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Internal Controls That Protect Your Business From Fraud

Internal Controls That Protect Your Business From Fraud

News headlines involving embezzlement, fraud, data breaches, and other scandals may have you nervous, especially during the current economic climate. “What is happening within my organization?” might be a thought regularly occurring in your head. After all, fraud is one of the most common ways that companies lose money.

To protect your business from fraud, you must continually evaluate internal controls. These protocols help keep a business safe from specific types of company risk.

Incorporating internal controls can ensure the effectiveness and efficiency of operations and support reliable reporting.

Read More: This Is How To Protect Your Company From Employee Fraud

These Internal Controls Can Protect Your Company

According to the Association of Certified Fraud Examiners (ACFE), organizations can reduce the impact of fraud by pursuing internal controls and policies that actively detect fraud. Some examples may include management review, account reconciliation, and surveillance/monitoring.

Here are four other simple and straightforward internal controls for your company to consider:

1. ACH Payments
Do you have a custom signature stamp for your office? If you do, we advise against this option. Even if you keep it locked up or only allowed specific employees to use it, there are still issues with this kind of system.

A better option is to implement an electronic system such as Automated Clearing House (ACH) payments. By sending payments through ACH, businesses can use fewer resources than traditional paper checks, and they can more easily track income and expenses with electronic records.

eGuide: What Business Should Expect From Their Accounting Department

2. Separation of Powers
Separation of powers is as crucial to your business as it is to the government. When one person has all the power, the system is likely to fail. Just like a system of checks and balances, having dual control in place is ideal for any business.

One employee can be responsible for setting up ACH payments and wire transfers, while another employee can be responsible for approving these numbers.

Reviewing and catching critical errors is a vital part of this process. If there is oversight by more than one person, the possibility of theft and fraud significantly decreases. When dual control is in place, the system can often be effective in combating asset misappropriation.

By practicing the separation of powers, three main functions are able to occur:

1. Custody of assets
2. Authorized use of assets
3. Record keeping of these assets

It might seem that having two employees dedicated to managing assets is overkill for your small business. While it might be challenging to achieve, it should be implemented whenever possible to improve the overall performance of the organization.

3. Single User/Password
Every day you and your employees access websites to conduct business as usual. Many companies share one login to their bank, accounting software, credit card, and other financial accounts. Where do you store your vital login information? In a spreadsheet? On your phone? Printed out and next to your computer?

Either way, these are not secure ways to save your password information. These logins are so easy to hack and steal that it is up to your company to protect itself.

Make sure each user/employee is set up as an authorized user, and you can set the rights for each person. You can also research inexpensive and secure apps or websites to hold your logins, ensuring that the hacking rate drops significantly. When people leave the organization, make sure to delete the username and change common passwords.

4. Expense Reimbursement
Implement a process for all employees to follow regardless of hierarchy. Make sure to have an annually updated policy and require receipts/invoices over a certain dollar amount.

If you have corporate credit cards, you can utilize merchant category codes to restrict the types of goods/services for which they are used. For more information on this process, you can reach out to your card company for assistance.

Read More: The Three Main Internal Controls for Accounting and How They Protect Your Assets

How Should Internal Controls Be Implemented?

Has your business ever completed an internal control audit? If not, this is a great place to start. By completing an audit, the effectiveness of any current controls is tested, and the audit can also highlight weak points for the company.

When your organization takes part in an audit, there are essential processes and paperwork that need to be reviewed by a CPA. Having a set of eyes outside of your organization can be vital to the success of this audit.

While it might require preparation and a lot of documentation, the result will provide your organization with information that is consolidated all in one place, making it easy to access financial reports and statements in the future.

The implementation process itself can be quite an undertaking for a company to manage itself. For this reason, we recommend you find an expert to take on and manage this audit.

eGuide: What Business Should Expect From Their Accounting Department

How Often Should Internal Controls Be Updated?

