NONPROFIT AUDITS: Are they Necessary?

I recently wrote a blog about the susceptibility of fraud in small businesses. After reading an MSN article this morning, I realized how frequently fraud affects nonprofits as well.

The severity of the fraud committed can be something as straightforward as an employee charging personal travel to a company credit card. It could also be something much more severe like deliberate falsification of financial statements. In the case of the MSN article I read, it was more in line with the latter. The President of the organization in question commissioned a $45,000 wax figure of herself - and had the organization foot the bill! Unfortunately, not all fraud is this obvious or easy to detect. What can management of a nonprofit do to protect the entity and its assets? Engage a CPA to provide an audit of your financial statements.

CPAs who conduct audits have always been required to have a thorough understanding of the entity’s activities. Now, auditors must also perform rigorous internal control testing to ensure that management has systems in place to prevent and detect fraud. One example of internal controls that CPAs look for is proper segregation of duties. This means that the auditor must confirm that there are separate individuals responsible for approving disbursements, receiving and distributing funds, receiving bank statements, and performing bank reconciliations.

Too often, we hear organizations discussing audits in terms of the cost of the audit. However, these organizations are ignoring the long-term benefits to being able to present audited financial statements. Having an audit of an organization’s financial statements decreases the potential for fraud. An audit will also ensure that the financial statements are accurately presented. This in turn leads to greater public trust....which can lead to improved donations and more grant money for the organization.

Nonprofit entities should be aware of the possibility of internal fraud and take the time to understand how an audit can help prevent or detect fraud. For a more detailed explanation on how having a CPA audit your financials can benefit your organization, please contact our offices.

--LeAnn Carlson

HOW ‘BOUT THEM COWBOYS? or, nine starter questions for the new season

For those of us in San Antonio, the annual football drama known as the Dallas Cowboy’s Summer Camp began this week. As someone that enjoys studying management styles and techniques, the Cowboys offer the ultimate case study. Jerry Jones should write a book. The book could be entitled “The Dysfunctional Organization - an insider’s view of how not to operate a business”.

In the E-Myth management model that we cling to, all functions are clearly identified. Then, all activities within a given function are identified. This process produces a written set of instructions for each task an employee will perform. This allows employees to know exactly what to do and how to do it. It also allows management to evaluate performance against a defined standard.

The Cowboys, however, use a different approach. The employees (players) are free to create and define their own functionality. The department managers (coaches) neither establish policy nor evaluate performance. Evaluations are made at the highest level, which is the owner (Jerry). Ultimately, the department managers (coaches) are evaluated on the performance of the employees (players) over whom they ultimately have no control. While this system – “The Cowboy Management Model” – makes perfect sense to the owner, it is a model that creates and encourages chaos. We do not endorse this model!

“The Cowboy Management Model” is what it is. As we dig into the model to address this season, we have identified nine pressing questions. Why nine? It is only day one of the preseason practices in San Antonio.

1. Will Tony and Jessica get back together?
2. Will Wade change from “Cream Puff” to “hard rear”.
3. Will Roy Williams actually run a precise route?
4. Will this be the year Flozell Adams passes 400 lbs?
5. How many interceptions will Terrance Newman drop?
6. What is the over/under on number of games Felix Jones will play?
7. What percentage of the team will make the 8:50 practice after a night on the Riverwalk?
8. Will Jerry fire his son Stephen Jones before the next draft?
9. How will $10 beer go over with fans in the Ultimate Dome?

And so the drama begins in Cowboys Country. Another season begins. Another disappointment unfolds.

Steve Cook is managing shareholder of Cook and Associates, PLLC, Certified Public Accountants, a full service CPA firm offering tax, audit, and wealth management services from offices in San Antonio and San Marcos, Texas.

Is your house in order?

Last week, a friend told me that Joe Godfroy had recently passed away. Though I had only met Joe a handful of times, I was shocked and saddened by the news. You see, Joe was one of the most engaging and lively public speakers I have ever had the opportunity to know and an absolute blast to be around. In short, he made an impact on me.

Joe had started out in the business world as a CPA, but his practice eventually evolved into a focus on financial planning. Joe's job became to help people plan for their futures, their retirements, and even their eventual passing - and judging from the multiple awards he received, he was very good at it.

