Monthly Archives: March 2015

March Tax Tips

The tax experts at Ciuni & Panichi, Inc. are always looking for ways to help you save at tax time.  The following are a couple of ideas that might help.  If you need more information contact James Komos at 216.831.7171 to review your tax questions.

Do you need to file a 2014 gift tax return by April 15?

Generally, you’ll need to file a gift tax return for 2014 if, during the tax year, you made gifts:

  • That exceeded the $14,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),
  • that you wish to split with your spouse to take advantage of your combined $28,000 annual exclusions, or
  • of future interests — such as remainder interests in a trust — regardless of the amount.

paintingIf you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

There may be other instances where you’ll need to file a gift tax return — or where you won’t need to file one even though a gift exceeds your annual exclusion. Contact James Komos at 216.831.7171 or jkomos@cp-advisors.com for details.

The Tax Advantage of Tangible Property Safe Harbors

If your business has made repairs to tangible property, such as buildings, machinery, equipmentbobcat and vehicles, you may be eligible for a deduction on your 2014 income tax return. But you must make sure they were truly “repairs,” and not actually “improvements.”

Why? Costs incurred to improve tangible property must be depreciated over a period of years. But costs incurred on incidental repairs and maintenance can be expensed and immediately deducted. Distinguishing between repairs and improvements can be difficult, but a couple of IRS safe harbors can help:

Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.

Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. (A qualified small business is generally one with gross receipts of $10 million or less.)

Contact James Komos at 216.831.7171 or jkomos@cp-advisors.com to ensure that you’re taking all of the repair and maintenance deductions you’re entitled to.

© 2015

Hidden Messages in your Financial Statements

Ratio analysis and industry benchmarking provide added insight

mfg77By themselves, financial statements provide limited insight into a manufacturer’s performance. To get a clearer picture of what’s really happening requires a relevant basis of comparison. Financial ratios and industry benchmarks provide management with the tools to identify strengths and weaknesses.

Which ratios should you focus on?

Financial ratios are calculated by comparing two or more items on your balance sheet or income statement. While this can be done in a variety of ways, manufacturers tend to use certain ratios more often than others.

For example, the debt to assets ratio is calculated by dividing your total debt by total assets. More debt results in a higher ratio. Because banks will likely take this ratio into consideration when you apply for a business loan, strive for a ratio of 1 to 2, or 50%, to be considered a reliable applicant with manageable debt.

The return on assets (ROA) ratio shows how much profit you’re generating for each dollar invested in total assets. This is calculated by dividing net income by total assets. A higher ROA generally means greater efficiency, because you’re earning more money on less investment.

Additional ratios include the:

  • Current ratio (current assets divided by current liabilities) — a current ratio of 2 to 1 is generally preferable,
  • quick ratio (current assets minus inventory, then divided by current liabilities) — a quick ratio of 1 to 1 or better is usually satisfactory, and
  • sales to inventory ratio (annual sales divided by inventory) — try to target for about 6 to 1, meaning you’ll need to order new inventory about six times a year.

Another useful ratio, the times interest earned ratio, is calculated by dividing net earnings before interest and tax by your interest expense. This reflects your company’s ability to meet interest expenses from operations.

How do you measure up?

In addition to measuring the progress of your business over a certain period and unearthing trends and problems, benchmarking presents a clearer view of where your manufacturing company stands in relation to your competitors.

Trade associations such as the National Association of Manufacturers provide up-to-date financial figures, including industry averages for rent, utilities, materials costs and employee compensation. Trade journals, as well as the U.S. Department of Labor, can also be helpful sources for relevant financial statistics.

To find the applicable industry statistics, you’ll need to know your specific industry segment’s North American Industry Classification System (NAICS) code. Find your NAICS code by visiting the U.S. Census Bureau website at http://www.census.gov/eos/www/naics.

What’s the upside of benchmarking?

Benchmarking offers several benefits. First, it gauges your financial strength by comparing it to past company performance and industry averages. This allows your management team to gain insight into which goals the company has achieved and where it’s fallen short, providing tangible ratios for your reference.

Benchmarking also puts your financial operations under the magnifying glass. A close-up view brings to light small problems that could affect your company’s overall financial well-being.

How can you avoid potential pitfalls?

On the flip side, calculating and evaluating these ratios can be time consuming. Also, if a number is recorded incorrectly, a ratio is miscalculated, or a statistic is out of date, the process can yield misleading information — possibly leading to knee-jerk responses. If something seems out of whack, research it further before taking corrective measures.

Finding the right fit

Every manufacturing operation is unique. The generalized benchmarks discussed here are for a typical manufacturer. At Ciuni & Panichi, Inc. we specialize in manufacturing and distribution and can provide customized guidelines that will fit your manufacturing specialty and company’s size.

If you work with your financial advisor to analyze your company’s financial ratios on a regular basis, your benchmarking efforts are more likely to be meaningful and reliable.  Contact John Troyer at 216.831.7171 or jtroyer@cp-advisors.com for more information.

© 2014

 

The Costly Consequences of Fraud

How Fraud Can Impact Your Company’s Value

ReggieNovakThere are many negative consequences of occupational fraud, such as financial losses, public embarrassment, and diminished employee morale, but one that is often overlooked is how fraud affects a company’s value.  The value of your company can become distorted by illegal schemes involving asset misappropriation, corruption, and financial misstatements.  All of these things can make it difficult to get an accurate valuation.

To ensure they come to realistic conclusions, valuators must adjust financial statements when the existence of fraud is known.

Teamwork
Business valuations are derived from financial statements to estimate value.  Unless specifically stated in the engagement letter, valuators do not audit financial information or investigate fraud.   So if financial statements contain fraudulent numbers, the valuation may be inaccurate, unless properly adjusted.

