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.

Financial Statements, So What? Part II

In PART I, I discussed some important factors regarding “canned” accounting package financials and the simplest form of financial statements which are Compiled Financial Statements, which a CPA prepares. In this Section I will discuss some general items in regards to Reviewed Financial Statements.

Just as in Compiled Financials the most common basis of accounting used in reviewed financial statements are either Modified Cash, GAAP and the Income Tax Basis of accounting. In some cases where the financials are prepared based on industry or other regulatory accounting rules -Statutory Basis may be used.

The basic methodology used in the preparation of reviewed financials is similar to compiled financial statements. There are many rules which must be observed for the proper disclosure and the fair presentation of financial information. In addition there are the minimum set of financials that are typically reported on. The underlying accounting and the financial statements themselves are the assertions of management. As such management is responsible for the contents of the financial information. The difference from Compiled financials is that analytical procedures and professional analysis and judgment are applied to gain an additional level of assurance that the financial statements present fairly management’s assertions. Some of these procedures might involve calculation of financial ratios, comparison to past historical financials to current financials or industry standard metrics. Review of accounting records, statement line items and other reconciliations. Additionally, inquiries are made of management to make sure all the relevant facts regarding the company and its financial affairs are either presented in the body of the financial statements or in the notes and other disclosures that may be provided.  This inquiry is later confirmed by management to the CPA by means of a “Management Representation Letter” which details all these "representations”  and is signed by management for the benefit of the CPA’s. A fair amount of work is involved for a CPA to issue reviewed financial information. Yet it is not as much or as extensive as those procedures employed in an audit. For that reason Reviewed financials are regarded as an intermediate type of financial statement to audited statements. In fact many auditors might require that at minimum a new client have at least Reviewed financials prior to having audited financials. This is because it provides a good base from which to perform audit work.  However, not having Reviewed financials would not necessarily preclude you from being auditable. An important point is that CPA’s must be independent in order to issue a Reviewed financial. This means they generally can not audit their own accounting, or be so involved with the client in providing additional services so as to audit their own work.

The reason for undergoing a review typically is a matter of compliance. It is possible some user of your financial information may require you to undergo this process in order to satisfy a condition of their involvement with the company. For example, investors often make Reviews a condition in the operating agreement of a company, banking institutions might require it also as part of a loan agreement. Likewise bonding companies, which provide for different types of insurance and many regulatory and licensing agencies also may require at minimum Reviewed financial statements. In some cases it can be triggered because some event in a company causes an interested party to force the company to undergo a Review. For instance a dissatisfied investor or partner or even a divorce. Given the state of the financial markets, Reviews may become much more common or even a requirement as many banks and lenders try to reduce their lending risks by requiring CPA prepared financials that are prepared on higher standards.  

A Review is a valuable exercise for any company who attains a level of success. It does require that a formal accounting system be in place and that management has some system of internal control.  For many first time companies, it is an exercise that prepares the company and its management for even higher standards of financial reporting.

A company that is planning to undergo a Review might hire another CPA firm, such as mine, to make preparations for the Review process. This has the potential of reducing Review costs and fees and also to address weaknesses the company might have in its accounting systems and controls.

In the next part of this series I will address Audited financials.

Business Intelligence PART III

In PART I, I made the Statement that all businesses are in the information and technology business. In PART II, I explained that the important factor to realize is how to leverage that information to create business opportunity. Now in this PART III, I want to illustrate a simple case study of a “Shoe Shine” business that is in the information and technology business.

Case:

            A shoe shine business operator leases a small 6 Ft. by 12 Ft. space in the lobby of an office building. The building is a prominent business location with plenty of lobby traffic. The business operator; we will call him “Ira” does well in his business and he is very well liked because of his people skills. He also has the daily paper, and current magazines for his patrons to read while he performs his shoe shine services. Over the years he has made many friends in the building and he always asks for a business card so that if any of his patrons leave anything behind he can always call them to let them know. Besides you never know when you might need a good insurance man, lawyer or accountant who work in the building. Ira acquired a simple “non smart” cell phone.  As he learned how to use it he realized he can input all is business card contacts into his cell phone directory. In doing this he realized that a small percentage of clients were from the surrounding office building but by far most of his clients where from the businesses that operated in his building. (Here Ira analyzes data!)

            Ira, is an entrepreneur who is always busy thinking, He asks the building owner if he can place a sign outside to advertise his business after he recalled many of his clients comment; they had no idea he was in the building and that only by chance did they stop in on business and notice his stand. However, the city won’t allow him to put a sign outside and the building owner was not willing to allow him to affix a sign on the building wall for fear of damage.

