Unearthing moneymaking gems is often just a case of exploring your company’s financial statements

nat_sr_accounting_0513Business leaders today don’t need to be big data gurus to discover new ways to boost revenue and earnings as long as they understand the basic fundamentals of data analysis and have a few minutes to spare. Analyzing your financial statements can reveal a bounty of insightful trends and potential moneymaking opportunities that warrant and inspire a journey into the details.

Executives tend to discount the strategic value of traditional accounting reports like financial statements because they recap prior activity. But when complemented by operational measures, balanced scorecards and strategic performance measurement systems, valuable results may be found.

A dive into financial statements can create a competitive advantage by helping executives proactively identify trends and even predict future demand for products and services, says Kristy Towry, associate professor of accounting for the Goizueta Business School at Emory University.

“Consultants have traditionally used accounting data to make agile, first-mover decisions that are crucial to advancing and sustaining growth,” says Jeff Thomson, CMA, president and CEO of the Institute of Management Accountants. “Executives can follow suit as long as they know where to look and understand how to analyze data.”

Explore your income statement

Even if revenue is growing, a dive into your income statements and its supporting data can help you capitalize on emerging opportunities or head off a looming sales decline.

Which products and services are selling and which ones aren’t? Are customers responding to social media outreach or specific promotions? Are they opting for lower-price items with fewer frills or are they willing to splurge on luxury models? And what do these trends mean for the future?

A review of sales records may reveal an opportunity to sell more products and services to existing customers or shift your product mix without increasing overhead. A review of operational data may highlight areas of excess capacity that can be used to generate additional sales and profits.

Kristy Towry

Kristy Towry

“Segmenting your customer base by key demographics and tracking their activity and behaviors can illuminate opportunities to grab additional market share through upselling or by offering current customers discounts for purchasing greater quantities,” Thomson says.

Simply repositioning a product or putting it on the front page of your website can boost sales and profits without raising costs, says Alan Reinstein, professor of accounting at Wayne State University. In fact, storing raw materials and products for an extended period of time can tie up cash and erode profit margins.

“Grocery stores put milk near the back of the store because it forces customers to stroll past higher margin products,” he says. “It doesn’t cost them a dime to evaluate sales data or use the results to craft or validate the efficacy of a product-positioning strategy.”

Since a rise in customer satisfaction increases retention and generally precedes a growth in sales, using a balanced scorecard or dashboard to track revenue, sales activity and customer sentiment can help business leaders interpret the needs of the marketplace and make advantageous moves.

Robert Kaplan and David Norton of the Harvard Business School originated the balanced scorecard to give managers and executives a more poised view of organizational performance by adding strategic, nonfinancial performance measures to traditional financial metrics. A holistic view of the organization allows executives to synthesize multiple data streams and accurately predict future performance, Towry says.

“I’m an advocate of the balanced scorecard because it helps business leaders change course or adjust their strategy on the fly by aggregating financial data and other key metrics and compares them to the goals in their business plan,” she says.

Unearthing moneymaking gems is often just a case of exploring your company’s financial statements

Activity-based analysis and costing is a way for managers to assess the performance of assets on their balance sheet and which products and customers are generating the most revenue and profits. The process also helps managers determine where improvements in quality, efficiency and productivity will yield the best return.

Jeff Thomson

Jeff Thomson

“Comparing costs with activities is common among certified management accountants because it helps management identify key cost drivers and potential savings by allocating direct and indirect costs to every stage in the order, manufacturing and distribution process,” Thomson says.

The analytical methodology often highlights opportunities to increase profit margins by outsourcing distribution or ancillary services to less costly external providers or automating manual manufacturing processes, or it may disclose an opportunity to increase cash flow by offering quick-pay discounts or incentives to major customers.

If reducing costs isn’t an option, business owners may be able to raise prices and margins for a particular product by using a formula to calculate elasticity of demand, which measures how the demand for goods and services varies with changes in price.

Generally speaking, the greater the number of substitute products available, the greater the elasticity will be. Naturally, very high price elasticity means that customers are sensitive to price changes, while very low price elasticity means you can raise the price of a top-selling product without effecting demand.

From a trend perspective, a sudden rise in price elasticity may portend an upcoming decline in sales unless executives initiate discounts or take steps to develop and launch new products.

Business owners often decide to eliminate unprofitable divisions or product lines after conducting an activity-based analysis, but they should proceed with caution, Towry says.

