4 Ways to Protect Your Business from Fraud

According to the Certified Fraud Examiners, small businesses with less than 100 employees have higher losses due to fraud when compared with other categories of business.  Review these four tips to protect your business and bottom line.  Remember, your involvement is key!

1. Be proactive and train employees in fraud prevention.  Adopt a code of ethics for employees and communicate the costs of fraud to the company and everyone in it — including lost profits, adverse publicity, job loss and decreased morale and productivity.  Ensure that employees know how to report instances of fraud as internal tips draw attention to instances of fraud more than any other detection mechanism.
    
   
2. Implement effective fraud and embezzlement controls.  One key to protecting your business is ensuring that more than one person is managing the financial records.  With a small office and maybe only one bookkeeper, segregation of duties may seem impossible. If the number of staff limits segregation of duties, options may include hiring another part time person to take care of only payroll or outsourcing certain duties to your CPA firm.  Proper separation of duties includes two signatories on checks above a certain dollar amount, ensuring that the person recording cash receipts is not the same person making the deposits, and assigning bank reconciliations to someone other than the individual handling cash receipts and disbursements.
   
   Additional controls may include regularly rotating bookkeeping duties, requiring vacations/time off and never allowing bookkeepers to take work home.
3. Know what to look for.  Small businesses are more likely to be victims of check tampering.  Because of this, it’s important to educate yourself on telltale signs that something might be wrong.  Common forms of embezzlement include forgery of checks and checks payable to the perpetrator or their personal vendors. Make sure all checks are made out to vendors you actually work with as embezzlers often create bogus vendors and submit payments for fake invoices.  If verified vendors are not being paid or customers are not receiving refunds, it may be that the funds have been redirected to the embezzler’s accounts.  Further, ensure employees have not received extra paychecks or bonuses.
   
   Additional controls can include regular audits of petty cash, credit card charges and expense reports and ensuring payments have appropriate documentation attached.  Finally, be sure to take the time to investigate any discrepancies.
4. Establish hiring procedures. Every company, regardless of size, can benefit from formal employment guidelines. When hiring staff, conduct thorough background investigations. Check educational, credit and employment history, as well as references. After hiring, incorporate evaluation of the employee's compliance with company ethics and anti-fraud programs into regular performance reviews.

For more information on steps you can take to protect your business, contact any one of the Bergan Paulsen team members.  

Source: The ACFE’s 2010 Report to the Nations on Occupational Fraud and Abuse

RELATED ARTICLE:  Protecting Your Organization Against Fraud   |   Industry: Nonprofit

Nonprofit Governance Defined

The current position taken by the IRS on nonprofit governance is best reflected in the reporting requirements of the Form 990 and from the Governance and Related Topics – 501(c)(3) Organizations found on the IRS website and summarized below:

Mission - A clearly articulated mission, adopted by the board of directors, serves to explain and popularize the charity’s purpose and guide its work. The IRS recommends that organizations write mission statements and review and update them on a periodic basis.

Organizational Documents – State law advises the type of organizational document and its content.  These documents provide the framework for the organization’s governance and management.  The IRS requires the submission of organizational documents and bylaws, if adopted, with an application for exemption under section 501(c)(3), and will review these documents to ensure that the applicant is organized exclusively for exempt purposes and that the applicant’s proposed or actual activities are consistent with those documents.  The IRS requires that significant changes to the organizational documents be reported on Form 990.

Governing Body – The IRS encourages an active and engaged board believing that it is important to the success of a charity and to its compliance with applicable tax law requirements.   Successful governing boards are appropriate in size; include individuals that are not only knowledgeable and engaged, but selected with the organization’s needs in mind.

Governance and Management Policies – Although the IRS does not require organizations to have governance and management policies, the IRS will review an organization’s application for exemption and annual information returns to determine whether the organization has implemented policies related to the following:

• Executive compensation – A vital role of the governing board is reviewing and approving the compensation of key employees.  The authorized body should consider establishing a compensation policy for key employees that includes approval by independent persons who review comparability data, adequately document the basis for its decision. 
• Conflicts of interest -  The IRS encourages organization’s board of directors to adopt and regularly evaluate a written conflict of interest policy to address potential conflicts of interest involving their directors, trustees, officers, and other employees and prescribe a course of action in the event a conflict of interest is identified. 
• Investments – The IRS recommends organizations adopt written policies and procedures to protect the assets of the organization and ensure that compensation to investment advisors be reasonable.  
• Fundraising – Fundraising should be done in compliance with federal and state laws, and fundraising costs should be reasonable. 
• Governing body minutes and records – The governing board and any authorized sub-committees should document in meeting minutes all actions taken.
• Document retention policy – The IRS encourages organizations to adopt a written policy to inform staff as to what documents should be maintained and for how long. 
• Ethics and whistleblower policies – Adoption and enforcement of effective ethics and whistleblower policies is encouraged of the governing board.  The organization’s governing body bears the ultimate responsibility for setting ethical standards and ensuring they permeate the organization.