Joe loved to speak to other financial professionals, and his message to us always carried the same theme: "Is your house in order?" Joe believed that if we, as financial advisors, did not have our finances settled and our planning taken care of, there was no way we could effectively take care of our clients. After all, he reasoned, all it took was one client to ask about what we did for ourselves and our credibility was shot. How can we effectively promote a product, a policy, or a plan when we haven't even bothered to do it ourselves?

Today, I'm going to take the question he posed to us so many times and pose it to you: Is your house in order?

• Do you have a will?
• Have you prepared Advanced Directives?
• Do you have enough life insurance to ensure that your family can carry on at your current standard of living without your income?
• If you are a business owner, do you have a succession plan?
• Do you have a plan for your childrens' education?

These can be tough questions to answer, particularly when the economy is struggling as it has been. However, these items are all essential to your financial success no matter what else is going on. As we learned with Joe and countless other examples, we never know when our time here will be up, and "someday" isn't always soon enough to deal with these important issues. In honor of Joe Godfroy.....please take some time this week to get your house in order.

--Dan Musick CPA

The Numbers Game

To mix things up a bit, I’ve compiled a short list of facts about the economic health of Texas, with focus on Austin. Enjoy!

2,376 – Number of patents issued in Austin in 2008. The University of Texas is third in the nation in the number of patents earned. Patents have a direct relationship to innovation and growth. Having "Silicon Valley East" also helps.

346,302 – Number of millionaires in Texas. That constitutes 4 percent of total Texas households. Have 25 friends? One just might be a millionaire.

$188,600 - Median home price in Austin. This is slightly higher than other Texas markets, but still below the national average.

9.4 – Percent of Americans unemployed in May. Texas was much lower than the average, with an unemployment rate of "only" 7.1 percent.

$149,389 – Median household income in Highland Park, Texas(!) Overall, Texas’ median income is much lower at $57,511.

2 – Austin’s rank in “The Healthiest Housing Markets for 2009”. Houston, Fort Worth, San Antonio, and Dallas make up the other top five spots at 1, 3, 4, and 5, respectively. The top 75 housing markets in the country were analyzed by the magazine “Builder” to determine the top 15.

$14,379,118 – Dollars spent on the Mega Millions lottery in Texas.

.00000000569114597006 – Odds of actually winning the Mega Millions jackpot. You can also look at it as 1 in 175,711,536. You have a much better chance of getting struck by lightning (1 in 700,000 in any given year).

The moral of the story: Don’t buy lotto tickets, marry someone from Highland Park, and watch out for lightning.

--LeAnn Carlson

Football Coaches - the Ultimate Managers

“…ANYBODY WHO WANTS ANYTHING NEED ONLY DO THE WORK.” Swami Chetanananada, Dynamic Stillness

What is the work that is to be done? To most readers, the Swami’s comment would be interpreted as simply working longer and harder to attain the desired goal.

In the E-Myth series of books, Michael Gerber points out that the master manager works “on” his business, not “ in” his business. Let’s say for instance that you own a small auto repair shop. You have successfully operated for a number of years but all that you have to show for your labors is a small amount of cash in the checking account and the emotional reward of a job well done. You have been working “in” the business. You have been an employee of your own business. You could even make the argument that the business owns you instead of the other way around.

The “work” that the Swami refers to is the same work that Gerber calls “working on your business”. It is dissecting the operation and breaking the operation down into its smallest functional components. Within each of these components, you then need to detail how each works. All of this must be reduced to paper and introduced to the employees. At this point, you become the manager of these components. You are now working “on” the business.

Are the Swami and Gerber wrong? Hardly! Football coaches have been using this management technique forever. The more successful the head coach, the more adroit he is at working “on” the business. The head coach has assistant coaches that manage each department (position). The head coach manages the team through his assistant coaches. Each assistant coach creates a specific training program for his department. Each and every day, all of the employees (players) in his department execute this training regiment. The training regimen occurs over and over and over again until the assistant coach knows that a predictable result will occur on every play. Then and only then, is the player allowed to play in a game. In football speak, the coach would say that his player has practiced his technique so many times that the player no longer thinks about his actions. He only reacts to play as it unfolds – in a predictable manner.

As a manager, isn’t this what we are looking for? If you have predictability, then you have the key ingredient in planning and subsequent execution. Working on your business daily will create an organization that generates consistency and predictability. Check out your local high school football practices and learn how the Pros manage. It will be fun and educational.