“Executives assume that eliminating unprofitable segments will increase profits, but the fixed expenses don’t go away,” she says. “They may end up launching a fatal cash crunch or death spiral once the revenue from that discontinued segment is no longer offsetting those fixed expenses.”

By using the financial data from your accounting system and applying alternative costing models, you’ll be able to determine how much overhead is being covered by the sales of each product and whether it makes sense to discontinue a particular segment or service.

Dare to compare

Comparing key ratios and data from your accounting system to similar companies in your industry can highlight opportunities to lower costs, increase efficiencies and improve your company’s bottom line.

Industry associations often provide benchmark data, and sites like Valuation Resources.com aggregate and provide information, research and analysis for more than 400 industries.

Start by breaking down your company’s accounting and operational data into standard industry measures, such as sales per square foot, same store sales growth or something as simple as the number of gallons of water used per car wash. Then compare your results to the standard for your industry to see where you have a competitive advantage or need to improve.

Major deviations from industry norms should invoke questions and a search for solutions, Reinstein says.

For example, a competitor may have lower selling, general and administrative expenses because they use e-commerce or distributors to push products instead of salespeople. Or they may be experts at using their point-of-sale system to increase loyalty and market share by offering customers incentives or rewards for making additional purchases.

“It’s critical to dive into the details and not ignore the trends, because a svelte, nimble company with ample cash reserves can force a sluggish competitor out of business in a heartbeat in a tepid economic environment,” Reinstein says.

Cash is king

While profits are important, cash is the key to survival for any growing company.

A cash-flow analysis tracks the movement of money in and out of your business by looking at operating, investment and financing activities. It also provides business owners with an accurate picture of their company’s profitability by using noncash items and expenses to adjust profit figures.

Another useful way to spot trends and analyze financial statements is by performing either a horizontal or vertical analysis, which compares numbers from one period to the next. The analytical methodology may point to favorable or unfavorable changes in cash flow that could spell trouble unless they’re corrected.

You’re probably in good shape if your cash is growing, and it accounts for 10 to 20 percent of your assets. If it’s not, then you need to figure out where it’s going. Is it costing you more to manufacture the same products, or have competitive pressures forced you to reduce prices during the last year?

Vertical analysis lets you compare each component of your financial statements over time to determine if and where significant changes have occurred. You may need to focus on collections or stop extending credit to major customers if receivables are growing too quickly, or you may need to reduce inventory if the payments on your short-term line of credit are chewing up cash and affecting your company’s liquidity.

Managing fixed expenses is critical for growing companies, Towry says. Otherwise, a blip in the economy can lead to an insurmountable cash shortage. Don’t just look at expenses when reviewing your financial statements. Break down fixed and variable costs and apply varying revenue forecasts to see how changing circumstances affect your cash position.

“Companies that overinvest in equipment, building leases or inventory can’t manage those costs down when the economy heads south,” Towry says. “Business owners need a cash budget and an awareness of cash in relation to profits because there’s no magic bullet for a major cash crisis.” ●

How to reach: Goizueta Business School at Emory University,
www.goizueta.emory.edu; Harvard Business School, www.hbs.edu; Wayne State University, www.wayne.edu; Institute of Management Accountants, www.imanet.org

How to manage third-party risk

Jim Stempak, principal, Crowe Horwath LLP

Jim Stempak, principal, Crowe Horwath LLP

Failure to assess and plan for risks associated with third parties can be costly. Of the more than 250 executives surveyed by CFO Research Services, 75 percent were harmed by action or inaction of a third party, resulting in financial loss, supply chain issues and data breaches.

“Companies initially think about risks with high-cost providers. But they may have a $10,000 contract with a small marketing or advertising firm that fails to adequately protect their customer information. Their servers get hacked and experience a breach that in turn raises concerns with their customers and brings reputational and financial risk and penalties,” says Jim Stempak, principal at Crowe Horwath LLP.

Smart Business spoke with Stempak about assessing third-party risk and solutions to limit exposure.

What poses third-party management risks?

Relationships that drive the most risks are:

  • Service providers — processing, accounting, computer services, IT, service centers, advertising and marketing, leasing, legal and collections.
  • Supply-side partners — production outsourcing, research and development, material supplies and vendors, and software development providers.
  • Demand-side partners — customers, distributors, franchises and original-equipment manufacturers.
  • Other relationships — alliances, consortiums, joint ventures and investments.

The Japanese tsunami and Hurricane Sandy illustrated this. If something happens to a single-sourced company, what’s the impact on suppliers or business partners?

