Fraud in Non-Profits?!

Posted on November 25 2014 by admin

It can’t be. After all, these organizations are meant to help those less fortunate than ourselves. Why would anyone commit fraud against a non-profit organization?

Unfortunately, because they can is too often the answer. Many non-profit organizations simply don’t have the staff or the budget to implement proper internal control procedures to help mitigate the risk of fraud. Sometimes it is those that you would least expect to commit the fraud that do.

Recently a minister in Tulsa, OK pleaded guilty to three counts of wire fraud and one count of subscribing to a false tax return. The minister admitted to personal use of approximately $933,000 of funds donated to build a community center. The funds were used on automobiles, liquor, jewelry, hotels, gambling and renovations to his personal home.

In September, a husband and wife in Los Angeles County were charged with embezzlement from a nonprofit agency meant to help abused and neglected foster children. The executive director and assistant executive director of the Little People’s World agency are charged with 22 counts of embezzlement and misappropriation of public funds. The couple “borrowed” more than $460,000 from the agency over a period of several years to fund their own investments and vacations.

Management, including board members, of non-profits need to make fraud prevention a priority. Oftentimes management of non-profits are so focused on the mission, as they should be, that they become too busy or unconcerned about something they don’t think could happen. And when it is management that is committing the fraud, those around them may be too intimidated to speak up. But speak up they must.

Non-profits should be training their volunteers on the “red flags” of fraud. Why does the executive director take so many trips? How does he/she afford that new car every two years? Was that jewelry a gift? And they should be directed as to whom they should speak regarding their concerns.

We all want to be trusting, especially when working with others for a common cause. But we must also be vigilant to help protect that cause.

By Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABV

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Metro Phoenix 2014 Third Quarter Office Market Report

Posted on November 18 2014 by admin

Vacancy Rates Fall From 23.0% to 21.6%

The Phoenix office market continued to improve through the third quarter of 2014 – its best quarter of the year to date – with 798,563 square feet of net positive absorption, bringing the year-to-date total positive absorption to 1,830,275 square feet. Vacancy also improved during the quarter, falling from 23.0% to 21.6% – its lowest level in six years.

Rents Remain Flat

According to Lee & Associates, despite the strong absorption in the third quarter of 2014, rents have stayed flat and will continue to remain there until vacancy rates fall below 20%.

Third Quarter Metro Phoenix Office Market Statistics

Microsoft Word - 111814_Metro Phx  2014 Third Qtr  Office Market

Southeast Valley is Top Performing Submarket

Newmark Grubb Knight Frank (NGKF) reports that the Chandler/Gilbert submarket was the top performing office sector in metro Phoenix during the third quarter of 2014 with 168,081 square feet of positive absorption. According to NGKF, “The driving force behind the positive numbers was the movement of General Motors into its new information technology center in Chandler.”

New Construction Bodes Well for the Future of the Metro Phoenix Office Market

In the Valley, 2,255,470 square feet of office space is currently under construction with Chandler and Tempe accounting for most of it.

Tenant Demand Exceeds Supply

Real estate commentators are optimistic about the rebuilding and repositioning of the Phoenix office market attributable to tenant demand exceeding supply.

By Gary Ringel, Managing Director of Henry & Horne, LLP’s Real Estate Appraisal & Consulting Group

(1) The source for the statistics is Lee & Associates Q3 Phoenix Office Market Report. We excluded submarkets with total inventories of 1,000,000 square feet or less.

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Use of a Calculation Report in the Court Room

Posted on October 22 2014 by admin

Per the AICPA Statement on Standards for Valuation Services #1 (SSVS #1), a valuation analyst may complete a calculation engagement for which he/she would submit a calculation report. A calculation engagement is much more limited in scope than a valuation engagement. A valuation engagement is performed for the purpose of expressing an opinion of value and requires consideration of all relevant information and the application of all relevant valuation methods and procedures. A calculation engagement is an agreement between the valuator and the client as to which valuation approach or approaches will be used and the extent of the procedures to be applied in the process of determining a calculated value. A calculation engagement does not result in the expression of an “opinion” of value but rather a calculated value. It is possible that a materially different value could be derived using a calculation rather than a valuation engagement. A calculation engagement is typically requested by a client who is just trying to get a feel for a business’ value but does not want to spend the amount of money necessary to have a valuation engagement performed.