All of your company’s internal controls should be updated yearly. One easy way to remember to do this is to make it part of your annual shareholder meeting where the control details can be documented and voted on.

While these are examples of simple internal controls to implement, the Signature Analytics team of experts can make recommendations based on your industry and the nuances of your business.

If you need assistance, please contact us to have internal controls set in place or feel free to ask us any other accounting and finance questions.

 


 

Discover how outsourced accounting can provide more visibility into your business

Top 10 Things Every Business Needs to Know About Sales Tax

Top 10 Things Every Business Needs to Know About Sales Tax

As a business owner, you are used to facing never-ending checklists to help get your new ventures up and running. Before the first customer walks through the door, the new owner has already tackled seller’s permits, licensing, zoning, and registration, among other hurdles. Even after these boxes have been meticulously checked, businesses selling tangible personal property, and even some providing services, have another primary consideration – sales tax.

Depending on your business model, the idea of staying compliant with sales tax regulations can be overwhelming; however, if you get your shop set up correctly, compliance is relatively simple.

The following are answers to the most common questions business owners have about sales tax.

1. What is sales tax?

Typically, sales tax is an amount of money that is calculated as a percentage and added to the cost of a product or service. Retail sales receive tax, and 45 of the 50 United States enforce this rule.

2. Do I have to collect sales tax on all of my sales?

Not necessarily. If you make a sale to a customer to resides in the same state as your business, you collect sales tax. If the customer purchases from outside the state, you do not collect sales tax. For example, if your California business makes sales to California residents, you would need to collect sales tax.

Deliveries made to a state in which you do not have a physical location are generally not subject to state sales tax. However, the purchased product must be shipped directly to the purchaser’s out-of-state location and must be intended to be used outside the state. In this case, neither the purchaser nor its agent may pick up the purchased property within the state.

Read more: Top 10 IRS Tax Issues

3. What rate do I charge my customers?

The state or other governing municipality determines the rate.

For example, California’s sales tax varies depending on the district. It can range from as little as 7.25% (the statewide minimum) to as much as 10.5% in the Los Angeles County suburb of Santa Fe Springs.

4. Am I supposed to charge a rate based on where the customer is located?

When determining the rate to charge, you must first learn whether you are operating in an origin- or destination-based state. California is a hybrid, modified-origin-based state where taxes of the state, county, and city are based on the source of the sale, while district taxes are based on the destination of the sale. California gives you two options in applying this; both are acceptable.

  1. The first option is to charge the state rate plus your district rate on sales shipped within your district. For sales shipped outside your district, collect the state rate only. If you choose this option, the customer is technically liable to remit the omitted district tax to the state.
  2. The second option is to charge the state plus the district rate for every single sale shipped to a customer in California. This process ensures that the local district tax always gets collected.
    It is worth noting that collecting the same sales tax rate from every customer in California is technically wrong. If you do this, you are most likely not collecting the correct rate on every sale.

5. If the customer does not pay the sales tax, do I still have a liability?

Yes. The seller is responsible for the sales tax, not the purchaser. The law allows that the retailer may be reimbursed by charging the sales tax to their customer. However, even if the customer does not give an extra amount of money intended as “sales tax,” you are still liable for remitting the full amount of the tax.

6. If the tax I withhold is higher than the tax owed, what do I do with the difference?

Technically, if you collect more than the amount of tax due, you must either return the excess amount to the customer or pay it to the state.

7. What if the customer does not ultimately pay for the product provided?

Sales tax is imposed on completed sales, not collections. Even if the customer account becomes uncollectible, the retailer is still responsible for tax on that sale. Keep this in mind when preparing sales tax returns. If an account is not yet collected, gross receipts from the sale must be included in the tax base for sales tax purposes.

8. Are any sales exempt from sales tax?

Yes. Some common examples of exemptions and deductions include:

  • Sales for Resale (if supported by resale certificate or purchase order)
  • Some Food Products (for example, cold food sold to-go)
  • Labor (Repair and installation)
  • Sales of prescription medication
  • Sales to the U.S. Government

9. When are my taxes due?

Businesses are assigned a filing frequency based on the total sales tax collected. Your business may need to file monthly, quarterly, or yearly.

