Why companies that don’t have an audit system, should

Internal and external audit systems provide companies with a method for testing internal controls, a process that can help detect or prevent fraud while making sure the company stays compliant, stops misappropriation of assets and corrects bad reporting. So it’s surprising that so many companies don’t have one in place.

“For many companies, a lack of an audit system reflects a perceived lack of time,” says J.W. Wilson, CPA, director of audit and accounting services at Clarus Partners. “That smaller companies don’t have the time or resources to implement an audit system, however, is a misconception.”

Smart Business spoke with Wilson about audit systems, their purpose, types and basic implementation.

Why might some companies not have an established audit system?

Often the term ‘audit’ conjures up the idea of large companies with full-time staffers whose only job is to conduct audits. Companies don’t need employees devoting significant time to an internal audit system for an audit to be effective. The process can be scaled down to focused processes any company can effectively manage. In fact, many business owners are likely already performing many audit functions, just without calling it an internal audit process.

There’s also the perception that audits performed by outside agencies are expensive and the value might not match the price. Companies most likely don’t need a top-to-bottom audit. They can have testing done that is designed to look for a specific process, which is very affordable.

What are the steps to putting an audit system in place?

Companies should start by talking with the experts that are closest to them. For instance, someone in the company may have an internal audit background and may be capable of establishing internal audit procedures. If not, talk with an external accounting firm. Auditors from an outside agency can be brought in to gauge the effectiveness of a company’s controls, or can offer advice on how to set up an internal audit process.

Testing can be fairly basic — for example, select and follow a transaction through the accounting cycle to a general ledger, compare the findings to those of the previous month and budgeted numbers, and if the numbers don’t match, a formal investigation should be undertaken.

When determining personnel processes, the top priority is segregation of duties, especially around handling cash and assets. Payroll is a good example. Within this function, the person who processes payroll shouldn’t be the same person who adds employees to the payroll system. Similarly, the person who initiates disbursements and transfers shouldn’t be the same person doing bank reconciliations.

At the end of each month, it should be standard practice to review financial statements and compare them to the previous month and the budget or forecasting statement to see if they meet expectations. Monthly statements should reflect what’s been budgeted. If not, what was the reason? Look into any unexpected results that don’t have a justification.

Ultimately a company needs to have the right controls in place and then test those controls. Run a random internal audit to test that the segregation of duties is being maintained. That can be done though a company’s accounting system. Each system has controls and rights associated with logins, so it’s possible to check to see that the segregation of duties is being maintained.

How can a company determine the best approach to setting up an audit system?

It’s important to understand that every company is different, so one company’s control procedures aren’t necessarily going to fit another company’s processes. Just focus on a few key procedures — those that may expose the company to the most risk of fraud — and make sure those processes are monitored and tested regularly.

The term audit shouldn’t be frightening. Efficient internal controls are important, no matter the type or size of the company. Internal and external controls can be scaled to fit a company’s specific needs. And if setting up an audit process is far outside the wheelhouse of anyone in the company, consider working with an accounting firm to test specific controls that are important to the business.

Insights Accounting is brought to you by Clarus Partners

The ins and outs of what to expect from equipment appraisals

At a certain point in time, almost every business owner will be faced with the question: What is your machinery/equipment really worth? Book value is rarely an accurate representation of what the equipment is really worth. More importantly, inquirers want to know the real value, which is accurate and can be substantiated.

Knowing what to expect during an equipment appraisal process can help business owners be more prepared.

Smart Business spoke with Theresa Shimansky, a manager at Cendrowski Corporate Advisors LLC, about the impact of machinery and equipment appraisals.

When is it time to have a certified appraiser evaluate a business’s equipment?
There are numerous reasons why businesses may need a machinery/equipment appraisal. Some of the most common reasons for appraisals are mergers and acquisitions, business valuations, bankruptcy, financing and SBA lending, insurance, buy/sell agreements, property taxes and partnership dissolutions.

