Segregation of Duties

As a CPA and business advisor, I hear about fraud and material errors far too often. Due to the lack of internal controls, small businesses are especially vulnerable. According the Association of Certified Fraud Examiners (ACFE), the median loss from fraud at a small business was over a $100,000 in the US. It is important for every organization create an appropriate internal control environment to reduce this risk.

A fundamental element in a strong internal control environment is the segregation of duties (SOD). By separating certain duties within an organization, no single employee should be in the position to both perpetrate and then conceal either errors or fraud. While the SOD can be difficult in a small organization, understanding this can help you improve your own control environment.

The principle duties that are incompatible and should be segregated are:

• Custody of assets.
• Authorization
• Recording keeping
• Reconciliation

Ideally, a different individual would do each of these duties since they serve as checks and balances on each other. By separating the tasks, the system would catch any errors unless two or more employees colluded. Collusion can override even a well designed system.

You must build checks and balances into your financial systems. Simple accounting errors, if gone undetected can devastate a company. Fraud as well. A strong and appropriate system of internal controls will reduce risk and increase accountability. Make sure you design these principles into your accounting system.

I haven't had a chance to check this out but found this free Fraud Prevention Check-up on the ACFE website: http://www.acfe.com/resources/publications.asp?copy=fraudprevention

Internal controls for fraud and error prevention

How are you managing your business finances? Many business owners are discovering that their assets are not as well protected as they thought. This is especially true in small business environments where a single employee manages all the finances. Often there are no checks and balances to verify that transactions are accurate.

Fraud frequently increases in a slowed economy as financial pressures grow and fewer people are asked to do more work. Pay cuts and other compensation reductions can leave some employees feeling entitled to more.

When proper, consistent procedures are not in place, employees can learn to manipulate the accounting system to their benefit. Whether they take money from the company or their mistakes are undiscovered, the end result can greatly impact your company’s management discussions, financial reports, and tax filings.

Unfortunately, once your financial records have been altered, discovering problems is extremely difficult. Most standard accounting practices are not designed to uncover internal problems such as embezzlement.

Therefore, the best way to safeguard your company’s assets is to recognize and improve weaknesses in your internal procedures.

I’ll write about some of these business practices over the next few posts.

Move Your Money

There is a movement afoot for people and organizations to move their banking from the mega-banks to a local bank.

The mega-banks (Bank of America, JP Morgan Chase, Goldman Sachs, Citigroup, Wells Fargo, Morgan Stanley, etc.) aren't particularly interested in you or your small business. Sure, they'll take your deposits while paying less than 1 percent on your account and they'll give you a credit card with interest rates in the range of 15-35 percent, but their real motivation is making money and serving their Wall Street masters.

The 10 largest banks hold over 60 percent of the nation's deposits. There are now 23 banks with over $100 billion in assets.

Local banks on the other hand serve their community. Their future prosperity is directly tied to the communities they operate in. Local banks don't give their executives million-dollar bonuses. Local banks hire local service providers like CPAs, attorneys, advertising agencies, marketing consultants, janitors, and other various service providers. At your local bank you'll find friendly people who know your name and want to help you.

Tomorrow, in Portland's Pioneer Courthouse Square, local bankers will be on hand to help answer questions as we encourage people to "Move Their Money." The festivities are from 1-4pm and should be a family fun event complete with music and speakers.

According to pollster John Zogby, nearly 10 percent of Americans have moved at least some of their money due to Wall Street abuses and the current banking crisis.

I hope you'll join me in moving your money and banking from the mega-banks that nearly brought down our economy to a local bank that is committed to and serves your community.

The Value of Planning

Yesterday I got some sad news. One of our clients died unexpectedly. He was under 40 and left behind a family and a business. While tragic, this isn't a rare event.

Are you prepared if this tragedy were to strike you or your business?

I'm not.