Steve Cook is the managing shareholder of Cook and Associates, PLLC, Certified Public Accountants with offices located in San Antonio and San Marcos, Texas.
www.cookcpas.com

NONPROFIT SURVIVAL GUIDE: Weathering the Recession

As an audit manager of a small CPA firm, I frequently interact with and perform audits for nonprofit organizations. As such, I have seen first-hand the impact the recession is having on these entities. Over the past year and a half our economy has faced several events which have not occurred simultaneously in over 20 years:

· Significant decline in the stock market
· Rising unemployment
· Deterioration of the housing market
· Decreases in production and sales

The Nonprofit Finance Fund recently completed a survey of more than 1,100 nonprofits. The results indicated a distinct financial vulnerability. Some of the findings are astounding:

· 31% of nonprofit organizations surveyed don’t have the operating funds to cover more than a month worth of expenses; another 31% cannot cover three months’ worth
· Only 16% foresee being able to cover operating expenses in 2009 and 2010
· Just 12% expect to operate above break-even in 2009

http://www.nonprofitfinancefund.org/details.php?autoID=177

These findings should prompt nonprofits to consider what this recession means and what can be done to reduce their risk. Here are a few tips for weathering the financial crisis:

· Make sure your money is safe. Is it insured? Are your investments diverse enough?
· Cut costs. This can be as simple as reducing office perks or cutting office supplies such as paper – use email/digital copies instead.
· Two words – social media. Start marketing your good deeds. Spreading awareness may lead to unexpected donations.
· Keep your annual donors and supporters happy. Write personal thank you notes or make a brief phone call.
· Have a contingency plan for cutting costs. Can you employ more volunteers? Can board members contribute in more technical manners?

If nothing else, keep in mind that this recession can be used to improve efficiencies and sharpen the organizational focus. Make wise choices with the funds you have and you may just find that you have weathered the storm.

--LeAnn Carlson

Small Business Faces Big Bite on Healthcare

Headline in Wednesday, July 15, 2009 Wall Street Journal:

“$1.04 Trillion House Health Bill Hits All but Tiniest Firms for Not Providing Insurance”

As we stated in last weeks blog, we are not about political parties. We are Capitalists. Fiscal responsibility and competition are the major underpinning of capitalism.

The July 15 article in The Journal written by Janet Adamy and Laura Meckler offered further proof that the current administration is leading us into the abyss. In a previous blog, we noted the overwhelming size of the deficit being created by the federal stimulus plan. Now, you can add to that number the pending cost imposed by proposed new health-care legislation.

According to the WSJ, Senate Finance Committee, Chairman Max Baucus is trying to prepare a tax package that will cover the projected $300 billion (with a “B”) shortfall over the next 10 years.

Of course, the answer is “tax the rich”. Unfortunately, it is economic suicide to take money away from the people. People reinvest money into the financial system. This money enters the system through direct investment or through bank loans. The banks’ ability to lend depends on their available deposits. Economists tell us that direct public investment is very close to 1:1. That is to say, for every dollar put into service the consumer gets $1 in value. Economists also tell us that funds that pass through the government and then to the public are closer to 1:.50 (or less).

These investments will convert to net revenues that become taxable income. So, it seems to me that taxing $1 will create more tax revenue than taxing $ .50.

The House version of the health-care bill would require insurance companies to accept anyone. The Bill also requires individuals to carry health-care insurance or pay a penalty of 2.5% of their gross income! Is this even constitutional? If a family earns less than $88,000 annually, the government will offer a subsidy to buy the insurance or they pay a penalty. This CPA can’t wait to see how the IRS gets that on a 1040.

I do not know about other states, but in the State of Texas, anyone can get medical care regardless of ability to pay. Yes, you will have to go to a clinic and wait your turn. And yes, you won’t be in the newest hospital in town; but you can still get quality health care. It is called Medicaid and it is Federal funds administered through the State. We actually have employees that option out of our firm’s coverage because the State plan is better and cheaper!

Why in the world do we need to create a $300 billion shortfall to build something that already exists?

--Steve Cook

The minimum wage will increase on July 24 - but is it a good idea?

Within the next couple of weeks, the federal minimum wage will increase from its current level of $6.55 per hour to $7.25 per hour for non-tip employees. The pay rate for tipped employees will remain at $2.13, but employers are still responsible for monitoring tip income and paying any shortfall to their employees.

