Whistleblower protections are hitting private companies

Whistleblower protections have been extended to employees of many private companies.

Recently, the U.S. Supreme Court ruled in Lawson v. FMR LLC that Sarbanes-Oxley Act (SOX) Section 806, which protects employees from retaliation, also applies to private companies, contractors and subcontractors that provide services to public companies. “Retaliation” is broadly defined to include the discharge, demotion, suspension, threatening, harassment or any discrimination against a whistleblower.

The Lawson decision has made SOX Section 806 an important consideration for private companies, which should consider:

  • Are we aware of anti-retaliation risks?
  • Do we have effective anti-retaliation policies and procedures?
  • Do these policies and procedures address how we deal with whistleblower complaints, which are likely to increase?
  • If so, do we have a compliance program to ensure these policies and procedures are being followed and are effective?

Smart Business spoke with Bill Brown, partner-in-charge, and Carolyn Bremer, senior manager, in Forensics and Litigation Services at Weaver, about how to react in light of this decision.

What is the impact of whistleblowers?

The government has long recognized the importance of leveraging witness information in enforcement. Traditional investigative tactics are reactionary and slow paced. In contrast, firsthand knowledge of illegal activity is direct and relevant, reducing the need for fishing expeditions.

It is well established that anonymous tips — the firsthand knowledge brought forward by whistleblowers — is by far the most effective source of information about suspected fraud.

How does the government promote assistance from whistleblowers?

Although financial incentives can be substantial (often a percentage of funds recovered), many whistleblowers are motivated by a desire to correct a perceived wrong. Would-be whistleblowers, however, may hesitate for fear of retaliation. The government recognizes the chilling effect retaliation has on whistleblowers, and SOX Section 806 is its response.

What kind of anti-retaliation policies and procedures should companies employ?

Whistleblower protections must be deeply rooted in your compliance and ethics policy. Anti-retaliation is an ethical issue that must be addressed from the top. To be effective, these policies and procedures must address:

  • Encouraging whistleblowers to come forward with relevant information.
  • Providing a reporting mechanism for handling increased whistleblower reports.
  • Establishing investigative procedures to resolve complaints.
  • Promoting acceptance of anti-retaliation policies throughout the organization.

First, retaliatory risks must be assessed in order to design procedures that fit your organization. During this assessment, top leaders must make it clear that they fully support the policies, and the procedures must reflect management’s ethical tone.

Once policies and procedures have been adopted, continuously monitor compliance and update procedures. An effective internal audit group usually can accomplish this.

Finally, you must investigate whistleblower reports. Some will require an extensive third-party investigation culminating in appropriate remedial actions, which may include litigation or voluntary disclosure.

What’s the key to engaging the right resources to deal with fraud?

Few organizations have internal resources with the investigative skills required. Consult a qualified firm with investigative and risk advisory professionals who can help you prepare for these new requirements.

If your organization doesn’t yet have a well-established internal audit department, you also may consider hiring an outside firm to facilitate the implementation and monitoring of your new plan.

Whistleblower protection against retaliation is already part of many private companies. With the Lawson decision, though, employers must be proactive in developing, implementing and monitoring anti-retaliation policies. Not only do such actions provide appropriate and lawful protections, they demonstrate your commitment to ethical behavior.

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How to successfully implement new software systems in your company

Companies update their systems to replace outdated software and to modernize or streamline supporting IT resources. They also implement new systems in hopes of benefitting from internal efficiencies through added features, better workflow, etc. The problem is most companies that implement a new system do not achieve all of their objectives, and many fail miserably.

“Ultimately, the new system may be better, but if executives listed the top things they wanted to accomplish by implementing the new system, many times they don’t achieve those things,” says Brian Thomas, partner in IT Advisory Services at Weaver.

Smart Business spoke with Thomas about how to buck the trend of frustrating and failed system implementations.

What pitfalls occur with new system implementations?

Most companies don’t do a detailed analysis of day-to-day operations and assess how that translates into new system requirements. Management must ask, ‘What are the requirements we, as a unique organization, have of a system that will make it successful?’

Midsize companies often don’t have the time and/or don’t feel the need to formulate detailed system requirements. Executives may operate off of a high-level understanding about improvements they want to see, while calling on people they know to get perspective on what comparable companies are doing.