I know the importance of having a will yet I don't have one. If you die without a valid will, state law dictates how your estate will be divided by your heirs according to very specific set of rules. Your friends, favorite relatives and charitable benefactors will get nothing despite your intentions. The only way to not follow the state distribution process is to die with a valid will.

It is probably best to use an attorney but that isn't necessary. Check with your state to determine what form (In writing, witnessed by two people, etc.) a valid will may take.

I've had "getting a will" on my to-do list for years. I'm going to get this accomplished before the end of summer.

On the business side, it is important to consider and plan for the death of owners and key employees. You can use key person insurance, buy-sell agreements, life insurance, and similar techniques to prepare for these contingencies.

A business can have considerable market value which can dissipate quickly upon the death of an owner if proper plans are not in place. I've seen businesses lose half their market value or more when the owner dies without proper planning.

I'm meeting with an attorney next week to put in place the necessary plans so that my untimely death or disability doesn't compromise my business, family, coworkers, or clients.

New Hiring Incentives

The Hiring Incentives to Restore Employment (HIRE) Act was enacted on March 18, 2010. This tax law provides two new benefits to employers who hire certain previously unemployed workers ("qualified employees").

First, employers who hire a qualified employee will get an exemption on the employer's 6.2 percent share of social security tax on the wages paid to these employees, for wages paid from March 19, 2010 through December 31, 2010.

A qualified employee are individuals who begin employment after February 3, 2010 and before January 1, 2011, who have either been unemployed or employed less than 40 hours during the 60-day period before employment. The qualified employee cannot be a relative or otherwise related party.

You also can't lay someone off and then rehire them or another person to do the same job. However, you can qualify for the exemption if you replace someone who quit or was terminated for cause.

To put this in plain English, if you hire someone after February 3rd and expand your payroll, you may qualify for this exemption to avoid paying the 6.2 percent employer portion of the social security tax.

Employers should use the new Form W-11 to confirm new hire eligibility. Form W-11 must be signed by the employee to qualify for the exemption.

Additionally, for each new employee retained for at least 52 consecutive weeks, employers will be eligible for a general business tax credit equal to the lesser of $1,000 or 6.2 percent of wages paid.

I'm not clear but I believe this new hire retention credit will be a 2011 tax year credit since the 52nd week of continuous employment will fall sometime in 2011.

Renewal and Revitalization

The Earth goes through its annual cycle of rebirth, abundance, decay, and dormancy. Our lives consists of cycles although most of us see only linearity.

Working in an accounting firm is like joining a series of cycles: New businesses starting, older ones being closed or transferred, tax seasons, year ends, visioning, implementing, etc. The cycles are endless and important.

Our firm, TriLibrium, just completed a 3-day working retreat on beautiful Whidbey Island. This is our second retreat and I find them to be critical to our firm's success and culture. We used this time to strengthen our team, renew our vision, deal with challenging issues, and bond as humans.

We can't do this work in an office and yet it must be done.

Are you taking time in your business to step away from the day to day routine to provide time to appreciate the cycles of your business?

"Benefit Corp." law passes in Maryland

I've written a number of blog posts on B-Corporations. TriLibrium, the company I founded, is a certified B-Corporation and I believe, the only public accounting firm in the country that has achieved that designation.

Part of the B-Lab (The non-profit supporting the B Community) strategy was the goal to have the B-Corp designation recognized as a distinct legal entity just like C-Corps and S-Corps. Yesterday, Maryland became the first state to pass a law recognizing B-Corporations. You can read more about that in this article.

Wish I could write more but it is April 14th. Have you filed your taxes?

Small Business Tax Credits in the Health Bill

It is busy season at TriLibrium so I've had little time to blog. I'm excited to get back to regular postings after April 15th.

In the meantime, I'd like to at least link my readers to an article that highlights some of the eligible tax credits for small business and tax-exempt organizations in the Patient Protection and Affordable Care Act which was just signed into law.