What are some gaps that expose risk?

A ChainLink Research study found that 70 percent of organizations reported no resilience and risk mitigation standards for service providers. It also noted that risk assessment often focuses on the easiest risks to quantify, such as financial viability and business continuity plans.

With supply-side partners, vendor risk assessments are hampered by a lack of good data and poor visibility into contractor use.

How often should companies conduct risk assessments of third parties?

Risk assessments should be done at least annually for all vendor relationships that are high risk. Those with moderate or low risk can be done on a rotational basis.

In determining high-risk relationships, consider the financial risk penalty if a supplier has a breach. Another risk is reputational, such as a third party compromising private health information found in hospital records. Other high-risk areas are protection of systems and data, and reliability or continuity of operations. Are there contingency plans if a vendor faces a natural disaster or labor strike?

Many organizations don’t address risk management of third-party relationships until a problem arises. Before that happens, establish ownership for the organization’s third-party risk management framework, and responsibility for review and monitoring of individual relationships.

What other solutions address these risks?

First, establish ownership and buy-in, which requires executive leadership and oversight, with clear goals and objectives. Strengthen the overall relationship with the third party. Then evaluate risks by developing a risk profile of the organization that covers financial, integrity and operational issues. This spurs initiatives to audit, inspect, benchmark performance and costs, verify, and gain assurance or attestation.

A third-party risk management program should have:

  • Risk measurement and monitoring.
  • Performance measurement and monitoring.
  • Incident tracking.
  • Evaluation of the value received from the relationship.

This information guides decisions about when and whether to renegotiate an agreement. Success depends on customizing the assessment to the relationship, using automation to streamline the process, and analyzing trends of incidents.

In the CFO Research Services study, less than half of companies had a formal process for assessing and managing third-party risks, and 97 percent said at least one aspect of their third-party risk management should be improved. Businesses do their due diligence when entering contracts but tend to take their eyes off of it once a contract is signed.

Jim Stempak is a principal at Crowe Horwath LLP. Reach him at (214) 777-5203 or [email protected]


Website: Learn more about third-party risk management with a webinar, podcast, white papers and more.


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How to mitigate the risks of using personal devices in the workplace

Brian Thomas, partner, IT advisory services, Weaver

Brian Thomas, partner, IT advisory services, Weaver

Over the past few years, employees have been trading in company-issued phones and bringing their own personal devices — phones and tablets — to connect to work servers. They want to carry a single device to access both work and personal material.

“Many companies have said there are enough people doing this that they no longer need to issue phones. They can just allow everyone to bring their own phones and connect them into the environment,” says Brian Thomas, partner in IT advisory services at Weaver.

However, the bring your own device (BYOD) trend comes with risks that companies need to recognize.

Smart Business spoke with Thomas about BYOD and practical steps to lessen risks.

How is the BYOD trend developing?

This is a strong trend among midsize businesses. As for the Fortune 500 organizations, it depends on the nature of the business. If a company has a lot of sensitive information, it will not necessarily adopt a pure BYOD strategy or will do so with an abundance of caution. Large corporations have information security departments that have been quick to identify the risks. In midsize organizations, there are simply not as many people to force a discussion about risk. Regardless, this is a broad trend that affects many businesses.

What are some of the risks?

The two primary areas of concern are physical access and the users themselves.

The No. 1 risk with mobile devices is that it’s not a matter of if they get lost, but when. If companies enable these devices to connect and receive company data, some of which will stay on the phone, then how do they protect that data when the device is lost and presumed to be in the hands of someone else? The primary methods for mitigating this risk are encrypting the phone’s contents, setting passwords to prevent unauthorized access and remote-wipe features that enable the company to delete the phone’s contents once lost. However, this is complicated in a BYOD scenario because users can connect a multitude of devices to the network, some of which will not support all of these features.

The reason users are a concern with BYOD is because they are often unaware of the risks associated with their mobile device activities. Because they own the phone, they may feel entitled to do with it as they please, including removing security features.

Do certain devices make companies more vulnerable to these risks?

In some ways, yes. The iPhone, for example, is a phone manufactured by one company with one operating system. There are multiple versions, but the uniformity of the product makes it simpler to manage and secure. In the Android world, vulnerabilities are more case-by-case. Similar to Windows PCs, anybody can manufacture the Android phones, and the operating system has to be reconfigured to work with different devices. As a result, updates to address vulnerabilities cannot always quickly be distributed by manufacturers and carriers.

