Journal entries may signal financial statement fraud

Posted on August 17, 2020August 17, 2020 by CCG

With a median loss of $954,000, financial statement fraud is the costliest type of white-collar crime, according to the Association of Certified Fraud Examiners. Fortunately, auditors and forensic accountants may be able to detect inflated income and other financial manipulation by testing journal entries.

Unearthing suspicious entries

Financial statement frauds come in many forms. For example, out-of-period revenue can be recorded to inflate revenue. Repair costs can be improperly capitalized as fixed assets to boost earnings. Accounts payable can be understated by recording post-closing journal entries to income. Or expenses can be reclassified to reserves and intercompany accounts, thereby increasing earnings.

To detect these types of scams, auditors:

Learn about the company’s financial reporting process and controls over journal entries,
Identify and select journal entries and other adjustments for testing,
Determine the timing of the testing, and
Interview individuals involved in the financial reporting process about inappropriate or unusual activity relating to the processing of journal entries.

Financial statement auditors may call on forensic accounting experts when they notice significant irregularities in a company’s financial records.

Testing journal entries

There generally are several common denominators among fraudulent journal entries. Experts look out for entries that are made:

To unrelated, unusual or seldom-used accounts,
By individuals who typically don’t make journal entries,
At the end of the period or as post-closing entries that have little or no explanation or description,
Before or during the preparation of the financial statements without account numbers, and
To accounts that contain transactions that are complex or unusual in nature and that have significant estimates and period-end adjustments.

Other red flags include adjustments for intercompany transfers and entries for amounts made just below the individual’s approval threshold or containing large, round-dollar amounts.

Technology tools are critical. Computerized testing enables auditors to evaluate entire datasets, thus reducing the risk of overlooking critical evidence. Such testing also allows fraud experts to devote more time to other aspects of an investigation, such as gathering information about the business and interviewing employees. Computerized testing can prove particularly helpful in situations where manual testing is largely ineffective — for example, when entries exist only in an electronic format and the desired data must be extracted.

Technology and expertise

Computer-assisted journal entry testing doesn’t replace a skilled auditor or fraud expert. Instead, these tools free up the expert’s time. Contact us about examining your company’s financial statements for signs of fraudulent activity.

The possible tax consequences of PPP loans

Posted on August 14, 2020August 14, 2020 by CCG

If your business was fortunate enough to get a Paycheck Protection Program (PPP) loan taken out in connection with the COVID-19 crisis, you should be aware of the potential tax implications.

PPP basics

The Coronavirus Aid, Relief and Economic Security (CARES) Act, which was enacted on March 27, 2020, is designed to provide financial assistance to Americans suffering during the COVID-19 pandemic. The CARES Act authorized up to $349 billion in forgivable loans to small businesses for job retention and certain other expenses through the PPP. In April, Congress authorized additional PPP funding and it’s possible more relief could be part of another stimulus law.

The PPP allows qualifying small businesses and other organizations to receive loans with an interest rate of 1%. PPP loan proceeds must be used by the business on certain eligible expenses. The PPP allows the interest and principal on the PPP loan to be entirely forgiven if the business spends the loan proceeds on these expense items within a designated period of time and uses a certain percentage of the PPP loan proceeds on payroll expenses.

An eligible recipient may have a PPP loan forgiven in an amount equal to the sum of the following costs incurred and payments made during the covered period:

Payroll costs;
Interest (not principal) payments on covered mortgage obligations (for mortgages in place before February 15, 2020);
Payments for covered rent obligations (for leases that began before February 15, 2020); and
Certain utility payments.

An eligible recipient seeking forgiveness of indebtedness on a covered loan must verify that the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage, make payments on a covered lease or make eligible utility payments.

Cancellation of debt income

In general, the reduction or cancellation of non-PPP indebtedness results in cancellation of debt (COD) income to the debtor, which may affect a debtor’s tax bill. However, the forgiveness of PPP debt is excluded from gross income. Your tax attributes (net operating losses, credits, capital and passive activity loss carryovers, and basis) wouldn’t generally be reduced on account of this exclusion.

Expenses paid with loan proceeds

The IRS has stated that expenses paid with proceeds of PPP loans can’t be deducted, because the loans are forgiven without you having taxable COD income. Therefore, the proceeds are, in effect, tax-exempt income. Expenses allocable to tax-exempt income are nondeductible, because deducting the expenses would result in a double tax benefit.

However, the IRS’s position on this issue has been criticized and some members of Congress have argued that the denial of the deduction for these expenses is inconsistent with legislative intent. Congress may pass new legislation directing IRS to allow deductions for expenses paid with PPP loan proceeds.

