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Sep

September 2019 Newsletter

Jo Alenson

September 2019 Newsletter

The High Cost of Internal Fraud


Every so often a dramatic case of financial fraud makes the headlines because of the sheer amount of money involved. But, on average, companies with fewer than 100 employees suffer the largest median loss and 42% of fraud cases are caused by a lack of internal control.

Internal fraud exacts a high cost in terms of financial losses (only about 39% of stolen monies are recovered), company reputation, and company culture. No one wants to think that someone at their company is capable of fraud, but most cases of fraud are perpetrated by someone at the managerial level or higher who is a long-term and highly trusted employee. Many involve more than one person.

Common Types of Internal Fraud

Following are five of the most common types of internal fraud:

  • Billing fraud: Inaccurately reporting spending, creating fictitious vendors, or overstating payments made.
  • Check and payment tampering: Diverting payments made to the company into personal accounts or writing company checks to personal accounts.
  • Payroll fraud: Inaccurately recording payroll or paying fictitious employees.
  • Theft and larceny: Stealing petty cash, cash collected from customers, company property, or personal property of company owners or employees.
  • Skimming: Using a card swipe or other device to collect credit card information, or processing credits to personal cards.

Controls to Prevent Fraud

Having the right controls in place can prevent fraud. Most internal controls fall into the following categories:

  • Company code of conduct: This document sets out in writing the company’s expectations for employees. It doesn’t need to be complex, but it does need to define what the company expects from each employee.
  • Procedural controls: These controls define a company's standard operating procedures. Controls that create checks and balances, for instance, like having all company checks signed by two people or having the payroll prepared by one person and checked by another before it is processed, are designed to "trigger" when a fraudulent action is taken.
  • Embedded controls: These controls work automatically all the time. They are always running in the background and don’t need to be turned on and off. Examples include requiring the use of standardized contract forms for vendors and independent contractors and using standardized forms for invoices, internal materials requests, inventory receipts, and travel expense reports. Embedded controls help your business run efficiently, but you also need procedures to monitor exceptions, such as change orders or costs that exceed a set amount.
  • Accounting system access controls: These controls limit access to sensitive financial information and track electronic access to the accounting system. Management can audit usage and identify unauthorized access.
  • Dashboards: Dashboards are generally used to monitor metrics of the company’s operations, such as sales figures or usage of company financial systems.
  • Approval authority requirements: Requiring specific managers to authorize specific types of transactions, such as large payments or expenses, can add a layer of transparency to accounting records.

Contact us for more information about internal control necessary to prevent fraud and how to implement them in your business.

Cybersecurity and the Importance of Data Privacy


Cybersecurity—especially data privacy—is one of the biggest problems facing businesses today. These security problems are compounded because every segment of every industry is affected differently, and each is subject to the risk factors peculiar to that segment. Grouping similar data together based on chosen parameters allows businesses to assess the privacy needs of each data segment they are holding. For example, the protections for public data don't have to be as stringent as the protections for private data.

Protecting the privacy of the data with which they are entrusted is a universal goal of businesses. The best way to get started is to answer the following questions:

  • What types of data does your business have (e.g., credit card information, health information, criminal history, biometrics)?
  • Which departments have access to that data?
  • Who are your data service providers and what are their credentials?
  • Which personnel can access the data?
  • What steps has your company taken to protect the data (e.g., encryption, back-up, internal controls)?

Federal and International Regulations

The United States has no federal law protecting data privacy. A number of states, however, are responding: at least thirty-one states have already established laws regulating the secure destruction or disposal of personal information. At least twelve states—Arkansas, California, Connecticut, Florida, Indiana, Maryland, Massachusetts, Nevada, Oregon, Rhode Island, Texas and Utah—have imposed broader data security requirements. Other states, including New York, are considering legislation.

California is a pioneer on the data privacy front. The California Consumer Privacy Act of 2018, which goes into effect on January 1, 2020, is similar to the General Data Protection Regulation (GDPR). Companies that do business in California will be affected by this legislation.

At least some of the activity at the state level is in response to the European Union's enactment of the GDPR. Any company doing business in a nation that has adopted the GDPR must comply with its consumer protections regarding data privacy. The GDPR covers many types of data, including the following:

  • Personally identifiable data (e.g., names, addresses, dates of birth, Social Security numbers)
  • Web-based data (e.g., user location, IP address, cookies, and RFID tags)
  • Health (HIPAA) and genetic data
  • Biometric data
  • Racial or ethnic data

The bottom line is that US businesses operating in multiple jurisdictions must consider these categories, as well as any other categories pertinent to their industry, as they segment the data they are holding. Understanding the data they hold is essential to businesses instituting the right level of privacy safeguards.

Three Steps to Securing Your Data

Understanding your data is the first step to securing data. The second step requires knowing the relevant laws and regulations with which your business must comply.