There is some debate among valuation analysts regarding the use of a calculation of value in a litigation environment. Because the engagements are limited in scope, some analysts do not feel comfortable testifying in court to a calculated value. If an opposing expert provides an opinion of value through a valuation engagement, the expert relying on a calculation of value may be subject to some harsh scrutiny under cross-examination regarding why a valuation engagement was not performed.

A recent Federal court case in the State of Pennsylvania dealt with whether or not a calculation of value is admissible as evidence under Daubert. In Hipplie v. SCIX, LLC, the plaintiff’s expert submitted a calculation of value. Under deposition testimony, the expert stated that he had limited information about the financial records of the Company and therefore could not perform a full valuation engagement. Defendants issued a Daubert challenge stating that the report failed two requirements, reliability and fit (relevance). The defendants asked that the calculation report be precluded from evidence.

The court sided with the Plaintiffs and allowed the report to remain in evidence. The court stated that a calculation report was approved by the AICPA, that the expert had reasonably explained why a full valuation could not be performed and that the methodologies and assumptions made were clear. The court found no reason for the trier of fact not to hear the testimony.

The weight of reliance the court put upon the calculation of value was not available as of this writing. Admittance as evidence and reliance upon are, as they say, two different things. A recent family court case in Arizona highlights this fact. A calculation of value was submitted by one of the experts in a marital dissolution case. The use of the calculation was not objected to and no Daubert challenge was issued. However, in its ruling the court determined that the calculation of value was not thorough or complete and did not reliably apply the principles and methods regarding business valuation to the facts of the case.

Although calculation reports may be admitted as evidence, it is the opinion of Henry & Horne, LLP that they do not contain enough facts or data to reliably provide a value to a court of law.

For more information about calculation vs. appraisals, please read the article entitled “Calculation vs. Appraisal Opinion in Marital Dissolutions” written by Stephen Koons.

By Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABV

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Estate & Gift Tax Valuations: Can the IRS Disregard an Agreed Upon Value for Shares in a Buy-Sell Agreement?

Posted on October 21 2014 by admin

Section 2703 of the Internal Revenue Code enacted in 1990 states that buy-sell agreements are disregarded for valuation purposes, unless the agreement satisfies the following tests.

Test One: The Agreement Must Constitute a Bona Fide Business Arrangement

The buy-sell agreement (Agreement) cannot be a ploy to transfer shares to members of the family at a price that is less than full and adequate consideration.

Test Two: Formula Clauses Must be Fair and Reasonable

If the Agreement includes a formula, it may not result in a transaction price that is lower than what would be agreed upon in an arm’s length negotiation.

Test Three: Terms and Conditions Comparable to Those in a Contract between Unrelated Parties

The covenants, restrictions and conditions in the Agreement must be consistent with practices incorporated in a business contract between unrelated shareholders.

Prior to the enactment of Section 2703, Treasury Regulation 20.2031-2(h) (Regulation) governed the manner in which a buy-sell agreement should be interpreted for estate and gift tax valuation purposes. This Regulation sets forth additional tests that are still considered relevant by most commentators.

Test Four: Agreement Must Include Valuation Methodology

The Agreement must include an explanation of the manner in which the value of the shares is determined.

Test Five: Shares Must be Sold Upon the Death of a Stockholder

In the case of an estate, upon the death of a shareholder, the Agreement must obligate the personal representative to sell the decedent’s stock.

Test Six: Shares Must be Offered to the Remaining Shareholders or Corporation Upon the Death of a Stockholder

When reporting the market value of a decedent’s shares, the agreed upon transaction price in the Agreement can be relied upon only if the contract includes a right of first refusal provision that vests the corporation, remaining stockholders, or a third party with the right to acquire the shares at a price which exceeds the stipulated sale price in the Agreement.

Make sure your buy-sell agreement satisfies the tests presented in Section 2703 and Regulation 20.2031-2(h).

