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

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

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

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

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

Why would employees commit fraud?

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

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

How does workplace fraud occur?

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

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

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

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

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

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

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

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

Are unannounced audits effective?

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

What’s the outlook for workplace fraud?

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

Insights Accounting is brought to you by Rea & Associates

How to know if your business needs audited financial statements

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

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

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

What are financial statement audits and when are they necessary?

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

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

When is a full financial audit not the best solution?

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

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

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

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

Which report is best to use?

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

Insights Accounting is brought to you by Sensiba San Filippo LLP

How planning now will lead to big tax savings next spring

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

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

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

Why are fall and winter critical times for tax planning?

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

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

What are some significant opportunities to consider?

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

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

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

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

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

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

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

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

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

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

Insights Accounting is brought to you by Sensiba San Filippo LLP

Timely reconciliations aid businesses to prepare for smooth year-end audit

Businesses that reconcile their financial books at the end of each month will make it substantially easier for them to have a well-prepared, problem-free year-end audit.

“If you are reconciling every month, when you get to December you won’t find any surprises, which usually helps a great deal with the year-end audit,” says Leslie Prichard, CPA, audit manager at Rea & Associates.

Smart Business spoke with Prichard about how businesses can prepare for a calm, uneventful year-end audit.

What can businesses do throughout the year to secure a smooth year-end audit?

When conducting year-end audits, auditors will ask businesses for items such as new agreements, loan documents, contracts and board minutes. Keep those in an organized file so it is not necessary to track them down later when the business may be pressed for time.

With each year-end audit, the auditor provides management recommendations or any internal control findings. The following year, the auditor will usually require a statement outlining how the business responded to those points, so it’s a good practice to have that ready for the auditor.

Are there other steps that would be beneficial to take ahead of year’s end?

Usually, auditors aren’t working on-site with companies until a month or two after year’s end. While a business must wait until its books are closed to begin some tasks, in the meantime it can reconcile its significant accounts.

This is also an opportune time for a company to prepare supporting documentation such as bank statements, accounts receivable and payable aging reports, inventory valuation reports, fixed assets schedules and debt documents. In addition, a draft of the financial statements should be ready for the auditor to review.

Another good practice is for the business to meet with the auditor throughout the year to develop monthly and year-end closing processes. If an organization has any new or complicated transactions, it is beneficial to inform the auditor about the matter before he or she arrives.

When a company is being audited, should it fear that some blemishes might be discovered in its books?

The auditor is actually a company’s ally, not its adversary. He or she is not going to penalize the business. Should the auditor find something technically wrong, the business will be informed of the matter. If it is significant, the auditor will ask for it to be corrected. In the case of an insignificant error on the financial statement, the auditor will likely be able to pass on recording it.

The auditor may issue a management comment if there are problems with the accounting processes and procedures. This helps the business owner by keeping them informed of specific concerns related to the accounting department.

What are the particular advantages of meeting audit deadlines?

Meeting audit deadlines keeps a business in compliance with various agreements. Should a bank require an organization’s financial statement in the case of a loan, for example, an uncompleted statement may violate its loan covenants. For some construction contractors, not producing a financial statement on time limits the kind of work for which the company may apply. Investors may require financial statements by a certain date, and are often displeased if those statements are late. A business with overdue financial statements runs the risk of a lender calling in a loan or investors deciding not to loan the organization more money.

Is there any further advice that would be helpful at audit time?

A company has a voice during the audit, and if its representatives don’t understand why the auditors are asking specific questions, they should ask for clarification. If company officials understand what the auditors are trying to test, that knowledge will help them to design the most effective and efficient procedures to use during the audit.

Insights Accounting is brought to you by Rea & Associates

How enterprise risk management can impact a company’s value

Business operations are subject to a number of internal and external risks, as are ownership interests in businesses. How organizations and their owners address these risks can have a significant impact on the value of businesses and interests therein.

An enterprise risk management (ERM) process involves identifying risks relative to an organization’s objectives, assessing them for likelihood and impact, developing a response strategy and monitoring progress.

“A well-defined enterprise risk management process framework can protect and create value for organizations and their owners,” says John T. Alfonsi, managing director with Cendrowski Corporate Advisors LLC.

Smart Business spoke with Alfonsi about an ERM process and how it can benefit a company.