A certified, reputable appraiser has the training, expertise and knowledge to provide a value that can be substantiated and reflects the true value of the equipment.

Are there different types of certified appraisal reports?
Yes, according to the Uniform Standards of Professional Appraisal Practice (USPAP) for personal property appraisals, Section 8, there are two types of written appraisals: Appraisal Reports and Restricted Appraisal Reports. A Restricted Appraisal is one in which the client and intended user of the report are the same.

However, if the intended user(s) includes someone other than the client under USPAP standards, the appraiser must use the Appraisal Report format. If anyone other than the appraiser’s client will be relying on the report, it cannot be a Restricted Appraisal Report.

How long does an appraisal take?
Time depends on several factors. First, how much equipment is being appraised? A large factory with thousands of pieces of machinery will take far longer than a small restaurant with only a couple of dozen pieces of equipment.

Other factors that can affect how long the appraisal will take are timing requirements — when do you need it, how many levels of value are being requested, and the type of equipment. Is it rare or can comparable items be easily found?

What will a certified appraisal cost?
Every appraisal has different requirements. The simplest answer is the cost will vary with the scope of work.

What can I expect during the process?
Expect the appraiser to view the equipment and document any pertinent information that will help to identify the equipment. The appraiser will ask about the make, model and serial number of the equipment, along with its current condition.

Appraisers will also need to know whether the equipment has been properly maintained, if there are maintenance records and if the equipment has any special features or upgrades. Appraisers may let clients know in advance what they will be looking at and any documentation they will need so that it can be available during the inspection.

Once the appraiser has documented the equipment, the research process begins. The appraiser will establish a value for the machinery/equipment and then write and certify the report.

Is the appraiser required to personally view the equipment?
An appraiser does not need to personally view the equipment. The appraiser can rely on another party (including the client) to provide necessary documentation. This is considered a “desktop appraisal,” and the appraiser is required to disclose this within the report and in the report certification.

What should a business owner look for when choosing an appraiser?
When choosing an appraiser, a company should only use a “qualified appraiser.” This individual, as defined by the IRS, has earned an appraisal designation from a recognized professional organization for competency in valuing property. Also, qualified appraisers regularly prepare appraisals for which they are compensated and demonstrate verifiable education and experience in valuing the type of property being appraised. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

Clearing up misconceptions surrounding the WOTC

The Work Opportunity Tax Credit (WOTC) is a federal program that incentivizes employers to hire people from certain target groups who face barriers to employment.

“The credit is meant to change behavior and encourage companies to take a chance on those who have barriers to entry in the workforce. It’s designed to give these individuals an opportunity at landing a job,” says Terracina Maxwell, COO at Clarus Solutions.

There’s no limit on the number of qualified individuals a company can hire, which makes it a significant option for companies willing to add a screening phase to their hiring process. Still, companies balk, often because they’re concerned about being accused of discrimination, that the administrative requirement is too time-consuming, or because of the uncertainty that the credit will be renewed by Congress.

Smart Business spoke with Maxwell about the state of the credit and why employers should give it a second look.

What is the value of the WOTC to an employer? Is it worth it?

The tax credit, depending on the category of person to whom it applies, can allow a company to claim between $2,400 and $9,600 per person. Companies that do a lot of hiring — especially those that hire hourly workers — would benefit from adding a stage to their hiring process to determine if a candidate qualifies for the credit.

Employers are only given a tax credit, which is based on hours worked, for a qualifying employee in their first year of hire. This is because Congress is incentivizing hiring — staying on the job for more than a year is great, but this credit is an attempt to give people a chance at a job.

Companies of any size or type may participate, and the target groups defined by Congress include those on government assistance programs, veterans, the disabled, felons and the long-term unemployed.

How difficult is it to collect on WOTCs?

Although this is a federal tax credit, it is administered at the state level. And because there is a lot of back-office paperwork that must be completed to file for WOTCs, it’s often an outsourced function. It requires a lot of interaction with the state workforce administrator, and can be cumbersome for small companies or companies that operate in multiple states.