By Gary Ringel

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Will My Gift Tax Return be Audited?

Posted on October 15 2014 by admin

Gary Ringel, Managing Director of the Business Valuation and Litigation Support Services group at Henry & Horne, LLP, wrote an informative article in our quarterly September 2014 BV/Lit e-News publication about the IRS and the likelihood of increased gift tax audits in the future. Gary reported that gift tax returns increased from 219,544 in 2011 to 258,393 in 2012. The increase in the total dollar amount gifted is much greater increasing from $51 billion in 2011 to $135 billion in 2012. As many did not file their 2012 gift tax returns until 2013, I expect both the number of returns filed and the gift amounts reported in the 2013 filings to be even greater than in 2012.

As Gary pointed out in his article, many professionals expect the Internal Revenue Service to shift resources from estate tax returns to gift tax returns as estate tax returns have declined significantly due to the estate, gift tax, and generation-skipping transfer tax exemption amount now in excess of $5 million. In 2012 there were 28,061 estate tax returns filed and only 8,693 of them were taxable estates. (*) Estimates are that only 0.10% to 0.15% of 2014 decedents will die with an estate subject to federal estate tax. (**)

It’s very good news then that the professionals we have talked to have not seen an increase in gift tax return audits for gifts made in 2012. With the three year statute of limitations beginning when the gift tax return is filed, those who filed their 2012 gift tax returns on the latest due date of October 15, 2013 could still be audited within the next two years up to October 15, 2016. But for those who gifted and filed anytime in 2012, they will be approaching the three year mark sometime next year.

To find out the common factors that trigger a gift tax audit and helpful details on the audit process itself, please click on the following link to Gary Ringel’s article titled “Gift Tax Audits Expected Increase in the Future?

By Cindy Andresen, ASA

(*) Internal Revenue Service Data Book, 2013, Publication 55B, Washington, DC March 2014

(**) L. William Schmidt, Jr., Senior Trust Officer, First Western Trust

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Arizona’s Dismal Housing Market Continues to Impede State’s Economic Recovery

Posted on October 7 2014 by admin

Single family permits in Arizona decreased a whopping 28.8% between 2014 and 2013.

Below are excerpts from the September 22, 2014 edition of The Monday Morning Quarterback, a weekly e-newsletter published by Elliott D. Pollack & Co.

Snapshot of Arizona’s Employment & Housing Statistics

  • In August, the seasonally adjusted unemployment rate in Arizona edged up 1/10 of 1% from 7.0% in July to 7.1% in August. This is the third consecutive month of increase in the unemployment rate. A year ago, the Arizona unemployment rate stood at 8.1%. In contrast, the U.S. rate dropped 1/10 of 1% from 6.2% to 6.1% in August.
  • Since January, Arizona added 51,400 nonfarm jobs (2.1%). Of these gains, the private sector gained 50,500 jobs and the government added 900 jobs. For the first eight months of the year, Arizona’s job growth ranked 15th out of 50 states in gains. The state has regained only 62% of the jobs lost in the great recession compared to nearly 100% for the U.S.
  • Greater Phoenix job growth is up 2.2% year-to-date and 2.3% year over year and has added 42,200 jobs on a year over year basis. It has regained 70% of the jobs lost in the recession. The unemployment rate for the area stands at 6.3%.
  • The August permit count of 838 new homes was the lowest count in the last 12 months decreasing a whopping 28.8% from last year. Year-to-date in 2014, 7,621 new home permits have been issued in the region. This is down 17.2% from the same period in 2013 when the region counted 9,206 permits.

In summary, there were few glimmers of hope in Mr. Pollack’s weekly e-newsletter. It is apparent that we will be waiting a few more years for the state to dig itself out of the single family residential housing recession that continues to impede Arizona’s economic recovery.

By Gary Ringel

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Start Up Companies – Why You Need a Valuation for Stock Options

Posted on October 1 2014 by admin

It seems everyone remembers the Enron accounting scandal. Prior to the company going bankrupt, Enron executives were accelerating payments under their deferred compensation plans in order to cash in before the bankruptcy. Other publicly-traded companies were seemingly abusing the timing of stock option awards by back-dating the option grants. Section 409A was added to the Internal Revenue Code to combat these perceived abuses. The impact of Section 409A is far-reaching due to the broad definition of “non-qualified deferred compensation.”