Financial Statements and Form 990 Reporting – The IRS encourages organizations to have audited financial statements and to form an independent audit committee to select and oversee the independence and competence of auditors.  The governing board, in full or in part, should also review and approve Form 990 before it is filed.

Transparency and Accountability – A charity encourages transparency and accountability to the public by making full and accurate information about its mission, activities, finances, and governance publicly available.

For further questions, please contact one of our nonprofit team members.

R&D Tax Credits for Agribusiness

More Opportunity for Agribusiness Companies Prior to 2004, the R&D tax credit was only available to companies that discovered information that was new to the world. This discovery test was eliminated after 2003, and now the information discovered only needs to be new to the taxpayer, therefore there are more opportunities for agribusiness companies than ever before.

Many ag entities consistently change their existing processes or develop new ones to increase productivity or enable them to produce new or improved products. Therefore, the activities that many agribusiness organizations perform on a day to day basis now qualify for the credit.

Ask yourself:  Has your operation produced new or improved agriculture related products recently?  Have you modified product formulations and/or growing processes in increase yields, reduce the reliance on chemicals, accelerate weight gain, or other improvements to the efficiency of your operation? 

Qualifying activities could include:

• Developing new strains of crops, plants or livestock
• Developing and implementing new ways to protect crops and livestock from disease
• Developing products with lengthened shelf lives
• Testing new technology or materials
• Developing new processing techniques or facilities

Three Areas of Qualifying Expenses
The R&D tax credit is based upon a percentage of qualifying expenses. Once it has been determined that a company is performing qualifying R&D tax credit activities, certain costs related to those activities must be identified and allocated to the qualifying R&D tax credit activities. The three areas of qualifying expenses include:

• salaries and wages
• supply costs
• contract research expenses

Contact our team of agribusiness experts for more information R&D tax credits or with questions regarding tax and assurance topics for your business.

RELATED ARTICLE: What is an R&D Tax Credit? | Industry: Manufacturing & Distribution

Surety Bonds in Difficult Economic Times

When it comes to the construction industry, bonds are often required when working on specific projects but are rarely a sure thing.  These days contractors that have been around for a long time as well as emerging contractors are being asked by surety companies to meet stringent requirements to obtain a bond.  Successful contractors take the time to carefully prepare and gather data well ahead of any meetings with any underwriter.  To get you started, we have pulled together a list of factors to consider when preparing an application for surety bonding.

A Strong Balance Sheet
Underwriters often want assurance that your business is in good financial health and that it has the strength to undertake any project you are bidding on.  They often assess the strength of your balance sheet by looking at the adequacy of your working capital.  What this means is, they’ll review your current and quick ratios.  The current ratio is calculated by looking at the amount of current assets divided by current liabilities, while the quick ratio is the amount of cash, cash equivalents and receivables divided by current liabilities and is a better indicator of your short-term liquidity.

In addition, sureties often look at the age of your accounts receivables as an indicator of problems in the future as well as your firm’s capitalization and debt.  Too little capital and excessive debt are warning signs to a surety that your balance sheet is unhealthy.  Finally, underbillings will be reviewed carefully as high levels of underbillings can indicate problems on one or more jobs.

Operational Strength
Sureties will look at prior projects to see if your business has the experience, equipment and manpower to complete the requirements of the contract requiring the bid.  Sureties are looking for assurance that you are capable of handling the types of jobs you are bidding on.

Established Banking Relationships
Sureties will look to see if you have an established banking relationship as evidence of sufficient lines of credit and credit history.

Current Business Plan
Most sureties will want to review your business plan as an indicator of your goals and the steps needed to take to achieve them.  An up-to-date business plan is important and should be reviewed annually or when you hire key employees.

Other Requirements
You should also be prepared to disclose information pertaining to:

• Personal finances
• Any transactions between related parties
• The existence of a formalized continuity plan
• Employee turnover rates
• Any non-bonded work you plan to bid on

You can increase your likelihood of obtaining the bonding you need by putting effective financial reporting in place and ensuring your CPA is a trusted advisor who is committed to helping you reach your goals.

For more information, feel free to contact one of our construction specialty team members.