Automation Saves Money and Time

Would your organization save money by doing more in less time, with greater accuracy? Would having complete, accurate reports available at the push of a button save time and inform decision making? Could reducing errors and identifying suspicious activity minimize financial losses?

Yes, yes and yes!

Increasing productivity, reducing errors, informing decisions and minimizing losses all happen when organizations automate their processes and controls. Automation is the single best way to effectively manage and get visibility to an organization’s finances and operations. Plus, organizations with a higher percentage of automated controls have better safeguards to protect assets and lower the risk of fraud.

Sure, automating is an investment. But the cost of the technology has come way down, while the tools have gotten more powerful. Advanced automation is now accessible even to smaller organizations, and the return on investment is high. Automation, when well-planned and implemented, not only reduces errors and identifies risk. It frees your team to focus on high-value work, keeping them interested and engaged.

Automation will not replace your team. There will always be a need for skilled financial and operations professionals to assess the results of automated reports and any anomalies that are identified. Manual processes and controls greatly enhance the opportunities for fraud and abuse to occur and go undetected, draining money from the organization. Organizations that have a high percentage of automation have a more comprehensive approach that increases confidence that organizational assets are safeguarded.

Automation allows organizations to quickly analyze huge volumes of data from multiple systems, flagging potential fraud patterns as they happen. Instead of a laborious, hands-on process of performing spot checks on random samples of data, software runs continuously in the background, doing the tedious work of scanning everything from emails to purchase orders, looking for patterns and anomalies, and flagging outliers for further investigation.

Organizations that fall into the low end of the range on the percentage of automated processes and controls should take out some time to look at the available software tools that can help crunch much more data, more thoroughly, in less time. Some options are affordable for small businesses and nonprofits. Once automated controls are in place, you’ll wonder how you ever got by without them.

 

2018 Tax Planning – The New Tax Law Will Impact Your Return

It’s summer! Know what that means? Time at the beach? Sure! Road trip? Absolutely! Summer camp? Well, almost… Summer Camp for Tax Professionals, aka the IRS Tax Forum, just happened here in Washington, DC. It’s perfectly timed between the April and October tax filing deadlines, with a chance to learn about tax trends, changes, and issues from the IRS and experienced tax professionals.

 

Timing was better than ever this year because of all the sessions on the Tax Cuts and Jobs Act that was passed in December 2017. The 2018 IRS Tax Forum provided details about how the new tax law will impact nearly every household and business in the nation. Tax professionals also got insight on new security and compliance procedures implemented by the IRS, state agencies and tax software vendors to reduce identity theft and fraud.

 

2018 IRS Tax Forum sessions covered a range of updates and issues, including:

 

  • Changes to employer tax withholding tables that do not consider the taxpayer’s specific situation. This could result in an expensive surprise next tax filing season.
  • New qualifying dependent credits and higher income limits for taking dependent and child tax credits. These credits partially offset elimination of personal exemptions.
  • Itemized deduction limits for state-level taxes and mortgage interest.
  • Elimination of moving and miscellaneous itemized deductions.
  • Clarification about eligibility for the new Qualified Business Income deduction for Sub S Corporations and Partnership clients (i.e., pass-through businesses).
  • New requirements for Sub S Corporations and Partnerships to track and report stock and loan basis.
  • Changes to depreciation and expensing rules for business assets.

 

There’s more. Too much for one blog post. Now is a great time for every taxpayer to check into how the new tax law will impact her or his tax bill for 2018. In a few months, it will be too late to make a change.

 

If you’re up for re-visiting your tax projections yourself, there’s plenty of online help. Guidance to project taxable income, tax withholding, deductions and tax liabilities is at the IRS website, https://www.irs.gov/individuals/irs-withholding-calculator for employees and https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes for business owners.

 

Not sure you want to DIY your taxes? Want help figuring out how the Tax Cuts and Jobs Act will impact you? Get a referral for a qualified tax professional, preferably one who went to Summer Camp for Tax Professionals, aka the IRS Tax Forum.

Is Your Price “Right?”

The Price Is Right is a fun game show, but deciding the right price for your product or service is no game. Charging enough to make a profit and stay competitive in your market is a careful balancing act. You need to pay the bills without driving customers away from your business to the competition.

 

Figuring out Your Right Price boils down to three fundamentals:

 

  1. Cost – Start by identifying all of the costs associated with making your product or delivering your service. Not as easy as it sounds. The most obvious costs are usually the direct costs, like materials and labor. Rent, utilities and supplies are also easy to identify. Less obvious are costs that don’t happen all the time, like marketing and memberships. Add up all the costs to form a budget for the month or year to get a feel what it costs to deliver your product or service.

 

  1. Competition – Know your market, industry and competition to use as a benchmark, but not your only guide. Your competitors’ prices do not tell you if they are operating at a profit or anything else about the inside of the organization. Is there a lack of competition or unmet demand in your market? Competitive pricing under the right circumstances is a great opportunity to capture market share.

 

  1. Value – Identify and market the value proposition that differentiates your product or service, and use it to command a higher-than-average price in your market. Does your team have credentials, experience or knowledge that the competition doesn’t have? Do you offer a higher quality, longer lasting product? All of that can be reflected in a higher price.

 

Making sure that Your Price is Right is no game. Should you charge less to gain market share, or charge more to highlight your quality? Will you be able to cover your costs and make a profit? Feel confident that Your Price Is Right by considering the three fundamentals — cost, competition, and value.

Tax Basics for New Business

 

Today, I spoke with my absolute favorite kind of new client – a new business owner who wants to make sure she is covering all her bases when it comes to business taxes. Entrepreneurs who plan and ask for qualified professional advice have a better-than-average chance of meeting their goals.

