What you need to know to protect your business from a cyberbreach

In today’s complex business world, cyberthreats are becoming more prominent.

As dependence on computer systems continues to grow, so does the threat for data and security breaches. Cybersecurity encompasses all the processes involved in protecting data that is stored or transferred between computer systems, networks and programs.

Smart Business spoke with Michael Maloziec, an accountant at Cendrowski Corporate Advisors LLC, to discuss the risks associated with cybersecurity and what your organization can do to protect itself.

What impact can a cyberbreach have on an organization?

A cyberbreach can have a varying degree of impact, ranging from minor inconveniences all the way up to compromised customer data and lost information. Kaspersky Lab’s IT Security Risk Survey 2014 found that damages from one successful targeted attack could cost a company as much as $2.54 million in repairs. Cybercrimes are continuously evolving and businesses need to take a proactive approach to ensure protection from unauthorized users.

Who is vulnerable to a cyberattack?  

Any organization with an internet connection could be susceptible to an attack.

The level of security needed depends on what sensitive information your organization possesses. Obvious high-risk information includes anything from credit cards, bank account information or even Social Security numbers, amongst other important data. Different organizations will face different risks depending on their industry and operations. It is impossible to completely prevent cyberattacks or even identify all the possible forms of cyberrisks because of their changing nature.

By implementing a cyberrisk management plan ahead of time, you will be better prepared for any risks that could arise.

What steps are involved with a cyberrisk management program?  

The five steps present in every cyberrisk management program are: identify, protect, detect, respond and recover.

The first step would be to identify and catalog the critical data within your organization. Employees should have an understanding of what critical data impacts their business. This also includes identifying key infrastructure and security assets.

Improve protection by managing access to systems. Implement policies and standard procedures, verify system backups and hold regular staff training. Continuous monitoring of the network and threat environment will aid in the detection of unauthorized actions and programs. In order to adequately respond to a suspected attack, organizations should proactively test their response plan and identify the root cause of each incident.

This includes applying procedures to contain the incident and mitigate damages as efficiently as possible. The final step of a cyberrisk management plan would be to learn from an attack and update your recovery strategies based on evolving best practices. Installing a cyberrisk management program can greatly reduce your risk to any threats or breaches.

What can organizations do to help prevent being the victim of a cyberattack?

The first step would be to become familiar with some of the known risks. Hackers try to gain access into your computer system from the outside through a weakness in the programming or software.

Malicious code or malware are specific codes sent out to gain access into your system. Malware requires an action from an existing user in order to take effect. Many attacks are disguised as email attachments or links to a specific Web page. Once a user opens the attachment, or visits the Web page, access could be granted to that computer or even your entire system.

To protect your business, keep your systems and software up to date. Replace old operating systems (like Windows XP), apply software updates and patches as soon as they become available and keep your antivirus software up to date.

Regular testing of firewalls and server settings will help keep unauthorized users out. Also, educate your staff about the risks of opening suspicious emails or attachments. If you use laptops or other portable devices, use encryption, and be sure to educate the users of those devices about their responsibility to keep them physically secure.

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

When do you need a business valuation?

The majority of business owners don’t know the true value of their company — whether it’s a C corporation, S corporation, partnership or sole proprietorship.

Often they think their company is worth more than it actually is, which can be problematic if, for instance, they’re trying to sell the company and retire by a certain age.

“If a business owner hears a valuation multiple, he or she may continue to refer to that number without consulting a professional, understanding how a business valuation works and ultimately knowing the true value of their business,” says Holly Taylor, CPA, ABV, ASA, senior manager at Rea & Associates.

It’s a common misperception to say that your company is worth four times EBITDA (earnings before interest, taxes, depreciation and amortization), as that doesn’t take into consideration your industry, business risks, cash flow expectation, debt and more, she says.

Smart Business spoke with Taylor about when you need a business valuation and the importance of it.

Why should a business owner have a business valuation performed?

Some valuations — ‘have-to valuations’ — are required because they are triggered by an event, like:

  • The death of a shareholder.
  • Gifts of closely held stock.
  • Equity compensation valuations.
  • Dispute related valuations, such as a shareholder dispute or divorce.
  • Forming employee stock ownership plans.
  • Converting from a C-corp to S-corp.
  • A charitable contribution.
  • The allocation of intangible assets.