Where is risk addressed in a business valuation?

The most common method of valuing a business is the ‘income approach,’ which requires a valuation analyst to project a business’s future cash flows.

The analyst then calculates the present value of the sum of these cash flows by employing an appropriate discount rate. The valuation analyst must address risk in two primary areas: projected future cash flows and the discount rate. Effective ERM processes can help businesses increase value by affecting the estimates for these quantities.

How does risk impact projected cash flow?

There exists a risk that an organization will not achieve its projected figures.

As such, the process by which management projects future cash flows can impact a valuation analyst’s assessment of the business. A key risk in the process is information integrity, the quality of information generated through monitoring and data assimilation. Information integrity allows management to make well-informed decisions and should provide a valuation analyst with greater confidence in a business’s projections.

Valuation analysts can analyze information integrity by examining historical projections and assessing elements of the internal control environment.

A valuation analyst also should examine the variance between historical projections and a business’s actual performance. If a strong correlation exists, a valuation analyst can be highly confident in current projections, if the process employed by the organization remains constant. If not, the analyst must examine the variance between the past projections and actual performance to discern whether bias existed in past estimates and current projections.

What about risks in the discount rate?

The discount rate is the yield necessary to attract capital to a particular investment, given the risks associated with that investment. A project with relatively high risk will require a relatively high yield to compensate an investor for bearing these risks.

In determining the discount rate, there are two sources of risk that need to be quantified: systematic and unsystematic.

Systematic risk is the risk one must bear for taking on a risky investment in the market. However, systematic risk is estimated by calculating the return to public equities due to availability of data. The ERM process has little impact on systematic risks unless the business’s performance is heavily tied to market performance.

Unsystematic risk is sometimes broken down into two components, industry risk and company-specific risk. Industry risk reflects the risks identified with the industry in which a business operates. Company-specific risks encompass all other risks, including size, depth of management, geography of operations, customer and/or vendor concentration, competition and financial health.

How can ERM processes mitigate company-specific risks and increase value?

An ERM process should quickly gather and assimilate high-quality information for use in the organization’s decision-making process, allowing the organization to rapidly assess the impact and likelihood of risks associated with changes in its internal and external environments. Early assessment and mitigation can help preserve value and capitalize on risky events when competitors do not react as swiftly to environmental changes. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

How to get what you’re looking for when constructing a business deal

If you plan to sell your business and quickly sail off into your retirement years, you may want to think again. Your willingness to stick around after the transaction is complete, serving as a bridge from the past to the future, can go a long way toward maximizing the value of your company.

“Buyers aren’t going to feel comfortable acquiring your business if they know the intellectual capital is leaving the day after they close the deal,” says Rich Anderson, managing director for corporate investment banking at Moss Adams Capital LLC. “Buyers like to know that the principals, while they’re getting their liquidity event, are willing to stay and be there to ensure a smooth and orderly transition.”

The pursuit of liquidity is one reason for pursuing a transaction. Raising capital to expand your business is another. In either case, you need to take a thoughtful approach when pursuing a deal.

Smart Business spoke with Anderson about how to position yourself to make a smart deal for your business.

What’s the first step when considering the sale of your company?

Look at how your business is positioned in the market and try to make an informed and objective assessment of what the future looks like.

That is what potential buyers are going to key in on. Put yourself in the shoes of the buyer when starting out on a project. How is your company performing? What are the growth opportunities for your company going forward? What resources will it take to execute on those growth initiatives?

Sometimes the big need is capital resources. Other times there may be a need for managerial expertise. The business may need supply chain or distribution or sales and marketing expertise to accomplish those initiatives.

Once your objectives are clear, look at your business through the eyes of a potential investor or buyer so you can see how your business will be viewed if you go to market. It may be that after consulting with your financial advisers, you identify a number of opportunities to focus on in the next year or two to get more prepared to go to market. Or you may decide the time to go is now.

You need that rigorous analysis of your business and of shareholder objectives on the front end to help frame the thought process and decide if it’s now or later. That’s one critical element that’s done in markets both good and bad.

What kind of prep work can help the process run more smoothly?

You need to have a clear sense of what you want to accomplish. Are you looking to get out of the business entirely or just take on a partner you can work with? Your approach can vary quite a bit depending on your desired outcome.