Many think applying for the credit is too much work. That’s justified, as historically all screening had to be done with pen and paper — and it was a lot of paperwork. After 2012, companies were allowed to administer it with electronic signatures and that has significantly decreased the amount of paperwork involved.

While the WOTC has existed since 1996, it would often expire at the end of each year, requiring Congress to re-enact it. This past year, however, Congress renewed it through 2019, allowing companies to confidently set up a process to screen for this credit as a part of their hiring process.

Is there a maximum amount of WOTCs an employer can collect?

There is no maximum WOTC an employer can collect. Congress wants many people in the designated groups to get hired.

It’s a nonrefundable credit, so a company in a net loss position with no tax liability will not be able to use the tax credit in the year it is earned. The credit will, however, carry forward for 20 years until a profitable position is reached.

Should employers be concerned that qualifying questions for WOTCs could be misconstrued as discrimination?

Individuals within the groups targeted for WOTCs can be hired without the risk of the employer facing allegations of discrimination if the employer uses IRS-approved forms or asks only the questions identified therein. Concerned employers can turn to the Department of Labor, which has created guidelines describing what an employer can ask and in what way.

Secondly, by law, applicants must voluntarily supply the required information. Tell candidates that there is no negative consequence for leaving it blank, and if they do answer it won’t affect their pay. Usually only a small percentage of applicants pass on completing the WOTC screening.

Insights Accounting is brought to you by Clarus Partners

A look at what you need to think about when considering an ESOP

The term ESOP is an acronym for an Employee Stock Ownership 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. In the end, the most important person to the company and its shareholders is an experienced ESOP facilitator.

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 to keep your business on track with annual financial checkups

The market and the businesses operating in it are in a state of constant flux. Keeping up with these changes requires forecasts and budgets. But these aren’t static documents. When used correctly, financial forecasts offer business owners a chance to gauge company performance and determine what strategic actions are needed to adjust to the way market realities are affecting their profitability.

“It’s a good excuse to re-evaluate the direction of the company within the context of expanding or contracting opportunities,” says Michael Stevenson, CPA, CFE, CFF, ABV, managing partner at Clarus Partners.

Smart Business spoke with Stevenson about the role of annual financial checkups and how to conduct them to stay on top of market realities and company goals.

What should be reviewed during an annual financial checkup?

The critical information to review during an annual financial checkup is all that pertains to where the company is at today and its goals for the future. That information should include financial, operating and revenue numbers for the past 12 to 18 months to start the conversation. From that conversation, future goals and the plan to achieve them can be set.

During the checkup, review the current head count, gross margins and all other balance sheet items. Look at receivables and payables to ensure the time between each is equal — receivables that are 90 days out and payables that are 30 days out can create problematic cash gaps.

As a company looks to grow or contract with the market, it needs to determine the proper head count to meet its goals and stay within budget. If top line isn’t growing, losses must be minimized. Typically that means selling equipment, cutting back on discretionary expenses or downsizing the employee count. Based on the direction a company is headed it must execute adjustments based on the realities of the situation.

Given all the data and possible paths, companies can face analysis paralysis and struggle to make a decision. But it’s important that once issues are identified in a financial checkup, the company acts.

When during the year should an annual financial checkup be conducted?

Whenever there’s a significant change in the business, a financial checkup is recommended. A very large account may come through the door that requires greater resources than are on hand to service the account, otherwise the company risks losing the client. This is a good time to check on what must be done to service the account to maximize its profit potential.

Absent a big event, financial checkups are best done during the fourth quarter. As year-end approaches it’s a natural time to start thinking about the plan for the coming year.

Who should be involved in an annual financial checkup?

The owner and executive team, whoever that encompasses, should be part of the process. What typically comes out of an annual financial checkup is the direction the company will be headed. It’s important that those involved leave the financial checkup on the same page so that a unified message can be communicated down through the ranks.

Why might business owners avoid annual financial checkups?