‘Should’ valuations aren’t driven by a specific event, but are used by owners to make important decisions about their future. You can use them for estate planning, succession planning, selecting the appropriate exit strategy, determining life insurance needs, looking for ways to increase value, setting or updating the value in a buy-sell agreement and/or setting up incentive plans for management.

Before you go into the valuation process, you should already have in mind what you are going to do with the valuation results. In order to get an accurate value, use an experienced, credentialed professional who will take all of the factors and variables into account.

Is there a specific time frame when a business valuation should be performed?

The ‘have-to’ valuations will need to follow set time frames. Depending on the triggering event, the IRS or court sets these dates.

However, it’s always important for an owner to know the value of their business. For example, with succession planning valuations, business owners should start thinking about their business succession plan at least five years before planning to implement it.

In general, it’s a good idea to have a business valuation done every other year, since your business interest is most likely your most valuable asset.

What are ways to grow the business’s value?

Growing your business starts with the mindset that the business is an investment. In fact, it’s typically an owner’s largest investment — 50 percent or more of his or her net worth — and therefore should be treated like any other investment.

The first step to increasing value is understanding what the business is worth. Only then can you set goals for where you’d like the value to be in the future.

The owner should develop a growth plan and have written goals and plans to increase the value. Three key areas to focus on are:

  • Increasing cash flow. Investors buy future cash flow; so increased cash flow will increase the business value. You can do that through increased revenue, an improved gross margin such as higher selling price or lower cost of goods sold, or lower operating expenses.
  • Decreasing business risks. These are issues like reliance on the owner, key employees, managers, customer concentration, supplier concentration, etc. The more risky an investment, the higher the rate of return is needed to entice a buyer.
  • Improving growth prospects. The higher the growth rate, the higher the value of the business.

Insights Accounting is brought to you by Rea & Associates

State, federal credits can provide savings for qualifying businesses

American businesses are continuously working to develop new products, create new processes, improve quality and increase efficiency. While many business owners consider these efforts a normal part of doing business, the federal government and the state of California believe that this process of innovation is critical to the future of the economy. To provide incentive and reward companies that choose to invest in research and development (R&D), lucrative state and federal tax credits were created.

Smart Business spoke with Gary Price, a tax partner at Sensiba San Filippo LLP, to learn more about R&D tax credits and how qualifying businesses can benefit.

What do business owners need to know about R&D tax credits?

Business owners should first be aware that R&D credits can be extremely valuable. Next, businesses should know that the definitions of qualifying research are in some ways more expansive than many know. Many businesses that qualify for R&D credits don’t know that they qualify and miss out on valuable tax savings.

What activities qualify for R&D credits?

R&D tax credits reward very specific activities defined by the federal tax code. In order to qualify, research must meet a four-part test. First, the research must be performed to discover information about improving or developing a business product or process. Next, the information that the research seeks to discover must be technological in nature. The research also must include a process of experimentation. Finally, the research must relate to a new or improved function, performance, reliability or quality.

What expenses can be included when calculating R&D credits?

Only specific types of expenses related to qualified research can be included in credit calculations. These include wages, supplies and contract expenses paid to a third party for qualified research.

How are R&D credits calculated?

Credits can be calculated by comparing current year qualifying expenses to research expenses in previous years. If a business didn’t have many research activities in prior years, the credit will be approximately 6.5 percent of the current year’s research expenses. There is also an alternative method for calculating the credit if the business doesn’t generate any credit under the regular method. The California credit uses a similar calculation and can actually produce even larger credits.

With the federal R&D credit currently expired, what should businesses expect in the future?

While the federal credit has expired, most expect Congress to once again renew the credit in time for 2015 filings. Congress has a long history of extending the R&D tax credit, but the process of allowing the credit to expire before renewing it just in time for tax filings can make planning a challenge.

Many prominent businesses and lawmakers are calling for a permanent extension of the R&D credit. With uncertainty regarding the credit’s future, businesses could look to move their research to friendlier countries. Making the credit permanent would help to prevent a brain drain where research-related jobs could be transferred to other countries.

