It can be a daunting task to get individuals to engage in making changes to the processes and controls already in place at their organization but when they are educated on how important the controls really are they may be more willing to with stain from their resistance to change.

The 2008 report to the Nation on Occupational Fraud and Abuse estimated that US organizations lose 7% of their annual revenues to fraud which translates to approximately $994 billion in fraud losses. Losses were noted to be significantly lower in the cases where the organization had implemented controls. Small businesses were noted to be especially vulnerable to occupational fraud. The median loss suffered by organizations with fewer than 100 employees was $200,000 which is higher than the median loss in any other category, including the largest organizations. Lack of adequate internal controls was most commonly cited as the factor that allowed fraud to occur.  To read more on this report go to http://www.acfe.com/resources/publications.asp?copy=rttn

One of the key parts of the ‘self-test’ reads as follows: “Internal control is a process designed to…achieve effectiveness and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulations.” What organization doesn’t want to process transactions more efficiently, have accurate financial statements to their stakeholders or ensure they are in compliance with applicable laws and regulations? Properly designed internal controls can lead an organization in the right direction.

I have found the following to be a handful of a few good controls (this is not intended to be a list of the minimum controls an organization should have; simply it is a few of the controls that I think are very important):

1. Do not underestimate the power of “Tone at the Top” – if management skirts issues under the table their subordinates will assume they can do the same. This includes maintaining an oversight body (Board of Directors, etc) that has intimate knowledge of how the company operates and understands how to read and process financial information
2. Implement “Big Brother” approaches – people are less likely to stray from doing the right thing if they know someone is out there watching over their actions

Another step I highly recommend is to gain an in depth understanding of your company’s processes and procedures and see where the weaknesses are; then develop internal controls to address the identified risks.

To take the brief test to determine your level of understanding of internal controls go here:  http://www.journalofaccountancy.com/Issues/2010/Mar/20092240.htm

1. Determine if employee deferrals comply with current regulations (See limitations at: http://www.irs.gov/retirement/sponsor/article/0,,id=151925,00.html)
2. Determine if employee deferrals comply with the Plan’s maximum percentage requirements, if applicable (controls should be in place to ensure that employees are not allowed to elect to contribute more than the Plan’s elected maximum percentage as indicated in the Plan Document)
3. Controls should be in place to ensure that contributions are submitted to the Plan in a timely basis (Determine the who and the when to make sure it happens as required by law). Key – Timing should not be in excess of the number of days it takes an employer to transmit payroll taxes
4. Knowledgeable personnel should review and approve all loans and distributions made from the Plan . This knowledgeable person has read and fully understands the Plan document and requirements contained therein.
5. For loan approval – Understand the plan requirements for the following: loan amount complies; interest rate in loan agreement complies; condition for loan.
6. For distributions – Understand the following:  distribution complies with plan provisions and ensure all necessary documentation is retained (specifically for hardship distributions); distribution request includes the appropriate amount and the accurate amount of withheld taxes (10% and possibly an additional 20% if early distribution); ensure the appropriate vested percentage is utilized for employer contributions; determine if distributions required by law (required minimum distributions, etc) were completed during the year.

I hope the information is helpful in establishing a sound control environment for your organization’s employee benefit plan.  If there are areas that I have missed feel free to leave a comment to help out the other readers.  The controls that I have listed are coming from an auditor’s point of view and you may have insights related to your field of expertise that could be beneficial to others!

1. Ensure all user control considerations included in the third party administrator’s (record-keeper, trustee, custodian, etc) Type II SAS 70 are in place at the Plan Sponsor
2. Analyze compliance testing results provided by the third party administrator and if the Plan failed any tests ensure that corrective action is taken in a timely manner (distributions or additional contributions to the Plan as necessary)
3. Determine if established internal controls are designed appropriately to catch errors or fraud that may occur during the processing of transactions related to the Plan. Consider conducting a brainstorming session with individuals involved in the Plan in determining what could go wrong and then determine if controls currently in place are adequate to address such risks.
4. If the census is prepared by the Plan Sponsor ensure that the total wages included in the census reconciles with the organizations payroll records (remember census must include all employees that received a paycheck during the year whether employed by the organization or not during the year); the census should also be reconciled with the record-keeper statements (employee contributions, employer contributions and loan repayments). Key point – A reconciled census that agrees with the Plan Sponsors audited financial statements and the record-keeper statements will save time and money during a benefit plan audit
5. Controls should be in place to ensure all information included on the participant statements (social security #, name, compensation, date of birth, date of hire and date of termination) is complete and accurate.  Inaccurate information could lead to:

• Allowing individuals to enter the plan when they were not eligible to do so or not allowing an employee into the plan that is in fact eligible.
• Inaccurate amounts being withheld for employee contributions and/or employer matching contributions.
• Inaccurate amounts being withheld or forfeited when an employee receives a distribution (early distribution tax penalties or issues related to utilizing the appropriate vesting percentage for employer contributions)

     6. Determine if the annual Form 5500 reconciles to the Plan’s financial statement’s

 Interested in refining your internal controls for benefit plan recordkeeping. More will come in a later blog post…

FASB ASC 855 requires that the auditor’s report date should not be earlier than the date on which the auditor obtained sufficient appropriate audit evidence to support their opinion (i.e. the date to which subsequent events were evaluated). Therefore, the auditor’s report date cannot be earlier than management’s subsequent event footnote date.

In summation: the specific management representations relating to information concerning subsequent events should be made as of the date of the auditor’s report.

Administrators of 403(b) plans do not need to treat annuity contracts and custodial accounts as part of the employer’s plan assets for purposes of ERISA’s annual reporting requirements (further, the employer is not required to count the individual as a participant under the plan for Form 5500 reporting purposes) provided that:

1. The contract/account was issued to a current or former employee before 1/1/09
2. The employer ceased to have any obligation to make contributions and has ceased making contributions to the contract/account before 1/1/09
3. All of the rights and benefits under the contract/account are legally enforceable against the insurer or custodian by the individual owner without any involvement by the employer
4. The individual owner of the contract account is fully vested

The Department will not reject a Form 5500 on the basis of qualified, adverse or disclaimed opinion if the accountant expressly states that the sole reason for such an opinion was because such pre-2009 contracts/accounts were not covered by the audit or included in the plan’s financial statements.

The above information obtained from Field Assistance Bulletin 2009-02.

Generally, a required minimum distributions is an annual amount that must be withdrawn from an IRA or an employer sponsored plan beginning with the year the account owner reaches 70 ½.

The IRS said that in many cases, because the law was signed so late in the year, and many individuals and plan sponsors were confused about how to comply with the new rules, IRA owners and plan participants received distributions they were not required to take or did not want.

Retirees who made a withdrawal from an IRA, 401(k) or other qualifying retirement plan have until 11/30/09, or within 60 days of the distribution, whichever is later) to put the money back in the plan tax-free.

Notice 2009-82 assures plan administrators that a plan will not be treated as failing to satisfy the requirement that it be operated in accordance with its terms merely because, during the period 1/1/09 to 11/30/09 it:

1. Did (or did not) make required minimum distributions to participants
2. Did (or did not) give beneficiaries the option to receive required minimum distributions
3. Did (or did not) offer a direct rollover option for required minimum distributions

 FYI – the IRS has NOT suspended the one-rollover-per-year rule of IRC Section 408(d)(3) and no more than one IRA distribution will be eligible for rollover under Notice 2009-82.

What changed? How is your T-E organization affected?

The final regulations require all 403(b) providers, including churches, to have a plan document in place no later than 12/31/08. Failure to adopt a written plan before 1/1/09 will render all subsequent contributions to the plan to be fully taxable. The plan document must address several issues, including:

• Employee eligibility, Contribution limits, Distributions, Benefits, Salary reductions, Investments, Loans, Hardship withdrawals, Allocation of compliance responsibilities to employers and fund providers (vendors)

The IRS has made available a sample plan document that can be used by tax-exempt organizations: see IRS Publication 2009-3.   If a plan is established directly through a mutual fund or other investment company most of these third-party vendors have created generic plan documents for use by their clients.

The final regulations also require “large” ERISA-covered 401(b) plans (generally plans with 100 or more eligible employees) to file audited financial statements along with their 2009 Form 5500.  Small 401(b) plans (generally fewer than 100 eligible employees) are eligible for a waiver of the audit requirement but are required to file the Short Form 5500 (5500-SF) which includes aggregate financial information related to the Plan.

Additional changes are discussed in detail at http://www.irs.gov/retirement/article/0,,id=172433,00.html

If you need help in understanding these new reporting requirements, please contact me.

IFRS for SMEs applies to private companies or those that do have public accountability (i.e. companies that file, or are in the process of filing, with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market; or it holds assets in a fiduciary capacity for a broad group of outsiders such as banks, insurance companies, brokers and dealers in securities, pension and mutual funds).

For private companies that are owned by a foreign parent, have a significant foreign investor, supplier or venture partner, IFRS for SMEs is an alternative to the more complicated and voluminous US GAAP.  For such companies using a consistent global financial accounting and reporting standard will increase comparability and improve efficiencies of conducting business with their foreign counterpart.