The most common excuse is not having enough time. Business owners often become consumed with the process of running their business, getting so immersed in managing day-to-day operations that they think they don’t have time to take a breath and find out what their business is doing.

Some business owners don’t want to face reality. They figure whatever problems might arise they’ll fix it by working harder to generate more revenue. Unfortunately, that doesn’t always work.

Businesses and the economy are and will always be changing. Business owners must recognize the importance of taking a break to get the big-picture view of their company. Those who just put their head down and keep plugging away are hurting their ability to manage effectively. Take the time to complete a financial checkup at least annually to take inventory and re-evaluate goals moving forward.

Insights Accounting is brought to you by Clarus Partners

How to ensure you choose the right person to improve your legal case

Expert witnesses are frequently used in the courtroom by attorneys. While many qualified experts exist, the “right” expert can greatly assist counsel and the litigation with his or her testimony. An expert witness can offer testimony about a scientific, technical or professional issue in a court case.

Finding the right expert is often a difficult task, but attorneys generally look for several attributes when selecting expert witnesses.

Smart Business spoke with John T. Alfonsi, managing director, Cendrowski Corporate Advisors LLC, about the qualities attorneys look for in an expert witness.

What are the key attributes an expert witness should possess?
Attorneys generally seek an expert witness who possesses at least four attributes: Relevant professional experience; a history of testimony in which that person has represented both plaintiffs and defendants; active involvement in his or her field of expertise; credentials.

Why are professional experience and testimony history both key qualities?
Opposing counsel may try to discredit an expert witness by demonstrating a lack of relevant business and/or courtroom experience. Though a potential expert may have years of experience, this does not necessarily mean he or she has a high level of expertise in the specific area of the case, or that his or her experience demonstrates the unbiased nature that an expert must possess.

For example, some experts have only provided their services on behalf of either the defendant or plaintiff. Such a track record might be used by opposing counsel to infer a bias on the part of the expert, even if the bias does not exist.

Why is active involvement an essential quality of an expert witness?
Active involvement often manifests itself in an expert’s writing and speech; both are key elements of his or her testimony. Experts who contribute to their field generally pride themselves on having a thorough understanding of the subject matter.

They may be most up to date on recent rulings and opinions regarding relevant analytical techniques, and will generally ensure their testimony complies with these items. Active involvement may also manifest in the expert’s ability to convey findings to non-technicians.

Experts primarily work with individuals who readily understand the technical terms and analytical methods of the field. This peer group may be quite different from a judge or jury pool. Involved experts will recognize this difference and have a profound understanding of their area of expertise so they can better articulate their findings.

Do attorneys generally look for specific credentials in selecting an expert witness?
Attorneys generally engage experts who hold credentials in their field, requiring the expert to pass rigorous tests, participate in continuing education programs and/ or possess significant related experience. Multiple credentials adhering to such criteria might exist in some fields.

For instance, business valuation credentials fitting the previously mentioned criteria include: Accredited in Business Valuation (ABV), Certified Valuation Analyst (CVA), Certified Business Appraiser (CBA) and Accredited Senior Appraiser (ASA). No one credential is generally better than the other, but credentials generally emphasize the expert’s commitment to his or her profession and understanding of the technical issues.

Is analytical ability the most important attribute of an expert?
It is a key attribute, but sometimes not the most important. Though an expert may have strong analytical abilities, it is important that he or she be able to articulate his or her findings in a clear and concise manner, both on the stand and in written testimony.

To specifically address this issue, some experts purposefully make liberal use of visual tools, including graphs and flowcharts, and include detailed explanations to ensure findings are well articulated and written at a level that non-business professionals can fully comprehend.

These experts might also assume a reader has little understanding of the technical aspects of the case, or of the analytical methods employed. This strategy helps ensure a reader or listener will not be confused by necessary technical jargon or methods that might otherwise be non-intuitive to a layperson. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

Using historical data, benchmarking to develop a financial forecast

A financial forecast is a rolling monthly assessment of a company’s performance compared to its budget goals. By tracking progress monthly against an annual budget, a company can determine what it needs to do to stay on track and meet year-end goals.