Also, almost everyone takes for granted how software users have shaped internal business processes based on the reports they generate. New systems mean new reports. If the new system doesn’t consider reporting, as well as how much old data to bring over, it can create back-end challenges. Then, companies are forced to either reconfigure processes or scramble to build new reports.

What’s the potential cost of these issues?

A lack of attention can drag out a project and lead to cost overruns. Management may run blind for a period of time if reporting requirements are not properly addressed before go-live, which hampers business decisions and company performance. Top management may perceive the software vendor as not delivering as promised. Delays and problems cause system users to have a tarnished view of a system, and could lead to employees building system workarounds, such as spreadsheets or databases on the side.

What steps do you recommend instead?

A new software system can substantially impact your company. So, it’s crucial to do the initial due diligence to determine whether the new system is capable of doing what management needs it to do the day it goes live.

Appoint someone internally or externally to build out detailed system requirements by working with users in each department to understand how their processes work. You can then provide these requirements to prospective vendors in an RFP-type format.

Vendors should demonstrate to decision-makers how their software achieves the requirements as part of the proposal process. If any are not fulfilled, which usually is the case, they should be able to articulate their plan for resolving the gaps. Management needs to analyze, ‘If this software does 75 percent of what we need, are we comfortable with the vendor’s responses or plans for what it doesn’t do? And if we have concerns, do we want to change how we do things or look at a different software product?’

It’s logical to expect this process to take a few months unless the system being replaced is a standalone product used by one department for a specific need. There are multiple vendors for a reason; companies must figure out what works best for them.

What about monitoring risks during implementation?

Once a vendor is selected, don’t turn over the keys. If the vendor made promises about covering gaps, the internal stakeholders need to remain involved throughout the project’s life cycle to ensure those things are actually happening.
An objective third party can work between the company and vendor to ensure everyone is accountable. They can even assess the risks of going live on the new software and let the company know when those risks have been brought down to an acceptable level. This helps the company avoid a failed implementation and protects the vendor from having a dissatisfied client.

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How to stay in front of tax issues before and after a M&A deal closes

For most company buyers, taxes are a priority when negotiating a purchase price. However, if tax issues are neglected during the integration phase, the negative consequences can be serious. To improve the likelihood of a successful merger, it’s important to devote resources to intensive tax planning before — and after — your deal closes.

During deal negotiations, you and the seller will likely discuss issues such as deductibility of transaction costs and the amount of local, state and federal tax obligations the parties will owe upon signing the deal. Often, deal structures such as asset sales can benefit one party and have negative tax consequences for the other, so it’s common to wrangle over taxes at this stage, says Sean Muller, partner-in-charge of Houston Tax and Strategic Business Services at Weaver.

“With adequate planning, companies can be spared from costly tax-related surprises after the transaction closes and integration of the acquired business begins,” Muller says. “Tax management during integration can also help your company capture synergies more quickly and efficiently.” You may, for example, have based your purchase price on the assumption that you’ll achieve a certain percentage of cost reductions via post-merger synergies. However, if your tax projections are flawed or you fail to follow through on earlier tax assumptions, such synergies may not be realized.

Smart Business spoke with Muller about tax planning after the deal closes.

What is one of the most important tax-related tasks in a deal?

Integrating accounting departments is critical, and there’s no time to waste. The seller may have to file federal and state income tax returns or extensions either as a combined entity with the buyer or as a separate entity within a few months following the transaction’s close. Companies must also account for any short-term tax obligations arising from the acquisition.

To ensure the two departments integrate quickly and are ready to prepare the required tax documents, decide well in advance of closing which accounting personnel to retain. If different tax processing software or different accounting methods are used, choose between them as soon as feasible. Understand that, if your acquisition has been using a different accounting method, you’ll need to revise previous tax filings to align them with your own accounting system.

What are the major areas of concern for companies related to tax planning and operational synergies?

