Accountant or Bookkeeper?

By definition bookkeeping is the recording of transactions into books and records held by some entity. Typically a business but, it could be any activity that involves tracking of money, quantities etc. Bookkeeping is actually a component of accounting. Accounting is a much broader term that may include financial reporting, analyzing financial information, verification of financial information, tax reporting just to name a few of the areas under accounting. To some degree a bookkeeper is to an accountant what a law clerk is to an attorney. Or perhaps what a nurse would be to a doctor.

            Unaware of this huge difference many people, even successful business people, unknowingly insult their accountants by referring to them as bookkeepers. Of course this could also go the other way where business people think their bookkeepers are accountants.  All of this is rather intriguing because when someone faints and drops to the floor like cold salami , rarely does one say; is there a nurse in the house? You don't here people say, I am going to have my law clerk sue you!  So why is it that when people have financial and accounting problems they think they need to get a better bookkeeper?

            A look at the financial statements of any publicly traded company will show the name of the Certified Public Accountants who prepared the reports and are attesting that management has carried out their responsibility in a fair presentation of the financial statements to the public.  Accountants employ rules that are commonly called "Generally Accepted Accounting Principles" or GAAP as the guidelines of how transactions should be accounted for and reported. In addition accountants employ " Generally Accepted Auditing Standards", or GAAS to make sure that audits are performed according to professional standards.

            Accountants play a very important role in giving financial statement users more reliable financial information from which to make business decisions. Decisions on how to invest, whether to make a loan or simply how well management does what is says it will do. In our capital markets money is allocated to businesses were management performs. It allows banks to make loans to companies that can repay their loans. In small businesses accountants also play a very important role. They help management make better business decisions based on information provided by their accountants.  Accountants, help in the compliance of loan covenants, tax laws, the payment of taxes just to name a few areas of importance.  Another perhaps, more widely known role accountants play is the role of trusted advisor.  A position earned after years of training, experience and demonstrated honesty and integrity.

Redlining with Appraisals

Having been in the real estate industry for many years I am no stranger to the relationship of a real estate appraisal and how much a bank would be willing to lend on real estate. In today's lending environment banks are concerned more than ever about the "Loan to Value" or LTV they are lending on.

            In years past, banks were lending on appraised values that everyone knew were over inflated. And yet lend they did by the billions. It made no sense whatsoever and anyone who really understood real estate watched in disbelief, if not in shock at the loans made. Of course we now know that everyone is paying the price for taking an appraisal at face value even when good judgment tells you otherwise. Have the banks learned from this? Judging from recent experiences, NO!

            A few loans I have been involved with only show banks have simply reversed the pendulum.  Just as they relied exclusively in the past on appraisals for LTV, they continue to do so today except, towards the other extreme. The problem is that the appraisals are being made based on market values for a given type of real estate in a given area. That sounds logical but is it real?

            In a market where foreclosures and short sales are common place, is it really fair to value a piece of real estate in comparison to another sold entirely in distress? My answer would be, not always! The banks claim; why shouldn't they rely on the appraisal if another buyer can buy very similar real estate at a much lower price? Although that may be true of a "purchase", in cases were a "refinance" is being made, the situation is different.  Is the borrower in distress? Is the cash flow and ability to repay good? Does the borrower have a good credit rating? Does the debt to income ratio fall in line with lending policy?

             When the bank has a refinance that is all positive and there is a slight difference between appraised value and the amount of the outstanding loan the bank should commit to renewing the loan even if the LTV is slightly off. Why? Because it is good business and economic sense.  There is no doubt in my mind banks have an important role to play in stabilizing real estate values. Latitude in this area truly improves overall real estate values and it rewards consumers who have been responsible and simply have been caught in what everyone knows will be a temporary market fluctuation.

            Instead banks lend a blind eye to circumstances, force existing borrowers to fork-over additional cash to bring the LTV into the banks guidelines. This leaves a bad taste in the consumers mouth, slows economic recovery and continues the decline in real estate values in a given market.

            The current climate in bank lending really is a form of economic "redlining". It is a policy that says, we know you are a good borrower, you have the cash, the repayment ability but, since other people in your neighborhood were less frugal, took big risks and overleveraged themselves we refuse to lend to you based on the fact your neighbors don't have the right financial color.