What can be done to manage the risks?

A combination of training and technology can be used to reduce the risks associated with BYOD.

Companies must educate employees about the responsibility they bear when accessing company data on their personal devices. Employees must also be educated about the risks associated with disabling security features, jailbreaking their phone, downloading apps from unknown sources, using open wireless connections and other activities that can compromise security. Employees need to understand that using their personal devices for work purposes requires them to give up a certain amount of freedom. Companies can have employees sign a contract that outlines the rules and consequences for violations, along with the company’s right to remove company data from the phone at any time.

Companies should use technology to enforce a central policy that applies minimum security standards on devices. Many companies implement mobile device management solutions, which assist with enforcing security polices to address the risks associated with lost or stolen phones.

Finally, this is a fast-changing technology area, so companies should always keep an eye on what’s new and assess how it affects their organizations.

Brian Thomas is a partner in IT advisory services at Weaver. Reach him at (713) 800-1050 or [email protected]

Blog: To stay current on audit, tax and advisory issues that may impact your business, visit Weaver’s blog.

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In order to navigate the risk, you need to understand the terrain

The enterprise risk management process helps businesses identify hidden dangers. If used correctly, it could also uncover opportunity. James P. Martin, managing director for Cendrowski Corporate Advisors LLC, shares how risk management is beneficial.

Q. How might risk affect company value?

A. Risks are uncertainties in the business environment. Alone, they do not degrade a company’s value. Degradation of value often comes from management making poor decisions based on incomplete or erroneous information. Sometimes, this is from long-standing assumptions about the business or the competitive environment that are not founded in fact.

The objective of enterprise risk management is to engage the entire organization in a continuous and proactive discussion about risk, about what could go wrong, and to proactively plan to mitigate risk and perhaps even capitalize on risk events.

When implementing an enterprise risk management process, it’s important to include participants from all levels of the organization — people throughout the organization will have a different perspective on risk and about how things really operate. Senior management will tend to focus on strategic issues, while process operators will tend to focus on process anomalies and nonconformances. The enterprise risk management process should bring these perspectives together.

For example, senior management may have a strategic initiative to increase customer satisfaction scores by a certain percent. The process operators with direct knowledge of customer order fulfillment, including knowledge of complaints and processing issues, would have vital information to help accomplish the strategic initiative. Too often, without a process to gather, analyze and organize such information, companies overlook the wealth of information they have within their own organization. The enterprise risk management system should help facilitate this information flow and allow everyone within the organization to understand their role in accomplishing organizational objectives.

James P. Martin, CMA, CIA, CFE, is managing director for Cendrowski Corporate Advisors LLC. Reach him at (866) 717-1607 or [email protected]

How to partner technology with best practices to create a first-rate process

Tom DeMetrovich, Director, Crowe Horwath LLP

Tom DeMetrovich, Director, Crowe Horwath LLP

Recently a number of corporate tax and accounting professionals were surveyed to gain insight into their tax provision process. They identified three major issues with their provision process:

  • Data collection — the provision model does not contain all of the required financial information.
  • Resource constraints — the tax provision process is very labor intensive.
  • Timing — more than half the companies surveyed reported that they have less than one week to prepare their consolidated tax provision.

The survey clearly demonstrates the need for automation. Corporate tax executives understand an automated system provides the standardized platform to consolidate data, eliminate many of their manual processes and be more time effective.

Tom DeMetrovich, director at Crowe Horwath LLP, says the survey results are indicative of the challenges faced by most corporate tax departments.

“Responsibilities are increasing and staffing trends generally are flat,” he says. “Implementing a Web-based software tool, such as the Thompson Reuters ONESOURCE Tax Provision, can be the solution that most corporate tax departments are seeking.”

Smart Business spoke with DeMetrovich about automating the tax provision process and the capabilities provided by a software solution to address the three major concerns expressed in the survey.

How can an automated solution assist with data collection?

An automated solution allows a company to consolidate the majority of its data into one platform. The software can interface with the existing accounting or financial reporting system and upload the required financial information. The software also is able to roll data forward from period to period. There’s no need to manually update and reconcile multiple Excel schedules for the new year or roll forward Excel workbooks. This functionality significantly reduces time spent gathering data and eliminates many of the errors in the current process.

How can an automated solution assist with resource constraints and timing?

Reducing the need for manual processes frees up corporate resources to handle more strategic, higher value tasks, leading to increased review time and increased time for analysis and forecasting.