This wage increase is the third of three annual increases that were prescribed by Congress and signed into law by President Bush in 2007. In three short years, the minimum wage has increased from $5.15 to $7.25 per hour – a staggering 41 percent increase! It’s great for political posturing to announce an increase in the minimum wage, but is it sound economic policy? Historical statistics would seem to say 'no'.

The most popular argument for minimum wage increases is that the increase would allow workers to better provide for their families. However, Department of Labor statistics indicate that most minimum wage workers are not the breadwinners of their households. In fact, the overwhelming majority of minimum wage workers are either part-time or student workers and are not responsible for supporting their families. In fact, the Economic Policies Institute reports that only 2.8 percent of minimum wage earners were single parents, and only 1.2 percent of minimum wage earners were listed as adult heads of household. It is estimated that 57 percent of minimum wage earners are single people – mostly students.

Also worth considering is the fact that the last several minimum wage increases have spurred increases in dropout rates. At-risk high school students see the ability to make more money immediately and choose to leave school to do so. Numerous studies have shown how much less the average high school dropout will earn over his or her lifetime than the average graduate.

Finally, it can be argued that raising the minimum wage can actually lead to increased unemployment rates. When businesses – particularly small businesses – face increasing labor costs, their choices are to absorb the costs or pass them through to their customers. In a tight market, neither of these options become particularly attractive. Remember, this increase not only means raises for those currently earning the minimum wage, but also any employee whose pay scale is somehow tied to the minimum. That guy making $9 per hour is going to want a raise too! Since they can’t raise prices, and they can’t absorb the costs, the business’s only way to control the bottom line is to eliminate jobs. When the minimum wage increased from $4.25 to $5.15, the Joint Economic Committee of the House of Representatives estimated that between 100,000 and 625,000 entry level jobs were lost.

Particularly in a tough economy, the rising minimum wage could put an incredible strain on businesses. There is a rising chorus of voices asking Congress to delay or repeal the upcoming increase. If you have a vested interest in this issue, now is the time to make your feelings known by contacting your local Congressman.

--Dan Musick

HOLD ON TO YOUR WALLET…..The Tax Man is Coming

“Money is not an issue”….anonymous Democrat

I am neither Republican nor Democrat. I’m a Capitalist. I believe that government’s duty is to provide basic services. The rest of my well being is my responsibility. Since neither party seems to care for my opinion, my political leanings are mostly “away”.

As a CPA, however, I am in a position to offer an informed opinion on financial matters. I am a numbers person and the numbers that I see today coming out of Washington scare me to death.

The current Congress is spending our children’s money at an unbelievable pace. Let’s call these “expenditures”. They are proposing to pay for these expenditures by increasing taxes on a select few citizens. Let’s call these “revenues”.

Several years ago David Walker, the former head of the Government Accountability Office, noted in his “Fiscal Wake-up Tour” that the U.S. was in an imprudent and unsustainable fiscal path. Mr. Walker’s focus at that time was on Social Security, Medicare and Medicaid.

The statistics presented by Mr. Walker revealed that the costs for just these programs would exceed projected revenues by $50 trillion (yes, that’s with a “T”) over the next 75 years, if unchanged. Now add the current Federal bailout program to this, and you have yourself some serious expenditures.

According to S. J. Leeds, a finance professor at the University of Texas at Austin, the original estimated cost of the bailout at a paltry $1 trillion was probably not accurate. Although he failed to make an educated guess, he suggested that trillions (plural) would be a better estimate.

The current budget forecast for this year is a deficit of $1.84 trillion.

And where is the revenue going to come from? Here is the plan. The current budget agreement calls for $861 billion in taxpayer cuts over the next 5 years with $97 billion in increased revenues. Unless my math is flawed, that is a $764 net reduction in revenue!

There is only ONE cure, and that is higher taxes. Tax revenues can increase from two directions. You can increase the effective tax rate and you can decrease the available deductions. The latter will create more taxable income while the former sends more to the government. Make no mistake, government can’t keep its promises of “only increasing taxes on the rich” and still spend at the rate it’s been spending.

I don’t know what the rest of the story is, but I will be hanging on to my wallet with both hands.

--Steve Cook

As American as....Taxes?

As we emerge from the July 4th weekend, we all find ourselves thinking about all things that are quintessentially American: baseball, apple pie, mom, and the flag. But what about taxes?