How can businesses determine whether they qualify for R&D credits?

The best way to determine whether your business may qualify for credits is to speak to a CPA who has specific experience regarding the R&D credit. To determine eligibility, you will need to not only know the definitions, but also how they apply to your specific activities. Your financials will also play a role in your ability to utilize identified credits. Working with a qualified adviser can help you understand the potential benefit that R&D credits could provide you as well as the process that will be required to document, calculate and file for credits.

Insights Accounting is brought to you by Sensiba San Filippo LLP

How to protect your business from being a victim of corruption

An article entitled “Confronting Corruption” by Ravi Venkatesan, published by McKinsey Quarterly in 2015, discusses illegal and corrupt business practices. There is an increasing response in the U.S. and developing markets against corporate wrongdoing, including new legislation and government officials boldly taking a public stance against fraud and corruption.

“Governments are strengthening existing legislation such as the U.S. Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act,” say Natasha Perssico, Forensic Accountant, and James F. Schultz, Principal, at Cendrowski Corporate Advisors LLC.

Smart Business spoke with Perssico and Schultz about anti-bribery and corruption matters covered in that article.

What sorts of actions are considered illegal or corrupt?
Payments for bribes used to secure an improper business advantage in obtaining or retaining business such as payment for regulatory approval of a product, reduction of taxes, or to avoid customs duties, are a few examples.

Speed money, or ‘grease payments’ are payments made to government officials or employees in the private sector to prevent undue delays in conducting business.

Other examples are employees who perpetrate financial reporting fraud to meet financial performance expectations or accept personal rewards such as kickbacks from vendors, advertising agencies, or commissions on real-estate transactions or machinery purchases. Another common practice is accepting deposits in overseas bank accounts upon successful business transactions.

What preliminary steps do you recommend to clients to avoid illegal actions?
Establish strong, unified internal controls over financial reporting and operational policies and procedures on a company-wide basis. Ensure compliance with laws and regulations regarding potential illegal acts for each operation line and geographic segment, regardless of the amount of revenue that is brought in from any segment or region.

What is the best course of action for top management to follow?
Enforce zero tolerance from the top. Too many companies emphasize meeting performance metrics, with insufficient attention to the company’s commitment of meeting goals and objectives within an ethical framework.

Support anti-bribery laws, speak out against corrupt practices in your industry and explicitly acknowledge any loss of business that results due to adherence to ethical principles. Ensure that every employee in every part of the world is utterly clear about what conduct is acceptable and what is not.

What recommendations would you make to avoid employees’ improper acts?
Train employees to be fully informed of unacceptable behaviors.  Have a formal code of conduct that is clearly and frequently communicated to employees, customers, vendors and business partners.

Additionally, foreign employees, vendors, and managers need to be trained to be both familiar and compliant with global laws such as the U.S. FCPA.

There should be clear policies, procedures with approval processes, stringent controls and regular internal audits of high-risk areas.

Respond to instances of fraud and corruption quickly and be prepared to investigate the issue immediately. Fair and decisive action should be taken that clearly communicates that fraudulent behavior is unacceptable.

What are the risks of taking a strong stance against corruption?
Be prepared for short-term repercussion.

While an unwavering commitment to ethical business practices is necessary to establish a strong reputation of high ethical standards, refusing to participate in bribery and corruption may result in certain short-term repercussions, including declines in business, missed budgets, increases in the length of time the company has to wait for approvals or other business processes, and possibly, angry responses from officials who are seeking bribes and other facilitation payments. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

How to ensure your plans aren’t bigger than your finances in times of growth

Growth is the goal for many companies — whether you get that growth from adding another location, forming an alliance, adding services, diversifying into other areas or merging with/acquiring another business.

But not all growth is good. So, it’s critical that you properly manage it, says Kent Beachy, CPA, CCIFP, a principal at Rea & Associates.

For example, construction companies a lot of times go out of business, not when economic times are bad, but when things are picking up.

“When growth is on the horizon, they’ll go out and take on more work than they can handle,” Beachy says. “They have to pay their labor weekly, but they may not get paid for 60 or 90 days.”

