Accounting News

Thursday, May 31, 2012
Managing Risks II

Last time we talked about the various types of risks that a company faces. Failure to plan for internal and external risks. For a private company that means angry owners and investors. These may be small companies who don't feel like they have the resources need to do a risk audit. But this a function that you can work on in partnership with your accounting team. Some basic steps can make all the difference in the event of a larger risk.

For a public company it can cause significant impacts to the stocks value. So it is reasonable to expect that they are managing for risk. However, that is not always the case. ValueBridge, a risk consulting firm, did a study of why large public companies missed their revenue forecasts. They looked at S&P 500 companies that missed estimates by more than 5%. Since every public company tries to be conservative with estimates so they can beat them and be heroes to shareholders this is a significant miss.

The biggest risk factor cited in their filings or public calls was operational risks. These risks accounted for 32.9% of the companies. As you recall these are internal risks to the company. External risks (strategic risks) were 31.6 % of the explanations for an earnings miss. These are more understandable because they were external to the company and can be harder to manage for.

An interesting risk was weather that came in at 17.7%. Some companies consider the risk they have from weather but there isn't a company that has no exposure to weather. A mild winter in the mid-west and northeast helped many companies but hurt others. Sales of winter clothing were down and vacations to warmer climes dried up. So weather changes in another part of the world spreads across the globe.


Accounting News

Tuesday, May 29, 2012
Managing Risks

One undervalued abilities of the top accountants is the ability to identify and plan for risk. This can be done when quarterly or yearly audits are performed on the business. The object is to identify any areas for risk and help management create a plan to mitigate the risks in their control or have contingencies set up when they can't.

There are several different categories of risk:

Operational Risk

There are associated with the daily operations the business. This can be risks to losing key employees, equipment failure, or process problems that can affect the operation of the business. All of these risks are internal to the company. A sub category of this are IT risks. How secure is the companies network and computer resources. Some companies could be shut down by a hacker just looking around for a server to exploit.

Strategic Risk

These are risks that are external to the company but part of the environment it operates in. This includes the economic conditions like a recession or boom. It is can also be risks associated with technological or social changes to the market.Almost every business has some risk associated with weather. It can be large like a hurricane or milder like a reduced demand from changing weather patterns.

Credit Risk

The market may change that lead to higher borrowing rates. This is most common among financial companies but any business that is highly leveraged has exposure to changing credit markets.

Compliance Risk

These are risks associated with regulatory agencies and governments. Changing laws, including taxes, can have a dramatic impact on the bottom line of a business. There are also tremendous risks in audits from regulators. An SEC audit and cost millions to defend without any charges being filed.

Any one of these risks can have a severe impact on the company. Most managers never account for lost days when a snowstorm can shut down an office. Or perhaps a key employee may leave to pursue their dream of becoming a fly fishing guide. At the bare minimum every company should have reserves to cover expenses should external forces change. All key employees need to have frequent conversations with management to make sure there are no hidden changes coming.

Every year take some time to meet with internal and external accountants to identify risks. Weather, economic conditions, and political changes are important to investigate. Don't just consider what might happen in the next twelve months but what changes are possible over the next ten years. Then make contingency plans to capitalize on the changes.


Accounting News

Thursday, May 24, 2012
Offers in Compromise Now Easier

The IRS has announced that they are changing the terms for accepting offers in compromise. The changes are to make the system more flexible. Offers in compromise are used by taxpayers to clear up due taxes but need to set up a payment plan.

The biggest change is how the IRS determines the eligibility of the taxpayer. They will now use just one year of estimated income if the total will be paid off in less than five years. Previously the analysis was based on four years of estimated income. If the payments will be paid over six months then the calculation moves from five years of income to two years. 

These changes are part of the Fresh Start program. The program is to offer relief to taxpayers who owe taxes and are under financial distress. It benefits everyone to get some taxes collected in a reasonable way. As my mom always liked to tell me, "you catch more flies with honey."

If you are a delinquent taxpayer and need to get an offer of compromise then an accountant experienced with the IRS is your best option. They can get a reasonable offer that you can pay. The penalties and interest only increase when back taxes are ignored. It is much better to take care of the problem when it arises.

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Accounting News

Monday, May 21, 2012
Become a Problem Solver

Businesses hire employees or outsource for only one reason; they have a problem. The help is needed to solve that problem. A good hire is someone that can continue to solve the problems of the business. If the problem is the phone is ringing and not getting answered then a receptionist will be the job open. At this level the problem is well defined and the solution straight forward. But as you move up the company the problems get harder to define and the solutions must be designed from scratch.

There is no difference with accountants. If all you are doing is providing monthly financial reports then that is not solving problems. An accountant is a valuable member of the financial team for the business. They should be identifying ways to increase revenue, decrease costs, and improve security.

Kim Nilsen has it correct when she writes about accountants growing into the role of strategic partner. Whether the accountant is an employee or outsourced the needs are the same. Many accounting functions that were once do by a person have been moved to accounting applications. What can't be moved over is the knowledge, insight, and advice that an accountant can yield.


