Mark Bailey – Page 11 – Excelsis Accounting Group

2018 Q3 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

July 31

• Report income tax withholding and FICA taxes for second quarter 2018 (Form 941), and pay any tax due. (See the exception below, under “August 10.”)

• File a 2017 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

• Report income tax withholding and FICA taxes for second quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 17

• If a calendar-year C corporation, pay the third installment of 2018 estimated income taxes.

• If a calendar-year S corporation or partnership that filed an automatic six-month extension:

• File a 2017 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.

• Make contributions for 2017 to certain employer-sponsored retirement plans.

How materiality is established in an audit or a review

When accountants conduct an audit or review, they can’t test every transaction. Instead, they set a “materiality” threshold. Several definitions of materiality exist. But the universal premise is that a financial misstatement is material if it could influence the decisions of financial statement users. To establish the right level of materiality, auditors rely on rules of thumb, apply professional judgment, and consider the amount and type of misstatement. Contact us for more information on what’s considered material for your business.

Marital Dissolution in Community Property States

The complexity and differences between the community property statutes of the nine mostly western states* that have adopted them have created a tax consulting and preparation quagmire that can intimidate even the most knowledgeable accountants and attorneys. We will begin by addressing some basic Federal tax implications, and follow up in future posts with valuation issues.

Property

Definition: “Generally, community property is property that you, your spouse (or your registered domestic partner), or both acquire during your marriage (or registered domestic partnership) while you and your spouse (or registered domestic partner) are domiciled in a community property state”. IRS Publication 555.

Continue reading “Marital Dissolution in Community Property States”

Surviving Divorce: Eight Steps to Starting Over

No one ever expects to get to this point. The anger, deception, frustration and fear have taken over your normally rational mind and you are not thinking clearly. Your friends, family and work place associates are all experts at telling you what to do, yet they have not been through it themselves and only have few facts relevant to your situation. The situation creates it’s own momentum and you are confused and unsure of what to do next. Following are suggestions for getting on track and moving forward.

Continue reading “Surviving Divorce: Eight Steps to Starting Over”

Audit Committee Standards

While there are many requirements and expectations of an issuer’s audit committee, the 1934 Exchange Act under rule 10A(3) mandates five specific standards in order for a company to be listed.

1. Independence – each member of the audit committee must be a member of the Board of Directors of the listed issuer, and must otherwise be independent:

– there can be no consulting, advisory or compensatory relationship, outside of that as a member

– members of the AC can not be affiliated persons as defined of the issuer or any subsidiary.

2. Responsibility – the audit committee, as a sub-committee of the Board of Directors must be directly responsible for the appointment, consultation with, and retention of the registered independent accounting firm, while including oversight including problem resolution between management and the auditor.

3. Complaint Resolution – the AC must establish procedures for addressing complaints received by the issuer including anonymous submission by employees.

4. Advisers – the AC must have the authority to engage advisers, including accountants, auditors, attorneys and consultants they feel are reasonable and necessary to carry out the duties of the committee.

5. Funding – the issuer must provide appropriate funding to allow the AC to carry out their duties as a committee of the Board of Directors.

Our experience has been that if there is a failure in meeting the requirements for an audit committee established by the ’34 Act it typically is for one of two reasons: first, and most common there is often confusion as to who the auditor should be responsible to – the AC or management. All too frequently, the unofficial role that management can play in the selection of the auditor becomes significant. Second, is the ‘step-child’ status many audit committees relegate complaint resolution too. this absolutely can not be the case if the issuer is going to minimize exposure, considering our litigious society.

MD & A Are You Blowing an Opportunity?

As a service to our public company clients we routinely perform an extensive review of the other information included in their annual report. While completing a large number of such reviews recently for our clients with December 31 year-ends we became aware of opportunities that are regularly over-looked by issuers. In preparing Management’s Discussion and Analysis there are some critical elements that will make them more effective.

Attitude – your MD & A is an opportunity to tell the story of the company in a positive way. As is your web page, your SEC filings are the ‘face’ of the company to potential shareholders, investors and others considering doing business with you. Do not minimize this opportunity by viewing it primarily as an obligation. We all have a tendency to spend less time on things we view as ‘necessary evils’ as opposed to ‘opportunities’.

Approach – the primary purpose of the MD & A is to allow the reader to “look at the company through the eyes of management by providing both a short and long-term analysis of the business of the company” (SEC Financial Reporting Policies sec. 501). The MD & A is intended to be entirely prospective, not historical. Too frequently we see comments like “As of 12/31/x1 revenues declined $xxx,xxx which was a reduction of x% over revenues of $xxx,xxx as of 12/31/x0”. That’s historical, not prospective, and anyone could calculate it from the financials. It provides no additional information of any value to the reader.