Before starting to integrate products, personnel and facilities, examine the tax implications of those actions. Major areas of concern include:

  • Supply chain integration. Combining the logistical operations of both companies may make fiscal sense on paper, but there could be tax consequences. Say, for example, that you’re planning to close your seller’s main warehouse and fold operations into your company’s existing warehouse facilities. What if the acquisition’s warehouse is domiciled in a more favorable tax locale than your warehouse?
  • Divestitures and sell-offs. Buyers often spin off unwanted divisions or products when they acquire a business, but from a tax standpoint such moves can be costly. For example, selling a segment could eliminate certain tax write-offs or protections. You also need to plan for the tax consequences of selling newly acquired assets.
  • Global implications. International acquisitions can be a tax minefield. Companies should keep in mind the kinds of new exposures the deal carries, such as value-added taxes. Also, consider how a foreign purchase may affect your company’s effective tax rate. Be sure your M&A advisory team includes people who are knowledgeable about the relevant tax laws.
  • Enterprise resource planning (ERP). If the two companies’ ERP systems aren’t merged and synchronized, data collection could slow or you could lose tax data. This could affect the accuracy and speed of the combined organization’s financial reporting.

When acquiring a company, your to-do list will be long, which means you can’t devote all of your time to the deal’s potential tax implications. However, the tax consequences of M&A decisions may be costly and could impact your company for years. So, if you don’t have the necessary tax expertise in-house, work with outside advisers that do.

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How to realize tangible value by integrating true ERM

Enterprise risk management (ERM) has become a big buzzword in business the past few years. However, corporate governance and compliance, which is how business executives utilize ERM, is really a traditional management function.

“What’s new about it is that there’s market interest and significant value associated with an enterprise that has implemented true ERM,” says Alyssa Martin, a partner in Risk Advisory Services at Weaver.

When an investment company is looking at an enterprise’s value, a consortium of banks are considering giving a syndicated loan, or companies are weighing a merger or acquisition, an ERM program increases the company’s intrinsic value, illustrating the sophistication of its corporate governance. An organization can also use ERM to improve internal decision making, promoting and instilling risk awareness within its culture.

Smart Business spoke with Martin about integrating ERM into strategic, business and financial management processes.

How does ERM differ from other methods of assessing and managing risk?

Risk assessment was more widely implemented during the regulatory increase and Sarbanes-Oxley wave, but companies often assess risks at the process level in silos.

ERM looks at risk across the entity, casting a wide net, incorporating the results of the risk assessment with integration practices throughout the organization. The first step is to perform an entity level risk assessment identifying the most critical risk categories and related events that influence the organization’s success. Then, you drill these risk considerations down into processes and functions.

An ERM program considers the business goals, objectives and strategies at all times, following these steps to monitor and manage risk on an ongoing basis:

  • Identify, assess and prioritize business risk.
  • Analyze key risks and current capabilities.
  • Determine strategies and new capabilities.
  • Develop and execute action plans and establish metrics.
  • Measure, monitor and report risk management performance.
  • Aggregate results and integrate them with the decision-making process.

An organization identifies the risk categories and specific risk events that have the most material influence, which are not necessarily the most common, for current operations and strategic initiatives. So, a domestic company that wants to grow internationally is changing its business condition and risk influences, and in turn, the management of related risks.

One of the advantages of ERM is that business leaders can move from managing negative events that have occurred to managing key risk indicators, which allows you to get in front of identified critical activities. For example, if a retailer that does 60 percent of its sales on credit monitors key risk indicators, such as U.S. consumer credit ratings and credit interest rates, it can modify business practices or promotional tactics before a credit freeze trickles down. Instead of offering customers no interest for one year, the retailer can offer no interest for six months.

Are many companies already following ERM?

Absolutely. ERM practices such as building internal controls, joint venturing with business partners or identifying regulatory requirements are already occurring within management functions. But an ERM program helps bolt decision-making and business tactics together to create cohesiveness within an organization, where everything is based on the same risk profile and agreed-upon risk tolerances.

With that said, companies must align the ERM program with their existing goals and strategies. This alignment is crucial. It ensures that program activities are not just new tasks but rather different ways of executing the tasks that may or may not include additional elements.

Where do companies fall short with ERM?

The most common mistake is thinking that entity level, enterprise-wide risk assessment equals ERM. That’s only the first step. Companies must use what they’ve learned through the assessment to put management tactics and monitoring into place.

An entity level risk assessment also does not instill a risk-awareness culture. Risk must become part of a company’s operations and decision-making processes through business planning, product development and regulatory compliance.

As an example, when considering performance evaluations, managers need to ask: Did you consider risk when you made that decision? Did you incorporate more anticipatory business planning versus reactionary planning? Risk management must become a component of the executive management’s responsibilities while ERM is integrated across the organization.

