TIME FOR YOUR MID-YEAR TAX CHECK-UP

Does it seem like you just took down the Christmas tree? Well, believe it or not, 2018 is half over! That means the tax year is half over, too. Only six months to avoid getting an expensive surprise when filing your taxes next year.

 

Doing a mid-year tax withholding checkup is even more important this year than it was before. Changes in the Tax Cuts and Jobs Act passed in December 2017 could impact your 2018 tax bill dramatically, depending on your family size and make-up, income level and location.

 

So what are the tax law changes that taxpayers should be aware of? Three areas are likely to make your 2018 tax bill look a lot different from 2017:

 

  1. Itemized Deductions – Deductions for state and local income, sales, and property taxes are limited to a total of $10,000. Home mortgage interest is limited on new mortgages to balances of $750,000. Deductions are eliminated for home equity interest unless used to purchase or improve a home. Non-disaster personal casualty losses, tax preparation and investment fees are eliminated. One bit of good news for high income taxpayers — the itemized deduction phase-out is eliminated.

 

  1. Personal Exemptions and Standard Deduction – The $4,050 per person personal exemption is eliminated. That will hit some families pretty hard. Losing personal exemptions hasn’t come up much in the news, but taxpayers will definitely notice when filing in 2019. Doubling the standard deduction has been a huge news headline. For example, married couples filing jointly will get a $24,000 standard deduction for 2018, instead of $12,700 for 2017. Millions of taxpayers will find that the standard deduction is more beneficial than itemizing.

 

  1. Tax Bracket – Six of seven individual tax brackets are reduced. Most taxpayers will benefit from the new rates, which range from 10% to 37%. Even after calculating the impact of losing some itemized deductions and all personal exemptions, lowering the rate results in a lower overall tax for many taxpayers. However, some taxpayers who were in the 33% marginal tax bracket will find themselves in the 35% marginal bracket in 2018. This unfavorable change will mainly affect singles and heads of households with taxable income between $200,000 and $400,000.

 

All of these changes means that it’s even more important to check on your tax withholding and plan ahead for next tax season. Tax projection calculators are available to help determine what your new income tax bill will look like. Of course, www.irs.gov is a great resource. The Tax Policy Center also posted a tool that appears easy to use – http://tpc-election-calculator.urban.org/.

 

Whichever tax calculator tool that you choose, don’t wait to do your mid-year tax withholding checkup. It will be time to put up the Christmas tree again sooner than you think!

 

 

Fraud and the CEO

I don’t usually cover the same topic three weeks in a row. But I couldn’t resist a third post about fraud after reading a recent Internal Auditor article, “The Lottery Loser,” by Art Stewart. The article highlights yet another example of bad things happening when one person has too much unchecked control.

 

Mr. Stewart summarizes and comments on a CNBC news report about a New York credit union CEO who ran a fraud totaling $6 million since 2013. His methods included depositing credit union funds into his personal account and submitting personal expenses for business reimbursement. Read the full article here for Mr. Stewart’s take on three critical measures that organizations can take to prevent a fraud like this from happening. https://bit.ly/2sQWeyn

 

Here are a few of my thoughts:

 

Oversight – Regardless of power or position, financial activities conducted by senior leadership should be overseen by someone who is independent of that activity. Organizations can implement periodic, independent reviews of financial transactions and variance/trend reporting to detect and act upon inappropriate activity. Larger organizations often have an internal audit or compliance function to perform oversight duties. Nonprofits usually delegate these reviews to the Board’s Treasurer.

 

Financial Controls – Implementing exception reporting, segregation of duties and other financial controls decreases opportunities for inappropriate financial activity to go undetected – or could prevent them from happening at all. In the case of Mr. CEO, an authorized check signer should not have access to blank checks. The account reconciliation, another important financial control, must have been poorly designed or performed, since it failed to detect a flagrant check-writing fraud for four years! A poorly-executed control is just as bad as no control at all.

 

Human Resource Management – Trust is great, but organizations need to protect themselves with policies and processes to verify that people in positions of trust are trust-worthy. Processes are also needed for times when trust is broken. Periodic background and credit checks can reveal personal or financial stresses that could lead to fraud. Mr. CEO’s financial losses would have shown up in his credit report and raised a red flag at the credit union. Whistle-blower reporting policies and mechanisms provide an anonymous way to bring inappropriate activity to light without risk of repercussion.