            Are these the same banks that took our tax dollars? Is this legal? Are the appraisals rigged to recapitalize banks? Who's looking at this? 

The Business of Change

The Business of Change

  

Throughout my business career I have had the opportunity to make significant contributions towards changing the overall operating plan if not the culture of a few business ventures. This change always came from an executive management level but in the end relied heavily on the abilities of the general operating staff.

The general industry term for people who are brought on to make operating changes is "Change Agent". Historically, change agents are hired consultants or at times in-house management appointed with special responsibilities and authority to make changes happen. Successful change agents are a breed of operational managers that are unique.  Assuming someone with an MBA and years of business experience is a change agent is like assuming a vet would be a good pediatrician.

I can tell you from experience that being a change agent is incredibly hard work. Not only do you spend a great deal of time understanding the business,  you also spend a lot of time practicing business psychology convincing people that new will be better, to give up the old ways and to look towards a brighter future. This is not an easy task, even when you have true believers. I guess this is because, part of change is that you have to deal with uncertainty, perhaps some pain and in the end most people have difficulty in being able to create reality out of a mere vision. To add to this state of anxiety, change usually occurs over time and not overnight. It is a challenge over time.

So what are some of the basic needs of creating change in business? It really varies from company to company and what type of change you are trying to implement. Nonetheless, there are some bare basic principles.

Start with a vision of what you want to accomplish.

This can be general at first but then you really have to do your homework. Get to all the details of what needs to happen. Then contemplate what will go wrong, how you will get trumped up and how you plan to recover from the inevitable plan that goes wrong. Then start again and rework the details until you know that you can accomplish the vision.

Evaluate the company. 

Again really do your homework. What is the ability of the overall staff. Sometimes you need to bring in new employees with new skills, sometimes you can train. Sometimes you need some temporary help to get it all done. Very important is to assess the ability of top management to tolerate change and the eventual chaos that sometimes emerges. Do they all understand the challenges, the risks, the rewards. Sometimes you have to campaign and get people to sign on before you can contemplate change. I can not stress this part enough because in this process not only do you get people to buy into change but they also provide great insight and help make for a better plan. It also forms a channel of communication that may never have existed before. Make sure you understand what the company is good at and what it does poorly. Be honest not just with yourself but with those who asked you to perform.

Do you have all the tools to make the changes.

Again really do your homework. What will the changes affect. For example a new computer system may require upgrades of computers, faster internet speeds, more workstations. A new marketing plan may require a better telephone system or a CRM (Customer Relationship Management ) system, or new delivery mediums. Think of work flows and everything it takes to complete the business mission.

Establish clear communications with all levels and in all departments.

Here we are in the information age, high tech everything. Emails, texts, walkie talkie telephones, cell phones, smart phones, PDA's, internets, intranets, voicemail, Skype and video conferencing. You can't even go to the bathroom in peace anymore. And yet.......the left hand does not know what the right is doing. Communicate with your people. Know how to talk to all levels of the workforce and be patient. Remember that communication requires "more listening" and very "specific language" to get the messages flowing in "both" directions. Sometimes it's repetition, illustration and explanation of causes and effects as well as confirmation of "message received". Be a teacher and a student. I have learned the neatest tricks from low level staff and taught the big bosses new tricks that make their work life better. 

Give praise, thanks and be humble.

I started out by saying being a change agent is really hard work. It can also be a lot of fun that is extremely rewarding. I have found that it is especially important to recognize people who make it all work. Give them thanks for trying, especially when things don't go quite as planned. If the plan was well conceived then a recovery should be possible from most mishaps. Remember that team work is very important and helping people accomplish tasks and learn is very rewarding. Pay attention to what people are doing and recognize their efforts and contributions, no matter how small or trivial.  Laugh, crack those jokes and know that no matter how successful your plan may be you could not get it done if not for the management and all the people who make it possible. Don't ever take credit for their effort.

Still contemplating the business makeover? Have a lot of questions? I might be available for a long lunch.

Prepared for Disaster

We do a lot of planning for our businesses. We plan for labor and personnel requirements, we plan for capital needs, we plan for taxes, licensing and environmental compliance.  We even go out and get insurance for those unforeseen instances when we think we might want financial protection. Nonetheless, it’s not enough. We have to plan for disasters too! It’s enough to give you anxiety. You know worrying about something you can’t possibly predict as to what will happen or the extent of disruption.  But don’t loose sleep. Just think of what is essential to run your company and keep it going should something happen. Every company no matter how small should have a formal disaster recovery plan. And as I sit and watch the news of an approaching hurricane here are a few tips, that although no substitute for formal plan, can help get your head around the issue.