PPP Audits

Be aware that leaders at the U.S. Treasury and the Small Business Administration recently announced that recipients of Paycheck Protection Program (PPP) loans of $2 million or more should expect an audit if they apply for loan forgiveness. This safe harbor will protect smaller borrowers from PPP audits based on good faith certifications. However, government leaders have stated that there may be audits of smaller PPP loans if they see possible misuse of funds.

Because of COVID-19, college-aged children need a basic estate plan

Posted on August 13, 2020August 13, 2020 by CCG

It’s August, and that means it’s time to get ready to go back to school for many students. If your child recently graduated from high school and is heading to college in the next few weeks, besides assembling the essentials — such as clothing, toiletries, bedding and a laptop — consider having your child “pack” a few estate planning documents that he or she may need at this stage of life.

Needless to say, having all the necessary financial and medical documents may be more important than ever because of the COVID-19 pandemic. And even if your student is staying home to participate in online learning this year, having these documents prepared now can provide peace of mind when he or she returns to campus.

Let’s take a closer look at four such documents:

1. Health care power of attorney. With a health care power of attorney (sometimes referred to as a “health care proxy” or “durable medical power of attorney”), your child appoints someone — probably you or his or her other parent — to make health care decisions on his or her behalf should he or she be unable to do so. A health care power of attorney should provide guidance on how to make health care decisions. Although it’s impossible to anticipate every potential scenario, the document can provide guiding principles.

2. HIPAA authorization. To accompany the health care power of attorney, Health Insurance Portability and Accountability Act (HIPAA) authorization gives health care providers the ability to share information about your child’s medical condition with you. Absent a HIPAA authorization, making health care decisions could be more difficult.

3. Financial power of attorney. A financial power of attorney appoints someone to make financial decisions or execute transactions on your child’s behalf under certain circumstances. For example, a power of attorney might authorize you to handle your child’s financial affairs while he or she is out of the country studying abroad or, in the case of a “durable” power of attorney, incapacitated.

4. Will. Although your child is still in his or her upper teens or early twenties, he or she may not be too young to have a will drawn up. This is especially true if your child owns assets. A will is a legal document that arranges for the distribution of property after a person dies. It names an executor or personal representative who’ll be responsible for overseeing the estate as it goes through probate.

If you have questions about any of these documents, don’t hesitate to give us a call. We can help provide peace of mind that your child’s health and financial affairs are properly handled.

The tax implications of employer-provided life insurance

Posted on August 12, 2020August 12, 2020 by CCG

Does your employer provide you with group term life insurance? If so, and if the coverage is higher than $50,000, this employee benefit may create undesirable income tax consequences for you.

“Phantom income”

The first $50,000 of group term life insurance coverage that your employer provides is excluded from taxable income and doesn’t add anything to your income tax bill. But the employer-paid cost of group term coverage in excess of $50,000 is taxable income to you. It’s included in the taxable wages reported on your Form W-2 — even though you never actually receive it. In other words, it’s “phantom income.”

What’s worse, the cost of group term insurance must be determined under a table prepared by IRS even if the employer’s actual cost is less than the cost figured under the table. Under these determinations, the amount of taxable phantom income attributed to an older employee is often higher than the premium the employee would pay for comparable coverage under an individual term policy. This tax trap gets worse as the employee gets older and as the amount of his or her compensation increases.

Check your W-2

What should you do if you think the tax cost of employer-provided group term life insurance is undesirably high? First, you should establish if this is actually the case. If a specific dollar amount appears in Box 12 of your Form W-2 (with code “C”), that dollar amount represents your employer’s cost of providing you with group-term life insurance coverage in excess of $50,000, less any amount you paid for the coverage. You’re responsible for federal, state and local taxes on the amount that appears in Box 12 and for the associated Social Security and Medicare taxes as well.

But keep in mind that the amount in Box 12 is already included as part of your total “Wages, tips and other compensation” in Box 1 of the W-2, and it’s the Box 1 amount that’s reported on your tax return

Consider some options

If you decide that the tax cost is too high for the benefit you’re getting in return, you should find out whether your employer has a “carve-out” plan (a plan that carves out selected employees from group term coverage) or, if not, whether it would be willing to create one. There are several different types of carve-out plans that employers can offer to their employees.

For example, the employer can continue to provide $50,000 of group term insurance (since there’s no tax cost for the first $50,000 of coverage). Then, the employer can either provide the employee with an individual policy for the balance of the coverage, or give the employee the amount the employer would have spent for the excess coverage as a cash bonus that the employee can use to pay the premiums on an individual policy.