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Weaver: What audit committees need to know about Auditing Standard No. 16

The communication between independent auditors and audit committee members of public companies will change in 2014 with Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 16.
The PCAOB’s standard is effective for audits of fiscal years beginning after Dec. 15, 2012.

“There’s an emphasis on two-way communication and the timeliness of communication,” says Dale Jensen, partner-in-charge of the Public Company Audit Practice at Weaver. “These requirements should only help the audit committee better understand the audit process and the results.”

Smart Business spoke with Jensen about PCAOB Auditing Standard No. 16’s implementation and how it changes auditor responsibilities.

How will communication between auditors and audit committees change?

Generally, the standard seeks to create more effective and timely two-way communication between the auditor and audit committee, including sharing what discussions have occurred between the auditor and management during the audit. It standardizes what is communicated and when.

Part of the standard addresses the appointment and retention of auditors — general information relevant to the planning of the audit. Committee members need to understand what auditors will discuss with management prior to the auditor retention. Many public companies won’t see a change here if they are following best practices. But some concepts have been expanded, such as requiring auditors to ask the committee if they are aware of any matters relevant to the audit, including knowledge of possible law violations.

The standard also discusses the audit’s results. Auditors already were disclosing many of the required items, such as significant and critical accounting estimates, and significant and unusual transactions. Now, the auditor must also communicate:

  • Difficult or contentious matters about which they consulted with management.
  • Matters that resulted in a going concern consideration, how the matter was alleviated, and the effects on the financial statements and audit opinion.
  • Any departures from the standard report.

The auditor also must share the results with the audit committee before issuing an opinion on the financial statements. This provides committee members with the opportunity to gain an understanding and address questions with the auditors prior to the issuance of the opinion and Form 10-K filings with the Securities and Exchange Commission.

Does the standard specify what type of communication is required?

Some things must be in writing, such as engaging an auditor, but, overall, communication can be written or verbal.

Auditors can communicate the required items solely in writing. However, verbal communication can help committee members truly understand the nuances of what’s being reported. For example, auditors may share audit results over a conference call or at an in-person meeting. This opens up the dialog and creates an opportunity for the audit committee to ask questions to gain a better understanding of the audit process, specific findings, etc. The key here is to allow adequate time for the auditors and audit committee members to have these discussions and to work through any issues or questions that arise.

How much impact will the standard have?

Overall, the impact of this standard will be positive because it’s enhancing two-way communication between auditors and audit committees about matters of importance to the audit and the financial statements. How much impact it has will really depend on the company, what its issues are and how information has typically been communicated to the audit committee in the past.

Dale Jensen, CPA, CFE, is partner-in-charge of the Public Company Audit Practice at Weaver. Reach him at (800) 332-7952 or [email protected].

Insights Accounting is brought to you by Weaver

Networking like a pro

Elisabeth Fraser Au-Yeung, vice president of marketing, Sensiba San Filippo LLP

Elisabeth Fraser Au-Yeung, vice president of marketing, Sensiba San Filippo LLP

Networking is a critical best practice for business owners regardless of their company’s size. When you are just starting out, the effort you put in to making and nurturing contacts can directly impact your revenue and the future success of your business.

Smart Business spoke to Elisabeth Fraser Au-Yeung, vice president of marketing at Sensiba San Filippo LLP, about tips and tools that can help you become a polished and eloquent networking expert.

How can business owners prepare for a networking event?

Savvy networkers always have a plan in place before attending an event. A plan may include evaluating the event — is the event of high value to attend? What are your goals for attending? Will your target audience be in attendance?

Try to obtain a list of attendees and any sponsor firms prior to the event. Use the list to build a prioritized list of ‘target’ attendees you want to meet and speak with. You can take it one step further and create goals for each person you want to meet, as well as speaking points that you have thought out and practiced for when you meet that person. You can even search online for photos of the individuals you want to meet so you can more easily find and recognize them.

In addition, you need to have a few tools including business cards, a practiced and polished elevator pitch, and even marketing collateral that you can hand out. Have a pen so you can make notes on the back of the business cards you receive. Note any significant details that the person you met shared so when you follow up, you can mention this and make it a more impactful and personalized connection.

When you arrive, how do you start a conversation?

It can be more comfortable to arrive to an event early, as the room will be less crowded. Do not wait for someone to approach you. Be the master of your own destiny. Approach a person or a group and ask if you can join them. When you meet someone, make eye contact, have a firm handshake and smile. By doing so, you will look and feel more confident.