“It’s also a decision-making tool management uses to guide a business,” says Michael Stevenson, managing partner at Clarus Partners. “It can help determine if and when equipment, head count, etc., should be added to manage the timing of any such moves, and it helps companies better understand their cash needs.”

Smart Business spoke with Stevenson about creating financial forecasts, what information to include and what not to do.

Who should be involved in the development of a financial forecast?

Whoever is responsible for company finances is essential to the process. And if there isn’t someone, consider bringing in a consultant to help. Either person should know the tax implications of any financial investments and the impact on cash flow. That can be used to temper conversations around investments so that the full financial consequences can be understood before action is taken.

Additionally, the company’s management team should participate because they have knowledge of the strategic plan and the budgeted financial goals for the company over the next few years.

What data should be used to assemble a financial forecast?

It’s typically easier to pull together fixed/variable expense information and then add revenue projections. Use as a base three to four years of historical data to reveal seasonal fluctuations in both revenue and expenses.

As for revenue forecasts, use the company’s current sales forecast — what’s in the pipeline and where the company wants to grow revenue — to make revenue projections. Balance that against economic, public and industry data to determine if the forecast makes sense.

What is the important historical data to gather when forming a financial forecast?

Consider at least three years of historical data from a profit and loss (P&L) perspective. Look at the cost of sales and determine whether gross margin is stable, increasing or declining. What is a target gross margin percentage? If the company is selling work at lower gross margin than targeted, is it worth it? Ask these questions in the context of gross profit percentage; selling, general and administrative expense as a percentage of revenue; and how these expenses grow with revenue.

Tie your P&L projections into a balance sheet forecast and check the cash balance and working capital. In a financial forecast, it’s best to have working capital that covers expenses on P&L for two and a half months in case revenue is lower than expected.

What is the important benchmarking data to include in a financial forecast?

When benchmarking against industry data, do so against companies that are of similar size and in the same geographic region. The important data to consider is revenue growth, gross margin percentage, EBITDA, and benchmarking working capital and receivables in terms of day sales outstanding.

Collecting receivables every 60 days but paying bills every 30 days creates a ‘cash gap’ or a cash flow problem. In a growing company that cash gap between assets and liabilities can get big enough that it must be funded with either a line of credit or a loan.

What are some common financial forecasting mistakes?

It’s a mistake to create hockey stick projections without the related infrastructure increase. For example, a company may be growing at 5 percent annually then decide it wants to grow at 15 percent, but does so without acknowledging the necessary increase in expenses to meet that goal. Infrastructure and personnel must grow to support higher revenue goals or a company won’t have the resources to make the climb.

Many companies also fail to consider the tax impact of an investment. Any time money is made there are tax implications, even in a pass-through organization.

Budgeting and forecasting help companies make good decisions. Sticking to them gives companies a higher survivability rate than those that fly by seat of their pants.

Insights Accounting is brought to you by Clarus Partners

How to manage risk and counter crises with a corporate response plan

The goal of any incident response is to minimize the impact of the negative event on the organization’s objectives.

This involves responding to the incident as quickly and efficiently as possible, making good decisions to limit further damage and repairing any damage that has been done. In order to accomplish this, an organization should have a corporate response plan (CRP) in place that is ready to go at a moment’s notice.

Smart Business spoke with James P. Martin, Managing Director at Cendrowski Corporate Advisors LLC to discuss the finer points of a corporate response plan (CRP).

What sort of events should be addressed with a corporate response plan?
Different organizations will have different risks depending on their operations. A CRP is a natural extension of the organization’s risk management process. Where the organization identifies a risk that has a high likelihood of occurrence, and a high impact if it were to occur, the organization should consider if a CRP would be useful in managing the risk occurrence.