An efficient, automated solution also reduces the time needed for processing the provision. The system allows multiple users to access and update the provision calculation in a controlled, secure environment. Therefore, the provision calculation is done more timely and accurately, which allows additional time for analysis, adjustments and reporting.

Can the software be implemented in-house?

Companies rarely implement a provision system in-house. The project generally is undertaken in conjunction with an outside provider, whether an accounting firm or the software provider. Tax departments have knowledge of their current provision process but lack the depth of knowledge necessary to select, install, configure and train their personnel on the new software.

The benefit of using an accounting firm for implementation is that the firm provides in-depth knowledge of the software and has broad-based knowledge of tax and the provision process. The company also has access to the accounting firm’s knowledge of its industry. The firm can:

  • Align software to the company’s current processes.
  • Make sure processes are correct from a technical tax standpoint.
  • Use industry knowledge to provide best practices that can be incorporated into the new automated process.

Once implemented, can tax departments manage the software without assistance?

Once the software has been properly installed, configured, tested and training has been completed, the tax department staff should be able to maintain the software. One of the biggest benefits to a Web-based solution is that the company’s internal IT group rarely has to be involved. Software updates are handled directly by the software provider. And, the tax department will be able to handle updates for changes in general ledger accounts, the addition of new entities and other enterprise-wide changes.

Tom DeMetrovich is a director at Crowe Horwath LLP. Reach him at (214) 777-5272 or [email protected]


More information on tax provision automation.


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How client records, software and the Internet have intertwined

Todd Jolicoeur, Tax Senior, Cendrowski Corporate Advisors LLC

Todd Jolicoeur, Tax Senior, Cendrowski Corporate Advisors LLC

In a world where electronic data transfer is becoming the accepted norm, the definitions of such terms as “books of original entry” and “data set” are constantly changing. Check ledgers are being replaced by backup files and seven-column pads by accounting software. Some remote accounting and data storage systems, often referred to as cloud accounting, are virtual in nature.

Smart Business spoke with Todd Jolicoeur, tax senior at Cendrowski Corporate Advisors LLC, to learn more about how technology has affected age-old accounting tools.

What are books of original entry?

When it comes to accounting that still utilizes column paper and a 10-key calculator, the accounting journals kept manually where any financial transaction are recorded for the first time, or originally, are the books of original entry that compile all of the information.

How has this changed with the use of accounting software?

Software has increased the efficiency of most accounting and tax services. Electronic books of entry are different because most data is entered only once. There is no longer the need to make sure each transaction is manually posted to each applicable journal. Because of the nature of software, this procedure is systematically performed and entries are automatically reflected in different accounting ledgers as pre-established by the software.

What is a data set when applied to accounting records?

The data set is essentially all of the information that supports an accounting statement, whether it is a balance sheet, bank reconciliation or general ledger. It is also the documentation that is often used by accountants to prepare other financial statements such as a Statement of Financial Condition or by tax professionals who perform tax services for individuals, fiduciaries and business entities.

One important note related to data sets is that the information contained within the data set is subject to subpoena when legal action is brought under suspicion of wrongdoing regarding finance and financial records.

How is the information stored for these data sets?

The oldest method is paper format. This includes things like checkbooks, receipts and other documentation. The prevailing new method is maintaining the records electronically. Firms are often digitizing and electronically storing any original documents required to perform accounting and tax services. Regarding electronic books of entry, firms have been transitioning for years to accounting software. The use of software not only expedites the work flow by requiring single entry of information, which flows to all appropriate journals and reports, but also when corrections are required you only need to make one correction, as opposed to making that same correction on several ledgers. Accounting records that are kept utilizing software are also easier to backup and create a copy of the data set for transfer to any parties that are authorized to receive such records.

What is cloud accounting?

The term simply refers to the remote storage of this information, as if it were stored in a cloud in the sky that can always be accessed. This is a relatively new concept that it is becoming more popular with the proliferation of technological gadgets. The use of electronic devices such as smartphones and tablets in business has increased the need for information to be stored on servers that allow for remote use. Whether this means using apps and remote connection to financial reports or accessing archived data and documentation, the need to use the Internet and these cloud resources is growing.

How can these changes in the process help my business?

You may want to speak with an accounting professional to determine the most advantageous way to perform your accounting function and store information as it relates to your needs for information recall and use.