 

A fraud that goes on for years means that one person had too much unchecked control over financial assets, transactions or reporting. When that “one person” is the CEO or other member of senior leadership, the risk of loss can spike due to his or her access to the organization’s finances. Taking Mr. Stewart’s and my advice on the three critical measures to prevent a fraud could keep your organization from being victimized like that New York credit union.

Fraud and Workplace Culture

Last week’s blog was about the three types of fraud and how to prevent them. Typically, organizations lose 5 percent of revenue to fraud each year. Think about how much that means to your organization’s bottom line. Not pretty. Fraud hits smaller organizations and nonprofits even harder, which means a bigger bite out of annual revenue.

 

The Association of Certified Fraud Examiner’s 2018 Report to the Nation on Occupational Fraud and Abuse says that the median loss of fraud cases examined over the last two years was $130,000. Twenty-two percent of losses exceeded $1 million!

 

Organizations can be reluctant to report fraud to law enforcement for two related reasons – bad publicity and poor internal disciplines. Reputations and bottom lines are hurt when a fraud case is exposed in the headlines. It’s even worse when the story behind the headline reveals that financial controls and oversight were so lax, the organization essentially handed the stolen funds to the fraudster.

 

Financial controls that fail to detect or prevent fraud are the symptom of a larger issue – poor workplace culture. What is that, and why is it important? Workplace culture is the personality of an organization – the values, accepted behaviors and attitudes that make the environment and its people work together.

 

Part of a strong workplace culture is promoting ethical, honest and transparent actions, starting with senior management. A strong tone at the top goes a long way to letting everyone in the organization know that dishonest and unethical behavior is not tolerated. Fraud is less likely to occur in an organization with strong workplace culture and tone at the top.

 

So here’s the ironic part. In a recent report, The Culture Economy, 60% of smaller business leaders think that strong organizational culture is a “nice to have” thing, not a necessity. What?! Just look at the fraud statistics to see how essential workplace culture is to the financial success of an organization. Sure, not everyone working in a place with lax financial controls is going to commit fraud; but lax controls make it easy for the dishonest or financially-stressed employee to steal or engage in corrupt practices.

 

A strong workplace culture lets your employees know that fraud and other dishonest behavior will not be tolerated. Of course, strong financial controls and oversight are important. Clear messaging about expectations and appropriate actions go a long way to making sure your employees know that fraud will not be tolerated.

Three Types of Fraud and How to Prevent Them

Every organization is vulnerable to fraud. According to the most recently published Report to the Nations on Occupational Fraud & Abuse, the typical organization loses 5 percent of its revenues to fraud each year. Smaller organizations and nonprofits are even more susceptible to fraud losses because of lower staffing levels and technology investments.

Understanding the types of fraud and how they can happen is the first step to preventing and detecting fraud, and minimizing the impact. Fraud can be broken down into three major types — asset misappropriation, corruption and financial statement reporting.

 

Here is some insight on each type of fraud and tips to prevent them:

 

Asset Misappropriation

Asset misappropriations involve an intentional theft or misuse of the organization’s financial or non-financial resources. Common examples are stealing cash, over-billing, and inflated expense reports. This is by far the most common fraud, making up almost 90 percent.

 

The most powerful weapons against asset misappropriations are segregating duties and exception reporting. Segregating duties prevents one person from having too much control over financial activities, like separating expense approval and check signing from the person who reconciles the bank account. Exception reporting highlights things that are out of the ordinary or shouldn’t happen, like an expense report submitted for a business trip that the employee didn’t take.

 

Corruption

Corruption is the next most common form of fraud. Thirty-eight percent of the studied cases involved some form of corrupt act, often involving senior management with authority over essential elements of the organization, like sales and operations. About 70 percent of corruption cases were perpetrated by someone who misused her or his authority to gain direct or indirect benefit. Examples include bribery, kick-backs and conflicts of interest.

 

Segregation of duties and exception reporting are also useful tools to detect and prevent corruption. A zero-tolerance policy from the top is another useful deterrent to corrupt practices.

 

Financial Statement Reporting

Financial statement fraud is less common than the first two types, but is usually the most costly. While only 10 percent of fraud cases are from manipulating financial statements, the median cost is a whopping $800,000. This type of fraud is commonly perpetrated by middle or senior managers whose income is based on meeting projected financial targets. Methods to thwart financial statement fraud are independent oversight, such as audits, and effective governance. Not exactly the easy stuff.

 

Recognizing that fraud can happen and implementing a proactive action plan to minimize the impact are two steps to prevent and detect the three types of fraud. Powerful weapons like segregating duties, exception reporting and zero-tolerance policies can minimize the impact of fraud in your organization.