Some hot-button issues today are frequently described in the newspaper headlines, such as cybercrime, fraud, business interruption, and other public relations disasters. An organization might have several CRPs, each designed to address a specific event type.

Why does an organization need a corporate response plan?
Risk management attempts to identify and mitigate risks. However, it is impossible to completely prevent risk occurrence or even to identify all risks facing the organization; this is why the organization needs to be ready with a plan.

The goal of the CRP is to make sure the organization has a mindset of preparedness and the basic tools that are essential to manage a risk occurrence when it does occur.

What are the basics for setting up a CRP?
Plans need to be developed to address the details of the organization’s response. When a risk actually occurs there will be no time for planning and coordination; this needs to be done up front. Consider who should be involved, both from a company perspective, and any outside experts that would be required.

Identify the types of information that will be essential in order to evaluate the extent of the threat and analyze an appropriate course of information. Consider procedures to ensure that data and information is adequately preserved and available for the CRP. Setting up the CRP involves deep planning around what tools will be needed for the specific threat type and proactively ensuring they will be available.

Who should be involved?
The Corporate Response Committee will tailor the CRP for the company situation and determine who should be involved with the operation of a response team. The team is responsible to go out and operate the CRP when an event occurs.

Of course, for IT security events, the committee should include members of the technology team. The members of the committee should be senior management such that they can authorize the CRP and provide members of the team with the authority to examine transactions and events on behalf of the committee.

What are the keys to success?
Planning needs to be done to progress from threat identification to a desired outcome: the organization needs to determine the acceptable end resolution.

This will also vary by threat type but should consider the overall goals of: 1) minimizing business impact, 2) resuming normal operations and 3) restoring any damage done. Consideration should always be given to the need for confidentiality.

For certain threats, such as a report that fraud has occurred, the CRP should involve confidentiality during the process to ensure that the investigation can proceed appropriately and to protect the rights of those parties that might be involved.

As with any other risk management activity, the CRP should also include an evaluation process at the end to evaluate the effectiveness of the response and identify improvements that should be made for the future.

Also, the risk occurrence and mitigation information should be used to check if prior risk evaluations for risk impact and likelihood ratings need to be updated. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

Manage your tax obligations when conducting out-of-state business

Most large states have dedicated departments or programs in place designed to find out-of-state companies that have done business in their state but have not paid the required taxes. While that has been in place for some time in the larger states, many smaller states are implementing the same or similar programs.

“States look for companies with economic presence in their state,” says Jeff Stonerock, tax director at Clarus Partners. “Economic presence is defined by a company generating revenue and earnings on sales into a state but does not have a physical presence in that state.”

There are tens of millions of dollars in unpaid tax that states are working to collect, he says. For example, the Ohio Board of Tax Appeal is currently hearing many commercial activity tax cases, which could lead to millions of dollars in back taxes for each noncompliant company.

Smart Business spoke with Stonerock about ways companies can track their out-of-state tax obligations to avoid getting surprised by a large bill for missed payments.

What are the tax obligations companies will likely encounter if they do business outside their home state?

The major tax obligations are income, sales, use, property, payroll, business license and privilege taxes. The tax that most often trips up businesses is sales tax on purchases, which some companies believe is the vendor’s responsibility.

Often when a company begins operations in new states, their vendors make one of two mistakes. They either do not charge sales tax for the new state or they incorrectly charge the sales tax for the home state of the company that they have charged in the past. During an audit, the purchasing company is liable for the unpaid tax in the new state.

Why might companies have trouble managing the tax obligations that are part of doing business in multiple states?

There are three common reasons companies have trouble managing their out-of-state tax obligations:

  • Different states have unique tax obligations. For instance, while Ohio companies don’t have business license obligations, in Tennessee they do at both the state and local levels.
  • Out-of-state tax requirements for the same type of taxes are unfamiliar. Though a company may understand the tax law in its home state, other states apportion or tax income differently.
  • Companies don’t have systems and processes in place to track employees, property or sales in other states, so there’s no system to account for the associated tax obligations.