The third step is to stay alert for any indications of a breach. The sad truth is that many data breaches go on for quite a while before they are discovered. The time lapse between hack and discovery allows hackers to continue accessing vulnerable data. That makes constant monitoring an important aspect of any data security program. Watching for the signs of a breach—such as an unanticipated spike in bandwidth usage—can indicate a problem.

By following these three steps, businesses can be sure they are doing their best to protect the data they and their data service providers hold.

Realize Tax Saving from Contributions to Charitable Organizations


The Tax Cuts and Jobs Act (TCJA) made many changes to the tax code, including increasing the standard deduction to $12,000 for a single taxpayer and to $24,000 for a married couple filing jointly. It also raised the capital gains rate. The result is that fewer taxpayers will itemize their deductions. Taxpayers who do continue to itemize, generally high-net-worth individuals, can continue to deduct their charitable contributions. This is a good thing for nonprofit organizations. The key to maximizing the benefit of charitable deductions is good planning.

Donating Cash Sometimes Makes Good Tax Sense

Often, taxpayers make cash contributions to their favorite nonprofits. This may still be the best choice for some taxpayers. For example, a taxpayer who plans to contribute depreciated stock may find it more beneficial to sell that stock and contribute the proceeds. That way, the taxpayer can recognize the loss on the sale and get a charitable deduction. Taxwise, this makes good sense.

Donating cash also may make sense if the donor "bunches" the gift. This means taking advantage of the standard deduction in some years and taking itemized deductions in other years. For instance, suppose an individual pledges to donate $10,000 per year for five years to their favorite nonprofit. The higher standard deduction may mean that it would be more advantageous for the taxpayer to restructure their donation. It may offer a greater tax advantage to the individual to deduct $25,000 during two of those five years.

Donating Appreciated Stock

Other charitable techniques might also offer tax advantages, however. By contributing appreciated stock—rather than cash—to the nonprofit of their choice, high-net-worth taxpayers can benefit a cause they believe in and minimize their taxes. That's because the TCJA allows donors of appreciated stock that has been held for more than one year to claim an income tax charitable deduction equal to the stock's fair market value on the date of the donation, up to 30 percent of the donor's adjusted gross income. As an added incentive to structuring contributions in this way, there is no capital gains tax on gifts of appreciated property to charity. The charity can sell the stock for full value without recognition of capital gains tax.

Donors of this appreciated stock can take a deduction equal to the fair market value of the stock at the time of the donation, reduced by the amount of the ordinary income that would have resulted had the contributed stock been sold (essentially, the donor's income tax basis in the stock). Unused deductions can be carried forward for up to five years from the date of the donation.

Contributions of appreciated stock can be structured in a number of sophisticated ways, including through a charitable remainder trust or a "charitable swap."

Whether you itemize your deductions or take the standard deduction, it makes sense to explore your options before making a sizeable charitable contribution. Call us for help identifying the option that works best for you.

Why Do You Need a Business Valuation?


Why would you consider keeping your business valuation current? You might be able to think of one or two reasons, but there are plenty:

  • What if something calamitous were to happen to you as the business owner? It obviously would mean a major change. With an up-to-date business valuation, your family will have a much easier time dealing with the potential sale or dissolution of your business.
  • You never know when an opportunity to sell or merge with another company will come your way. You may have to decide quickly. With a current business valuation, you'll be able to take advantage of any opportunities that may occur.
  • You may want to take on a new partner or LLC member. You'll need to know the value of your business to determine the buy-in price. The new owner will also want to see the valuation—to decide whether the buy-in price is reasonable.
  • Do you have an exit strategy? Are you reaching retirement age? You'll need to know the value of your business to construct a plan. It could mean a restructuring; a valuation can help determine the strategy.
  • You may be thinking about expanding or building a new facility. The bank might want a valuation of your business for financing purposes. With your valuation, you can streamline the process and more easily obtain a lending decision.
  • What if your partners or shareholders want out? You'll need the valuation to figure out how to divide your business. With the information on hand, an unpleasant situation can be less stressful.
  • With a valuation, you'll have a benchmark with which to compare the value of your business before and after a business disaster occurs. After all, you can't go back in time to value your business as of a previous date—not with the utmost accuracy.
  • Divorce or other family issues may occur. With an up-to-date business valuation, you can help plan how to deal with personal emergencies and unpleasant events. Divorce? The court will almost certainly want to establish the value of your business as an asset of the marriage, but most likely, the judge will appoint a neutral third party to conduct the valuation. However, you may be able to avoid court entirely if you know the value of your business as you and your spouse begin discussions and negotiations to settle matters on your own.
  • You may want to determine the annual per share value of an employee stock ownership plan (ESOP).

You should be convinced by now that you need a business valuation. What's the next step? Start by finding a qualified business appraiser who's experienced with business valuations. Note that "valuation" covers a wide range of items, so make sure it's a firm that can do business valuations and has experience with your particular niche.

Contact us to learn more and to discuss your need for a comprehensive business valuation.

Second Spouse Planning


How do you ensure that both your new spouse and your children from your first marriage receive an inheritance if you die before your newly married spouse does? Who gets the house—your new spouse or your children? How will your new spouse get by financially if you choose to provide an immediate inheritance for your children?