10. Is a sales tax return required even if my liability for the period is zero?

Yes. Every business with a sales tax license is required to file a return even though no sales were made during the period covered by the return. However, if you have seasonal sales or your sales tax liability has declined, you may request less frequent filing from the state.

Read more: How To Reduce Your Tax Liability

This Is The Bottom Line

Sales tax is an essential source of revenue for the state, and you should strive for full compliance in this area to avoid costly penalties and fees that result from a sales tax audit. By setting up your business early with a system that ensures correct collection and remittance of sales tax, you can avoid unnecessary expenses and fees in the future. Contact us if you need help.

Tips And Tricks For Filing 1099s: The Deadline Is In January

Tips And Tricks For Filing 1099s: The Deadline Is In January

The beginning of the year is anything but dull, but after the holiday celebrations, it’s time to settle down and get organized for tax season. While employees might not have taxes on the brain until April, businesses, and employers are busy preparing early on. It’s crucial to start this process sooner rather than later, so no paperwork is forgotten. One essential form to remember is 1099.

What Is A 1099 IRS Form?

A 1099 IRS form is a record of a person or an entity providing payment to someone. There are several types of IRS 1099 forms, such as 1099-MISC, 1099-INT, 1099-CAP, and more. These informational returns are used to record payments to individuals or partnerships for interest, services, bonuses, and other types of income paid during the year.

Please note that business owners must file 1099 forms with the IRS and send a copy to the individual each year by January 31st, the same as the W2 filing deadline.

What Are Examples Of The 1099 Form?

  • If you paid more than $600 to a freelance website designer, you must file Form 1099-MISC
  • If you have convertible notes payable that accrue interest during the year, you must file Form 1099-INT
  • If you paid dividends to inventors, you must file Form 1099-DIV
  • If you forgave an outstanding debt during the year, you must submit form 1099-C
  • All amounts paid to law firms must be reported on a 1099, regardless if the law firm is categorized as a corporation and even if the amounts are less than $600

Here Are The Accounting Best Practices for 1099s

Good recordkeeping is key to fulfilling this requirement and meeting the January 31st deadline:
Payments to vendors should be categorized in your books and records by vendor and not merely by category or expense line item.
Small businesses should always request a form W9 from any vendor with whom they conduct business. A W9 will tell you if the vendor is a Corporation (excluded from 1099 requirement) and what their federal tax ID number is (needed for the 1099).
Read More: Financial Tips From Successful Leaders

These Are Common Mistakes To Avoid

Below are some examples of mistakes commonly made by small business owners when it comes to 1099 rules:

  • Classifying employees as a 1099 vendor when they meet the IRS definition of a W2 full-time employee.
  • Giving expensive gifts or prizes to sales representatives or others without issuing a 1099 for the value of the gift.
  • Not filing a 1099 for interest accrued on convertible notes or other bonds.
  • Not keeping proper records or requiring a W9, so when it comes time to prepare the 1099s they are filed late due to trying to collect all the necessary data from each vendor.

Read More: Tax Planning Strategies: What You Need To Know For 2020

Get Started On The Forms Today

Do not wait until the last minute. Reduce the January time crunch by reviewing your vendor list with your accountant in December if you can remember. Find and address issues early and make sure you have a plan to get the 1099s filed by the January 31st deadline.

Signature Analytics Can Help

If you need help preparing the data necessary to complete your 1099s, have questions about who you should be sending this form to, or any other financial paperwork inquiries, please contact us today.

 

 

Cryptocurrency: how electronic money can affect accounting

Cryptocurrency: how electronic money can affect accounting

Before we had paper money, developed countries like the U.S., Canada, Japan, etc. used commodity money; finite goods with intrinsic value like gold, salt, and cocoa beans, as mediums of exchange.