As you are speaking with people, listen to what they have to say and be cautious about interrupting. When it is your turn to speak, ask open-ended questions about the people with whom you’re speaking, such as what brought them to attend the event? What makes them passionate about their business or industry? What are they doing for the summer? People enjoy discussing the things they are passionate about, including their business and personal interests.

How should business owners ‘pitch’ themselves and their business?

When asked about your business, have a brief and easily understandable description of what you do. Be sure to incorporate into your description the ‘so what’ factor — what it is that makes you or your company different and why the person you are speaking with should be interested in hearing more about your business.

What are the most important tips for success in networking?

Networking is all about relationship building — having rapport and building chemistry over a period of time with people you meet. A relationship will not be built at just one event. It is something that needs to be nurtured.

Remember to ask everyone you meet for a business card. After the event, send an email and a LinkedIn invite to connect with them within 48 hours. Reference something you discussed by checking your notes on the backs of the business cards so your contacts have a recollection of your conversation. Make yourself ‘valuable’ by offering to send a white paper or thought-leadership piece. Follow up with your contacts every 30 days to keep in touch, and even offer to meet for coffee or lunch to further strengthen your relationship.

Elisabeth Fraser Au-Yeung is a vice president of marketing at Sensiba San Filippo LLP. Reach her at (925) 271-8700 or [email protected]

See Sensiba’s blog for more market insights.

Insights Accounting is brought to you by Sensiba San Filippo LLP

How the marketplace will respond to health care reform

DeVon Wiens, partner, Health Care Practice, Moss Adams LLP

DeVon Wiens, partner, Health Care Practice, Moss Adams LLP

California’s health care exchange may see a flood of customers when it opens in 2014 — not only from people who have been uninsured but also many previously covered under employer-sponsored plans.

“What the policymakers are saying is different from what we’re hearing from businesses,” says DeVon Wiens, a partner in the Health Care Practice at Moss Adams LLP. “Policymakers don’t anticipate a big shift among employers away from providing coverage and toward letting employees go to the exchanges to purchase their own insurance.”

That’s likely true for larger employers with 1,000 employees or more who have enough critical mass to self-insure, he says. But it’s not the case with smaller businesses.

“Many employers may be sending up the white flag,” Wiens says. “Instead of spending $8,000-plus a year per employee, they’ll give them an equivalent increase in compensation and let them buy their own health insurance through the exchange. Some studies show that there won’t be a huge shift, but we see it more often than not among our clients.”

Smart Business spoke to Wiens about the Affordable Care Act (ACA) provisions and how businesses are responding.

Why do you anticipate many people will buy insurance from the exchange?

Many small to midsize companies are waiting and watching — they don’t want to be the first to go to the exchange, but they’re not going to be last either. Once one or two companies in the same industry go to the exchange, the others will follow suit. This will only accelerate now that the employer mandate has been delayed a year. Essentially, it means businesses can drop coverage and send employees to the exchange without facing a penalty. This is more likely in industries that do not require a professional level workforce or for which current levels of available qualified candidates to fill open positions are hard to find.

Insurance companies clearly expect more people to flock to the exchange because they’re purchasing providers. United Healthcare through its affiliate, Optum Heathcare, and Humana recently acquired large medical groups in the California market, as well as others around the nation. If groups opt to go into the exchange, their commercial insurance business shrinks and insurance profits drop dramatically. They want to offset the loss by having more control over physicians and other providers, with closed networks similar to Kaiser Permanente. This consolidation will likely lead to access-to-care problems later for those not covered by commercial insurance, employer-sponsored plans or Medicare.

Will the exchanges be ready by 2014?

In 1982, California counties responsible for indigent care established the County Medical Services Program. They basically set up their own HMOs, and the program struggled mightily at first. Today most are well-run organizations.

It will be the same with the health care exchanges. After a few years, the exchanges likely will learn how to operate and more effectively administer the insurance products offered. They’ll probably have to reduce the number of coverage options to be efficient.

Over time a switch to a single-payer system is likely. Approximately 20 percent of the cost of health care is because we don’t have one system, one way to pay a claim. The lack of centralized control drives up costs. However, a single-payer system also adds costs by taking competition out of the insurance market. Still, pure economics dictate a shift to a single-payer system eventually, especially with a slow economy.