It helps to have an adviser who can ask open-ended questions to drill down to your key objectives and get those out on the table for discussion. These are things you need to think about before you move ahead with any formal actions to ensure a smooth transaction for your business.

It will take time. If you’re thinking of selling your company in 2015, that doesn’t mean you’ll be exiting in 2015. You’ll probably be leaving in 2016 or 2017.

How do you protect against rumors of a possible sale getting out?

The goal is to run a very efficient and quiet process.

The reason you don’t want to announce your intention to sell is that there are no guarantees that the transaction is going to happen. When you go to market, the goal is to have a transaction take place. The market or the operating performance of your business could change, however, affecting the valuation and marketability of your company.

When you go to market, you need to have a nondisclosure agreement that prohibits any suitor or investor from contacting any employees in the company, customers or suppliers for any reason. The suitors need to maintain confidentiality by limiting the number of people within their own business who are aware that they’re in discussions with a target company. ●

Insights Accounting is brought to you by Moss Adams LLP

Why listening to your heart can be a risky venture in retail development

Starting a franchise or independent retail business can be both exciting and challenging. While there is much to know and learn, real estate procurement is at the top of the priority list.

Location, location, location. The phrase has been touted for years as the key to the success or failure of a new business. But in today’s retail world, knowledge has proven to be just as important — both concept knowledge and market knowledge, says Larry Schwartz, Director and Senior Consultant of the Franchise Services Group at RBZ.

One key to getting off on the right foot is having a clear understanding of your concept before you lay out your growth plan.

“Oftentimes, tenants, in their desire to grow or get open quickly, do not understand what is truly important to their brand from a site selection standpoint, which can result in a subpar location being chosen, or an inappropriately timed entry into a new market,” says RBZ Franchise Services Group affiliate Mike Leonard, Managing Partner of Keyser, a leading commercial real estate firm.

“We see it time and time again — a franchisee opening a store in a less than ideal site strictly because ‘it’s close to my house,’ or going into an outdated shopping center because ‘it’s where all my friends and I shop.’”

Knowing who your customer is and from where said customers are coming before starting the search for space is of the utmost importance.

Smart Business spoke with Schwartz and Leonard about how the ups and downs of the economy can affect retail development.

How has the retail search process evolved?

Once a tenant has established who their customer is and from where they are coming, the next equally important step in the search for space is formulating a plan for responsible growth and implementing strategic site selection.

But then how do tenants find space? Gone are the days of driving around and looking at ‘For Lease’ signs. That is a sure way to miss out on the premium location opportunities in today’s market. It’s how many tenants did it back in the early 2000s when it felt as though new retail development was everywhere.

Exciting new centers were popping up in every major town and there were ample opportunities for tenants/franchisors to more easily find space to aggressively grow their brand. Put in the legwork to learn about new spaces available in today’s market and your efforts could pay off in a big way.

How did the Great Recession affect retail development?

Many tenants were unable to pay their rent due to decreased sales. As countless large and small businesses shuttered their doors, shopping centers were foreclosed on, developers went out of business and vacancy rates rose across the board.

For tenants still in a position to grow, however, it was an incredible opportunity to secure the type of real estate that had previously appeared beyond their reach. Previously hard to come by locations opened up for the first time in years, and as small businesses slowly recovered, these premier locations were locked up and the great retail absorption was on.

Fast forward to 2014 and most of the premier locations have long since been gobbled up. While new development is again on the rise, the number of retail and quick casual restaurant tenants in expansion mode is far outpacing the amount of ‘A’ caliber sites coming out of the ground.

How are tenants combatting this inventory problem?

In today’s retail landscape, there is nothing more valuable than market knowledge. Knowing which tenants have expiring leases, which brands may be poised for a buyout and developing close-knit relationships with key developers in order to find out about new projects before they come online are all critical items to know in the race to secure premium locations in today’s commercial market.

Working with a commercial real estate broker who specializes in tenant representation can help you uncover these desirable locations. Taking the time to determine what truly makes your business tick will position you far better to experience sustained brand success. ●

Insights Accounting is brought to you by RBZ

How to avoid the net investment income tax with material participation

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, both enacted in 2010, contain the largest set of tax law changes in more than 20 years. Arguably the most notable of the changes, and certainly the largest revenue raiser, is the net investment income tax (NIIT).