Even today, developing countries use commodity money as currency.

In 2005, a brewery in Cameroon promoted the sale of their beer by placing prizes under bottle caps. Winners could walk away with prizes ranging from a free bottle of beer to luxury cars. And because winning bottle caps were valued as much as $1 each, bottle caps were being used as a form of currency in place of money.

So what makes currency money?

Money doesn’t need to have intrinsic value to be considered valuable; it only needs to facilitate exchange.

What is cryptocurrency?

Cryptocurrency (Bitcoin, Litecoin, Ripple, etc.) is an electronic medium of exchange which typically utilizes blockchain technology. Cryptocurrency is not a “fiat currency,” meaning that unlike paper money issued by developed governments, cryptocurrency hasn’t been declared a legal tender.

What is the cryptocurrency impact on accounting?

When trying to account for cryptocurrency, one of the biggest issues is trying to recognize the true value of the asset. Accountants try hard to portray a company’s assets and liabilities as accurately and truthfully as possible, but when an asset’s inherent value fluctuates wildly and is not backed by something more concrete, such as a physical asset, it becomes difficult to definitively say “one unit of this cryptocurrency is worth X.”  

However, because cryptocurrencies are still a medium of exchange, the accounting treatment of an asset remains fairly constant over time.

Downsides of cryptocurrency

In 2009, North Korea informed citizens that the won (its national currency) would be redenominated. Not only was their currency changing, almost overnight, but citizens were only allowed to exchange a limited amount of old currency, rendering many people’s life savings worthless.

Government-issued currencies have an inherent protection of the value by the backing organization’s credit (in the case of the U.S. dollar, the Federal government guarantees the value). Unfortunately, without being a government-backed coin, cryptocurrency has the potential of being just as volatile. Volatility typically arises from the fact that there is no underlying asset from which the cryptocurrency derives its value.

How businesses can leverage cryptocurrency

There are plenty of risk-averse companies performing services in exchange for cryptocurrency or similar related obligations (i.e. call options, warrants, etc). This obviously depends on your risk appetite and ability to withstand a negative outcome from the investment.

Depending on the cash needs of the business and the speculative volatility of the cryptocurrency, it may be an alternative means of fundraising, even if supplemental to the typical means of currency such as bank loans, angel investors, or private equity.

Another option is to undertake what is called an Initial Coin Offering, or ICO. This is similar to an IPO (Initial Public Offering) whereby a company has a set amount of cryptocurrency coins they sell to the public in order to raise capital. Although the concept is still relatively new and the regulatory bodies are grappling with how to treat ICOs, popularity will increase over time particularly because they aren’t usually tied to specific assets. Instead, they are akin to corporate paper in that they are backed only by the reputation of the issuing entity but are not a debt instrument.  

Cryptocurrency has the potential to make a lot of money from fluctuations. Accountants should know how to help their clients understand the tax ramifications of electronic money or how it can affect reporting. If your business needs assistance with reporting, accepting cryptocurrency for payment, or leveraging cryptocurrency, contact us today.

Leading vs. Lagging Metrics

Leading vs. Lagging Metrics

Metrics are an important tool to measure results and drive the right behaviors in a business. The best businesses utilize metrics to improve results and involve staff at all levels in the reporting of these results. However, one mistake that business owners often make is looking only at lagging metrics. In order for metrics to be useful in driving performance results, the business needs to look at leading metrics. The earlier the business can catch issues and problems, the better off the business will be, as it’s easier and less expensive to solve issues earlier rather than later.

For tangible examples, here are two often-used metrics that are often used to measure results that are detrimental to a business. By taking a closer look at the inputs to these metrics, the business owner can see which behaviors and processes are influential and measure them separately, so as to drive better results.