How can companies better manage their out-of-state tax obligations?

Know your operations: where and what you sell, where you have property, where employees are working or traveling to, and have systems and processes in place to track all of those. It’s critical to track where people and property are located and the location where revenue streams are being earned.

If, for instance, the company is in the construction industry and operating in multiple states, it’s important to know where all sales and assets have been earned and located, and where employees have worked during the year. Determine when to start filing taxes in all of the states and cities in which there are sales, assets or employees outside of the home state, or have a clear understanding why there’s not a requirement to file in the new state.

Without a plan, companies can’t have a full understanding of their tax compliance obligations, and that puts them at risk for interest and penalties for nonpayment. Be proactive and not reactive with taxes. Companies wouldn’t get a building permit after a building is constructed. Know the tax obligations before business is undertaken.

As long as companies understand their tax obligations before doing business in another state the taxes are rarely, if ever, prohibitive. But not knowing the obligations and finding out down the line that years of back taxes are owed can cripple a business, making the out-of-state venture not only unprofitable but dangerous to the life of the business.

Insights Accounting is brought to you by Clarus Partners

How an experienced investigator performs background due diligence

When trying to learn about an individual, many companies turn to online background checks. However, this could be a mistake as much of the available information may not be fully verified, which is why many businesses turn to a licensed investigator to help provide a more complete and accurate picture.

Smart Business spoke with Theresa Mack, Senior Manager at Cendrowski Corporate Advisors LLC, about working with a licensed investigator to help your business uncover the information you need.

Why hire a licensed investigator?
Most online or database-driven background checks are actually ‘record checks.’ In other words, data from records are compiled and the quality of the source information is not thoroughly verified.

This cursory check may be sufficient in some cases. However, depending on the information found, the nature of the background check, the check’s intended use and the access to confidential/proprietary information that a potential employee may have, a complete background due diligence investigation by a licensed investigator may be warranted.

An investigator uses multiple resources to verify data accuracy and corroborate information. Thus, background due diligence investigations help reduce the risk of client reliance on false information.

How do investigators perform background due diligence activities?
An investigator generally works on a six-step methodology: prepare, inquire, analyze, query, document and report.

This methodology is highly applicable to background investigations. An accurate and comprehensive investigation is based upon existing, determined and verified information, leaving no rock unturned.
Investigators will tailor their activities to suit the needs of their clients, which typically include attorneys, businesses and individuals.

Client needs will define both the records checked by the investigator and the type of documents that can be released to the investigator and the client.

Where does an investigator begin?
An investigator often begins by examining open-source information, which refers to sources that are overt and publicly available. These are available through online data warehouse applications, which house data from disparate sources.

Open-source information includes public documents that are created throughout a person’s lifetime, allowing the investigator to follow a paper trail leading to a complete history of the individual being searched. These may include court filings, property tax documents, vehicle registrations and social media sources.

Open-source intelligence is a form of intelligence collection management that involves finding, selecting and acquiring publicly available information and analyzing it to produce actionable intelligence.

How does an investigator evaluate sources?
Any record is only as good as the chain of events involved in its creation. Online record checks simply provide information on an individual. Investigators go further by evaluating the veracity of the source data.

Record maintenance, storage and dissemination procedures can often impact the accuracy of the information. Typos, misprints and mistakes introduced by human error can also affect the accuracy of records. These latter items are often seen on personal credit reports, criminal convictions and even civil litigation histories. While these are official records, they can contain errors nonetheless.

Processes for updating records can also compromise the accuracy of information, as records are only as accurate as their frequency of updates. Some records are never updated and may provide stale data if the user is unaware of this underlying issue.

Finally, the method that data warehouses employ for acquiring information critically impacts information integrity. For instance, the provider may have purchased information from a secondary source. In such an instance, it is essential that the provider have accurate retrieval processes and is knowledgeable about handling special data items. An investigator evaluates each of these issues over the course of conducting background due diligence activities. ●

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