, ‘We need you guys to do this.’ ●

Insights Accounting is brought to you by RBZ

How oversight and a little skepticism can help curb fraud in the workplace

Business owners want to trust their employees. And many think their employees can do no wrong. But nowadays, many business owners are unfortunately being proven wrong. Workplace fraud is a serious issue that businesses across America are facing.

“Just because a business owner has complete trust in his or her employees — even longtime employees — and believes they’re immune to fraud, doesn’t mean they won’t get burned,” says Brent Ardit, CPA, audit manager at Rea & Associates.

“It’s important to have some level of professional skepticism,” he says. “Don’t cause friction within the organization, but you owe it to the company to have a level of oversight. Trust is definitely not an internal control.”

Smart Business spoke with Ardit about how the risk for workplace fraud drives the need for strong internal controls within a company.

Why would employees commit fraud?

One of the more common reasons an employee would commit fraud is because of financial trouble at home. He or she might think, ‘I’ll just take this little bit of money from my company now. No one will notice, and I promise I’ll return it. I’ll put it back once things get better.’

Several workplace fraud studies have shown that the economic recession the country experienced a few years back has led to a rise in workplace fraud.

How does workplace fraud occur?

Workplace fraud occurs most often when there’s a lack of segregation of duties. One person may be managing the majority of accounting and financial reporting tasks with little to no oversight. This increases the chances for fraud to occur.

What approach should a company take to clamp down on fraud?

First, there needs to be a tone-at-the-top approach. The company’s leadership has to set a good example for employees when it comes to managing the company’s finances.

In addition, business owners should examine the accounting department structure. After review, they may find more oversight is needed. A cost-benefit analysis can determine how to design a company’s internal control structure.

Business leaders may have great ideas for how to combat fraud, but if it’s going to cost the business more than what they would save, it might not be worth doing. The company should weigh all the options on how to reduce fraud. That may mean hiring additional staff to oversee finance functions, or it may mean a company restructures itself with existing staff to ensure that adequate financial oversight is established to deter fraud.

If a business has a single employee solely managing the accounting and finance functions, it should ensure that other employees are cross-trained in the individual’s tasks and responsibilities. Also, the business may want to ask the employee to take a vacation. If an employee refuses to take vacation, it may be a sign that something is amiss.

Is paying more attention to employee work alone a deterrent to fraud?

Regularly reviewing work, rather than waiting until year-end, is beneficial. If employees know that leadership is watching, it provides some level of deterrence. And if the temptation for fraud arises, the employee is inclined to avoid a violation since he or she knows they are being watched. It’s like the Hawthorne effect, which refers to the tendency that people will alter their behavior simply because they are being observed.

Are unannounced audits effective?

Yes, if a company has internal audit procedures, having an unannounced audit could prove effective. If employees know the company is watching and that an internal audit could take place at any time, they’ll probably be less likely to commit workplace fraud.

What’s the outlook for workplace fraud?

It’s critical that companies stay ahead of the issue. New schemes appear every day, and continued oversight and monitoring of reports will help head these off. If a company follows these guidelines, it can keep fraud to a minimum.

Insights Accounting is brought to you by Rea & Associates

How to know if your business needs audited financial statements

As a business owner, you know the value of audited financial statements. Audits provide essential credibility to stakeholders, both internal and external, regarding the accuracy and reliability of financial information. Without the third party assurance provided by audits, lenders and investors would be rightfully leery of making loans and investments.

While audits can be very valuable, there are also other financial reporting solutions that can be simpler and even more effective in the right situations.

Smart Business spoke with Stephanie Tsiagkas, audit partner at Sensiba San Filippo LLP, about the different reporting and assurance solutions available to businesses.

What are financial statement audits and when are they necessary?

Financial statement audits provide the highest level of assurance and can be extremely useful in securing equity and debt financing from third parties. Audits provide an unbiased, objective examination of the financial statements of the company, including the selective verification of specific information such as inventory.

Audits require gaining an understanding of internal controls, testing of selected transactions and communication with third parties. At the conclusion of an audit, an auditor will issue a report on the financial statements, which can be shared with third parties, containing the auditor’s opinion as to whether the financial statements are presented fairly, in all material respects, in accordance with generally accepted accounting principles (GAAP). If you need a high level of assurance for external stakeholders such as banks when trying to secure a loan, an audit can be extremely valuable.

When is a full financial audit not the best solution?