The key differences in IFRS versus US GAAP:

• Disclosures are simplified in a number of areas including pensions, leases and financial instruments
• LIFO is prohibited
• Goodwill and indefinite life intangible assets are amortized over a period not exceeding ten years
• Depreciation is based on a components approach
• A simplified temporary difference approach to income tax accounting
• Reversal of impairment charges, if certain criteria are met, is allowed
• Accounting for financial assets and liabilities makes greater use of cost

 Key challenges if your company decides to use IFRS for SMEs:

• Understanding the differences between IFRS for SMEs and US GAAP
• The willingness of financial statement users to accept financial statements prepared under IFRS for SMEs
• Working with and accepting a more principles-based set of accounting standards compared to the more rules-based US GAAP
• The impact on taxes and tax planning strategies
• The impact on financial reporting metrics

 The final IFRS for SMEs can be obtained free, after registering, from the IASB website: http://www.iasb.org/IFRS+for+SMEs/IFRS+for+SMEs.htm

 Additional information about IFRS for SMEs and about activities of IASB can be found at www.ifrs.com

Has your company received a portion of the American Recovery and Reinvestment Act of 2009 funds or do you anticipate applying to receive such funds?  If so the following are a few key points that should be discussed/considered:Consider appointing a Recovery Act “Czar” who is responsible for becoming familiar with the numerous requirements associated with the Recovery Act funds and communicate them to others in the organization.  They will also be a resource for others in the organization and be indicative of a strong “tone at the tope” for the importance of compliance with Recovery Act awards.

• Additional controls and systems may be required to ensure that Recovery Act funds are separately identified and tracked in the accounting system.  This segregation will have to carry through to the Schedule of Expenditures of Federal Awards and the Data Collection Form.
• Additional controls and systems may be required to meet the stringent reporting requirements to the federal agencies. 
• Internal control over compliance is extremely important to ensure funds are spent appropriately.  Consider the following:
  • Are control procedures over federal expenditures appropriate, working properly and designed to prevent unallowable expenditures?
  • Are additional controls and systems required to ensure that Recovery Act funds are separately identified and tracked?
  • Are new controls needed to meet the stringent reporting requirements to the federal government?
  • If Recovery Act funds are passed down to subrecipients are controls in place to ensure appropriate monitoring and reporting requirements?
• The Federal Audit Clearinghouse is required to provide public access, via the internet, to all single audit reports filed with the FAC for fiscal years ending 9/30/09 and later.  This will include the Schedule of Findings and Questioned Costs, if applicable.
• With the addition of Recovery Act funds, there will likely be more high-risk programs and additional compliance requirements that auditors will need to test.

For more information, see the Government Audit Quality Center Alert No.’s 106, 111 and 112 and the OMB Circular A-133 Compliance Supplement Appendix 7.

The term cash receipts includes currency, checks, etc. received by mail or in person. Good cash-receipt handling contributes to good cash-flow management and the task is most manageable when receipts are posted promptly in the accounting system. Over time, you will begin to see patterns in your organization so that accurate predictions of cash-flow needs can occur.

Keeping detailed records of grant receipts will assist you in the separation of business income from other income, which is crucial when answering questions from the IRS and is beneficial during audits. Further, to facilitate a smooth audit process it is recommended that the original supporting documentation related to grants and their receipts should be maintained at a central office rather than at many different locations within the organization.

The most common grants are described below:

1. A pass-through grant is received by a nonprofit organization and is transferred to another entity. When funds are received the organization should debit cash and credit a liability account; revenue should never be recognized on these grants unless there is an arrangement where the organization receives a fee for assisting in the collection of the funds.

2. A cost-reimbursement grant reimburses a nonprofit entity for a specified cost incurred by the nonprofit in the performance of a specific program activity.

3. A program or operating grant provides funding to the nonprofit organization for the operation of an entire organization or one of its programs.

4. A challenge grant requires a nonprofit organization to raise gifts from other contributors in order to receive the challenge grant proceeds (i.e. grantor will contribute $5,000 if the nonprofit organization raises the initial $5,000 to support operations of program X).

Under the cash basis of reporting the organization should debit cash and credit the related revenue account upon receipt (i.e. the revenue account that relates to the programs/services that the grant funding is being received for).

If the organization is reporting under the accrual basis of accounting:

1. Reimbursement grants are recorded as a debit to cash and a credit to deferred liability.  As the appropriate expenses have been incurred, the deferred liability is debited and revenue is credited.

2. Challenge grants are initially recorded as a deferred liability. When the conditions of the challenge have been met, revenue is recognized (deferred liability account is debited and the revenue account is credited).

Having problems converting your receipts to the accrual basis of accounting? Give us a call.