The good news for 2010 is that eligible small business can get a tax credit up to 35 percent of the premiums paid by employers. Tax-exempt organizations are eligible for a 25 percent credit.

The maximum credits are for small employers (less than 25 full-time equivalents) paying average wages less than $50,000 per year. Reduced credits are still available for organizations outside these ranges.

You can find more details at WebCPA.

Innovations Towards Sustainability

Our firm is constantly innovating towards sustainability. This is an ongoing process and in the spirit of transparency, cooperation and co-evolution, we share our ideas to help others.

One of our recent innovations is to provide a bus ticket to any client who visits us by any means other than a car. We have a pretty large number of clients who walk, bike and/or ride the bus to meet with us. When they do, we provide them with a $2 bus ticket which they can use for future travel. If they don't need or want the bus ticket, we provide them with an option of donating it to social service agency.

This encourages alternative transportation while simultaneously helping an important community organization. The cost is minimal and the return on investment high. Maybe you could implement this at your organization.

Downsizing (Part II)

In my previous post on Downsizing I discussed my move to a smaller home and how I'm shedding over half my possessions. I found an apartment and am moving Monday. The anticipation of being free from my possessions is exhilarating.

The reason I bring this up is not to put myself on some kind of pedestal, but rather to point out just how against the grain this act is. The "American Dream" is about more and more and more (stuff). At a cost of less and less time, love, education, health, freedom, self-determination, joy, etc.

The path to sustainability is about more and more and more time, love, education, health, freedom, self-determination, joy, etc. and less and less stuff.

I venture to guess that probably 90 percent of my U.S. readers have more than enough stuff. Are you better off with all the stuff?

I'll be honest, more stuff makes me less happy. Sure, acquiring new stuff temporarily gives me what I call a "Costco" high, but the thrill is gone in such a short time and then the long-term burden of ownership (maintenance, storage, insurance, moving, repair, disposal, etc.) kicks in.

Getting Educated

I recently heard Richard Heinberg talk at the Illahee Lecture series and blogged about the event. Richard is a Senior Fellow at the Post Carbon Institute (PCI).

One of the other Fellows at PCI is Chris Martenson, the creator The Crash Course that I've recommended before. I'm posting this again to lead my readers to some very digestible and important information for understanding our economic situation.

The Crash Course is presented in chapters you can easily watch in 3 to 18 minutes online. The course is 20 chapters long but I watched it over the course of a few weeks and thoroughly enjoyed each chapter. I occasionally go back to refresh my understanding of various sections.

Downsizing

affluenza, n. 1. The bloated, sluggish and unfulfilled feeling that results from efforts to keep up with the Joneses. 2. An epidemic of stress, overwork, waste and indebtedness caused by the pursuit of the American Dream. 3. An unsustainable addiction to economic growth.

I've been into social change and sustainability as far back as I can remember. I long ago concluded that sustainability can only be achieved through LESS environmentally destructive economic activity. I am not a compulsive consumer yet I've probably acquired, owned and disposed of more "junk" in my 47 year life than 95 percent of the people who have EVER lived. Am I happier because of it?

For a variety of reasons I've decided to sell my house and am moving into an apartment. My current strategy is to movie only those things I want or need, and am looking forward to shedding as much as 3/4 of my possessions. By moving only the things I need or really want, what remains will be easy to give away, sell, or re-purpose.

I've long been burdened by too much stuff. I remember the exact moment I discovered that fact. It was the early 90's and Vicki Robin ("Your Money or Your Life") was in Portland giving a talk about simplification. When she asked "How much is enough?", I realized my maximum joy from possessions occurred during my early college years when my belongings could easily fit in a car. Since that time I'd acquired more and more yet feeling less and less fulfilled. The truth is, most of my possessions feel like a burden rather than a joy.

I've been suffering from Affluenza but I'm about to get cured.

I know I'm an extremely privileged person to be in this position but I wondering how many other people in my position feel the same way?