File cash transaction reports for your business — on paper or electronically

Posted on August 11, 2020August 11, 2020 by CCG

Does your business receive large amounts of cash or cash equivalents? You may be required to submit forms to the IRS to report these transactions.

Filing requirements

Each person engaged in a trade or business who, in the course of operating, receives more than $10,000 in cash in one transaction, or in two or more related transactions, must file Form 8300. Any transactions conducted in a 24-hour period are considered related transactions. Transactions are also considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.

To complete a Form 8300, you will need personal information about the person making the cash payment, including a Social Security or taxpayer identification number.

You should keep a copy of each Form 8300 for five years from the date you file it, according to the IRS.

Reasons for the reporting

Although many cash transactions are legitimate, the IRS explains that “information reported on (Form 8300) can help stop those who evade taxes, profit from the drug trade, engage in terrorist financing and conduct other criminal activities. The government can often trace money from these illegal activities through the payments reported on Form 8300 and other cash reporting forms.”

What’s considered “cash”

For Form 8300 reporting, cash includes U.S. currency and coins, as well as foreign money. It also includes cash equivalents such as cashier’s checks (sometimes called bank checks), bank drafts, traveler’s checks and money orders.

Money orders and cashier’s checks under $10,000, when used in combination with other forms of cash for a single transaction that exceeds $10,000, are defined as cash for Form 8300 reporting purposes.

Note: Under a separate reporting requirement, banks and other financial institutions report cash purchases of cashier’s checks, treasurer’s checks and/or bank checks, bank drafts, traveler’s checks and money orders with a face value of more than $10,000 by filing currency transaction reports.

E-filing and batch filing

Businesses required to file reports of large cash transactions on Form 8300 should know that in addition to filing on paper, e-filing is an option. The form is due 15 days after a transaction and there’s no charge for the e-file option. Businesses that file electronically get an automatic acknowledgment of receipt when they file.

The IRS also reminds businesses that they can “batch file” their reports, which is especially helpful to those required to file many forms.

Setting up an account

To file Form 8300 electronically, a business must set up an account with FinCEN’s BSA E-Filing System. For more information, interested businesses can also call the BSA E-Filing Help Desk at 866-346-9478 (Monday through Friday from 8 am to 6 pm EST) or email them at [email protected]. Contact us with any questions or for assistance.

5 ways to protect your investment accounts from fraud

Posted on August 7, 2020August 7, 2020 by CCG

Because the average investment account boasts a much larger balance that a typical checking or savings account, cybercriminals are particularly interested in hacking them. Financial institutions are largely responsible for ensuring the security of these accounts, but business customers and consumers also should adopt defensive measures. Here are five recommendations.

Select two-step authentication. Most financial service providers give customers the option of using a two-step verification process to prevent unauthorized access to their accounts. A two-step approach requires you both to log in to your account with a password and to verify your identity with, for example, a one-time code sent to your mobile phone.
Choose complex and unique passwords. Criminals often gain access to bank and investment accounts thanks to weak passwords — or because an accountholder uses the same password for multiple accounts. Make sure you use complex, unique passwords with upper- and lower-case letters, special characters and numbers for every investment account you maintain.
Establish account alerts. In addition to reviewing your monthly account statement for unauthorized transactions, request that your investment institution notifies you via email or text of all account activity. For example, the financial company should confirm buy or sell orders or transfer requests. If you receive a message regarding a transaction or transfer you didn’t authorize, contact your investment company immediately.
Consider biometrics. Certain devices, including many mobile phones and some laptops, support the use of biometrics, such as face recognition or fingerprint scans. Using biometrics can seem inconvenient at first, but criminals find it almost impossible to foil this unique form of verification.
Exercise caution with emails. To prevent the installation of malware that can steal account passwords, open emails with caution. If you receive an email from a business or service provider, don’t click on any links. Instead, type in the business’s website address and log in to your account that way. If the spelling, grammar and structure of an email appears unprofessional or suspicious, delete the email and remove it from your deleted email folder. Finally, keep antivirus and malware detection software updated.

Protecting investment accounts takes a multi-layered approach — and constant vigilance. Although your financial service provider likely uses state-of-the-art security to fend off cybercriminals, you also must do your part.

Avoid “bad blood” among family members: Protect your will from legal challenges

Posted on August 5, 2020August 5, 2020 by CCG

You’ve probably seen it in the movies or on TV: A close-knit family gathers to find out what’s contained in the will of a wealthy patriarch or matriarch. When the terms are revealed, a niece, for example, benefits at the expense her uncle, causing a ruckus. This “bad blood” continues to boil between estranged family members, who won’t even speak to one another.