Executive Level Overview – Sec. 501.12 is a gift from the SEC that most issuers don’t open. This is a chance to tell your story. Because many companies have become larger, global and more complex, and the disclosure rules correspondingly so, MD & A has become lengthy and complex and correspondingly, boring and so not read as thoroughly as it should be. In an effort to improve clarity and understandability many company’s are incorporating an Executive Level Overview (ELO) as an introductory section summarizing the most significant areas of the MD & A that management wants to emphasize. Typically this includes: economic or industry wide factors; how the company earns revenues and generates cash; lines of business, locations, principle products, services; and provide insight into material opportunities, challenges and risks which management is most focused on.

It is a ‘highlight’ of those things that are important to the company, reported elsewhere as well (e.g. Risk Factors, or Business Description).

Liquidity, Capital Resources, Results of Operations – You must address each of these areas specifically. When drafting these comments keep in mind that you should address three questions for the reader: (1) What happened? (2) Why did it happen? and most importantly (3) Is it expected to continue? That last one is the crux of the MD & A. Remember – the reader is entitled to assume that “past performance is indicative of future performance” unless you tell him different.

Other Tips – (1) If you’ve previously discussed it in your Form 10k you don’t need to keep beating it to death unless it applies to new information in the current interim filing . Most companies over disclose information that they’ve previously discussed numerous times. The unwelcome result is that the points you want to make get buried in the irrelevant. (2) Discussion for interim reports should be limited to material changes occurring subsequent to the last annual report. Over disclosure, again, can result in burying relevant information in the minutiae. (3) The SEC requires that it be “presented in clear and understandable language”. That means you need to lose the ‘legalese’. (4) In the words of an internationally recognized securities attorney with whom we’ve worked – “Disclosure is too important to leave up to only the attorneys”. While their focus is compliance, as it should be, this is more than a compliance document. It is the public face of your company. Remember it is an opportunity to ‘sell’ to investors, financiers and those people you want to do business with. (5) Finally, sentence structure, grammar and spelling are critical. If your MD & A is sloppy, those reading it will assume the company is run the same way.

You have a great company with a great business plan and outlook for the future. Tell the world in your MD & A.

Would SOX 404(b) Have Protected Koss?

Koss Business Fraud & Embezzlement Last week Koss, the manufacturer of high quality head phones, disclosed that their principal accounting officer had embezzled between $4.5 million and $31 million between 2005 and December, 2009. The advocates of requiring small issuers to annually file integrated audit reports on their respective internal control systems immediatley pointed at Koss as justification for requiring the implementation of 404(b) beginning in June, 2010. Is this adequate justification? For several reasons, I don’t believe it is.

This was an intentional fraud. Neither financial statement nor internal control audits are designed to guarantee the detection of fraud. Yes, an internal control audit would have disclosed the existence of significant deficiencies and material weaknesses. An expanded internal control review might have even stumbled across the defalcation. More likely it would have only resulted in an adverse opinion on the internal control systems by the company’s auditor. This could have been an alert to investors, but more likely it would have been ignored as the SEC’s own studies have indicated. Integrated audits have not resulted in a higher level of confidence by investors. Fraud audits for all issuers require a lower level of materiality that can not be justified economically.

If in this particular case the amount embezzled was material for any of the five years effected it would seem that it should have been detected under normal financial statement audit procedures in at least one year. A failure by the audit firm to properly complete an audit is not justification for adding another layer of regulation on small issuers under SOX.

The company had retained the same national audit firm for the past five years. Based on the professional fees disclosed in the proxy statement it is possible that Koss was a small fish in the big pond of this national firm and may or may not have gotten the service it needed and deserved. Some large national firms have been known to ‘rank’ their clients. If you are not the big dog on the porch you are not likely to get the same level of expertise, experience and service as the bigger clients.

Cost. Certainly for Koss the cost of an ICFR program – including both the external audit fees and the internal program costs – would have been less expensive than the amount embezzled, but requiring all firms to bear a cost to ‘potentially’ prevent an occasional fraud loss of this type is ridiculous. Theoretically, 404(b) would cost a firm similar in size to Koss, $250,000 annually (ballpark WAG). One-third to one-half of that being for the external auditors. So the investors in Koss would have been out something in excess of a million dollars. The cost/benefit equation for requiring this universally just wouldn’t seem to balance, unless you subscribe to the premise that something graeter than 10% of all statements are fraudulent.