True, other countries pay income taxes too, and in fact, some pay them at a much higher rate than we do here in America. However, our system of government "for the people, by the people" means that we as a citizenry are uniquely positioned to make sure our tax dollars are spent for their best purpose.

Consider this: the highest earning Americans pay federal income taxes at 35 percent and state or local income taxes as high as 12 percent, plus payroll taxes, sales tax, property taxes, motor vehicle taxes, and the list goes on......it's conceivable that our top "inclusive" tax rate here in America can approach 60 percent! Even on the low end of the spectrum, Americans can see their total tax burden at 20 percent or more of their income.

This isn't meant to be a political blog, so I won't offer my opinion on whether that's a good or a bad thing. But it is reality, and each of us - no matter how much we pay in taxes - has a duty to keep our Government accountable to spend our tax dollars wisely.

As we return to work and get over our "barbecue overdoses", let's all take some time to remember that we the People are the ones who technically run the government and that this power comes with responsibility. Everyone knows of their civic duties to vote and pay taxes, but let's not forget that we also have a duty to hold Government responsible for proper stewardship of our tax dollars.

--Dan Musick

Using the Fraud Triangle to Prevent Employee Theft

A recent article in the Austin Business Journal titled “Fighting Fraud” got me thinking. What can small businesses do to reduce fraud in the workplace?

The Association of Certified Fraud Examiners estimates that fraud costs U.S. companies nearly 7 percent of gross revenues annually, or $994 billion in 2008. Often, fraud and theft go unreported because employers are too embarrassed to have it publicly known. Regardless of whether fraud becomes public knowledge, its effects can be devastating.

As an employee of an accounting firm, I am constantly made aware of the many threats that can face a small business. Employees can wear many “hats”, and combination of duties can allow for fraud. For example, someone who has access to business checks and authorization to sign those checks can be tempted to use those funds improperly. Small business owners should become familiar with the “fraud triangle”:

Pressure, opportunity, and rationalization are the three key elements present when committing fraud. Pressure is what makes an individual commit fraud. It generally stems from financial issues such as outstanding debt, expensive tastes, or addiction issues. Opportunity is the ability to commit fraud. Opportunity arises through weak internal controls, inadequate oversight, or a high management position with plenty of freedom. Rationalization, the third element, is a crucial aspect in committing fraud and occurs because individuals feel the need to justify their actions. Examples of rationalization include thoughts such as “I deserve to be paid this much”, “I’m just borrowing the money”, or “My family will starve if I don’t take it”.

Employers should be aware of behavioral “red flags” that employees display that may indicate potential fraud:
· Overassertive or controlling
· Smooth talking
· Intense desire for personal gain
· Living beyond their means
· Working excessive overtime
· Not taking vacations or sick leave
· Not comfortable with people reviewing their work

Keep in mind that displaying just one or two of these characteristics may not be suggestive of fraud. However, combining several of these traits with the presence of elements of the fraud triangle can be a tell-tale sign of impending theft.

--LeAnn Carlson

COMMUNICATION POLICIES VS THE NEW SOCIAL MEDIA?

While drinking my morning coffee, I came upon an article regarding implementation and execution of social media and its effect on the company’s communication policy. The article was written by Michelle Golden and appeared in The Practical Accountant (an oxymoron, by the way). As our firm plunges headlong into the uncharted world of social media communication, I found this article very insightful.

The 30 and under crowd is comfortable with all the new communication technology. So why are the over-30s (the managers) uncomfortable? Ms. Golden points out that there are five basic reasons:
1. Fear of the Unknown (ie, lack of knowledge in the area)
2. Professionalism (ie, how will the client receive the message)
3. Time Waste (ie, these are personal activities, not business)
4. People Skills (ie, are we under developing basic people skills)
5. Legal Concerns (ie,will these new media hold up in court)

A closer look at these items reveals that the issue is not generational, but rather one of understanding. It is understanding how each individual delivers his message, and understanding how the client will receive the message. As a manager, this should be our focus.

So how do we learn and implement these skills? There are three possible solutions:

The first option is to hire a professional communication firm to implement and teach your staff. A second option would be to rely on the under-30 employees to educate the rest of your staff. Finally, a company can incorporate both options one and two. We chose the third option, as young staffers rarely understand the significance of client communications.

One word of warning, though. Ultimately, the decision of how to communicate with a client is not yours….it is your client’s. The one person that should dictate how you reach a client is the CLIENT!

by Steve Cook