Section 409A deals with all types of non-qualified deferred compensation arrangements, including certain stock option plans. These arrangements require that the deferred compensation may only be paid upon a service provider’s separation from service, disability, death, a fixed payment date or schedule, a change in control of the business or the occurrence of an unforeseeable emergency. In the event that operational or documentary failures occur, the income is subject to immediate taxation to the service provider (employees and contractors). In addition, significant penalties and interest may be imposed on the service provider (not on the employer).

Non-qualified stock options having an exercise price at least equal to fair market value of the underlying security are generally not subject to Section 409A. However, if the fair market value is more than the exercise price, the compensation would be subject to immediate taxation to the service provider on the date of the grant. The penalties are onerous and include a 20% federal penalty, increased underpayment penalties and possible state penalties (e.g., California imposes a 20% penalty). These penalties are in addition to the regular tax on the income. Interest may also be imposed.

Ensuring that the exercise price is at least equal to “fair market value” of the underlying stock is important. Since valuation is a complex endeavor, we recommend retaining a qualified appraiser to value the company and its equity securities.

By Steve Koons, CPA, ABV, ASA, CFF

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Using Current and Quick Ratios to Help Determine a Company’s Liquidity

Posted on September 23 2014 by admin

liquidThere are many ratios that a company’s lenders use to gauge the strength of the company’s ability to pay its current bills as well as its long-term debts; and still have enough cash left in the bank to use for expanding the company’s operations. One concern of lenders, for example, is: How quickly can a business convert its assets to cash, without a loss in value, in order to meet its immediate and short-term obligations? In other words, when looking at the balance sheet, do the company’s current assets and current liabilities show that the company is “liquid”?

Liquidity is a measure of the quality and adequacy of current assets to meet current obligations as they come due. (*) Lenders look at various ratios calculated from a company’s financial statements to help them assess the ability of a potential (or even existing) customer to repay borrowed monies, plus interest. Two important ratios in this regard come from the balance sheet: 1. Current Ratio; and, 2. Quick Ratio.

Current Ratio – Calculated by dividing total current assets by total current liabilities [Total Current Assets/Total Current Liabilities]. (**)

A ratio of 1.0 times may not be a ratio that a lender will like to see from its customer. This means there are exactly enough of the current assets in cash, or to be converted to cash, which in turn, will be exactly enough to pay the current liabilities of a business. Lenders prefer that there be a cushion, or a bit of extra current assets to cover the current liabilities. Their reasoning might be, for example, that the quality of the accounts receivable used in the numerator of the calculation may not be stellar. That is, perhaps only 90% of the receivables on the balance sheet will ultimately be collectible.

Lenders start to get heartburn if their customer’s company balance sheet shows a calculated current ratio of, say, 0.9 or 0.8 times. This means there are not enough current assets to cover the payments that are due on the company’s current liabilities. The lender might wonder: If a company can’t cover its current payables amounts, how can it make payments on its long-term loans?

Quick Ratio – Calculated by adding cash and equivalents to trade receivables, and then dividing by total current liabilities. [(Cash & Equivalents + Trade Receivables, net)/Total Current Liabilities].

This ratio is also known as the “acid test” ratio. It is a stricter, more conservative measure of liquidity than the current ratio. This ratio reflects the degree to which a company’s current liabilities are covered by it most liquid current assets, the kind of assets that can be converted quickly to cash and at amounts close to book value. Inventory and other less liquid current assets are removed from the calculation. Generally, if the ratio produces a value that’s less than 1 to 1, it implies a “dependency” on inventory or other “less” current assets to liquidate short-term debt.

The Current and Quick Ratios are only two of the many ratios used by lenders to evaluate a company’s ability to pay its debts or stay in business. There are several others which are not meant to be covered in this article.

By Don Bays, CPA, ABV, CVA, CFF

(*) Risk Management Association Annual Statement Studies, Financial Ratio Benchmarks, 2013-2014, Definition of Ratios.

