Monthly Archives: April 2015

The Importance of Separation of Duties

Pam WilliamsApril 27, 20150 Comment

by Katie Anthony

It is important to have levels of separation of duties in your business. You may say that you are a very small business and cannot afford to have many employees. That may be true, in which case you can add approval and double sign-offs on items of significance as well as review of certain processes. You may be in a situation where you do not even have enough employees to do this. In such a case, it might benefit your company to set up a monthly or quarterly review by an outside accounting firm.

You may be asking why separation of duties is so important. A big reason is that although a greater number of frauds are perpetrated by employees low on the ladder, greater amounts are stolen by employees at the management level. The ACFE Report to the Nations on Occupational Fraud and Abuse: 2014 Global Fraud Study reports that employees committed 42% of occupational frauds but caused a median loss of $75,000, while executives committed 19% of occupational frauds with a median loss of $500,000. These high level employees are trusted and intelligent, so they are able to get away with the fraudulent activities for a longer period of time, enabling them to steal larger amounts of money. fraud triangle

There are three elements to occupational fraud, which are opportunity, rationalization, and pressure, as credited to Donald Cressey. He believed that these three elements must all be present for an ordinary person to commit fraud (Fraud Examiners Manual: 2014 US Edition).

Let’s start with rationalization. You may not think you are able to influence someone else’s rationalization. However, some people rationalize fraudulent actions by saying that they are owed what they are stealing from the organization because they feel underappreciated. You need to take steps to make sure that you pay your employees appropriately for their roles and that you do things occasionally to show your employees that you appreciate them. Employees sometimes even rationalize their behavior based on what they see employees higher than themselves doing. That means you! Keep in mind that your employees are watching you to set the tone of the business.

While you cannot remove pressures employees feel from those outside of your organization, you can make sure that you don’t put too much pressure on them from within. This means doing evaluations that are not only one-sided, but rather structured so that your employees can give feedback about their workloads and stress levels. If you overwork your employees they may feel pressure to take shortcuts that eventually lead to fraudulent actions.

Last but not least, is opportunity. Separation of duties and reviews can really help with this element. If employees feel that no one looks at their work, they may take that opportunity to begin stealing, especially if the other two elements of the fraud triangle are present. By adding separation of duties and reviews, you are filling a gap that will help keep your business healthy. If, despite all your precautions, one of your employees IS stealing, separation of duties and reviews will help catch them. The ACFE Report to the Nations on Occupational Fraud and Abuse: 2014 Global Fraud Study goes on to show that review is second only to a tip in discovering frauds in small businesses.

While no plan to prevent and detect fraud is perfect, each step you take will help. Langdon and Company LLP knows that you want to keep your business healthy and thriving. L&C can help you define the duties in your processes that need separation as well as provide review services for your organization. Contact our office today with any questions or concerns you have.

Katie ([email protected]) is an Audit Staff at L&C and works with a variety of clients.

SSARS 21: Statement on Standards for Accounting and Review Services: Clarification and Recodification

Pam WilliamsApril 20, 20150 Comment

by Lee Byrd

Representing the most significant changes to the compilation and review literature in decades, the AICPA Accounting and Review Services Committee recently issued Statement on Standards for Accounting and Review Services (SSARS) No. 21. The guidance aids in drawing a definitive line between preparation and reporting services and is composed of four sections as follows:

Section 60 – General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services, provides a foundation for the other three sections and guides professionals on their responsibilities related to engagements performed in accordance with SSARS.
Section 70 – Preparation of Financial Statements, applies when an accountant is engaged to prepare financial statements but is not engaged to perform an audit, review or a compliation on those financial statements. Professional judgment should be used in determining the type of engagement requested by the client (i.e. whether the CPA is engaged to prepare financial statements or simply assist in their preparation). A report is not required for a preparation engagement but the CPA should include a legend on each page of the financial statements stating, “no assurance is provided.”
Section 80 – Compilation Engagements, applies when an accountant is engaged to perform a compilation engagement. The guidance provides new compilation report language, distinguishing this report from an assurance engagement report for audit or review services. CPAs may add additional paragraphs for explanatory purposes.
Section 90 – Review of Financial Statements, applies when an accountant is engaged to perform a review of financial statements. The accountants’ review report has been updated to require the use of headings in the report and the name of the city and state of the CPA’s issuing office.