(1)   Perform a complete system back up of your network. Make two copies and keep both in separate locations from your office. You can FEDEX one to a trusted family member to get it away from a hurricane zone. (do this the day before the airports shut down.) Remember, files on computers on a network typically do not get backed up, so get it on the network drive.

(2)   Before you leave the office unplug servers, computers, faxes, telephone systems. Not just from the electricity but from telephone lines as well. This is to prevent power surges and lightning strikes that may fry essential electronics. Wrap essential computers and equipment in plastic bags, and move them to a secure place in your office if you think windows may break and equipment may be subject to water damage. Mold, mildew and high heat and humidity may damage equipment too.

(3)   Have your employees put away and lock up all files, paperwork and loose documents. Great time for office clean up. You might want to empty out that office refrigerator too!

(4)   Update all employee contact list with their address, telephone numbers, email addresses. Make sure you know where they will be staying. Divide that list among top level management and assign them each the task of staying in touch with a set group of employees so they can advise them when they can return to work. Remember some employees may not be staying at home either because of an evacuation area or because they will be staying with other family members. Make sure your employees know they are expected to call in and return to work when it’s safe.

(5)    Pick the management team that will be responsible for making the first attempt to get back into the office after the storm passes to make any potential damage assessments. Make sure your employees know who these people are. You might want to develop emergency management badges and give a list of the management team to the local police department so they will allow these employees back into the area after the storm in the event the area is secured by police to prevent looting.

(6)   Make sure to secure all insurance policy documents and a list of essential passwords to accounts etc. Critical documents can me scanned and placed on the internet into a private account. Google Docs is a great way to have these handy should you need these from any place on the planet and best of all it’s free!

(7)   Order extra water, gloves, first aid supplies, garbage bags, food and have these handy for your staff since its possible you may not have electricity for a few days time, there will be no air conditioning, potable water and clean up may be required. You should also be prepared to assist your employees if they have suffered a major disaster.

(8)   You may want to consider buying a generator or two, and heavy duty power cords to run basic office equipment if your business must be up and running after a storm.

Many insurance company’s now require that you have a formal disaster plan in order for them to insure you. But your priority should be to be up and running as soon as possible. If your business potentially may gain new or increased business after a major storm, be prepared to respond to your market as soon as possible. Roofers, contractors, plumbers, electricians, landscapers, arborists, hardware stores, real estate agents, hotels, doctors, vets, gas stations, food retailers and other like professions and businesses need to be ready to respond to a surge in demand.

This list of items to consider is not all inclusive. Each company has its own needs and operating requirements. Even if you have a formal plan it should be revised at least yearly. If you need an operations oriented professional to assist you prepare a plan, then please give us a call.

Tax Identity Theft Is Rising

In 2008, there were approximately 52,000 incidents of reported identity theft at the IRS. According to the General Accountability Office (GAO) there were 245,000 cases in 2010. (Wall Street Journal, May 25^th, 2011)  That 371% increase in two years would suggest there is an epidemic of identity theft in tax related matters that involve the IRS. That should be alarming to the public at large as well as to tax practitioners.

But what is identity theft that involves the IRS? There are various scenarios that are used to bait the IRS as well as would be taxpayers. Here are some examples:

(1)   You receive an email with the IRS logo asking that you provide personal information regarding your return. That information is later used to commit some kind of fraud or identity theft. You should note the IRS will never contact you or a practitioner via email.

(2)   Various cases of prison inmates have been found to steel identities in order to obtain fraudulent refunds.

(3)   In some cases children’s and taxpayer’s social security numbers are used in order to secure employment. Those individuals then do not file returns for that income and the real individuals who’s identity was stolen suddenly receives a letter from the IRS saying they have either failed to file a return or omitted earnings from their properly filed income tax return resulting in additional taxes that may be due.

Sen. Bill Nelson (D., Fla.) has been addressing the issue before the Senate Finance Committee.