You want to make sure that your children won't be disinherited if you leave everything to your new spouse who then wills the money elsewhere. Your simple reciprocal will may be fraught with risks that could cause your children to be disinherited.

Here are some solutions:

Pass your assets to a revocable trust agreement that is funded during your life through your will or through beneficiary designations, or through a combination. The trust is revocable at any time, so you can change your mind. On your death, the trust becomes irrevocable and benefits your spouse and children.

  • You may invest the assets to make them income-producing and pay all the income to your new spouse for the rest of their lifetime, while preserving the principal for your children.
  • On your spouse's death, the remaining principal of the trust goes to your children outright or in further trust.
  • You can name an independent trustee who will have the power to pay a portion of the principal to your new spouse if there's a need.
  • You can have your second spouse's interest in the trust end upon remarriage.

Through proper planning, you can maintain control over your assets to prevent disinheritance of your children, while still providing for your spouse.

If you don't make specific arrangements, here is a broad look at what may happen to your assets, although this may vary with state law and other situations:

  • Your second spouse typically will be able to claim one-third to one-half of the assets covered by your will, even if it specifies something else.
  • Joint bank or brokerage accounts held with a child will go to that child.
  • Your IRA and 401(k) will go to whomever you've named as beneficiary. Contrary to popular belief, wills do not supersede these beneficiary elections.
  • If you want some other arrangement, you and your spouse must have a written prenuptial or postnuptial agreement that meets your state's inheritance laws. You'll need to change beneficiary forms.
  • If you own a house, you may still leave it to your kids but give your spouse the right to occupy it for life. State law may govern this situation.
  • In many states, married people have a legal duty to support each other. If your second spouse eventually needs long-term care, their assets and yours might be tapped to pay the bills.

These financial issues merit consideration—competing interests of your adult children and your second spouse may induce headaches. Suppose cognitive impairment makes your spouse, widow or widower prey to con artists and an assortment of financial liabilities? And, as noted, state law can make a big difference in how your estate is handled. In the case of blended families, it's always wise to get professional help even as you tie the knot.

The Next Generation of Leaders Is Quiet but Influential: Gen X


We know a lot about the different generations in the workplace:

  • Baby boomers—born between 1946 and 1964—are in the process of retiring.
  • Gen X—born between 1965 and 1976—accounts for more than 30 percent of the workforce.
  • Gen Y (aka millennials)—born between 1977 and 1997—makes up the largest contingency of workers in today's workforce.
  • Gen Z—born after 1997—is coming into its own; lots of speculation surrounds this generation and how it will shape the workforce.

What happened to Gen X?

Although the members of Gen X are poised to take over as business leaders, we don't hear as much about them as we do about the other generations. The truth is that Gen X may not make the headlines, but this generation has shaped many of the changes in today's workplace.

Members of Gen X are

  • the first generation to expect to balance their work life with their personal life;
  • the bridge between analog and digital generations (they have an innate ability to communicate with both because they've lived both); and
  • resilient and unafraid to meet new challenges (they've successfully come out on the other side of the dot.com bust and the Great Recession).

As businesses transition to a new generation of leaders, they should look for some of these traits in their "rising stars." We've heard about the shortage of talent across many industries. Gen Xers are equipped to meet the challenge; they can cross segment and industry lines if given the chance.

What does Gen X offer?

Gen X is adaptable to—and not afraid of—change. This is a bonus for businesses facing an increasingly technological work environment, dealing with the impacts of social media on daily business, and addressing societal changes. Recognizing their unique skill sets rather than, necessarily, their direct experience, businesses should look to Gen Xers to expand their pool of potential employees.

Gen Xers understand that it's okay to hire a bookkeeper, marketer, or COO whose experience is in a different industry because the net effect may be better processes or procedures. They focus on transferrable skills and cultural fit rather than straight experience. This best of this generation of workers has the ability to:

  • Communicate well across the company
  • Maintain a 360-degree view of the business while keeping its mission and vision in mind
  • Embrace difficult decisions, even when that means admitting a mistake or making a painful personnel decision
  • Unite their team behind them

Gen X leaders might not be able to do everything well, nor are they stepping into a perfect world. Technology is expanding at a lightning pace, artificial intelligence is changing the nature of work, the push for more diversity is growing in the workplace, and distinct differences are emerging among the generations in the workplace. To succeed, Gen Xers will have to balance all these challenges while ensuring they develop the same leadership skills that made their predecessors successful.

About this Author

Employers, clients and colleagues know me as a strategic and creative marketing and communications leader with an entrepreneurial spirit. I identify and execute strategies that grow brands, build effective relationships and enthusiastic teams, and deliver results in fast-paced, highly competitive industries. I bring fresh eyes to each organizations' needs and challenges and a breadth of experience honed in international and domestic corporate, non-profit, turnaround and start-up ventures for top companies in airline/travel, technology, the performing arts and spa/wellness.