Unfortunately, a comparable scenario can play out in real life if you don’t make proper provisions. With some planning, you can avoid family disputes or at least minimize the chances of your will being contested by your loved ones.

Start at the beginning

Before you (and your spouse, if married) set the table for your will, which is the centerpiece of any comprehensive estate plan, discuss estate matters with close family members who’ll likely be affected. This may include children, siblings, adult grandchildren and possibly others. Present an outline regarding the disposition of your assets and other important aspects.

This doesn’t mean you should be specific about everything in the will, but it’s a good idea to provide a basic overview of your estate. Consider the input of other family members; don’t just pay lip service to their feedback. In fact, they may raise issues that you hadn’t taken into account.

This meeting — which may require several sessions — may head off potential problems and better prepare your heirs. It certainly avoids the kind of “shockers” often depicted on screen.

Means of protection

Although there are no absolute guarantees, consider the following methods for bulletproofing your will from a legal challenge:

Draft a no-contest clause. Also called an “in terrorem clause,” this language provides that, if any person in your will challenges it, he or she is excluded from your estate. It’s often used to thwart contests to a will.

This puts the onus squarely on the beneficiary. If he or she asserts that the estate isn’t divided equitably, the beneficiary risks receiving nothing. Be aware that, in some states, this clause may not be enforceable or may be subject to certain exceptions.

Choose witnesses wisely. You may want to use witnesses who know you well, such as close friends or business associates. They can convincingly state that you were of sound mind when you made out the will. You also may want to choose witnesses who are in good health, preferably younger than you and easily traceable.

Obtain a physician’s note. A note from a physician about your health status is recommended. For instance, it can state that you have the requisite mental capacity to make estate planning decisions and thus will be useful in avoiding legal challenges.

Last but not least

After your will is drafted, don’t make the mistake of putting it in a safe where you may forget about it. Review it periodically with your attorney. By fine-tuning the will, you improve the likelihood that it’ll deter a legal challenge and, if necessary, prevail in court. Contact us with any questions regarding your will.

Strengthen your supply chain with constant risk awareness

Posted on August 4, 2020August 4, 2020 by CCG

When the COVID-19 crisis exploded in March, among the many concerns was the state of the nation’s supply chains. Business owners are no strangers to such worry. It’s long been known that, if too much of a company’s supply chain is concentrated (that is, dependent) on one thing, that business is in danger. The pandemic has only complicated matters.

To guard against this risk, you’ve got to maintain a constant awareness of the state of your supply chain and be prepared to adjust as necessary and feasible.

Products or services

The term “concentration” can be applied to both customers and suppliers. Generally, concentration risks become significant when a business relies on a customer or supplier for 10% or more of its revenue or materials, or on several customers or suppliers located in the same geographic region.

Concentration related to your specific products or services is something to keep a close eye on. If your company’s most profitable product or service line depends on a few key customers, you’re essentially at their mercy. If just one or two decide to make budget cuts or switch to a competitor, it could significantly lower your revenues.

Similarly, if a major supplier suddenly increases prices or becomes lax in quality control, your profit margin could narrow considerably. This is especially problematic if your number of alternative suppliers is limited.

To cope, do your research. Regularly look into what suppliers might best serve your business and whether new ones have emerged that might allow you to offset your dependence on one or two providers. Technology can be of great help in this effort — for example, monitor trusted news sources online, follow social media accounts of experts and use artificial intelligence to target the best deals.

Geography

A second type of concentration risk is geographic. When gauging it, assess whether many of your customers or suppliers are in one geographic region. Operating near supply chain partners offers advantages such as lower transportation costs and faster delivery. Conversely, overseas locales may enable you to cut labor and raw materials expenses.

But there are also risks associated with geographic centricity. Local weather conditions, tax rate hikes and regulatory changes can have a substantial impact. As we’ve unfortunately encountered this year, the severity of COVID-19 in different regions of the country is affecting the operational ability and capacity of suppliers in those areas.

These same threats apply when dealing with global partners, with the added complexity of greater physical distances and longer shipping times. Geopolitical uncertainty and exchange rate volatility may also negatively affect overseas suppliers.

Challenges and opportunities

Business owners — particularly those who run smaller companies — have always faced daunting challenges in maintaining strong supply chains. The pandemic has added a new and difficult dimension. Our firm can help you assess your supply chain and identify opportunities for cost-effective improvements.

Are scholarships tax-free or taxable?

Posted on August 3, 2020August 3, 2020 by CCG

COVID-19 is changing the landscape for many schools this fall. But many children and young adults are going back, even if it’s just for online learning, and some parents will be facing tuition bills. If your child has been awarded a scholarship, that’s cause for celebration! But be aware that there may be tax implications.