Will the exchanges lower health care costs?

They may bend the cost curve, but they won’t reduce costs. If you look at health care spending, the freight train coming at us isn’t the uninsured; it’s our aging population.
Regulation and market forces drive the health care market, and right now market forces are moving faster. But the ACA is here to stay, and the market will adjust to it. The smartest thing the government can do is outsource the work of the exchanges, like it does with Medicare, one of the smaller federal government departments. Medicare outsources most claims processing and auditing to private industry. If they approach the exchanges in the same way — set the ground rules for how health plans play, and let the private sector participate — over time they’ll figure out how to make this work.

DeVon Wiens is a partner, Health Care Practice, at Moss Adams LLP. Reach him at [email protected]

Insights Accounting is brought to you by Moss Adams LLP

How a new Missouri law provides incentives to self-insure with captives

Alan J. Fine, CPA, JD, member in charge, Captive Insurance Advisory Services, Brown Smith Wallace

Alan J. Fine, CPA, JD, member in charge, Captive Insurance Advisory Services, Brown Smith Wallace

William M. Goddard, CPCU, principal, Captive Insurance Advisory Services, Brown Smith Wallace

William M. Goddard, CPCU, principal, Captive Insurance Advisory Services, Brown Smith Wallace

Missouri Senate Bill 287, which becomes effective Aug. 28, puts the state on equal footing with others that have been popular domiciles for captive insurance companies.

“It changes certain capital requirements for pre-existing types of captives, as well as provides additional flexibility by allowing segregated cells, also known as shared captives or rent-a-captives,” says Alan J. Fine, CPA, JD, member in charge, Captive Insurance Advisory Services practice at Brown Smith Wallace.

Smart Business spoke with Fine and William M. Goddard, CPCU, principal, Captive Insurance Advisory Services practice at Brown Smith Wallace, about the new law and why companies should consider captive programs to address insurance needs.

Is a captive program the same as self-insurance?

It’s a formalized program for self-insurance. Captives generally provide incentive to the insured — the captive owner — to pay more attention to safety and other matters that improve the results.

Captives can be used with health insurance as well as property and casualty. Companies should consider captives if their risk profile is such that they’re a better risk than others in their industry. When you’re in the commercial marketplace, companies with good risk profiles are used to fund risks of those that are not so good. There’s also a built-in profit for the insurance company, so self-insuring through a captive allows you to keep those profits.

What are the benefits of captives?

In addition to savings, which can be $200,000 to $400,000 annually for most midsize captives, you may be able to get types of coverage that are not available in the commercial marketplace. If structured properly, there also are potential tax benefits.

What does the new law change?

It allows for new types of captives. Prior law allowed companies to start a captive for their own company, known as a single-parent captive. You put up the capital, you are responsible for the audit and you reap all of the benefits.

The new law adds the option of going with the concept known as shared captive, rent-a-captive or sponsored captive. Generally speaking, someone else puts the captive together and you own a piece. There are certain efficiencies created with sponsored captives. For example, you have regulatory filings due quarterly and annually. With 10 standalone captives, they would each file separately with the Department of Insurance and be audited independently. The sponsored captive concept allows those 10 to band together for efficiency, while still providing the same asset protection of having your own captive.

The bill’s passage also affirms Missouri’s continued commitment to the captive industry.

Will more companies form captives?

There are more than 6,000 captives worldwide, so those companies have figured out that this can be a good alternative to the traditional insurance market. You can save money on insurance, obtain coverage that’s not available elsewhere and formalize your self-insurance program.

Health care had not been a big subject for captives; however, companies looking to save money on health insurance are now throwing captives into the mix of things they are considering. Companies have been insuring workers’ compensation in captives for years, but with medical insurance it takes some innovative thinking to figure the best advantage to you in forming a captive. You need someone that understands health care, as well as a tax expert to understand regulations from the tax perspective because health care reform is really a tax law.

When it comes to captives, it’s not always readily apparent how they can be utilized. Answers are not easy to determine, and no two situations are alike. You have to examine your individual case and analyze how a captive could benefit you. Fortune 500 companies have studied captives; companies that fall below that — middle market to small companies — have few advisers out there spending time to educate them about potential benefits.

If you have a good risk profile, are profitable and have good cash flow, it is worth exploring the available options.