Todd Jolicoeur is a tax senior at Cendrowski Corporate Advisors LLC. Reach him at (248) 540-5760 or [email protected]


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How to comply with new HIPAA regulations for business associates

Tony Munns, member, Risk Advisory Services, Brown Smith Wallace

Tony Munns, member, Risk Advisory Services, Brown Smith Wallace

Companies are being challenged to protect vast amounts of proprietary and confidential information. And now, many are being held to an even higher standard when it comes to protected health information (PHI).

“The Health Insurance Portability and Accountability Act (HIPAA) has existed since 1996. It’s well established that covered entities — health care providers, benefit plans and clearinghouses — have a responsibility to ensure the privacy and security of PHI. Recently, the rules have been tightened to also cover business associates — organizations with which a covered entity shares PHI. These changes mean that business associates now have to fully comply and be accountable under the HIPAA security rule,” says Tony Munns, member, Risk Advisory Services, at Brown Smith Wallace.

Smart Business spoke with Munns about the final omnibus rule and what actions businesses should take.

What prompted the new rule?

A significant number of data breaches were from business associates who were not as diligent as they should have been, and covered entities were not selecting business associates with the appropriate rigor. A notable example involved an insurance company that had a business associate who was responsible for off-site storage of sensitive data. The business associate was using a garage, which was left unlocked and wasn’t climate-controlled. That contracting choice has led to separate investigations by both California and federal regulators.

What action should companies be taking?

The Department of Health and Human Services said that it’s not sufficient to just have an agreement, there needs to be satisfactory assurance that the business associate can and does follow proper procedure. Entities covered by HIPAA have until Sept. 23, 2013, to update their business associate agreements. Current agreements do not have to be changed until they’re up for renewal, but in any case all agreements have to be updated by Sept. 22, 2014.

What steps should companies take to comply with the legislation?

  • Understand the new requirements and the impact on the business.
  • Update business associate agreements.
  • Apply the satisfactory assurance mandate.

Review existing agreements and perform due diligence to get comfortable with the practices of your business associates. This might involve requesting that audits be performed, such as Statement on Standards for Attestation Engagements No. 16 reports. In the insurance company example, no one examined whether the person contracted to provide off-site storage was capable of providing it to the level expected.

What are other requirements of the final omnibus rule?

The new rule requires that individuals be informed that their information has been breached. Managing breaches is no longer sufficient. Meanwhile, business associates are not required to provide a notice of privacy practices or designate a privacy official; they only need to comply with the general privacy requirements and all security measures, much like covered entities.

The definition of a breach was also changed from ‘a significant risk of financial, reputational or other harm to an individual’ to ‘an acquisition, use or disclosure of PHI in a manner not permitted.’ Under the old rule, companies that didn’t believe information was compromised didn’t need to classify it as a breach. Now they have to report the breach, but can apply mitigation to demonstrate there was a low probability of harm.

What are the penalties?

There are four categories:

  • Ordinary breaches, such as an error or lost equipment — $100 to $50,000 per violation.
  • If reasonable due diligence would have revealed the violation — $1,000 to $50,000 per violation.
  • Conscious, intentional failure or reckless indifference, but the breach was corrected — $10,000 to $50,000 per violation.
  • Conscious, intentional failure or reckless indifference and the breach was not corrected — $50,000 per violation.

For all violations, the cap is $1.5 million. And there will be more enforcement.

Tony Munns is a member, Risk Advisory Services at Brown Smith Wallace. Reach him at (314) 983-1297 or [email protected]


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What companies need to do to prepare for health care reform

Joseph R. Popp, JD, LLM, Tax Supervisor, Rea & Associates

Joseph R. Popp, JD, LLM, Tax Supervisor, Rea & Associates

The Patient Protection and Affordable Care Act (PPACA) mandate for employers to provide employees health care or pay a penalty takes effect Jan. 1, 2014, and many businesses aren’t sure how to prepare.

“We regularly talk with people in various industries about what is important to them. For the past six months, every person from every industry has mentioned the employer mandate. There’s a lot of uncertainty,” says Joseph R. Popp, JD, LLM, tax supervisor at Rea & Associates.

Smart Business spoke with Popp about the employer mandate and steps business can take now to be ready for 2014.

What do employers need to do first?

The first step is to determine if you’re considered a large employer. The test is whether you have 50 full-time equivalent (FTE) employees; if not, the employer mandate does not apply to you. This will be easy to answer for many businesses. However, for some it will be difficult to calculate. Employers will have to add up their full-time workers, which are those who work 130 total hours a month or more, and all the part-time people. Part-time employees must be converted to FTEs by adding up the total hours they worked that month and dividing by 120. When that figure is added to your number of full-time workers, you have your monthly FTE count. Businesses with 40 to 60 FTEs may want to look at how they can stay or get under 50, and they may need to pull in various professionals to help them with that planning.