Scholarships (and fellowships) are generally tax-free for students at elementary, middle and high schools, as well as those attending college, graduate school or accredited vocational schools. It doesn’t matter if the scholarship makes a direct payment to the individual or reduces tuition.

Tuition and related expenses

However, for a scholarship to be tax-free, certain conditions must be satisfied. A scholarship is tax-free only to the extent it’s used to pay for:

Tuition and fees required to attend the school and
Fees, books, supplies and equipment required of all students in a particular course.

For example, if a computer is recommended but not required, buying one wouldn’t qualify. Other expenses that don’t qualify include the cost of room and board, travel, research and clerical help.

To the extent a scholarship award isn’t used for qualifying items, it’s taxable. The recipient is responsible for establishing how much of an award is used for tuition and eligible expenses. Maintain records (such as copies of bills, receipts and cancelled checks) that reflect the use of the scholarship money.

Award can’t be payment for services

Subject to limited exceptions, a scholarship isn’t tax-free if the payments are linked to services that your child performs as a condition for receiving the award, even if the services are required of all degree candidates. Therefore, a stipend your child receives for required teaching, research or other services is taxable, even if the child uses the money for tuition or related expenses.

What if you, or a family member, is an employee of an education institution that provides reduced or free tuition? A reduction in tuition provided to you, your spouse or your dependents by the school at which you work isn’t included in your income and isn’t subject to tax.

Returns and recordkeeping

If a scholarship is tax-free and your child has no other income, the award doesn’t have to be reported on a tax return. However, any portion of an award that’s taxable as payment for services is treated as wages. Estimated tax payments may have to be made if the payor doesn’t withhold enough tax. Your child should receive a Form W-2 showing the amount of these “wages” and the amount of tax withheld, and any portion of the award that’s taxable must be reported, even if no Form W-2 is received.

These are just the basic rules. Other rules and limitations may apply. For example, if your child’s scholarship is taxable, it may limit other higher education tax benefits to which you or your child are entitled. As we approach the new school year, best wishes for your child’s success in school. And please contact us if you wish to discuss these or other tax matters further.

How fraud perpetrators are stealing unemployment benefits

Posted on July 31, 2020July 31, 2020 by CCG

When Congress authorized an additional $600 in monthly unemployment benefits as part of the CARES Act, out-of-work Americans weren’t the only ones it helped. Criminals have descended like locusts on state unemployment insurance agencies, using stolen identities to fraudulently claim both standard benefits and the additional funds administered by the Pandemic Unemployment Assistance (PUA) program. States have lost hundreds of millions of dollars. Individuals have also suffered, as government efforts to control fraud have clogged up benefit systems and delayed payments to the jobless.

States struggle

Washington state was the first to experience a COVID-19 outbreak and has since estimated losses of $650 million to unemployment insurance fraud. According to the Secret Service, a scam was detected when someone noticed that multiple direct deposits of benefits had been made to individuals residing out of state. These deposits were subsequently transferred overseas — likely by organized crime gangs.

But Washington is hardly alone. Many other states have discovered fraud. In May, Rhode Island’s labor agency reported that it had almost as many illegitimate unemployment insurance claims as legitimate ones. And widescale fraud in Michigan forced that state to stop payment on nearly 20% of unemployment claims pending review.

Fighting back

If you’re currently employed and receive an unemployment benefit check or debit card or a letter confirming an application for unemployment benefits, immediately contact your state. If you can’t get ahold of your state agency (a problem encountered by thousands of potential fraud victims), report your suspicions to police and the Federal Trade Commission (FTC) at identitytheft.gov. Your identity has likely been stolen and sold to criminals on the dark web. Be sure to request copies of your credit reports and review them for illegitimate activity.

Businesses can help fight unemployment insurance fraud, too. The FTC suggests that companies:

Ask employees to speak up if they suspect their identities are being used to perpetrate unemployment insurance fraud,
Direct HR to flag state unemployment agency notices about currently employed workers,
Report suspected fraud to a state agency — preferably via its website,
Provide a copy of the documentation to affected employees and let them know if the state requires them to also make a report,
Bolster cybersecurity to prevent the loss of personal data that could be used to commit fraud.

This last tip is particularly important if your employees currently are working from home.

An easy target

The pandemic has probably unleashed more fraud activity than any other recent event. Even though PUA program payments were due to expire on July 25, state unemployment benefits are too easy and lucrative a target for fraudsters to pass up. But you can do your part to help disrupt these schemes.