This is yet another issue that taxpayers must now be aware of in order to protect their identity. The security of your information is very important and has to be addressed by both the IRS as well as individual taxpayers. In particular taxpayers should question when any information regarding your identity is requested. What information is really needed and what security measures are taken by any organization that has access to that information. All too often I deny providing information requested online if it is not vital. In particular my social security number. In addition, I never use my real birth date even online even when it is required for non official business. Instead I have adopted a second birth date used exclusively for non important registrations. I rather get called on this than volunteer more information than needed.

Now that children are literally born with a social security numbers, parents need to exercise more care in who has that information. For children, parents should truly question providing children’s social security numbers to clubs, athletic leagues, tutors and other events and registrations that request personal information about your children. As a parent, my observation is that many organizations do not employ the same safeguards towards children social security numbers and other personal information as they would with the same information about adults. There is a general disconnect between the fact that the children themselves are not financially responsible so their information is not as important. This isn’t true at all. A name and a social security number is gold. Throw in that birth date on FaceBook and it’s a dream come true for someone wanting to steal your child’s identity.  I have seen various registration settings and environments that are completely stacked against a child’s financial identity. 

   

For example FaceBook doesn’t really need your “real” birth date. What’s more, don’t publish it at all. Does your subscription to the New Yorker really need your birth date? Probably not. At a recent chamber of commerce registration they requested I provide a birth date, so a birthday card can be sent out. Wonderful, I received my birthday card a whole month later. I celebrated twice. Of course that doesn’t work for say a credit card application or filing your tax return.

Financial Statements, So What? PART III

In Part I, of this series I discussed Compiled Financial Statements and in PART II I went over the salient facts of Reviewed Financial Statements. Here we will take a very brief view of Audited Financial Statements.

An Audit can be performed on the most common basis of accounting used in Compiled and Reviewed Financial statements. Modified Cash, GAAP and the Income Tax Basis of accounting and in some cases where the financials are prepared based on industry or other regulatory accounting rules -Statutory Basis may be used. However, unlike Compiled and Reviewed financial statements, here in the United States, the most common basis of accounting for Audits is GAAP. Perhaps, followed by Statutory Basis financials. Why? Simply put GAAP is the basis of accounting that is most used by public corporations that are traded by stock exchanges and is the United States financial reporting standard. The exception are insurance companies, utilities and other industry specific companies that have a regulatory basis of accounting.  GAAP is a “rules based” method of accounting that is many, many years in the making with very precise and specific rules to aid, among many factors, in comparing financials among companies in an industry. Increasing demand and a trend towards allowing “IFRS” or International Financial Reporting Standards are well underway, for multinational public companies and foreign companies. IFRS is not rules based but more broad “principles based” form of accounting. This gives a great deal of flexibility but still maintains critical reporting standards. Where GAAP is based on historical costs, IFRS allows for fair market value reporting. This can be a very valuable contribution to financial reporting.

An audit is by far the most complicated set of financial statements that CPA’s prepare. Again, here too the financials are the assertions of management and the accountants render an opinion as to whether the financials, including the notes and other supplementary information, present fairly, the results of operations, financial position and cash flows of the company. Further CPA’s must be independent in order to render an opinion. The financials are not the responsibility of the CPA’s, only the opinion they render is the responsibility of the CPA’s. This is worth noting as it is a common misunderstanding of the general public.

An “Audit Program” is the game plan that accountants use in order to audit the company’s books and records. Some of the tools CPA’s use include trend analysis, industry metrics, observations, testing of transactions and internal controls and confirmations of accounts and notes receivables and  accounts and notes payables. Physical observations and counts are performed on assets and inventories to make sure they not only exist but they are valued correctly. Inquiries are made of the company’s lawyers to determine law suits or potential lawsuits and claims. An accounting of uncertain tax positions are made to determine potential liabilities. Mathematical statistics and sampling techniques are applied and used extensively to make inferences as to the value of certain accounts. A great deal of professional judgment is applied as to whether the Audit Program is sufficient, as to whether the conclusions are correct, and simply as to whether all aspects of the company are properly accounted for and disclosed either in the body of the financial statements, supplementary information or in the notes and disclosures.