Changes to Oregon's BETC

The Oregon Legislature, in an effort to address budget issues and to fine tune the Business Energy Tax Credit (BETC) program, has made changes that local readers may want to know about.

The attorneys at Lane Powell have done an excellent job summarizing the changes including the new limits. You can read their summary here.

Chaos is the New Normal

Last night I attended the Illahee Lecture Series featuring Richard Heinberg, Senior Fellow at the Post Carbon Institute. I wish I had time to comment on his lecture but this is busy season at TriLibrium so I'll be brief while providing you some interesting links.

Richard's main point was that there will be no return to normal. Global economic output as measured by GDP probably peaked in 2005/2006 and that we'll never again return to that level given the direct connection between energy and our economy. The solutions are varied and diverse but the key point is that a return to "normal" is impossible given limiting factors and the sooner we embrace this fact and transition to the new paradigm the better. A movement he mentioned and that I intend to explore further is called "Transition Towns."

I'd also like to point readers to Richard's publication "Searching for a Miracle: 'Net Energy' Limits & the Fate of Industrial Society." This report explores whether any combination of known energy sources can successfully supply society's energy needs up to the year 2100. I won't give away the answer but they explore the different solutions against 10 criteria. The report is available as a free PDF download.

I'd also like to point those interested in accounting and innovation to a recent blog post by Gifford Pinchot. Gifford discusses Intrapreneuring in Accounting and the need for innovative accountants to help provide the understanding, metrics, and systems for the economy of the future.

Our Sustainable Purchasing Decision Matrix

Last week we moved into new offices. Our new office naturally reflects the culture and values we are developing at TriLibrium. With our move, we’ve recently made a flurry of investment and purchasing decisions. I’d like to explain how we make our decisions.

The old purchasing paradigm was a two dimensional decision seeking to optimize the competing tradeoffs between price and quality. Given equal quality, one would simply shop for a better price or, given the same price, one would opt for higher quality.

With every purchase decision at TriLibrium, we introduce a third factor -- Triple bottom line performance (TBL). Accordingly, we look at price/quality/TBL performance and seek to optimize these sometimes competing factors.

TBL performance is enhanced by:

• Supplier relationship
• Supplier location
• Materials
• Environmental impacts
• Life cycle assessment considerations
• Social impacts
• Reduce, reuse, recycle mentality

The first consideration was location. This single factor alone will have a huge impact on our footprint. We opted for a centrally located building with excellent public transit access.

Our desks were made out of doors reclaimed from the Heathman Hotel and repurposed for us by Endurawood. Our conference table was also made for us by Endurawood out of a technical material made from sunflower seed husks, recycled paper and natural resins.

We purchased two new employee desk chairs. One made locally and the other manufactured using cradle-to-cradle design.

We purchased numerous used items including our conference room white board, conference room chairs, refrigerator, filing cabinets, reception area chairs, and more.

Most of the subs and vendors we used were clients helping us re-circulate more money in the green and sustainable community.

B Corporations and the New Economy

My company, TriLibrium, is a certified B-Corporation. I believe B-Corp certification to be the current gold standard for firms dedicated to doing well by doing good.

Yesterday I had the opportunity to participate in a "State of the B Community" update. The B Corporation community is maturing and expanding. There are now more than 250 certified B-Corps total. The community has expanded to Canada and just this week, the first one will appear in Europe. On January 1st, B Labs released the new benchmarking tool, Version 2.0.

Whether or not you want to pursue B-Corporation certification, I highly recommend using the B Corporation survey to benchmark your environmental and social performance. This is a free service that will help you assess where you stand, and how you might improve. Getting a baseline benchmark is critical for performance improvement and to measure and report on your progress.

Because it is worth sharing, here is the B Corporation Member Declaration:

Declaration of Interdependence

We envision a new sector of the economy which harnesses the power of private enterprise to create public benefit. This sector is comprised of a new type of corporation – the B Corporation™ – which is purpose-driven and creates benefit for all stakeholders, not just shareholders.