If they are deemed a large employer, what’s next?

Determine which employees may pose a risk for penalties based on your current situation if you were to make no changes. To do so, you need to look at a number of factors on a case-by-case basis.

One factor is whether the coverage provided by the employer is considered affordable. If an employee’s income is between 133 and 400 percent of the federal poverty level based on family size, you have to provide him or her with affordable coverage. Affordability is based on a sliding scale that starts at 3 percent and goes to 9.5 percent of gross income. There are a number of safe harbors that the IRS has provided to calculate if your coverage is considered affordable to a particular employee.

There’s also the coverage test, which is not concerned with premiums but instead an employee’s actual out-of-pocket medical costs. The minimum standard is 60 percent of medical costs paid by the plan — the new bronze-metal tier plan. If you have a plan with a high deductible, this along with other plan features may disqualify it from being considered adequate coverage. The Department of Health and Human Services (HHS) has released a calculator that allows you to enter details of your plan and it will calculate its value in percentage terms. That will work for most plans. If it doesn’t, you’ll need to have an actuary calculate that value.

What are the penalties for not providing affordable or adequate coverage?

If you provide coverage to 95 percent of full-time workers, but it fails one of those tests for some employees, the penalty is $250 per month per full-time employee or $3,000 annually. If you don’t provide adequate coverage to 95 percent of full-time workers, the penalty is $166 per month per full-time employee, or $2,000 annually. On this $166 penalty, you’re not penalized for the first 30 employees each month.

Based on analysis we’ve done for companies, in most cases the least expensive option as an employer/employee group is for the employer to enhance health insurance payments to correct affordability and adequacy test failures. But that’s the most expensive option for employers.

Many employers will most likely make some plan changes so coverage is more affordable to the employee group as a whole, and then pay penalties on the outlying employees. In many cases, paying those annual penalty amounts for some employees will be cheaper than implementing a 100 percent compliance plan. Early planning will give businesses adequate time to build the best course of action.

Joseph R. Popp, JD, LLM, is a tax supervisor at Rea & Associates. Reach him at (614) 923-6577 or [email protected]


Webinar: Our free webinar, ‘Bracing for Impact: What You Need To Know About Health Care Reform,’ offers more on this topic.


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How to select a professional staffing firm to assist with the hiring process

Heidi Hoyt, managing director, Skoda Minotti Professional Staffing

Heidi Hoyt, managing director, Skoda Minotti Professional Staffing

A professional staffing company can find candidates who are a better fit for your company, and speed up your hiring process.

“The key is to select a staffing company that is a specialist in the area you’re recruiting. They need to understand your company and its culture,” says Heidi Hoyt, managing director at Skoda Minotti Professional Staffing.

Smart Business spoke with Hoyt about the benefits of using a professional staffing firm and how to find the right one.

Why use a professional staffing company for hiring?

A company’s HR person is likely to be a generalist. The greatest advantage in using professional staffing firms is the invaluable industry expertise they possess.  A staffing firm will provide access to candidates that a company wouldn’t reach on its own. They are well-connected in their specific field, whether that’s financial or another industry, and they are always talking to passive candidates as well as those actively seeking employment. You want access to passive candidates, not just the people who are on the job boards.

Professional staffing firms also have a broad knowledge of what other companies in an industry are doing, which adds value. They’ll have technical experts in accounting and finance, for example, and will be able to identify candidates and look for intangibles that would go unnoticed without their accounting background.

Another advantage: Professional staffing firms weed out lesser-qualified candidates, which saves a company time and money. Instead of having to review 100 resumes, a client receives a select few that have been pre-screened and are right for the position. That service drastically shortens the hiring process, sometimes by weeks. If the staffing firm is doing its job correctly, it’s only sending highly qualified candidates for review, so that all the client has to do is pick the person who’s the best fit.

How does a staffing firm evaluate candidates?

Candidates might have similar education and experience, but a staffing professional will look for other items on applicants’ resumes that differentiate. For example, they might look at past employers — they know what types of candidates those companies hire. They know that XYZ company is a demanding place to work; that it hires strong people who excel even within a tough environment. The staffing professional will also dig into work histories, and it will carry more weight if someone was promoted regularly at XYZ company, because it’s known to holds its employees to high standards and exceptional work performance.