Smart Business spoke with Mark Watson, a partner in Tax and Strategic Business Services at Weaver, about how the NIIT may affect you and what to do about it.

Who is subject to the NIIT?

As of Jan. 1, 2013, certain individuals, estates and trusts are subject to the NIIT. Corporations and partnerships are not.

With individuals, the NIIT is equal to 3.8 percent of the lesser of two amounts — the individual’s net investment income for the taxable year or the individual’s modified adjusted gross income in excess of a specified threshold. The threshold is $200,000 for a single individual, $250,000 for married couples filing jointly and $125,000 for married couples filing separately.

How are net and gross investment income calculated?

An individual’s net investment income is equal to his or her gross investment income less properly allocable deductions. Gross investment income is comprised of five buckets of investment and unearned income:

  1. Interest, dividends, annuities, royalties and rents.
  2. Other income from a trade or business that is a passive activity.
  3. Other income from a trade or business of trading in financial instruments or commodities.
  4. Net gain from the disposition of property.
  5. Income earned on an investment of working capital.

How can taxpayers reduce or eliminate NIIT?

Since NIIT includes income from a passive activity, individuals can reduce or eliminate NIIT by avoiding passive activities. One way to do that is to satisfy the material participation standard.

A passive activity involves the conduct of a trade or business in which the individual does not materially participate. Individuals are treated as material participants only if they are involved in the activity’s operations on a regular, continuous and substantial basis. Specifically, an individual will be treated as materially participating if any of these seven tests is satisfied:

  • The individual participates in the activity for more than 500 hours during the taxable year.
  • The individual’s participation in the activity constitutes substantially all of the participation in the activity of all individuals during the taxable year.
  • The individual participates in the activity for more than 100 hours during the tax year, and participation is not less than that of any other individual.
  • The individual’s aggregate participation in all of their ‘significant participation activities’ — non-rental activities in which the individual participates for more than 100 hours — exceeds 500 hours during the taxable year.
  • The individual materially participated in the activity for any five of the 10 taxable years that immediately precede the current taxable year.
  • The activity is a ‘personal service activity’ — involved in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting or any other trade or business in which capital is not a material income producing factor — and the individual participated in that activity for any three prior taxable years.
  • Based on the facts and circumstances, the individual is regularly, continuously and substantially involved in the activity.

For purposes of these tests, time spent by an individual’s spouse in the activity counts as time spent by the individual. Also, contemporaneous daily time reports, logs or similar documents are not necessary to prove an individual’s hours of participation; any reasonable means of proof may be sufficient.

With the introduction of the NIIT, it is more important than ever to analyze your various trade or business activities and, where the material participation standard is satisfied, classify such activities as non-passive. Doing so may result in substantial tax savings.

Insights Accounting is brought to you by Weaver

What the AICPA’s new SOC 2 guidelines mean to your organization

If your organization provides services that include handling valuable data, the success of your business may depend on your ability to demonstrate effective internal controls. To meet this need for assurance, the American Institute of Certified Public Accountants (AICPA) introduced Service Organization Controls (SOC) reporting in 2011. While SOC reporting included three different reporting options: SOC 1, SOC 2 and SOC 3, SOC 2 was designed specifically to meet an entirely new type of assurance — assurance over controls not related to financial reporting.

Now, just three years into SOC 2 reporting, the AICPA has made a comprehensive effort to improve SOC 2 reporting standards. Why did SOC 2 need a comprehensive overhaul? How will these changes affect your organization?

Smart Business spoke with Brian Beal, manager of business process assurance services at Sensiba San Filippo LLP, to discuss what service organizations need to know about the changes to SOC 2.

Why were SOC 2 standards updated and why was the update important?

While the original SOC 2 provided a critical assurance tool, users of SOC 2 found it too difficult to administer and understand. A SOC 2 evaluation could cover any or all of five Trust Service Principles (TSPs), which included security, availability, processing integrity, confidentiality and privacy.

Some organizations may have only desired a report to cover one of the TSPs, but other organizations needed assurance in multiple areas. While the TSPs could have shared many common test criteria, the initial SOC 2 procedures required time-consuming redundancy in testing these criteria, meaning that testing for multiple TSPs could be extremely costly and drain resources.

Additionally, end users of SOC 2 reports found them to be voluminous and difficult to understand. If the reports were too complex for readers, it was difficult for them to achieve their original objective, which is to provide assurance to users of the reports.

