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October 2012

Compliance Checklist: Seven Items You May Have Forgotten

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Running a business is filled with regulations everywhere you turn.  These can drain precious time away from the core of your business, but if you ignore them, there could be huge financial consequences you may be risking without even realizing it.  The best way to handle them is to understand your exposure, consult with any experts you need to bring in, create a checklist, and make sure you’re in compliance.

Here’s a head start in creating that checklist.  This is by no means a comprehensive list.  These items apply to most businesses and are often overlooked.   Go through the list to make sure there aren’t any surprises for your business.  If there are, feel free to contact us, and we’ll help you find out where to get answers.

1. EIC notice to employees.

It’s now required annually to notify certain employees about the Earned Income Credit so that more people who need it can take advantage of it.   If you have employees, the next deadline for this compliance item is the first week of February 2013 and can be met if you get the right W-2 forms.  Details are in IRS Publication 15.

2. Corporate meeting minutes.

Just about the first thing the IRS will ask for in an audit is your corporate meeting minutes.  If you are incorporated as a C Corp or S Corp, you need properly formatted and executed documentation of the annual shareholders’ meeting, even if it is just you.  The risk in not having it includes a potential increase in tax liability from undocumented deductions.

3. PCI compliance. 

PCI stands for Payment Card Industry, and if you take credit cards, you may have compliance requirements under this industry standard.  The standard is designed to provide the cardholder with a minimum acceptable level of security, and your requirement is to maintain certain processes and procedures to safeguard the stored credit card data.

4. Document retention.

While it’s a great thing to go paperless, you may get caught by surprise if you are not downloading and preserving the items you used to have on paper.  The IRS and other agencies still need proof of these items in order to approve the deduction.  This includes invoices that are coming via email in PDFs, bank statements you’ve gone green on, and direct deposit payroll stubs, to name a few.

Fax copies fade after a few years and can catch you by surprise when you go to look up an old record and can no longer read it.  It’s best to scan fax receipts in so they will stay readable for the length of the retention period.

You’ll also want to keep up-to-date on how many years it’s necessary to maintain these items in the case of an audit.

5. New hire reporting.

In small business, most of us are hiring so infrequently that it’s easy to forget this one.  Most state unemployment agencies require that you report new hires within about three weeks of their start date.  The purpose of this is to track fathers who have missed child support payments.

6. Changes in state tax compliance.

As geographic borders disappear and our business expands, we need to regularly re-evaluate state requirements on income, franchise, and sales tax obligations.  It can be too easy to “do things the way we’ve always done them” and forget that as our business expands into new territories, new obligations can arise.

If we’ve hired a virtual employee in another state, we may have new obligations.  If we’ve earned money during a speaking engagement in another state, we may have income to report in that state.    And, of course, if we open new offices in another state, we have new compliance items to deal with.

7. Payroll posters.

Surprisingly, the highest payback item in this list for those of you that have employees may be posting your payroll posters.  Compliance usually costs less than $100, and the fines avoided can be as much as $17,000, a pretty big dent, no matter how big your small business is.

Small Business Compliance

Did you get caught by any surprises?  If so, let us know how we can help to bring your business into compliance and help you avoid unnecessary costly risks.

Are You Vulnerable to Fraud?

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According to the Association of Certified Fraud Examiners (ACFE), over $3.5 trillion is projected to be lost to fraud worldwide in 2011 alone.  The typical organization loses 5 percent of its revenues each year.  While we have a lot to think about as entrepreneurs, we do need to take time to educate ourselves about this unfortunately common business loss.

The Fraud Triangle

An easy way to understand fraud is to learn about the Fraud Triangle.  The creation of the Fraud Triangle is credited to Dr. Donald Cressey, a well-respected criminologist and sociologist who made significant contributions to his field.

Three components need to be present in order for fraud to occur:

  1. Motivation (or Need)
  2. Rationalization
  3. Opportunity

When fewer than three legs of the triangle are present, we can deter fraud.  When all three are present, fraud could occur.

Motivation

Financial pressure at home is an example of when motivation to commit fraud is present.  The fraud perpetrator finds themselves in need of large amounts of cash due to any number of reasons:  poor investments, gambling, a flamboyant lifestyle, family requirements, or social pressure.  In short, the person needs money and lots of it fast.

Rationalization

The person who commits fraud rationalizes the act in their minds:

  • I’m too smart to get caught.
  • I’ll put it back when my luck changes.
  • The big company won’t miss it.
  • I don’t like the person I’m stealing from.
  • I’m entitled to it.

At some point in the process, the person who commits fraud loses their sense of right and wrong and their fear of any consequences.

Opportunity

Here’s where you as a business owner come in.  If there’s a leak in your control processes, then you have created an opportunity for fraud to occur.  People who handle cash, signatory authority on a bank account, or financial records with poor oversight could notice that there is an opportunity for fraud to occur with the ability to cover the act up for some time.

Prevention

Once you understand a little about fraud, prevention is the next step.   To some degree, all three points on the triangle can be controlled; however, most fraud prevention programs focus on the third area the most:  Opportunity.  When you can shut down the opportunity for fraud, then you’ve gone a long way to prevent it.

The Typical Fraud

The median cost of an occupational fraud case was $140,000, according to the ACFE.  It goes undetected for a median time frame of 18 months.   The most likely way to discover fraud is a tip from an employee who works at the victim organization.

Small Business Vulnerability

Small businesses are the most vulnerable to fraud, because they employ the least amount of fraud prevention controls.  Here are just a few quick tips to help prevent fraud in your organization:

  • Create a culture within your organization that deters fraud and provide employees with education about fraud prevention to reduce rationalization.
  • Tighten down access to financial areas, segregate duties, and use other internal control best practices to reduce opportunity.
  • Provide financial literacy programs to employees to reduce need or motivation.
  • The ACFE recommends that small businesses provide employees with an anonymous way to report suspicious activity.

While we hope fraud never happens to you, it makes good sense to take preventative steps to avoid it.  Please give us a call if we can help you in any way.