A big part of growth is being able to finance it; you must have the right financing sources, such as built-up profits and/or a line of credit, he says.

Smart Business spoke with Beachy about how to set up the right systems to monitor your financial accounting and cash flow in times of growth.

What’s the first step to monitoring and managing your growth?

Along with having the right personnel in place, you must install systems to account for your growth.

Generally, if you’re adding another location or diversifying, you want to make sure that your system allows you to track that growth. Or, if you’re acquiring another business, you need to be able to divide and keep track of those numbers separately so that you can measure your ROI.

Management needs to decide which dashboards and key performance indicators are the most effective at providing data about the finances, human resources, production, etc. These metrics, which can be tailored to your unique business, will provide telltale signs.

If you see profits declining, you know that the growth is not being managed properly. Or, if jobs start to go bad because you’re stretching your employees too thin, you may need to add personnel.

You’ll want to review these indicators on a weekly, daily or monthly basis, in order to ensure you’re making the best possible decisions.

Is profitability the biggest factor for managing growth?

In the end you need to be profitable, but cash flow is key to managing growth. With enough cash flow, you can maintain the business — if you need to — while you work on your ability to make money on jobs.

Financial statements and accounting may give you a history into the profitability, but cash flow is a planning technique for the future.

How do successful businesses manage their cash flow in times of growth?

You need to do a cash flow projection based on what you know — what you’re projecting according to your budget, according to what you’ve planned for the business in the coming year.

In times where production or work is increasing, that’s going absorb more cash flow. You must have the proper means available to support it.

For example, you may project that, based on the sales backlog, you’re going to run out of cash in three to six months. By catching that, you can assess whether you will have the necessary resources available to manage the shortfall or whether you will need to access other means, such as asking your bank for an increased or additional line of credit until your customer payments come in.

You need to do a cash flow projection for the year, even though you may only have a very strong idea of what the next three months are going to look like because things are changing so much.

Then, revisit those benchmarks for the cash flow analysis or projection monthly, or more frequently if you need to.

Growth takes careful planning, to ensure it doesn’t eat into your cash flow and profits — and you and your company get into trouble.

Insights Accounting is brought to you by Rea & Associates

How thinking ahead can maximize value in transition

Entrepreneurs live for the challenge of launching and building their business. Growing an organization that solves problems, delivers new products and creates value can be an all-consuming passion. As an entrepreneur, building is in your blood. While building may come naturally, it isn’t the only thing that matters when it comes to getting value out of your business. In fact, the way you exit your business can have an even greater effect on what you get out of it, than the way you started it.

Smart Business spoke with Bob Belshe and Kevin Strain, audit partners at Sensiba San Filippo LLP, on how entrepreneurs can develop and implement exit strategies to maximize value and meet personal objectives.

Why do business owners need an exit plan?

The right exit plan can help you achieve both business and personal goals. Conversely, failing to plan for transition can create the need for difficult choices, loss of value and avoidable tax liabilities.

Successful business transitions require an understanding of the objectives and priorities of the business owner. Do you want to maximize value in a transaction? Are business continuity and legacy important? Every business is unique and every business owner has his or her own idea of success. Success requires more than just a great business. It also requires a great exit strategy.

When is the right time for exit planning?

Whether your eventual exit is one year or 20 years away, it’s never too early to think about your end game. Decisions made on day one can have huge implications down the road. Transition objectives should inform your decisions throughout the life of your business. An entrepreneur who wants to maximize value for an external sale within a five to 10 year window should make much different decisions than a business owner who wants to transfer ownership to employees. From corporate structure to investments to distributions and tax planning, the way you manage your business day to day must align with your end game.

What exit alternatives are available to business owners?

With the right planning, there are many different options for selling or transitioning a business. Initial public offerings, asset based sales, stock sales, management buyouts, employee stock option plans and private equity recapitalization can all provide different benefits in transition. While there are numerous ways to sell or transfer a business, there is usually a much smaller pool of alternatives that align with both personal and business objectives.

How can business owners develop the right exit strategy?