 

All business owners need to know about taxes. All kinds of taxes: income, employment, sales and use, and property. Plus, if the business has sales or other business activities in more than one state, it has to follow the tax rules for each state. Needless to say, that involves more details than I can fit into this blog.

 

Here are the four basic tax areas that small businesses need to know:

 

  1. Income Tax

Net business income is subject to federal and state income taxes. For sole proprietors, net income is figured on Schedule C, which is part of the IRS Form 1040 for individual tax return. Net income is total business income minus the “reasonable and customary” expenses necessary to operate and sustain the business.

 

  1. Employment Tax

Payroll taxes of 15.3% must be paid on business wages or on net business income from self-employment using Schedule SE on the owner’s return. Non-owner employees must have taxes withheld and remitted to the IRS, state and Social Security Administration. Contractors to whom $600 or more is paid during the year are required to receive IRS Form 1099 to report their earnings.

 

  1. Sales Tax

State taxes are assessed on sales of products and some services, depending on the jurisdiction. Internet and mail order sales are subject to tax depending on the location of the seller and purchaser, and applicable laws. Businesses that operate in more than one jurisdiction, like my new client, must collect, report, and remit taxes in all applicable states.

 

  1. Business Property Tax

Tangible personal property used in a business is subject to property tax, usually collected at the local, or county, level. Taxed property includes furniture, machinery, tools, and all computer and peripheral equipment hardware and all operational software.

 

One business “tax” often overlooked by new businesses is a getting the appropriate business license for each jurisdiction in which it operates. Every business needs to be registered and licensed at the state and local level.

 

I am looking forward to meeting again with my new client next week. Entrepreneurs who plan and get professional advice not only meet their goals – they are fun to help.

 

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.

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.

Basic IT Controls Still Reduce Cyber Fraud

Last week’s Institute of Internal Auditors (IIA) cyber fraud webinar was a great reminder. Basic IT controls that we learned years ago are still valuable to follow. Sales reps may promise that their product is the “silver bullet” for preventing cyber fraud, but those apps don’t replace good old fashioned IT controls and training.

 

Fraud has existed for a long, long time. Technology gives criminals new opportunities to perpetrate bigger frauds more quickly than ever before. Many data breaches occur because basic IT controls are neglected, leaving systems vulnerable to hacks and malware. Purchasing advanced solutions doesn’t replace basic IT controls.

 

Four basic IT controls that reduce cyber fraud are:

 

  1. Update and Patch Management

Skipping system updates and patches create vulnerabilities, such as those that were exploited by hackers in some recent cyber fraud events (e.g., Equifax and Home Depot). Excuses for skipping updates and patches include lack of time and concern about impacts on other systems. Updates and patches are crucial — they protect systems with up-to-date security processes.

 

  1. Monitoring

System logs and periodic monitoring should be established to detect operating activities or conditions that should not occur. Anomalies, such as after-hours transaction volume spikes and data transmitted to an unauthorized IP address, should be monitored and acted on. Automated alerts and error reports require follow-up and action to be effective.

 

  1. Password Management

Passwords are the key to the front door of an organization’s systems. Sharing passwords and keeping factory-issued passwords are like hanging the keys on the door knob. One example is when a system administrator fails to change the manufacturer’s default password, leaving the door to that system wide open to unauthorized access.

 

  1. Fraud Risk Training

Traditional methods, like training and documentation, make people aware of cyber threats and vulnerabilities. Real life examples of the risks and costs of a data breach, and techniques used by hackers to manipulate people and data, help workers to recognize risks and how to avoid them.

 

Even after investing in silver bullet applications, organizations can still fall victim to cyber fraud due to a breakdown in basic IT controls. Following these four basic IT controls help organizations reduce their vulnerability to expensive cyber fraud.

Business Financial Records

More than 500,000 small businesses are born every year, according to the Small Business Administration (SBA). Every year, a few of those small businesses find their way to me and ask questions like: How do I keep my business finances straight? When should I start keeping financial records? What tools should I use to manage it all?

 

Every business is different but they all have one thing in common – they can’t make good decisions without getting control over and understanding their finances. Establishing financial systems and processes is essential. Hiring a qualified bookkeeper or accountant is one way to get started, but many new businesses don’t have the budget.

 

I only have the capacity to help a few new businesses every year. For those I can’t get to, here are three steps that business owners and entrepreneurs can take to get control over and understand their finances, and to make good financial decisions:

 

  1. Separate Business and Personal Finances

Open a separate business account to avoid commingling personal and business funds. Don’t wait – open the account as soon as possible. If you can, do it before incurring any business expenses. Apply for a business credit card to avoid putting business expenses on your personal credit card. Separating personal and business finances allows for a transparent view of your business progress. It also helps to establish that you are operating real business, not a hobby.

 

  1. Track All Financial Activity

Maintain a record of all business income and expenses. Expenses should be tracked by category, such as rent and advertising, so you know where your funds are going. The IRS does not specify a particular system or format for business records. The only requirement is that your records are accurate, complete, and provide enough detail to identify the underlying source documents. Source documents may be kept electronically. Computer software packages purchased online or in retail stores can be very helpful, easy to use, and require very little knowledge of bookkeeping and accounting.

 

  1. Plan and Monitor

Even without a formal budget, you need to plan for monthly and annual income and expenses. Having a plan for your finances helps to prioritize your business activities and provides a baseline to monitor your progress. Didn’t meet your plan? Don’t see it as a failure; it’s an opportunity to assess your plan and adjust your activities.

 

Paying a qualified and experienced professional to help set-up sufficient record keeping is a great option. But if that’s not in your budget, taking these three steps will help you feel confident that your records can help you to make good decisions for your business and to satisfy the IRS.