Alan J. Fine, CPA, JD, is a member in charge, Captive Insurance Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1292 or [email protected]

William M. Goddard, CPCU, is a principal, Captive Insurance Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1253 or [email protected]

To learn about the benefits of starting a captive insurance company, watch our video at www.bswllc.com/captivevideo.

Insights Accounting is brought to you by Brown Smith Wallace

The who, when, why and how of machinery and equipment appraisals

Theresa Shimansky, manager, Cendrowski Corporate Advisors LLC

Theresa Shimansky, manager, Cendrowski Corporate Advisors LLC

Executives often wonder why they need to have machinery and equipment appraised, but these appraisals are important components of business today.

“Typically, appraisals are performed because of buy/sell agreements, mergers and acquisitions, business valuations, partnership dissolutions, insurance, bankruptcy, property taxes, financing and Small Business Administration lending. Other reasons would be divorce, estate planning or other estate issues, retirement planning, cost-segregation analysis and litigation support,” says Theresa Shimansky, a manager at Cendrowski Corporate Advisors LLC.

Smart Business spoke with Shimansky about how machinery and equipment appraisals are typically handled.

What is the useful life of an appraisal?

Generally, an appraisal is good for three years, but it depends on the current market, economy and industry. An appraisal’s useful life also depends on the availability of the type of equipment being appraised. The value can drastically change with economic factors such as supply and demand.

If buying or selling a business, is a machinery and equipment appraisal beneficial?

Absolutely. Buyers want to know the breakdown between real and personal property. This is a cost segregation analysis or study. Appraisals are completed for many reasons, but most importantly for tax reasons — breaking the assets into different categories for depreciation purposes.

What information and documentation will an appraiser require?

The appraiser will need to know the manufacturer, model, serial number and age of the equipment. This information typically can be found on a plate attached to the equipment. Mostly, it will be visible; however, sometimes locating this plate can be tricky. For example, restaurant equipment will occasionally have a kick plate covering the information plate. Machines may have the plate attached inside a compartment or near the motor, while others may not have one at all. When a machine does not have a plate, it is helpful if the owner has the original manual or sales invoice that should list most of the information.

The appraiser also needs to know about the condition, special features and upgrades. Important questions to keep in mind are:

  • Does it work well?
  • Has it had any major repairs or is it in need of any?
  • Is it maintained according to manufacturer specifications? The appraiser may request to see maintenance logs or ask about special attachments or upgrades.
  • Is its software up to date?

An appraiser will evaluate and photograph each piece of equipment. When this is not possible, appraisers will note in the report which equipment could not be visually inspected and explain they are relying on the representations of similar machines’ condition and other pertinent information.

What is a ‘qualified appraisal’?

A ‘qualified appraisal’ is clearly defined in Internal Revenue Service (IRS) Publication 561, where the appraisal:

  • Is made, signed and dated by a ‘qualified appraiser’ in accordance with appraisal standards.
  • Does not involve a prohibited appraisal fee.
  • Includes, but is not limited to, a description of property, condition, date of value, terms of the engagement agreement, qualifications of the appraiser, method used to determine value and basis for value.

Generally, an appraisal is considered qualified if it follows the Uniform Standards of Professional Appraisal Practice, developed by the Appraisal Standards Board of the Appraisal Foundation.

What should you look for in an appraiser?

When searching for an appraiser, only use a ‘qualified appraiser.’ This is an individual, as defined by the IRS, who has earned an appraisal designation from a recognized professional organization for demonstrating competency in valuating property. Also, qualified appraisers regularly prepare appraisals for which they are compensated, and demonstrate verifiable education and experience in valuating the type of property being appraised.

Theresa Shimansky is a manager at Cendrowski Corporate Advisors LLC. Reach her at (866) 717-1607 or [email protected]

Website: For additional information, please visit our website at www.cca-advisors.com.

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How to set a tone at the top to stop fraud in its tracks

Mark Van Benschoten, Principal, Rea & Associates

Mark Van Benschoten, Principal, Rea & Associates

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

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

Stopping fraud is about protection of the corporate entity.”

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

What are ways that employees commit fraud?

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

What should a business tell its employees about fraud?

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

A hotline sounds like Big Brother watching, is it?

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

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

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

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

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

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

What other steps can companies take to prevent fraud?

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

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

Mark Van Benschoten, CPA, is a principal at Rea & Associates. Reach him at (614) 889-8725 or [email protected]

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

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