Audit services are extremely important to a capitalist market such as our own. I believe it safe to say, Wall Street would not be the center of financial power and wealth if it where not for the audited financial reports that auditors render opinions on. In other words, if you couldn’t compare companies on the same set of accounting rules and or you could not trust the financial statements of companies that trade their stocks, bonds and other financial instruments traded on Wall Street; bankers, investment funds, investors, brokerage houses and the public at large could not make good financial decisions. Essentially, capitalism would come to a screeching halt. Jobs would be lost, lending would dry up and a recession followed by a depression would follow only to be superseded by a global financial collapse.  We got a bad taste of that in 2008, when the United States and the world lost faith in the United States. Not because the accounting was bad, but because it was good enough so that everyone could see that the underlying value of loans and real estate, on corporate books was no longer there and all the companies involved essentially plummeted in value. It was the beginning of a financial collapse.

The most common misunderstanding about audits are that that they are designed to detect fraud, theft and the misappropriation of funds. Audits do sometimes detect these matters. However, an audit has to be specifically designed to detect these types of matters. Even then, audits rely on the honesty of the management. If management is involved in fraud, theft or the misappropriation of funds it is often very difficult to detect. This is why audits rely heavily on internal controls and various other safeguards. It’s a lot harder to get away with any wrongdoing if it requires various levels of management to get away with it.

Audits are expensive simply because of the risk auditors take and because of the amount of work that needs to get done. For many small companies audits are cost prohibitive. Some small poorly run small companies may not even be auditable.

Although I do not perform audits, during the past years my firm has been involved in a number of audits either in preparing clients for audits,  securing auditors, or assisting management who undergo an audit.  For small and medium size companies that do not have internal auditors, having an external CPA is a valuable asset and company resource. It’s possible a relationship with my firm can save your company a great deal of money if you undergo an audit.

IRS Revokes Tax Exempt Status of 275,000 Groups

News Flash! Decision of the IRS to revoke the tax exempt status of 275,000 tax exempt organizations. Yikes! That sounds like a lot of organizations. The reality is that the number is really not surprising.  Many Not-For-Profit (NPO) Tax-Exempt organizations are created by heart and soul people who have a vested interest to do some good in the world but simply fail to recognize how challenging if not daunting it is to (1) raise donations and (2) keep up with the regulatory requirements of running an NPO.

The old IRS law allowed NPO’s to not file a return if their gross receipts fell bellow a certain level. In 2006, the IRS changed the law and now all NPO’s must file a return, with the simplest form of return (990-N) being a very basic information return that essentially says, I am here, I am alive.  Of the 275,000 I suspect a few couldn’t manage that simple reporting as the IRS had given an extension of 5 months to accomplish the task and at that time 50,000 somehow managed to file a return.

There is an NPO for just about every imaginable and conceivable purpose. From saving trees or whales to helping the elderly and children to creating cultural diversity and sustaining art forms. In 2010 the IRS showed 1.8 million NPO’s. Of these roughly 66% were religious organizations.  I once heard that in Miami Dade and Broward counties there were some 8,000 NPO’s. All competing for donated funds and grants from other NPO’s and local, state and federal governments. Without question the work NPO’s perform enrich our lives in every conceivable way. This is because many NPO’s are very cost effective. One of the primary jobs of an NPO is to create administrative capacity through the work of community volunteers. These volunteers help run the organizations and are in fact the people that raise money, run the back office and even provide the programs and services NPO’s bring forward. If you think it’s hard to compete with third world wage levels try free labor!

NPO’s fill the gaps where government can not accomplish the task and puts money to work to serve the disadvantaged, to create a sense of community, to advance democracy through business leagues, social and recreation clubs. It supports education, the arts, healthcare and the homeless, just to name a few of the missions they carry out.  NPO’s are priceless organizations that form the fabric of the United States goodwill and span the globe.

Managing an NPO is a bit tricky. In fact it’s harder to run an NPO than it is a typical small or even medium sized business. There are a number of key considerations in simply forming an NPO.  In addition the management of any NPO organization is best accomplished not just by someone who has run a business before but, someone who specifically has experience with NPO’s. Firstly, there are a number of types of NPO’s, each with a distinct set of operating rules and even allowable deduction rules for those that donate funds. The accounting is more complex, and the tax returns are just as complex.

If you run an NPO, or are thinking of starting one. Get a qualified CPA or tax attorney that knows about NPO’s to advise you. If your heart and soul is tied to that NPO it’s not only to your advantage to do it right, but it also protects the credibility of every NPO that has an important mission to carry out.