Planning the right exit strategy requires an understanding of your business, your personal and business objectives and knowledge of exit alternatives. The objectives of the owner will help prioritize maximizing the value of the business, facilitating retirement and financial security, controlling method and timing of exit, ensuring the survival and growth of the business, and reducing employee and family uncertainty. A good exit plan provides a solution that serves all priorities. Without an exit plan, business owners are often left to choose between value, timing and continuity.

What are common transition objectives?

Maximizing value at transition is a very common objective. In Silicon Valley, many entrepreneurs are also focused on job creation and the legacy of their organization. Having employees understand end-game strategy for management is very important as transition approaches. Communication can help eliminate uncertainty and provide security, keeping employees engaged and motivated. Business owners should not be afraid to have open conversations with their management team and employees.

What can business owners do today to plan for a successful exit?

Regardless of when you plan to sell your business, it’s never too early to plan for transition. Decisions made today such as business entity selection, ownership structure and tax strategy can have a profound impact on transition. Entrepreneurs should meet regularly with experienced advisers to develop, implement and review their exit plan.

Insights Accounting is brought to you by Sensiba San Filippo LLP

A look at what you need to think about if you’re considering an ESOP

The term ESOP is an acronym for an Employee Stock Ownership Plan, a qualified retirement plan. Just like any other qualified retirement plan, the sponsoring company makes tax deductible contributions to the ESOP for the benefit of the employees.

Unlike other plans, these contributions are used to acquire stock in the employer company. An ESOP provides an exit strategy for the company’s shareholders.

Smart Business spoke with Walter McGrail, a principal at Cendrowski Corporate Advisors LLC, regarding the benefits of adopting an ESOP in your business.

What are the benefits of adopting an ESOP?

There are several benefits to consider when deciding whether to adopt an ESOP.

Most people think of the tax considerations as the employer receives a deduction for making contributions to an ESOP just like it would if it made contributions to a 401(k) plan. Employees can continue to make tax-deferred contributions to the ESOP just like a 401(k). Owners of C corporations can completely avoid income tax on qualified sales of stock to an ESOP.

Sponsoring employer companies are able to shelter earnings from income tax. Aside from tax benefits, the single most influential consideration in deciding whether to adopt an ESOP is that an ESOP stands ready, willing and able to buy shares of your company.

A company doesn’t need to identify potential shareholders or a market through brokers. If a company has an employee workforce in place, it has a potential buyer for its shares.

How does an ESOP work?

An ESOP is established by the employer company.

The company’s shareholders sell their shares to the ESOP. The selling shareholders can provide seller-financing for all or a portion of the purchase price.

To the extent that the sponsoring company has access to bank financing, the company can borrow funds to loan funds to the ESOP to either pay down, pay off or, in some cases, completely pay the purchase price.

The ESOP repays the company loan or the seller financing or both with the proceeds from the tax-deductible contributions made by the employer. This is often referred to as the company receiving a tax deduction for the repayment of the loan used to purchase its shares.

The ESOP may own 100 percent of the company or own company shares along with other continuing shareholders. The ESOP is represented by a trustee, who is a fiduciary, acting on behalf of the employees’ interest in the ESOP.

How much does the ESOP pay for the company’s shares?

The purchase price paid for the shares is based on an independent, third-party appraisal.
The appraisal is conducted on behalf of the ESOP and based upon such valuation, the ESOP acquires the shares. The appraised value will reflect the market value of the shares sold.

How do I find out more about ESOPs?

An ESOP involves several parties like any other sales transaction. As discussed, the ESOP will need a trustee.
The trustee will need legal and financial counsel, including an independent valuation provider. The company and the exiting shareholder require quality legal and financial advice as well.

Leveraged ESOPs require a bank or other lending institution. As with any other qualified plan, the company will need a plan administrator.

When it’s all said and done, the most important person to the company and its shareholders is an experienced ESOP facilitator.

You want to work with a professional that possesses the expertise to lead a company through the ESOP adoption process, as well as the share sale process. A strong firm can also provide qualified valuation analysts to assist with the valuation process. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

How outsourcing accounting services can facilitate growth

Accurate and up-to-date financial information is a powerful tool for a growing business. With reliable information, business owners can make better strategic decisions, secure resources and increase profitability. But, how can business owners ensure they have this competitive advantage?