If fraud is suspected, the valuator will most likely engage a forensic colleague to determine the extent of the issue.  This will increase the scope of the engagement but ensure that a proper value can be established.

Importance of internal controls
While a number of factors are considered, size matters when valuators and forensic experts are assessing the risk of fraud.  A business that has less than 100 employees tends to suffer the highest median losses, according to the Association of Certified Fraud Examiners.

The internal controls a company has put in place, such as the policies and procedures to protect its assets, improve efficiencies, and ensure financial statements, will tell a valuator a lot about its potential fraud risk.  Controls such as a fraud training program and whistleblower hotline are considered to be a good first line of defense against such issues.

There are other examples of internal controls that minimize fraud and protect a company’s value.  These include:

  • Restricted access to physical assets, including locks, passwords, and security systems
  • Formal job descriptions, codes of conduct, and employee manuals
  • Mandatory vacation policies
  • Duplicate signatures on checks above a preset dollar amount
  • Monthly bank reconciliations and physical inventory counts
  • Background checks on prospective job candidates
  • Annual or surprise audits

Even these do not completely prevent fraud.  If a manager is lax in his/her supervision of employees or overrides the system, the environment is ripe for fraud to thrive.

Make adjustments
Valuators will take steps to account for additional risk if fraud or poor accounting practices are known or suspected.  If an unscrupulous CFO were to prematurely post unearned or fictitious sales to boost his bonus, this would cause the company’s value to be overstated since the earnings or assets are now exaggerated.

To account for the CFO’s actions, a valuator might increase the company’s specific risk (a component of the cost of capital).  By increasing the cost of capital, it has the inverse effect on the valuation.

Valuing a company, building a case
Because valuators typically don’t look for fraud, be sure to discuss any concerns about the accuracy of financial statements when you engage an expert, particularly if a fraud investigation is already underway.  Such information will enable the valuator to make appropriate adjustments and, if necessary, help your litigation team gather evidence and assess possible damages.

Reggie Novak is a Senior Manager in the Audit and Accounting Services Group.  As a Certified Fraud Examiner, Mr. Novak can assist you with prevention services, including recommending internal controls and other measures to be implemented to prevent theft or misappropriation.  If fraud is suspected, he can investigate and present his findings and recommendations.  Contact Reggie Novak at 216.831.7171 or rnovak@cp-advisors.com for more information.

Charles Ciuni is the Chairman of Ciuni & Panichi, Inc. and a Certified Valuation Analyst.  Mr. Ciuni can provide the comprehensive and detailed analysis required for a business valuation.  He also specializes in litigation support services.  Contact Chuck Ciuni at 216-831-7171 or cciuni@cp-advisors.com.

You may also be interested in:

Internal Controls for Business Owners to use Today

© 2014

Fraud and Technology – Is it harming your business?

Fraud Schemes to Watch Out For

cyber crimeCybersecurity breaches, such as recent hack attacks on Target, Neiman Marcus and J.P. Morgan, grab all the headlines. But most businesses are likely to fall victim to smaller-scale technology fraud — most often schemes perpetrated by their own employees. Here are several to look out for.

Phishing

Technology can play a critical role in helping prevent and detect fraud, but it’s also used to perpetrate and disguise wrongdoings. The Web in particular has opened up new virtual avenues for fraudsters.

Consider phishing — one of the oldest types of Internet fraud and still immensely popular. Phishers might e-mail executive, accounting or HR staff, posing as a legitimate entity such as a bank or governmental agency, and encourage recipients to download malicious software (malware). Such malware allows the fraudsters to record keystrokes and uncover passwords. The phisher can then use this information to divert funds from company accounts or steal proprietary data.

Purchasing fraud

Respondents to the most recent Association of Certified Fraud Examiners (ACFE) survey estimated that the typical organization loses 5% of its annual revenues to employee fraud. In this survey of fraud examiners, the ACFE revealed that the reported schemes committed by workers in the IT department caused a median loss of $50,000.

IT staffers might, for example, accept kickbacks from vendors or submit fraudulent invoices for equipment or software that wasn’t actually obtained. The risk of this type of fraud is especially high when the same person who approves purchase orders and receives shipments also approves invoices.

Internal Control Overrides

Employees can also wield technological knowledge to override internal controls intended to prevent fraud.

Organizations that fall prey to tech-related fraud share some common traits. These include poor or nonexistent technology controls (passwords, data validity checks) and lax oversight of technology spending (such as lacking a formal vendor bidding process). Also, many of the employees of such companies have low “technology IQs.”

Detection and Prevention

Certain behavioral patterns can help you spot and stop such occupational fraud schemes. Red flags should go up if IT staff:

  • Have been experiencing financial difficulties
  • Appear to be living beyond their means
  • Are reluctant to share responsibilities with other staffers
  • Don’t take vacation or sick days
  • Are evasive when asked for information

To prevent illicit activities from occurring in the first place, conduct thorough background checks on all prospective IT employees. Also consider offering an anonymous tipline to staffers, customers and vendors. These reporting mechanisms have repeatedly proven to be one of the most effective tools for fighting fraud.

Thief-proof Controls

Technology fraud can be costly, so enlist the help of a specialist to ensure that what keeps your business running isn’t being used to harm it. A qualified fraud expert can conduct risk assessments and help design internal controls that even savvy fraudsters will find difficult to override.

Reggie Novak is a Senior Manager in the Audit and Accounting Services Group.  As a Certified Fraud Examiner, Mr. Novak can assist you with prevention services, including recommending internal controls and other measures to implement.  If fraud is suspected, he can investigate and present his findings and recommendations.  Contact Reggie Novak at 216.831.7171 or rnovak@cp-advisors.com for more information.

You may also be interested in:

The Costly Consequences of Fraud

Internal Controls
© 2014