What criteria should companies consider when selecting a professional staffing firm?

Pick a firm that specializes in your area of need; that goes back to having professionals on hand who understand the nuances of the industry within which you’re conducting the search. If they’re specialized, they will be even more connected to the specific pool of candidates that you are targeting.

Also look at reputation and how well recognized the company is within the field from which you’re seeking a candidate, and within the staffing industry overall. That will help you select a firm that will consider your company’s culture and evaluate candidates from a behavioral standpoint in additional to their skills.

Most companies hire people with whom they have a connection, and who will be a good fit within a company’s culture, even if they lack some of the specific hard skills listed in the job description. It’s important to find a staffing firm that looks beyond education and job description specifics — one that sees the position from an all-encompassing perspective. You might have an accounting department comprised of ‘Type-A’ personalities and an HR department that’s a bit softer. It’s important that the firm you select understands the culture of the department and the company to ensure the right fit overall.

Heidi Hoyt is managing director at Skoda Minotti Professional Staffing. Reach her at (440) 605-7227 or [email protected]

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How auditors’ report disclosures on financial statements may expand

Carolyn H. McNerney, CPA, director, Assurance Services, SS&G

Carolyn H. McNerney, CPA, director, Assurance Services, SS&G

The recent financial downturn and continuing economic global crises have caused some users of financial statements — investors, lenders or financial analysts — to question if auditors’ reports could tell more of the story and alert users earlier to looming problems.

“Everybody wants to minimize investment risk. They figure the more that they know, the better equipped they are going to be to make decisions,” says Carolyn H. McNerney, CPA, director of Assurance Services at SS&G.

Now, standard setting agencies are considering what disclosures need to be added to auditors’ reports.

Smart Business spoke with McNerney about expectations for revised auditor reporting.

What are the responsibilities of management versus the auditor for financial statements?

Management is responsible for preparing the financial statements, including required footnote disclosures in conformity with generally accepted accounting principles (GAAP) or other reporting framework. The auditors’ responsibility is to express an opinion on the financial statements based on their audit, which involves performing tests and procedures to obtain evidence about the amounts and disclosures in the statements.

Many, if not most, auditors would argue that disclosure should come from management and an auditor’s responsibility is to ensure the ‘numbers’ are fairly stated. Most also acknowledge that the complexity of required disclosures combined with the multitude of new financial instruments, including derivatives, has increasingly complicated reporting. This complexity is a primary driver in the call for more information in auditors’ reports.

What new disclosures are being discussed? 

New disclosures are currently being addressed by the International Auditing and Assurance Standards Board (IAASB) as well as by the Public Company Accounting Oversight Board (PCAOB), which sets the U.S. professional reporting standards for auditors of public companies.

Proposed additions include discussion of matters of audit significance that would be in a separate auditors’ commentary or discussion and analysis section of the auditors’ report. The focus would be on key audit areas, which typically require the use of significant management judgment in determining the amounts reported and auditor judgment for the audit approach.

Will the benefits of expanded disclosure be offset by a lack of comparability?

Standard setters are still deciding what should be disclosed and in how much detail. There is a concern that many financial statement users will be confused by detailed disclosures of audit risk and auditors’ responses thereto. A ‘clean’ auditor’s opinion often takes only one page. Some proposed new example reports go on for many pages.

The question is: Will users be able to interpret and compare auditors’ reports that contain a varying amount of disclosures and are significantly different in length? Sophisticated financial analysts may find this additional information useful, others may find it confusing or misinterpret what the disclosure is intended to convey.

Does the additional cost of potential new disclosures outweigh the benefit? 

Additional disclosures in the auditors’ reports will require more time of both auditors and management, resulting in additional costs. In the U.S., expanded disclosures are currently being proposed only for public companies.

In the private company world, financial statement users have access to management and, perhaps, even the auditor, should they have questions. For this reason, additional disclosures for private companies are not currently being proposed.

What should owners look for in the future?

It seems very likely that there will be some kind of revised, expanded auditor reporting standards for public companies over the next several years. The IAASB has publicly discussed a desired timetable for the issuance of new reporting standards while the PCAOB has not. Certainly, both of these organizations are keeping a watchful eye on each other’s activities and proposals with respect to auditor reporting. However, even private business owners invest in the public company marketplace and receive annual reports of investments.

Carolyn H. McNerney, CPA, is director, Assurance Services, at SS&G. Reach her at (330) 668-9696 or [email protected]

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