What were the biggest changes to SOC 2?

The new guidelines have made SOC 2 reporting simpler, more efficient and more useful. First, the list of five original TSPs has been shortened to four, as privacy follows the generally accepted privacy principles (GAPP) and is being revised separately. Next, redundancy in testing has been significantly reduced as more than 120 testing criteria have been reduced to 28 core ‘criteria common to all principles.’ Now, each TSP starts with the same basic 28 principles. Testing for availability requires three additional criteria, while processing, integrity and confidentiality each require six additional criteria. Whether you are testing for one TSP or multiple, the testing process will now be less painful.

In addition to simplifying the testing process, the format of the actual report will change as well. A new risk assessment element can now be used to identify risks and correlate those risks with the criterion being examined. Risks will be documented within the SOC 2 final report in order to show how each control is specifically mitigating the risk identified. The result is a clearer, more valuable report for both service organizations and stakeholders.

How will the changes improve the evaluation process?

The nature and intent of the SOC 2 report hasn’t changed. The new guidelines simply seek to clarify and solidify the array of control criteria. The process should now be simpler, reports should be more consistent and the entire process should provide greater value to both service organizations and stakeholders.

What actions do I need to take?

The 2014 version of SOC 2 is already published and supersedes the previous version for periods ending on or after Dec. 15, 2014, while the AICPA is encouraging early implementation. Be sure your next SOC 2 report is utilizing the newly released standards. The process and the result should be significantly improved.

Insights Accounting is brought to you by Sensiba San Filippo

Updated language may be needed in retirement plan during restatement

Every six years, the IRS requires that all retirement plan sponsors restate their prototype or volume submitter retirement plan documents for any law changes since the last restatement period. The current restatement period started May 1, 2014, and runs through April 30, 2016.

If a business’s plan operates under a prototype or volume submitter document, it’s important for the business to work with its service providers to ensure its document is restated timely.

Now is a great time for businesses to make any voluntary plan design changes to their plans. By going through this procedure, it will eliminate the cost of doing a separate amendment later.

Since the last restatement period, several significant law changes have occurred.

One change in particular is causing companies to closely examine their retirement plan documents to determine what may need to be changed.

A 2013 U.S. Supreme Court decision repealed Section 3 of the Defense of Marriage Act (DOMA) and determined that it was the states’ responsibility to define the term “marriage.”

Smart Business spoke with Andrea McLane, manager, Rea & Associates, about the importance of keeping your organization’s retirement plan up to date with changes that have been made in the law.

What did the DOMA decision involve, and what was the outcome?

The Supreme Court’s DOMA case involved a same-gender couple that had been married in Canada, but lived in New York.

When one spouse died, the other inherited her estate and sought to claim the federal estate tax exemption for surviving spouses.

The IRS denied her claim and ordered her to pay $363,053 in estate taxes. It was appealed to the U.S. Supreme Court, and Section 3 was overturned under the equal protection basis.

Section 3 of the DOMA decision originally barred married same-gender couples from being treated as married under federal law. Only that section was ruled unconstitutional.

What do businesses need to know about DOMA and their retirement plans?

By holding Section 3 of DOMA unconstitutional, qualified retirement plans must now treat the relationship of same-gender married couples as a marriage in order to maintain the plans’ tax-qualified status. The term ‘spouse’ includes an individual married to a person of the same-gender if the individuals are lawfully married under state or foreign law.

If a business’s retirement plan defines a spouse by reference to Section 3 of DOMA or only as a person of the opposite gender, it must adopt an amendment by the later of Dec. 31, or the restatement period as it was defined.

In addition to ensuring the plan document reads properly, plans must recognize same-gender marriages for all plan purposes.

Therefore, businesses must be certain that participant-related documentation, such as beneficiary forms, loan or hardship requests, etc., follow the proper procedures, recognizing the marriage and obtaining spousal consent where required.

What if a business fails to amend its retirement plan documents by the deadline?

Actually, many businesses don’t realize that they need to periodically amend their plan documents by a certain date.

The IRS offers a special voluntary compliance program for businesses to restate their plan without the plan being disqualified.

There is a user fee, which gets larger as the number of participants increases.

Insights Accounting is brought to you by Rea & Associates