Successful business group. CPAs are required to begin using SSARS 21 for financial statements with periods ending December 15, 2015 and thereafter; however, the standard allows for early implementation. The standard also requires a signed engagement letter for all SSARSs engagements, signed by both the CPA and management or those charged with governance. Additionally, while audit, review and compilation engagements require participation in a peer review program, preparation services do not fall within any of the aforementioned categories and therefore, are not subject to peer review.

Langdon & Company LLP‘s accountants are very familiar with this new standard and would be happy to answer any questions you may have. Please contact our office for additional information.

Lee Byrd ([email protected]) is an Audit Manager at our Firm and has over 7 years of experience with a variety of clients.

Spring Cleaning: Document Retention Policies for Non-Profits

Pam WilliamsApril 13, 20150 Comment

by Brittany Powell spring-cleaning-office

Determining what documents and files you need to keep can be a daunting task and all too often turns into a case of “I’ll keep this…just in case.” Establishing a formal document retention and destruction policy for your non-profit organization can help prevent clutter from piles of unneeded documents. In fact, a document retention policy is one of several policies that the IRS Form 990 asks specifically if a nonprofit organization has.

The IRS Form 990 instructions define a document retention and destruction policy as a policy that “identifies the record retention responsibilities of staff, volunteers, board members, and outsiders for maintaining and documenting the storage and destruction of the organization’s documents and records.” As the National Council of Nonprofits points out in its article, “Document Retention Policies for Nonprofits,” a written document retention policy provides consistency in the document retention/destruction habits of both staff and volunteers.

So, as your organization is spring cleaning, what documents should you keep and what can be tossed? The following categories are derived from the AICPA’s sample document retention policy and provide a guideline for how long certain documents should be kept.

Documents that should be kept permanently:

– Audit reports

– Correspondence regarding legal and important matters

– Deeds, mortgages, and bills of sale

– Determination letter from the IRS

– Tax returns

– Articles of Incorporation, Bylaws, etc.

– Minutes of board meetings and resolutions made by the board

– Retirement and pension records

– Trademark registrations and copyrights

Documents that should be kept for 7 years:

– Expired contracts, mortgages, notes, and leases

– Payroll records and summaries

– Personnel files for terminated employees

– Timesheets

– Withholding tax statements

– Invoices (to customers and from vendors)

Documents that should be kept for 2-3 years:

– Bank reconciliations and statements

– General correspondence

– Duplicate deposit slips

– Employment applications

– Inventory records

– Correspondence with customers and vendors

These guidelines can help your organization begin establishing its own document retention policy and guidelines. However, as we become a more technologically-driven society, it is important to be consider documents stored in the cloud or on a server and to have a back-up plan in place for your electronic documents. Additionally, the National Council of Nonprofits points out in its article that organizations should give consideration to email records and how they fit into the procedures defined in the document retention policy.

If you have additional questions or would like additional information, please contact our office.

Brittany Powell ([email protected]) is an audit senior at Langdon & Company LLP and has experience with a broad range of non-profit clients.

The Interaction of Pell Grants and Tax Credits

Pam WilliamsApril 1, 20150 Comment

by Rebecca Lunn pell grant

Federally funded Pell Grants assist millions of students annually. However, for students with these scholarships, the process of claiming tax credits is complex and often confusing. As a result, students with the greatest financial need may be foregoing additional tax benefits available.

Based on an IRS publication (see link below), under current law a Pell Grant student can choose to allocate his or her Pell Grant funds either to qualified tuition and related expenses (QTRE) or to living expenses (up to the amount of actual living expenses), which constitutes taxable income. Most students and parents do not understand this option, so often families allocate all QTRE to the Pell Grant funds, leaving little or no QTRE to allocate to an educational tax credit.

For 2014, the American Opportunity Tax Credit (AOTC) provides a 100% credit for the first $2,000 of QTRE and a 25% credit for the next $2,000, for a total credit up to $2,500. As noted in the IRS publication, if a student’s QTRE exceeds scholarships by $4,000, the student would still qualify for the maximum AOTC credit. However, if the QTRE exceeds scholarships by less than $4,000, the student may benefit from including some of the Pell Grant in taxable income in order to claim a larger AOTC. It is important to note that any scholarship that is allocated to living expenses must be included in taxable income on the student’s (not the parent’s) tax return.

If you need additional assistance in understanding how to obtain the maximum tax benefit with a Pell Grant scholarship, the tax department at Langdon & Company LLP is pleased to assist.

Please click here for detailed examples of the interaction of Pell Grants and tax credits.

Rebecca Lunn ([email protected]) is a Senior in our Audit Department working primarily with the non profit, and health care industries.

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