(**) Current assets on a company’s balance sheet are the total of cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that can be converted to cash in less than one year. Current liabilities, as shown on the balance sheet, are the sum of all money owed by a company and due within one year. Current liabilities include such items as accounts payable, accrued expenses and current payments on long-term debt.

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Expense Reimbursement Schemes – Are Your Employees Stealing from You?

Posted on September 16 2014 by admin

Expense reimbursement schemes are extremely common in companies. Employers may underestimate the costs of this type of fraud. Perpetrators of these schemes range from administrative employees buying company supplies to highly compensated executives with million dollar travel budgets. One of my first assignments in the beginning of my career was to audit the expense reports of the officers of a large company. I was amazed at the number of personal expenses improperly submitted on these reports.

In most companies, employees submit expense reports detailing all expenses incurred for business purposes, such as meals with clients, business travel expenses, etc. Usually, the employee is required to explain the business purpose of each expense and provide supporting documentation such as a receipt, cancelled check or personal credit card statement. Typically, the report must be approved by a supervisor in order for the expense to be reimbursed. It is not uncommon for the review of expense reports to be cursory at best, and for companies to allow a wide range of latitude in acceptable forms of documentation to support expenses.

The most common type of expense reimbursement schemes are as follows:

  1. Mischaracterized Expenses: The most basic type of scheme is to request reimbursement for a personal expense by claiming that the expense is business related. For example, claiming dinner with a friend as “business development.”
  2. Overstated Expenses: One way employees may overstate their expenses is by altering a receipt or other supporting documentation to reflect a higher cost than was actually paid. Another method is “over-purchasing” business expenses. This is commonly used by employees who travel. For example, an employee will purchase a second ticket to the same travel destination. The second ticket will be more expensive than the first one. Then the employee refunds the second ticket and flies on the first (less expensive) ticket. However, the employee attaches the receipt from the more expensive ticket to the submitted expense report.
  3. Fictitious Expenses: It is fairly simple for employees to create realistic counterfeit receipts to support fictitious expenses. In addition, some employees will request blank receipts from legitimate companies and fill them in later. In some cases, an employee will even steal blank receipts from a hotel or restaurant, and use them over time to submit fictitious expenses. Another method is to write checks, photocopy them as support and then destroy them. Therefore, the employee never actually incurs the expense. With credit card statements, once the expense report is filed, the employee can return the item and receive a credit to his/her account.
  4. Multiple Reimbursements: The most common example of this scheme is submitting several types of support for the same expense. For example, an employee might submit an airline ticket stub and a travel agency invoice on separate expense reports in order to get reimbursed for the cost of a single flight twice.

Overall, the best detection method is a detailed review of employee expense reports. Detailed reviews and periodic audits of travel and entertainment accounts will not only detect these schemes, but deter employees from submitting personal or fictitious expenses for reimbursement

By Julia Allen Miessner, CPA/CFF

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Camaraderie or Collusion – Encourage One But Not Both

Posted on September 9 2014 by admin

Management teams across the nation are encouraging team building among staff to encourage and promote employee friendships and to boost morale. I commend these organizations for promoting a healthy work environment which provides a social support network at both a personal and a professional level. Positive employee morale can lead to reduced employee turnover, reduced absenteeism and increased company profits.

While management is promoting a sense of camaraderie among employees, it must be careful not to promote an environment which is susceptible to fraud. As employees become comfortable with each other, they may turn to collusion to circumvent anti-fraud controls. Collusion is “secret cooperation for an illegal or dishonest purpose.” (1) Collusion typically occurs between two or more employees, an employee and a supervisor or an employee and a vendor.

The 2014 Global Fraud Study (2) published by the Association of Certified Fraud Examiners (ACFE) found that as more than one perpetrator is involved the losses associated with the fraud rises.


See my article in the September 9, 2014 edition of BV/Lit e-News for more information about what management can do to minimize the occurrence of fraud and its impact on the organization.

By Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABV

(2) Report to the Nations on Occupational Fraud and Abuse – 2014 Global Fraud Study, ACFE

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