Accounting News

Thursday, May 17, 2012
Local Lodging Tax Allowance

There are new proposed regulations from the Internal Revenue Service concerning local lodging expenses.They will cover lodging expenses when not travelling away from the home for business.

Historically, any lodging expenses were not allowed as a deduction when the employee was not travelling. The proposed change allows an expense to be deducted if it is appropriate and helpful for the development of a business. It is not allowed if the primary benefit is the personal or social one and only secondarily as a benefit to the business.

Some examples of lodging that would not apply are: 1) lodging as a part of a benefit or compensation (weekend stay at a luxury hotel as a bonus). 2) Allowing an employee to avoid a long distance commute. 3) Because the employee is required to work overtime. 4) Lodging for a relocated employee as they look for a permanent residence. 5) If the employee will be using the lodging indefinitely.

An example of what may apply is requiring employees to stay at a local hotel to improve training or team building.

Under the proposed rule the employer could deduct the expense as a business expense or the employee could deduct it from their income if the cost were paid by the employee.

The tax code is an ever evolving set of rules. We highlight some of the changes here that may apply to you. But there is no way we can get to them all. When you are filing your taxes there is no solution better than hiring a tax professional. They have the annual training to help you out.

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Accounting News

Tuesday, May 15, 2012
Will SEC Adopt IFRS

The longer the Securities Exchange Commission (SEC) goes without announcing a decision on International Financial Reporting Standards (IFRS) the louder the questions become. Timothy Geithner, the Treasury Secretary has been arguing for adoption of the rules but it SEC chairwoman Mary Schapiro has made no announcement.

There has been a push for international standards to make it easier for regulators and investors. The hope is that it would have been approved by the end of last year. But they delayed a decision until the beginning of 2012. Now that deadline has also passed. The speculation is that chairwoman Schapiro is just biding her time until the presidential election this fall. She said she would not serve another term and can leave the decision to her successor.

The counterargument has been that the new standards are of a lower quality than the generally accepted accounting principles (GAAP) currently in use.  The Financial Accounting Standards Board (FASB) would like a slower adoption rate.

My biggest problem with the SEC is making no decision at all. They are paid by taxpayers to make decisions. If they can't choose anything they should resign immediately and hand the job over to someone who can. It is the uncertainty that is most damaging to the markets. Waiting another six months for a new administration to start the process over is an embarrassment to the SEC, chairwoman Schapiro, and ultimately the President.

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Accounting News

Wednesday, May 9, 2012
Higher Fines for Fraudulent Tax Preparation

Representative Erik Paulsen of Minnesota has introduced legislation to increase the fines for preparers who file fraudulent returns for personal benefit. The bill is called the Fighting Tax Fraud Act and is currently in the House Ways and Means Committee. The bill is in response to recommendation from Nina Olson, a taxpayer advocate.

These fraudulent returns are most commonly from tax preparers who use their clients information to file false returns. In effect it is just another form of identity theft. But there are also schemes that alter the return after the client reviews it. An amendment is filed but the refund goes to the tax preparer.

These are already crimes but the bill would increase the fines. Rep. Paulsen believes increased fines will act as a deterrent to future criminals. It is impossible to prevent all fraud but it seems like a better solution would be to reduce the ability of tax preparers to file without authorization for the filer. No one would argue that fraud should be weeded out and the perpetrators sent to jail. But increased fines rarely have a deterrent effect on crime.


Accounting News

Monday, May 7, 2012
Fair Value Accounting for RBS

The Royal Bank of Scotland Group (RBS) has issued a quarterly loss of $2.46 billion. This is compared to a loss of $854 million for the same period last year. The loss is largely from its fair value accounting of its $4 billion in debt. Without the accounting change the bank would have posted a pre-tax profit of $1.78 billion.

The bank is complaining about the new accounting rules in the International Financial Reporting Standards (IFRS). The rule requires the bank to adjust earnings to show the cost to buy back their debt. The say this leads to poor performing banks to have an decrease in the value of the debt and thus decreases the expense. The opposite is true of a well performing bank.

This rule as lead to large quarterly swings in the profits reported by banks. But it is expected that the swings will even out over time based on the accounting models. The International Accounting Standards Board (IASB) has approved the new rule but is has not been put into effect in every European country.

While it may be a change for the executive team of the bank it is poor to blame the accountant. Accounting is designed to illuminate the truth. This reveals how volatile the market for bank debt is. A good manager should learn to mitigate the volatility for their investors and shareholders.

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Accounting News

Thursday, May 3, 2012
Groupon Accounting Problems

Since its IPO, shares of couponing site Groupon have nosedived. One of the reasons has been questions about their accounting. They were forced to restate their fourth quarter earnings that resulted in an increase in operating expenses and a decrease in revenues. The SEC is also investigating the accounting practices of the company.

Groupon has now announced new members to its board and audit committee.. Daniel Henry and Robert Bass are the two new members. Both have experience in finance and Bass is a vice President at Deloitte.

It is crucial to have a strong financial and accounting presence on every board of directors. They have the experience to make sure the financial statements issued by the company are complete and follow GAAP. Whether there are serious problems at Groupon or not, investors get very uncomfortable when earnings have to  be restated. But some blame must also go the auditors who allowed the no-standard accounting to be used.

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