While there is no doubt audits are valuable tools, a financial audit isn’t always the best or the only solution. When the level of desired assurance does not require a full audit, a review, compilation or agreed-upon-procedures engagement may provide a simpler and more effective solution. Reviews are less extensive and provide the next level of assurance below an audit. Businesses in their first year of operations or businesses that are winding down operations can often benefit greatly from a review. Reviews typically take less time and cost less than financial audits. While banks often initially request or require an audit, they may, depending on the situation, be willing to accept a review instead.

Compilations can provide value in the right circumstance. While they do not provide any assurance — they assume the data provided by management is accurate — they can be very useful when businesses need to organize and standardize financial reports for internal use. Compilations also can be accepted by banks when seeking smaller loans.

Agreed-upon-procedures engagements are designed to provide a report of findings based on specific procedures performed over specified information. When a need for reporting is limited to specific information or transactions, a financial audit may cover a lot of unnecessary ground and fail to address critical reporting topics.

For example, some retail lease agreements provide for lease payments that are contingent upon the revenue of the tenant — when the tenant brings in more revenue, rent increases. In such a case, an agreed-upon-procedures engagement could provide targeted testing and reporting to the lessor that revenues have been accurately reported. A full audit would provide broad assurance at significant cost, but may fail to provide detail testing over reported sales numbers.

Which report is best to use?

Each report is designed to suit specific circumstances. Your internal needs and budget, as well as requirements from your bank or other parties, will determine the right solution. While large loans may require audited financial statements, banks may be willing to accept a review or compilation for smaller loans. If you don’t believe a full audit is necessary, you may consider asking your accountant for his or her opinion or even asking your lender if he or she will accept a review or compilation. It won’t hurt anything to ask, and it just might save you a lot of time and money.

Insights Accounting is brought to you by Sensiba San Filippo LLP

How planning now will lead to big tax savings next spring

Many Americans don’t choose to spend much of their free time thinking about taxes. In fact, many seem to view taxes as a seasonal obligation that requires attention just once each year.

Unless paying more tax than is required is desirable, proactive tax planning is a very good idea as many opportunities for tax reduction require action in the year preceding the filing of tax returns.

Smart Business spoke with Megan McManus, tax manager at Sensiba San Filippo LLP, to learn what can be done today to reduce the next tax bill.

Why are fall and winter critical times for tax planning?

A person’s tax returns are simply reporting requirements for taxes due from income earned in the prior year. By the time the taxes are owed and filing is required, many opportunities for savings have passed. Now is the right time to plan for next spring’s tax bill.

For individuals, many tax saving opportunities are accessed through employer-provided benefit plans. Most employers provide just one opportunity each year for employees to make changes to their benefit elections and various contributions. Each employer determines its own open enrollment period, but a large number of employers tend to offer an open enrollment at the end of the year, in November or December.

What are some significant opportunities to consider?

Retirement accounts provide one of the most significant saving opportunities available to employees. That’s why it is so important that employees take full advantage of any matching contributions an employer is willing to make to a 401(k) account. Contributing less than the employer match cap is essentially turning down free money.

In addition to traditional 401(k) plans, Roth 401(k) plans are an increasingly popular investment vehicle that is more often being offered to employees by many employers. A Roth 401(k) is very similar to a 401(k), but contributions to the former are made with after tax dollars.

A Roth 401(k) has the same annual contribution limits as a traditional 401(k) — $17,500 this year — but does not have the income limitations imposed on Roth IRAs, meaning higher-income taxpayers can also take advantage of the investment vehicle. Employees are advised to find out before the next open enrollment if their employer is currently offering a Roth 401(k).

What other employer-offered savings vehicles are available to employees?

Savings can also be created by contributing to a health savings account (HSA). These tax-free contributions must be used for medical expenses and any unused balance can roll forward every year. While HSAs are only available to those on high-deductible health plans, a flexible spending account (FSA) is not restricted to just high-deductible health plans.

An FSA does come with one significant catch — it’s a use it or lose it account. Only $500 can be rolled over from year to year, so it’s very important to carefully consider annual contributions.

What are some actions that should be taken now that will likely ensure savings later?

Remember that tax planning is an individual process. What is right for one individual or family may not be right for another. Understanding the opportunities, the current situation and future plans will allow a person to minimize his or her tax liability and maximize wealth.

Before the end of the year, or before the open enrollment period, it’s a good idea to sit down with a tax adviser. With his or her help, a plan can be developed based on individual needs and available opportunities.

Failing to plan now could lead to paying more than necessary next spring.

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