“Financial information can be empowering, but managing it can also be a burden on a growing business. Partnering with a CPA firm that specializes in providing business services can provide a spark for many organizations,” says Brenda Stelle, a manager of the business services department at Sensiba San Filippo, LLP.

Smart Business spoke with Stelle about the benefits of working with a business services department.

What are business services and how do they bring value to a growing business?

Recognizing the need for accounting solutions for small and midsize businesses, some leading accounting firms have assembled business service teams that provide bookkeeping, financial reporting and tax planning services. These business service teams are particularly useful for growing and startup businesses that need help but may not yet require an internal accounting department. It’s also a way for companies to acquire expert services without the risk and investment of a new hire.

Many business service teams also offer project costing and accounting system design and implementation. Sometimes startup companies just don’t know where to begin or how to properly prepare expense reports or get a loan to finance growth. Business service teams have answers, so owners don’t have to waste time searching for them.

What should be expected from an accounting firm’s business service team?

Business service teams can help clients see that their future success depends on being proactive. They work with owners to analyze the critical financial information that may help to avoid a crisis, manage an unforeseen financial problem or seize an opportunity for growth. With accurate, meaningful and timely information, a business owner can analyze key performance indicators with confidence.

Maybe the biggest thing a business service provider can offer is peace of mind. Business owners can feel overwhelmed on a daily basis just because they don’t have an accounting system to reassure them that bills will be paid.

How does a business choose the right business services partner?

Work with a business services partner that has experience in your industry and has the resources of a strong CPA firm. Also, be sure to get referrals and check references.

Not all business service providers are the same. It’s a good idea to find out if an accounting firm has made these services a priority. Firms that have dedicated business service teams are often more focused on providing services that maximize the value they deliver. These dedicated teams allow for greater responsiveness and timely turnaround.

When choosing a business services partner, take the time to communicate expectations to ensure that your new partner can handle your needs. Be clear about what you expect, otherwise you may find yourself with a provider but not a solution.

How can business owners ensure they are receiving value?

A properly staffed business services team can work with clients of varying sizes, from startups to those with $20 million in revenue. Some will bundle services together so that the whole is greater than the sum of its parts.

Business owners should seek out a CPA firm that focuses on long-term relationships, and has high retention rates and client references you can speak with. Sit down with them and let them get to know you, your business and where you want to go. They will identify the critical functions that will provide the information needed to run a strategic business. From there, they will set up a plan of action and move forward.

Insights Accounting is brought to you by Sensiba San Filippo LLP

How to set up internal controls on limited resources

Setting up internal controls is challenging for small and midsized companies. Generally, you don’t have that many employees, and they tend to wear multiple hats. The business processes that fuel day-to-day operations take priority, while the internal control aspect often takes a backseat.

“We often hear, ‘This is too much work. I don’t have time for this,’” says Michaela McGinn, CPA, principal and director of assurance services at Rea & Associates.

“If you don’t have time to look at who has control of your cash, then — and this is a great example given to me — if I handed you a briefcase of $100,000 and said, ‘Here hold this for me,’ would you be OK with that?” she says. “The answer might be yes, but what if it was $500,000 or $1 million?

“That’s what you’re doing when you give full access to information and resources with no one monitoring it.”

Smart Business spoke with McGinn about key internal controls that even organizations with limited resources can implement.

How do internal controls differ among different sized organizations?

A single owner and two to three people in an accounting department cannot recreate the control environment of a Fortune 100 company, but you can still provide yourself a level of comfort and oversight.

There are two types of internal controls. Preventative controls are established to ensure something doesn’t happen, such as limits on certain transactions and segregation of duties. A detective control is a check on the backside to make sure there wasn’t human error and your assets are secure. An example is the reconciliation of accounts and a review of that reconciliation.

Smaller companies may need to utilize more detective than preventative controls because there is a greater chance that one person has full access to funds — from making deposits to issuing checks and payroll to performing monthly bank reconciliations. It’s a matter of choosing what controls can be done in a timely, economic, efficient way.

If you trust your employees completely, are controls even necessary?

If Mary has worked for you for 30 years, and you trust her with everything, you still need to implement controls for both her benefit and yours. Don’t put Mary in a position — if you truly trust her — where that trust is being questioned. The more you separate out the different pieces of a process, the more you reduce the potential risk associated with inaccuracies or coverage of assets.