As members of this emerging sector and as entrepreneurs and investors in B Corporations™,

We hold these truths to be self-evident:

• That we must be the change we seek in the world;
• That all business ought to be conducted as if people and place mattered;
• That, through their products, practices, and profits, businesses should aspire to do no harm and benefit all.

To do so, requires that we act with the understanding that we are each dependent upon another and thus responsible for each other and future generations.

Other Green Incentives for Business

In my last blog post I covered IRC Sec. 179D and the deduction for energy efficient commercial buildings.

Today, I'm going to highlight some of the other energy and efficiency related incentives that you might want to know about. Due to the complexity and the narrow applicability of many of these tax incentives, I'm just going to list them out today and I'll decide later whether to delve deeper into any of them.

1. Accelerated Depreciation for Qualified Smart Electric Meter and Qualified Smart Electric Grid System (IRC Sec. 168(e)(3)(D)(iii) and (iv));
2. Qualifying Advanced Energy Project Credit (IRC Sec. 48C);
3. Energy Efficient Appliance Credit (IRC Sec. 45M);
4. Credit for Carbon Dioxide Sequestration (IRC Sec. 45Q);
5. Qualifying Advanced Coal Project Credit (IRC Sec. 48A);
6. Qualifying Gasification Project Credit (IRC Sec. 48B);
7. Alcohol Fuels Credit (IRC Sec. 40);
8. Enhanced Oil Recovery Credit (IRC Sec. 43);
9. Renewable Electricity Production Credit (IRC Sec. 45);
10. Biodiesel Fuels Credit (IRC Sec. 40A);
11. Low Sulfur Diesel Fuel Production Credit (IRC Sec. 45H)
12. Advanced Nuclear Power Facility Production Credit (IRC Sec. 45J); and
13. Nonconventional Source Production Credit (IRC Sec. 45K).

Green Tax Incentives for Commercial Buildings

The Energy Efficient Commercial Building Deduction is allowed under IRC Sec. 179D. This code section was originally added by the Energy Policy Act of 2005 and was extended through 2008 legislation. Section 179D now applies to properties placed in service after December 31, 2008 and before January 1, 2014. Unlike most of the incentives I've covered in earlier blog posts, this incentive is based on a deduction and not a credit.

Section 179D allows an immediate deduction for the cost of energy efficient building property placed in service during the year. The maximum amount of the deduction is $1.80 per square foot on a lifetime basis and is available for energy efficient building property place in service after 2005 and before 2014. The maximum deduction in any taxable year would be equal to $1.80 x square footage of the building less the aggregate amount of Sec. 179D deductions for all prior tax years.

Note that this section applies to both new construction and renovations.

The maximum 179D deduction of $1.80 per square foot is actually comprised of three separate components:

1. Building envelope
2. Lighting
3. HVAC

Each component is worth a maximum $0.60 per square foot deduction.

To qualify for these deductions, commercial building performance must exceed baseline standards. Any deduction allowed under 179D reduces the depreciable basis of the property.

The standards for each of these three building components is far too detailed and specific to delve into here but let me point out a couple things to be aware of.

First, because Sec. 179D deductions are based on square footage - the bigger the building, the larger the deduction. These deductions can be huge for distribution centers, parking garages and other facilities with large footprints. As a rule of thumb, I've heard a building needs to be greater than 50,000 sf before these provisions are cost effective due to the documentation and increased costs necessary to qualify for the deduction.

I've also heard that the construction cost needs to be north of $1 million before deciding whether to pursue these deductions because the cost of proving performance will exceed the deduction on smaller projects.

This deduction is available to either the building owner or the tenant, depending on who incurred the costs.

In the case of a government-owned building, the Sec. 179D deduction is awarded to the primary designer should the building qualify based on performance. An architect, engineer, contractor or energy consultant who creates the technical specifications for a new building or an addition to an existing building which incorporates the necessary performance standards may qualify for this deduction.

A government-owned building is any publicly owned building such as a prison, school, water treatment facility, court house, military facility, etc., etc. Designers working on such projects can qualify for some huge deductions under this code section.

Green Tax Incentives for Travel (Part II)

In Part I of this post I focused on "Green" tax incentives related to travel/transportation, primarily for the individual. As mentioned in that blog post, the following tax credits are available for both individuals and businesses:

• New Qualified Plug-in Electric Drive Motor Vehicles Credit (IRC Sec.30D)
• Certain Plug-in Electric Vehicles Credit (IRC Sec. 30)
• Alternative Motor Vehicle Credit (IRC Sec. 30B)

The calculation of the credits, certification requirements, and all of the rules are the same for business as individuals with a few exceptions.

First, there is no rule allowing the business portion of any of the credits to apply against individual AMT. Second, business credits carry forward if unused while individual credits fall into the "use them or lose them" category.

Two additional "green" incentives for business are related to fringe benefits for employee commuting:

1. Transit and Vanpool Transportation Fringe Benefits (IRC Sec. 132(f)(2))
2. Bicycle Commuters Fringe Benefit (IRC Sec. 132(f))

Under the tax law, an employee may exclude qualified transportation fringe benefits from gross income and wages for payroll tax purposes while the employer is ably to fully deduct these fringe benefits as ordinary and necessary business expenses. The transportation fringes include parking, transit passes, vanpool benefits, and qualified bicycle commuting reimbursements.

Prior to 2009, up to $230 per month of parking benefits and up to $120 per month of transit and vanpool benefits were excludable from income. The Recovery Act (ARRA) increased the monthly exclusion for vanpool and transit benefits to the same $230 per month available for parking benefits.

The Bicycle Commuters Fringe Benefit allows an employer to reimburse a bike commuter up to $20 per month for reasonable expenses incurred by the employee during the calendar year for the purchase, improvements, repair, and storage of a bicycle that is used regularly for a substantial portion of the commute between an employees home and workplace.

Employees are not allowed to exclude from income the bicycle commuting fringe benefit for any month that another transportation benefit is received by the employee. Employers have until March 31 to reimburse employees for expenses incurred int he prior calendar year. Accordingly, you could still provide this tax advantaged fringe benefit to your 2009 bike commuters.

Tax Filing Deadlines at the end of the month

Just a quick reminder that some filing deadlines are looming. From the IRS website, here is what is required to be mailed by February 1st:

Furnish Forms 1099 and W-2. Furnish each employee a completed Form W-2, Wage and Tax Statement. Furnish each other payee a completed Form 1099 (for example, Form 1099-MISC, Miscellaneous Income).

File Form 941 or Form 944. File Form 941, Employer's QUARTERLY Federal Tax Return, for the fourth quarter of the previous calendar year and deposit any undeposited income, social security, and Medicare taxes. You may pay these taxes with Form 941 if your total tax liability for the quarter is less than $2,500. File Form 944, Employer's ANNUAL Federal Tax Return, for the previous calendar year instead of Form 941 if the IRS has notified you in writing to file Form 944 and pay any undeposited income, social security, and Medicare taxes. You may pay these taxes with Form 944 if your total tax liability for the year is less than $2,500. For additional rules on when you can pay your taxes with your return, seePayment with return on page 20. If you timely deposited all taxes when due, you have 10 additional calendar days from the due date above to file the appropriate return.

File Form 940. File Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. However, if you deposited all of the FUTA tax when due, you have 10 additional calendar days to file.

File Form 945. File Form 945, Annual Return of Withheld Federal Income Tax, to report any nonpayroll income tax withheld in 2008. If you deposited all taxes when due, you have 10 additional calendar days to file. See Nonpayroll Income Tax Withholding on page 4 for more information.