Scrap/Yield

Scrap and yield losses are critical business metrics to measure. However, once the business reaches the point of scrapping a product, the loss has already occurred. The business owner needs to go upstream and measure behaviors that drive better yield and scrap results. For example, a business owner could measure vendor quality at receiving/inspection. Metrics such as PPM (parts per million, or defect rates from the vendor) effectively show whether the parts that are received from the vendor meet the desired quality specifications. If quality can be measured at the vendor level, then there is a higher chance that the final product yields will be higher and scrap will be lower.

Employee Turnover/Retention

Voluntary turnover is an important measure for HR. But by the time the business reaches the point of measuring turnover, the employee has already gone. By measuring certain behaviors, the business owner can identify issues before a good employee leaves the company. One problem might stem from reviews and raises not being delivered on time. If HR begins measuring the delivery of reviews each month, with the goal set at 100% on-time reviews. This could make employees feel more valued by the company and lead to a reduction in employee turnover.

When used effectively, business metrics are an invaluable tool to measure a company’s results and drive the right behavior and actions among employees. But a business owner shouldn’t only look at the metrics used to measure the business. He or she should also question whether the metric is a leading or lagging indicator, and consider the flow of data for that metric. The more outcomes the business owner can measure upstream, the easier it is to find and correct problems and issues before they become unfavorable results.

Employee Stock Option Basics: Considerations & Best Practices

Employee Stock Option Basics: Considerations & Best Practices

Stock options can be a great way to motivate key employees, help them feel more invested in the future of the company, and make overall compensation plans more attractive to current and prospective employees. For these reasons, it is becoming increasingly popular for companies to issue stock options to their employees.

Large, publicly-traded companies such as Starbucks and Southwest Airlines grant stock options to many, or all, of their employees. Start-ups may also grant stock options to employees who take the risk to work with the company at an early stage with the hope of large payouts once the company goes public or is purchased.

If your company is considering granting stock options to your employees, below are some best practices and considerations to keep in mind prior to rolling out an employee stock option plan.

Employee Stock Option Basics

An employee stock option is a contract issued by an employer to an employee to purchase a set number of shares of company stock at a fixed price through an established period of time.

The two classifications of stock options issued are incentive stock options (ISO)—which can only be granted to employees—and non-qualified stock options (NSO), which can be granted to anyone, including employees, consultants, and directors.

Key Considerations

As you set-up your employee stock option plan, it is important to consider the following:

    • Amount of ownership you are willing to dedicate to employee equity compensation.
    • Impact of stock options on the valuation and/or dilution of your current investors and owners of the company.
    • A company valuation (required under IRC 409A) will be necessary to determine the underlying price per share of your company’s stock. Typically this must be performed by an outside valuation professional on an annual basis and may be costly.
    • Timing and size of grants, including an expectation of future grants to current and future employees.

Accounting Implications of Stock Option Plans

    • Under Accounting Standards Codification (ASC) 718, companies are required to record stock compensation expense over the vesting period of the stock option grant. As this amount can be difficult to value, it is typical for companies to use an outside professional or program to calculate this expense on an annual basis.
    • As stock compensation is a non-cash expense, it is typically ignored by non-audited companies; however, it can be a costly and lengthy process to record past years of expense in the first year of an audit. Therefore, keeping detailed records of option grants, exercises, and employee termination dates from the beginning will greatly decrease the time required to calculate the expense and related financial statement disclosures if/when you require audited financial statements.
    • Options issued to consultants for services must be revalued each reporting period, thus complicating your expense further.

Implementing a New Stock Option Plan

Implementing a new equity compensation program often requires assistance from outside your organization.

    • Lawyers will be required to compile the plan documents and individual stock option award agreements to ensure you are meeting all legal and compliance standards.
    • Professional help can also be beneficial in designing and implementing your plan.
    • A tax professional should be consulted to ensure you are issuing options in a way most tax beneficial to your company and employees.

We Can Help

If you need assistance calculating the stock-based compensation for audit purposes, or would like to better understand some considerations for incentivizing your employees or attracting new talent, contact us today.