What are some best practices for setting up these controls?

All operational processes need to be documented and re-evaluated at least annually. If possible more than one employee needs to be familiar with the process, so in the case of death, sickness or job loss someone else can pick up the task.

Do monthly reconciliations of key accounts, such as receivables, cash, inventory, payables, payroll costs, etc. Then, have those reconciliations independently reviewed. For example, the controller or business owner could review reconciliations by a payroll clerk.

Limit your exposure with approval processes and limits on transactions. You also can restrict access to the general ledger — allowing only a very limited number of individuals the ability to post entries vs. read-only access.

Review your vendor lists to keep them up to date, and have someone look over the standard and nonstandard journal entries.

On the receivables side, put together a policy for creating credit limits for customers, and then evaluate that policy regularly to ensure you’re following it.

Other areas to monitor are where employees have the ability to manipulate something for the benefit of somebody else. If you have a bonus or commission structure based on a formula, determine whether people can beef up sales financial information to make it look better.

If you’re unsure where to start, with the help of your accountant or auditor, pick a few key controls and weave them into the day-to-day or monthly process. There are many ways to accomplish this without hiring additional bodies or increasing the roles and responsibilities of your people on a significant level — and at the end of the day, it provides a greater peace of mind and helps protect what’s most important to the company and its owners.

Insights Accounting is brought to you by Rea & Associates

What to consider when looking at the benefits of a cost segregation study

A cost segregation study is the process of identifying fixed assets and their costs and classifying these assets and costs to maximize federal income tax depreciation deductions.

It involves reclassifying some of a building’s costs presumed to be subject to a 39-year cost recovery life into shorter personal property or land improvements with a five or seven year rate of depreciation for personal property and/or a 15 year rate for land improvement projects.

“With engineer-based cost segregation, a building owner may depreciate a new or existing facility in the fastest allowable time, accelerating the owner’s tax depreciation and tax deduction and deferring income taxes,” says Lou Petro, senior manager at Cendrowski Corporate Advisors LLC.

Smart Business spoke with Petro regarding the benefits of performing a cost segregation study.

What facilities are available for a cost segregation study?

Cost segregation studies are economically viable for almost any commercial facility. The facility may be newly acquired or constructed, under construction, inherited, or a property upon which a full cost segregation study has never been performed.
Applicable facilities include apartment buildings, breweries, car dealerships, banks, distilleries, grocery stores, health care facilities, hotels and motels, laboratories and research facilities, and manufacturing facilities.

The list also includes office buildings, resorts, restaurants, retail malls, warehouses and wineries. In essence, any depreciable real property used in a taxpayer’s business would be suitable for a study.

How much can a cost segregation study save?

Typically, the present value of a taxpayer’s cash flows is increased by about 20 cents for each dollar reclassified out of a 39-year property. In a typical cost segregation study, between 15 and 45 percent of a building’s costs can be reclassified to shorter life assets.

The percentage depends on the type of facility and on such things as special use or process equipment, interior finishing and land improvements. For newly constructed property, the bonus depreciation allowance allows the deduction of up to 50 percent of qualifying shorter life asset costs, which accelerates the tax savings extensively.

Who would perform a cost segregation study?

The IRS requires that cost segregation studies be engineering-based. The IRS Cost Segregation Audit Techniques Guide states, ‘Preparation of cost segregation studies requires knowledge of both the construction process and the tax law involving property classifications for depreciation purposes.

‘In general, a study by construction engineers is more reliable than one conducted by someone with no engineering or construction background. Experience in cost estimating and allocation, as well as knowledge of the applicable tax law, are other important criteria.’

How would a taxpayer choose a firm to perform a cost segregation study?
A taxpayer needing a cost segregation study should use a firm that has the qualified personnel and expertise in place to perform an engineering-based study.

Generally, such a firm would have experience with this kind of work and could assist you through the process and answer any questions that might come up along the way.

A combination of registered Professional Engineers and tax-qualified CPAs would be appropriate for the work. The firm, in general, would provide a potential client with a fixed fee proposal for the cost segregation work. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC