Anderson ZurMuehlen Blog

Fortifying Your Business with Enterprise Risk Management

Hundreds of years ago, prosperous towns managed the various risks of foreign invaders, thieves and wild animals by fortifying their entire communities with walls and towers. Today’s business owners can take a similar approach with enterprise risk management (ERM).

Assessing threats

In short, ERM is an integrated, companywide system of identifying and planning for risk. Many larger companies have entire departments devoted to it. If your business is ready to implement an ERM program, be prepared for a lengthy building process.

This isn’t an undertaking most business owners will be able to complete themselves. You’ll need to sell your managers and employees on ERM from the top down. After you’ve gained commitment from key players, spend time assessing the risks your business may face. Typical examples include:

• Financial perils,
• Information technology attacks or crashes,
• Weather-related disasters,
• Regulatory compliance debacles, and
• Supplier/customer relationship mishaps.

Because every business is different, you’ll likely need to add other risks distinctive to your company and industry.

Developing the program

Recognizing risks is only the first phase. To truly address threats under your ERM program, you’ll need to clarify what your company’s appetite and capacity for each risk is, and develop a cohesive philosophy and plan for how they should be handled. Say you’re about to release a new product. The program would need to address risks such as:

• Potential liability,
• Protecting intellectual property,
• Shortage of raw materials,
• Lack of manufacturing capacity, and
• Safety regulation compliance.

Again, the key to success in the planning stage is conducting a detailed risk analysis of your business. Gather as much information as possible from each department and employee.

Depending on your company’s size, engage workers in brainstorming sessions and workshops to help you analyze how specific events could alter your company’s landscape. You may also want to designate an “ERM champion” in each department who will develop and administer the program.

Ambitious undertaking

Yes, just as medieval soldiers looked out from their battlements across field and forest to spot incoming dangers, you and your employees must maintain a constant gaze for developing risks. An ERM program, while an ambitious undertaking, can provide the structure for doing so. We can assist you in managing risks to your business in a financially sound manner.

© 2017

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Ready for the New Not-For-Profit Accounting Standard?

A new accounting standard goes into effect starting in 2018 for churches, charities and other not-for-profit entities. Here’s a summary of the major changes.

Net asset classifications

The existing rules require nonprofit organizations to classify their net assets as either unrestricted, temporarily restricted or permanently restricted. But under Accounting Standards Update (ASU) No. 2016-14, Not-for Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, there will be only two classes: net assets with donor restrictions and net assets without donor restrictions.

The simplified approach recognizes changes in the law that now allow organizations to spend from a permanently restricted endowment even if its fair value has fallen below the original endowed gift amount. Such “underwater” endowments will now be classified as net assets with donor restrictions, along with being subject to expanded disclosure requirements. In addition, the new standard eliminates the current “over-time” method for handling the expiration of restrictions on gifts used to purchase or build long-lived assets (such as buildings).

Other major changes

The new standard includes specific requirements to help financial statement users better assess a nonprofit’s operations. Specifically, organizations must provide information about:

Liquidity and availability of resources. This includes qualitative and quantitative information about how they expect to meet cash needs for general expenses within one year of the balance sheet date.

Expenses. The new standard requires entities to report expenses by both function (which is already required) and nature in one location. In addition, it calls for enhanced disclosures regarding specific methods used to allocate costs among program and support functions.

Investment returns. Organizations will be required to net all external and direct internal investment expenses against the investment return presented on the statement of activities. This will facilitate comparisons among different nonprofits, regardless of whether investments are managed externally (for example, by an outside investment manager who charges management fees) or internally (by staff).

Additionally, the new standard allows nonprofits to use either the direct or indirect method to present net cash from operations on the statement of cash flows. The two methods produce the same results, but the direct method tends to be more understandable to financial statement users. To encourage not-for-profits to use the direct method, entities that opt for the direct method will no longer need to reconcile their presentation with the indirect method.

To be continued

ASU 2016-14 is the first major change to the accounting rules for not-for-profits since 1993. However, it’s only phase 1 of a larger project to enhance financial reporting transparency for donors, grantors, creditors and other users of nonprofits’ financial statements. Contact us for help preparing or evaluating an organization’s financial statements under the new standard.

© 2017

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How Effectively Do You Manage Risk?

Businesses can’t eliminate risk, but they can manage it to maximize the entity’s economic return. A new framework aims to help business owners and managers more effectively integrate enterprise risk management (ERM) practices into their overall business strategies.

5-part approach

On September 6, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) published Enterprise Risk Management — Integrating with Strategy and Performance. You can use the updated framework to develop a more effective risk management strategy and to monitor the results of your ERM practices.

The updated framework discusses ERM relative to the changes in the financial markets, the emergence of new technologies and demographic changes. It’s organized into five interrelated components:

1. Governance and culture. This refers to a company’s tone and oversight function. It includes ethics, values and identification of risks.

2. Strategy and objective setting. Proactive managers align the company’s appetite for risk with its strategy. This serves as the basis for identifying, assessing and responding to risk. By understanding risks, management enhances decision making.

3. Performance. Management must prioritize risks, allocate its finite resources and report results to stakeholders.

4. Review and revision. ERM is a continuous improvement process. Poorly functioning components may need to be revised.

5. Information, communication and reporting. Sharing information is an integral part of effective ERM programs.

COSO Chair Robert Hirth said in a recent statement, “Our overall goal is to continue to encourage a risk-conscious culture.” He also said that the updated framework is not intended to replace COSO’s Enterprise Risk Management — Integrated Framework. Rather, it’s meant to reflect how the practice of ERM has evolved since 2004.

New insights

The updated framework clarifies several misconceptions from the previous version. Specifically, effective ERM encompasses more than taking an inventory of risks; it’s an entitywide process for proactively managing risk. Additionally, internal control is just one small part of ERM; ERM includes other topics such as strategy setting, governance, communicating with stakeholders and measuring performance. These principles apply at all business levels, across all functions and to organizations of any size.

Moreover, the update enables management to better anticipate risk so they can get ahead of it, with an understanding that change creates opportunities — not simply the potential for crises. In short, it helps increase positive outcomes and reduce negative surprises that come from risk-taking activities.

ERM in the future

We can help you identify and optimize risks in today’s complex, volatile and ambiguous business environment. We’re familiar with emerging ERM trends and challenges, such as dealing with prolific data, leveraging artificial intelligence and automating business functions. Contact us for help adopting cost-effective ERM practices to help make your business more resilient.

© 2017

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Don’t Let “Founder’s Syndrome” Impede Your Succession Plan

Are you the founder of your company? If so, congratulations — you’ve created something truly amazing! And it’s more than understandable that you’d want to protect your legacy: the company you created.

But, as time goes on, it becomes increasingly important that you give serious thought to a succession plan. When this topic comes up, many business owners show signs of suffering from an all-too-common affliction.

The symptoms

In the nonprofit sphere, they call it “founder’s syndrome.” The term refers to a set of “symptoms” indicating that an organization’s founder maintains a disproportionate amount of power and influence over operations. Although founder’s syndrome is usually associated with not-for-profits, it can give business owners much to think about as well. Common symptoms include:

• Continually making important decision without input from others,
• Recruiting or promoting employees who will act primarily out of loyalty to the founder,
• Failing to mentor others in leadership matters, and
• Being unwilling to begin creating a succession plan.

It’s worth noting that a founder’s reluctance to loosen his or her grip isn’t necessarily because of a power-hungry need to control. Many founders simply fear that the organization — whether nonprofit or business — would falter without their intensive oversight.

Treatment plan

The good news is that founder’s syndrome is treatable. The first step is to address whether you yourself are either at risk for the affliction or already suffering from it. Doing so can be uncomfortable, but it’s critical. Here are some advisable actions:

Form a succession plan. This is a vital measure toward preserving the longevity of any company. If you’d prefer not to involve anyone in your business just yet, consider a professional advisor or consultant.

Prepare for the transition, no matter how far away. Remember that a succession plan doesn’t necessarily spell out the end of your involvement in the company. It’s simply a transformation of role. Your vast knowledge and experience needs to be documented so the business can continue to benefit from it.

Ask for help. Your management team may need to step up its accountability as the succession plan becomes more fully formed. Managers must educate themselves about the organization in any areas where they’re lacking.

In addition to transferring leadership responsibilities, there’s the issue of transferring your ownership interests, which is also complex and requires careful planning.

Blood, sweat and tears

You’ve no doubt invested the proverbial blood, sweat and tears into launching your business and overseeing its growth. But planning for the next generation of leadership is, in its own way, just as important as the company itself. Let us help you develop a succession plan that will help ensure the long-term well-being of your business.

© 2017

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Should Your Business Use Per Diem Rates for Travel Reimbursement?

Updated travel per diem rates went into effect October 1. To simplify recordkeeping, they can be used for reimbursement of ordinary and normal business expenses incurred while employees travel away from home.

Per diem advantages

As long as employees properly account for their business-travel expenses, reimbursements are generally tax-free to the employees and deductible by the employer. But keeping track of actual costs can be a headache.

With the per diem rates, employees don’t have to keep receipts for covered travel expenses. They just need to document the time, place and business purpose of the travel. Assuming that the travel qualifies as a business expense, the employer simply pays the employee the per diem allowance designated for the specific travel destination and deducts the per diem paid.

Although the per diem rates are set by the General Services Administration (GSA) to cover travel by government employees, private employers may use them for tax purposes. The rates are updated annually for the following areas:

  • The 48 states in the continental United States and the District of Columbia (CONUS),
  • Nonstandard Areas (NSAs) that are in CONUS but have per diem rates higher than the standard CONUS rates,
  • Certain areas outside the continental United States, including Alaska, Hawaii, Puerto Rico and U.S. possessions (OCONUS), and
  • Foreign countries.

The rates include amounts for lodging and for meals and incidental expenses (M&IE) but not airfare and other transportation costs.

What’s new?

For October 1, 2017, through September 30, 2018, the per diem standard CONUS rate is $144, an increase of $2 over the prior year. This rate consists of $93 for lodging and $51 for M&IE. Also effective October 1, there are 332 NSAs. The following locations have moved from NSAs into the standard CONUS rate:

  • California: Redding
  • Iowa: Cedar Rapids
  • Idaho: Bonners Ferry / Sandpoint
  • North Dakota: Dickenson / Beulah
  • New York: Watertown
  • Ohio: Youngstown
  • Oklahoma: Enid
  • Pennsylvania: Mechanicsburg
  • Texas: Laredo, McAllen, Pearsall and San Angelo
  • Wyoming: Gillette.

There are no new NSA locations.

What’s right for you?

As noted earlier, the per diem changes go into effect on October 1, 2017. During the last three months of 2017, an employer may switch to the new rates or continue with the old rates. But an employer must select one set of rates for this quarter and stick with it; it can’t use the old rates for some employees and the new rates for others.

Because travel expenses often attract IRS attention, they require careful recordkeeping. The per diem method can help, but it’s not the best solution for all employers. An even simpler “high-low” per diem method is also available. And, in some cases, a policy of reimbursing actual expenses could be beneficial, despite the recordkeeping hassles. If you have questions regarding travel expense reimbursements, please contact us.

© 2017

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GAAP vs. Tax-Basis Reporting: Choosing the Right Model for Your Business

 

Virtually every business must file a tax return. So, some private companies issue tax-basis financial statements, rather than statements that comply with U.S. Generally Accepted Accounting Principles (GAAP). But doing so could result in significant differences in financial results. Here are the key differences between these two financial reporting options.

GAAP

GAAP is the most common financial reporting standard in the United States. The Securities and Exchange Commission requires public companies to follow it. Many lenders expect private borrowers to follow suit, because GAAP is familiar and consistent.

In a nutshell, GAAP is based on the principle of conservatism, which generally ensures proper matching of revenue and expenses with a reporting period. The principle also aims to prevent businesses from overstating profits and asset values to mislead investors and lenders.

Tax-basis reporting

Compliance with GAAP can also be time-consuming and costly, depending on the level of assurance provided in the financial statements. So some smaller private companies opt to report financial statements using a special reporting framework. The most common type is the income-tax-basis format.

Tax-basis statements employ the same methods and principles that businesses use to file their federal income tax returns. Contrary to GAAP, tax law tends to favor accelerated gross income recognition and won’t allow taxpayers to deduct expenses until the amounts are known and other requirements have been met.

Key differences

When comparing GAAP and tax-basis statements, one difference relates to terminology used on the income statement: Under GAAP, businesses report revenues, expenses and net income. Tax-basis entities report gross income, deductions and taxable income. Their nontaxable items typically appear as separate line items or are disclosed in a footnote.

Capitalization and depreciation of fixed assets is another noteworthy difference. Under GAAP, the cost of a fixed asset (less its salvage value) is capitalized and systematically depreciated over its useful life. Businesses must assess whether useful lives and asset values remain meaningful over time and they may occasionally incur impairment losses if an asset’s market value falls below its book value.

For tax purposes, fixed assets typically are depreciated under the Modified Accelerated Cost Recovery System (MACRS), which generally results in shorter lives than under GAAP. Salvage value isn’t subtracted for tax purposes, but Section 179 expensing and bonus depreciation are subtracted before computing MACRS deductions.

Other reporting differences exist for inventory, pensions, leases, and accounting for changes and errors. In addition, businesses record allowances for bad debts, sales returns, inventory obsolescence and asset impairment under GAAP. But these allowances generally aren’t permitted under tax law; instead, they’re deducted when transactions take place or conditions are met that make the amount fixed and determinable. Tax law also prohibits the deduction of penalties, fines, start-up costs and accrued vacations (unless they’re taken within 2½ months after the end of the taxable year).

Pick a winner

Tax-basis reporting is a shortcut that makes sense for certain types of businesses. But for others, tax-basis financial statements may result in missing or even misleading information. Contact us to discuss which reporting model will work the best for your business.

© 2017

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Reasons to Outsource Payroll and Obtain a Service Audit Report

With Labor Day starting out this week, it’s a good time to focus on how your business pays employees. Payroll reporting doesn’t have to be a laborious process. Consider using an outside company to manage your payroll function. Here’s why payroll outsourcing may be beneficial and how a service audit can provide assurance about your payroll provider’s internal controls.

Rewards and risks

Payroll can be an administrative nightmare if done in-house, especially for smaller companies. In addition to keeping up with employee withholdings and benefits enrollment, you must file state and federal payroll tax returns and follow union reporting requirements. Outside service companies that specialize in payroll administration can help you manage all of the details and minimize mistakes. Payroll providers can also handle expense reimbursement for employees and provide other services.

When payroll is outsourced, however, your company could be exposed to identity theft and other fraud risks if the service provider lacks sufficient internal controls. For example, sensitive electronic personal data could be hacked from your network and sold on the Dark Net — or old-fashioned paper files could be stolen and used to commit fraud.

Audits of payroll companies

Fortunately, CPAs offer two types of reports that provide assurance on whether an outside payroll provider’s controls over paper and electronic records are adequate.

Type I audits. This level of assurance expresses an opinion as to whether controls are properly designed.

Type II audits. Here, the auditor goes a step further and expresses an opinion on whether the controls are operating effectively.

When performing these attestation engagements, Statement on Standards for Attestation Engagements (SSAE) No. 18 requires:

  • The payroll company’s management to provide a written assertion about the fairness of the presentation of 1) the description of the organization’s control objectives and related controls and the suitability of their design; and 2) for a Type II audit, the operating effectiveness of those control objectives and related controls,
  • The auditor’s opinion in a Type II audit regarding description and suitability to cover a period consistent with the auditor’s tests of operating effectiveness, rather than being as of a specified date, and
  • Auditors to identify in the audit report any tests of control objectives and related controls conducted by internal auditors.

Further, auditors are prohibited from using evidence on the satisfactory operation of controls in prior periods as a basis for a reduction in testing in the current period, even if it’s supplemented with evidence obtained during the current period.

When an audit is complete, the service auditor typically will issue a report to the payroll company. As the customer of the service provider, it’s then up to you to obtain a copy of the audit report from the payroll provider and distribute it to your financial statement auditors as evidence of internal controls.

Outsourcing with confidence

Your financial statement auditors are required to consider the internal control environment for any services you outsource, including payroll, customer service, benefits administration and IT functions. Most service providers obtain service audit reports. If yours doesn’t, you might need to request permission for your CPA to contact and visit the payroll provider to plan their financial statement audit. Contact us for more information.

© 2017

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Credit loss standard: The new CECL model

A new accounting standard on credit losses goes into effect in 2020 for public companies and 2021 for private ones. It will result in earlier recognition of losses and expand the range of information considered in determining expected credit losses. Here’s how the new methodology differs from existing practice.

Existing model

Under existing U.S. Generally Accepted Accounting Principles (GAAP), financial institutions must apply an “incurred loss” model when recognizing credit losses on financial assets measured at amortized cost. This model delays recognition until a loss is “probable” (or likely) to be incurred, based on past events and current conditions.

The Financial Accounting Standards Board (FASB) found that, leading up to the global financial crisis, financial statement users made independent estimates of expected credit losses using forward-looking information and then devalued financial institutions before the institutions were permitted to recognize the losses. This practice made it clear that the requirements under GAAP weren’t meeting the needs of financial statement users.

New-and-improved model

Accounting Standards Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326), introduces a new “current expected credit loss” (CECL) model. The CECL model requires financial institutions to immediately record the full amount of expected credit losses in their loan portfolios based on forward-looking information, rather than waiting until the losses are deemed probable based on what’s already happened. The FASB expects this change to result in more timely and relevant information.

The measurement of expected credit losses will be based on relevant information about past events (including historical experience), current conditions, and the “reasonable and supportable” forecasts that affect the collectibility of the reported amount.

Specifically, an allowance for credit losses will be deducted from the amortized cost of the financial asset to present its net carrying value on the balance sheet. The income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the relevant reporting period.

Companies will be allowed to continue using many of the loss estimation techniques currently employed, including loss rate methods, probability of default methods, discount cash flow methods and aging schedules. But the inputs of those techniques will change to reflect the full amount of expected credit losses and the use of reasonable and supportable forecasts.

We can help

The updated guidance doesn’t prescribe a specific technique to estimate credit losses — rather, companies can exercise judgment to determine which method is appropriate. Contact us if you need help finding the optimal method for identifying and quantifying credit losses, along with complying with the expanded disclosure requirements.

© 2017

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Timeless Counts in Financial Reporting

Do you procrastinate when it comes to closing your books and delivering year-end financial statements? Lenders and investors may think the worst if a company’s financial statements aren’t submitted in a timely manner. Here are three assumptions your stakeholders could make when your financial statements are late.

1. You’re hiding negative results

No one wants to be the bearer of bad news. Deferred financial reporting can lead investors and lenders to presume that the company’s performance has fallen below historical levels or what was forecast at the beginning of the year.

2. Your management team is inept, uninformed or both

Alternatively, stakeholders may assume that management is hopelessly disorganized and can’t pull together the requisite data to finish the financials. For example, late financials are common when a controller is inexperienced, the accounting department is understaffed or a major accounting rule change has gone into effect.

Delayed statements may also signal that management doesn’t consider financial reporting a priority. This lackadaisical mindset implies that no one is monitoring financial performance throughout the year.

3. You’re more likely to be a victim of occupational fraud

If financial statements aren’t timely or prioritized by the company’s owners, unscrupulous employees may see it as a golden opportunity to steal from the company. Fraud is more difficult to hide if you insist on timely financial statements and take the time to review them.

Get back on track

Late financial statements cost more than time; they can impair relations with lenders and investors. Regardless of your reasons for holding out, timely financial statements are a must for fostering goodwill with outside stakeholders. We can help you stay focused, work through complex reporting issues and communicate weaker-than-expected financial results in a positive, professional manner.

© 2017

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Close-up on Cutoffs for Reporting Revenues and Expenses

The Financial Accounting Standards Board (FASB) has amended U.S. Generally Accepted Accounting Principles (GAAP) to clarify the guidance on reporting restricted cash balances on cash flow statements. Until now, Accounting Standards Codification Topic 230, Statement of Cash Flows, didn’t specify how to classify or present changes in restricted cash. Over the years, the lack of specific instructions has led businesses to report transfers between cash and restricted cash as operating, investing or financing activities — or a combination of all three.

The new guidance essentially says that none of the above classifications are correct.

FASB members hope the amendments will cut down on some of the inconsistent reporting practices that have been in place because of the lack of clear guidance.

Prescriptive guidance

Accounting Standards Update (ASU) No. 2016-18, Statement of Cash Flows (Topic 230) — Restricted Cash, still doesn’t define restricted cash or restricted cash equivalents. But the updated guidance requires that transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents be excluded from the entity’s operating, investing and financing activities. In other words, the details of those transfers shouldn’t be reported as cash flow activities in the statement of cash flows at all.

Instead, if the cash flow statement includes a reconciliation of the total cash balances for the beginning and end of the period, the FASB wants the amounts for restricted cash and restricted cash equivalents to be included with cash and cash equivalents. When, during a reporting period, the totals change for cash, cash equivalents, restricted cash and restricted cash equivalents, the updated guidance requires that these changes be explained. These amounts are typically found just before the reconciliation of net income to net cash provided by operating activities in the statement of cash flows.

Moreover, a business must provide narrative and/or tabular disclosures about the nature of restrictions on its cash and cash equivalents.

Effective dates

The updated guidance goes into effect for public companies in fiscal years that start after December 15, 2017. Private companies have an extra year before they have to apply the changes. Early adoption is permitted. Contact us if you have additional questions about reported restricted cash or any other items on your company’s statement of cash flows.

© 2017

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