There are already criminal and civil penalties in place to protect the investor from this type of malfeasance as we’ve discussed in our prior posts. Another in the form of 404(b) is not needed. The responsibility to the shareholders rightfully lies with the Audit Committe of the Board, the Board of Directors and management. If more company oversight is needed and beneficial those charged with governance are ostensibly sophisticated enough and in the best analytical position to know and provide it.

I still view the cost of 404(b) as an ineffective unsupportable dissipation of investors equity. We’ve had some great dialog on this topic in the past. Did I change anyone’s mind?

IFRS – Time to Panic?

IFRS is a ticking time bomb! In recent months the focus of discussions related to adoption of the International Financial Reporting Standards have centered on differences with US GAAP (such as LIFO inventory), timing and implementation. I don’t want to debate the necessity of adopting a world standard given our weakening influence over the world economy, or the esoteric benefits or detriments. My concerns are much more basic. Without tort reform in the United States, IFRS is a time bomb with a very short fuse resulting in a cataclysmic disaster waiting to happen.

Currently, US GAAP is a rules based set of standards. While the end result of their application frequently results in worthless unsupportable financial reporting, the issuer and their auditor have but to point to the ‘rules’ in defense. On the other hand, IFRS is principles based, and simpler to apply. But it can and frequently does require the issuer and his auditor to exercise judgment. Judgment that can be questioned, criticized and litigated.

Please don’t misunderstand. Professionally in my opinion the quality of financial reporting will be significantly improved by the application of sound principles. IFRS is long overdue. Without liability reform, however, I fear financial reporting and assurance services will quickly follow the health care industry in terms of cost to the providers.

Maybe I’m just paranoid in my advancing years.

Oil and Gas Accounting – SEC Issues SAB 113

Oil & Gas Industry The Office of the Chief Accountant through Corp Fin recently published Staff Accounting Bulletin 113. There are four main areas of focus within this SAB which will likely affect everyone to some degree: valuation methodology of oil and gas reserves; clarification of methodology related to write-offs of excess capitalized costs under the full cost method; extending appliability of guidance to include unconventional methods of extracting oil and gas from sand and shale; and removing information from the guidance which is no longer necessary.

For the most part SAB 113 is pretty straight forward, however, as is the case with many of the SABs, hidden in the minutiae are land mines for the unwary or uninformed. Correspondingly you would be well served to skim through it for any matters that might affect your company, and then discuss them with your audit firm.

Additionally, on October 26, 2009 additional Oil and Gas Rules were released. These compliance and disclosure interpretations (C & DIs) relate to Regs S-X and S-K. There is some important information here which is very relevant and brief!

SOX 404(b) – The Tar Baby and the SEC

Br'er Rabbit and Tar-Baby As a youngster the Song of the South stories penned by Joel Chandler Harris at the beginning of the 20th century and brought to life by Disney were some of my favorites. In one, Bre’r Fox and Bre’r Bear make a tar baby to catch Bre’r Rabbit. Bre’r Rabbit becomes offended when the inanimate tar baby doesn’t respond, strikes it and becomes stuck to it. The more he struggles the more inextricably attached he becomes. It certainly seems that the SEC has found a tar baby in SOX 404(b) as it pertains to non-accelerated filers.

Recently the SEC deferred the compliance date – once again. This time for 9 months. The reason for further deferral was explained as being necessary as the results of an on-line survey conducted by the SEC which was not completed in time. A survey, I venture, that was essentially unknown to virtually everyone it might have affected, so not having it available was irrelevant.

As you may recall the original rationalization for 404 included the premise it would reduce fraud while increasing investor confidence in the issuer’s reporting. Those interviewed for the survey above indicated they did not believe there had been any increase in investor confidence as a result of 404 applied by large filers. Yet in his public comment, Commissioner Aguilar stated ” I join Chairman Shapiro in assuring investors that there will be no further extensions of the compliance deadline.” What am I missing? By the SEC’s own survey, investors don’t care! So why is it mandated? Certainly there can and have been benefits enjoyed by larger issuers. For them it is good governance in many cases, and worthwhile. But not for small companies.

There is essentially no benefit to most non-accelerated filers either actual or perceived in most cases, and the cost is proportionately greater than for larger companies. Both the SEC and the PCAOB have exercised common sense in promoting ‘scalability’ in other areas. They need to do so here as well by eliminating the requirement – one with no or negligible benefit and grossly disproportionate cost – for small non-accelerated issuers.

Will it reduce fraud in small companies? I seriously doubt it and I believe most public company audit partners would agree. The SEC has the weapon it needs to fight fraud in the 302 certifications.

Send this tar baby back to Congress and let the money be redirected for innovation and growth.