            Ira kept thinking about the customers in other buildings that came very infrequently. He realized there was a whole untapped source of clients he wanted to serve. On a slow day he started looking at the directory and came across some executives he knew from other buildings. He decided to call them and asked a simple question;  Would you be interested in a shoe shine while you sit in your office and have lunch or make phone calls? Essentially, Ira let his clients know he would come to them on a schedule convenient to them. The answer was a loud YES!,  from almost all of those executives. (Here Ira has leveraged data into useful information to increase sales)

            By scheduling visits, on one day every other week Ira was able to triple his income and increase traffic to his lobby. As word spread more people would stop by and visit his building. In addition he started a pick up and delivery service. He would pick up shoes when he visited the other buildings, shine and repair shoes, and either deliver them on his next round or call his new customers for a pick up when they were done.  (Here Ira differentiated his business from other shoe shine businesses)  His business picked up so much he had to hire an apprentice. Soon Ira had so many clients he had to figure out how to group his contact list on his cell phone by building. Ira is in fact in the information and technology business by the simple fact that he used a simple cell phone database and leveraged that information to generate more business.

Conclusion:

            The Economist, a business magazine, published an article on January 27^th, 2011; “Not Just Talk”, commenting on the use of cell phones and simple text capability for many business uses in non developed countries. The uses included providing market rates and quantities for common commodities by use of text messaging. An informal market of demand and supply allowing subscribers to find goods for sale by various vendors and locals. Another was a texting service where codes could be texted into a database system which would validate the authenticity of prescription drugs. A system designed to thwart drug counterfeiters. Even simple “non smart” phones have boundless capabilities in their use.

            A qualified external CPA, with an operations approach, can take a fresh look at your business and provide valuable support. But looking beyond the numbers is skill set that takes years in the making.

Financial Statements, So What? PART I

With the proliferation of accounting systems which come with “canned” financial statements many business owners are absent minded about financial statements prepared by the CPA. In all honesty, if you don’t need to pay for CPA prepared financial statements, don’t spend the money.  With one caveat; do you really understand what they mean? Do you trust your internal accountants to tell you what you “don’t” want to hear? CPA’s prepare three general kinds of financial statements:

(1)   Compiled Financial Statements.

(2)   Reviewed Financial Statements.

(3)   Audited Financial Statements.

Compiled:

            Many people have the belief that compiled financial statements is accomplished by taking those “canned” financials that come out of your accounting system and simply placing them on CPA stationary. Nothing could be further from the truth. In fact there are volumes of standards and rules which must be diligently followed by a CPA to conform to Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accounting. These standards provide for the presentation, disclosures, basis of accounting, the basic set of financial statements to be presented and a variety of other provisions that must be adhered to in order to issue a report. Compiled financial statements are typically the cheapest form of financial statements many CPA’s prepare simply because they do not require the labor of examination, confirmation and other attestation procedures performed under reviewed or audited financial statements. But in no terms does that mean a CPA can prepare them blindly. Generally, for many businesses  the basis of accounting most frequently used are Modified Cash Basis, Income Tax Basis and GAAP. In some cases where the financials are prepared based on industry or other regulatory accounting rules -Statutory Basis may be used.

            Year after year I find all kinds of mistakes on “internally” prepared financial statements. Often, I find financials that overstate Gross Profit Margin, leaving owners to believe their profit margin is higher than they thought.  I have even found financials that omitted some line items of expenses all together. Balance Sheets that don’t balance. Most amazing is the enormous percentage of businesses that do not employ a Cash Flow statement.  Everyone knows Cash is King right? The simple truth is many bookkeepers do not know how to prepare even a simple cash flow statement, or how to use the system report generator. Some report generators can be tricky devils. Owners and managers need to be aware today’s accounting systems allow you to prepare financials in any which way you can dream of thanks to flexible report generators. This is a great thing, but un-managed and un-checked can lead users of these reports to very wrong conclusions. For this very reason many outside users require that financial statements be submitted only if they are prepared by a CPA. Simply put, more sophisticated users know that although the financials are not reviewed or audited, due care was taken by a professional to present fairly financial information.

            One last note, every set of financial statements issued by a company is the responsibility of management. This is to say that even if a CPA prepared those financials the underlying information is the representation of management and therefore they are responsible for that information. This is true even of financial statements which have been audited by outside independent accountants. Just take a look a Dow Chemical, Ford Motor Company or any large organization and the auditor’s report clearly sates that fact.

            I will continue this news segment with the other two types of financial statements “reviewed” and “audited” financial statements.