A Vote For the Tattletale

I recently read this story about a whistleblower that will be paid $30 million in connection with information they delivered about an ongoing fraud.  $30,000,000.  In comparison, Peyton Manning, QB of the Denver Broncos, will receive $15 million in guaranteed salary for 2014.  Is it fair that someone, a bonafide tattletale, should be compensated more for one instance of disclosure than one of the greatest NFL quarterbacks of all time?  (I'm not really a Broncos fan, but Peyton Manning is in the process of leading my fantasy football team to a third successful season in a row, so I'm his #1 fan right now).

Most enforcement agencies have whistleblower programs, like the IRS and SEC (Securities and Exchange Commission).  They all work in similar manners - if a civilian gives the agency information that is constructive enough to lead to the uncovering of a significant fraud, the whistleblower can be entitled to compensation for their efforts.  

This does not mean if you call the IRS and tell them you think your neighbor is cheating on their taxes, and they audit them and find $1,000 of unreported income, that the IRS will come to your door and hand you a fee.  The whistleblower programs are directed a much larger, nationwide and international frauds.    

For $30 million, is it worth being known as a tattletale?  Having been involved with financial statement audits for almost ten years, I seem to think that whistleblower programs are essential in our communities and especially in governments and large businesses.  During a financial statement audit, auditors perform a variety of procedures to detect material misstatements in the organization's financials.  Management takes responsibility for putting in place controls and protocols to prevent and/or detect fraud.  

In reality, rank and file employees take shortcuts and cut corners on a daily basis in order to get their job done.  And, if there is collusion between 2 or more employees with access to key financial components, it will be hard to detect by any auditor or semi-present manager.  However it might not be hard to detect by the shy, quiet employee in the corner that sees what's going on but is dismissed as a threat because of their lack of personality.  In the end, that employee has more potential to stop the fraud than anyone else involved.  

 $30 million is a lot of money, and is being rewarded to someone that helped uncover a mutli-billion dollar fraud.  It's a tough pill to swallow that a tattletale is being rewarded in that manner.  But whistelblowers are a key component of all organizations' fraud prevention and detection program.  

Outsourced accounting

Small business owners are predominantly known for "doing it all".  In most small businesses, the owners are responsible for all aspects of the business, from customer relations to product delivery.  Yet, one of the most important business management tasks, commonly known as "the books" is often overlooked or thrown together quickly.  There are a variety of reasons for this lack of attention.  

First, most small business owners do not have sophisticated financial knowledge, which makes "the books" cumbersome and intimidating.  These are the clients that come to a CPA and hand over their books with the disclaimer "well, I'm not an accountant, so I apologize for the shape the books are in".  Well of course you're not an accountant!  If you were, you probably would have gotten a job in accounting, not have started your business.  

Second, most small business owners run relatively simple, cash-basis operations that do not require accruals and adjustments on a monthly basis.  These are the clients that determine the success of their business based on how much money is in their bank account.  

Third, most small business owners simply do not have time to focus on the financial side of their business.  By the time they are done dealing with customers and vendors, filling orders, managing employees and putting out other fires that come up during the day, the last thing most small business owners want to do is reconcile their bank statement.  

All of these reasons, albeit legitimate, can wreak havoc in a small business if left unchecked for a long period of time.  This is where small business owners can most benefit from outsourced bookkeeping and accounting services.  By outsourcing, the business owner is getting another set of eyes on the books.  This set of eyes can point out unusual charges, identify trends in the business finances, reconcile bank accounts and advise the business owner on their cash position.  

Outsourcing is most effective when combined with tax planning and preparation.  When the business owner's CPA can advise the client monthly or quarterly then the year-end planning and preparation are much less complicated and time consuming.  Outsourcing typically has a lower cost impact than hiring a part- or full-time bookkeeper.  Having the books analyzed by an accounting professional for a few hours each month, and then the tax return prepared by the same professional at the end of the year is more cost effective than only allowing the accountant to look at the books once a year.  Furthermore, the accounting professional will most likely set the accounting records up in a formal accounting software such as Quickbooks or Peachtree, which will give the business owner historical data going forward.  

If you are a small business owner and the burden of "the books" has become too much for you to handle, consider outsourcing your monthly accounting function.  This will free up more time for you to focus or running your business, which is why you started it in the first place!

Straight cash

Cash basis taxpayers can make decisions during these last few days of December to improve their tax situation.

Cash basis taxpayers report income and expenses in the year that they actually occurred.  This allows cash basis taxpayers to defer income or accelerate expenses as the situation requires.

Income

Income must be recognized by a cash basis taxpayer when it has been constructively received and is available to the taxpayer.  If a taxpayer receives a check in January for work performed in December, that income is taxable in the next year.  However, if a taxpayer receives a check in December for work performed in December but puts it in a drawer and doesn't deposit the check until January, this is still income to the taxpayer because it had been constructively received and was available in December.  With this being the case, tax basis taxpayers can manage their cash inflows at year-end by sending out bills later to defer collection to next year, or requiring customers to prepay if more cash/income is needed.

Expenses

Expenses can be recognized by a cash basis taxpayer in the year paid or charged.  Yes, you read that correctly, charged.  The IRS will allow charges on a credit card as cash basis expenditures, even if the bill is not paid until the next month.  This provides some wiggle room for businesses that have cash flow concerns at year-end, because they can use a credit card to make purchases instead of cash.

Cash basis taxpayers can also use the end of the year to stock up on capital assets, especially right now due to the expiring Section 179 and Bonus depreciation provisions.

A word of caution: just because an entity is a cash basis taxpayer does not mean that every cash expense is deductible.  All expenses must still be properly substantiated and properly deductible.

Cash basis taxpayers should also consider their business operations when making year-end decisions on spending.  Yes, buying $5,000 of office supplies on New Years Eve will reduce the tax burden on the entity, but will that cash outlay penalize the business operations in January?

 

Corporate minutes scam

Over the past few weeks, several businesses in Arkansas have received solicitations in the mail requesting that the business pay a service to keep them in compliance with an "Annual Minutes Requirement Statement".  On November 5, Attorney General Dustin McDaniel released on his website information regarding the solicitations, confirming that it was a scam.  After a simple Google search, this same scam appears to be present in several states around the country. Arkansas law does require corporations to maintain minutes of the meetings of owners and board of directors.  But, as noted in the Attorney General's release, these minutes are not required to be filed with the State.

Best practice is for owners and directors to meet at least annually in order to satisfy their obligations as those charged with governance of the entity.  Topics to cover at such meetings can include (but are not limited to):

  • Elect corporate officers
  • Review and analyze financial results
  • Approve corporate borrowing or debt financing
  • Approve incentive compensation plans
  • Review employer-sponsored retirement plans and performance
  • Retain independent auditors, and approve audit reports or tax returns prepared by external CPA's
  • Discuss status of pending or threatened litigation

Minutes should be signed by the Secretary and Chairman and evidence all members present, and the original signed minutes should be stored in a safe place with other corporate records.

Minutes are required to be kept by all corporations, whether they are $1 billion businesses with 20 board members, or a small S-corporation with one shareholder.  In the event of an IRS exam, one of the items the IRS will most likely request to review is the company's meeting minutes for the year under exam.

A copy of the Attorney General's announcement can be found on his webpage here.