Audit News Articles
By: Dave Thomsen, CPA, Partner| email
Local Savings are the key to maintaining a viable cooperative. You hear it from us in every audit meeting report, from the bank, and at management and director training programs you attend. The percentage of local savings is the key factor in determining a cooperative’s profitability. It is the cornerstone for providing essential benefits to the member patrons of your companies, such as; needed facilities and equipment, the ability to hire and maintain high quality employees, pay patronage, and subsequently redeem any deferred patronage through estate and equity retirement payments.
So, how do you know if you’re generating adequate local savings? Hopefully you are doing many of the items mentioned above; growing, adding new assets, keeping good employees– meeting the needs of your patrons, and of course, keeping your banker happy! Though there are several factors to consider, most cooperatives use a percentage number, local savings divided by sales, to determine if their local savings are on the right track. Depending on your cooperative’s mix of grain and supply sales, as well as commodity prices, that percentage should be in the 1 – 3% range. Our clients have been very profitable throughout the last several years. The following is an average of what we have seen over the past three year period:
• Sales up to $50 million = 1.75%
• Sales $500 – $150 million = 2.06%
• Sales $150 – $300 million = 1.92%
• Sales over $300 million = 1.48%
So, how does your local savings stack up? We know that every cooperative faces it’s own unique set of challenges and growth opportunities. If you’d like to discuss possible ways to improve your local savings, we’d be happy to speak with you.
The “Fiscal Cliff” deal extends beneficial key cost recovery provisions. Bonus depreciation, which was set to expire December 31, 2012, was extended to qualified properties acquired and placed in service prior to January 1, 2014. The additional deduction is equal to 50% of the acquired value of the qualifying property. The law also extended the definition of qualified 179 property to include qualified leasehold improvement property, restaurant property and retail improvement property. It also applies to most types of tangible personal property and computer software. Qualifying property is MACRS property with a recovery period of 20 years or less.
By: Greg Cargin, CPA, Partner| email
You may have noticed in the past few years that your annual audit seems to take longer than it once did. Changes in accounting and auditing standards, increased disclosure requirements, and the unprecedented growth of our clients are causing us to spend more time planning, documenting, and completing our audit procedures than ever before.
One afternoon, a member of my staff asked why we went to see our client that day. At first, I was surprised by the question, but quickly wondered the same thing. We had done what we were accustomed to; we packed up our computers and parked ourselves in the client’s boardroom. Over the next 6 hours, the client continued to email information, reports and files as needed, periodically popping in to make sure the items in the emails were what we wanted. The client had also provided us with access to their system so we were able to get our own reports and printouts as needed. We really needed very little face to face interaction with the client that day.
I wondered, can we be more efficient when working with our clients? Can we successfully accomplish many of the same audits tasks by the exchange of information electronically? Many data processing systems allow for outside access and it is becoming more common for employees to work from home using technology; can it be possible for us, as auditors, to do more work in our office?
For many clients, this may not be preferred, or even possible, but it may be time for all of us to have conversations about ways we can use our time more wisely. Being able to complete a larger percentage of planning, testing, documenting and research from our office versus yours can save travel time and expenses, costs of the audit that continue to rise annually. It also allows us to spend less time driving and more time working for you. We also get the personal benefit of additional opportunities to spend more evenings with our families.
As we continue to strive for ways to provide better service and value to our clients as costs continue to increase, please feel free to discuss with us alternatives to what we have done in the past. Open communication is not only the key to successful relationship, but also provides for a more successful audit.
1. Does the person who handles incoming cash receipts also record transactions?
2. Is a cash register used in the business?
3. Is a bank lockbox used for processing customer payments?
4. Are deposits made daily and secured prior to depositing in a safe?
5. Are incoming checks restrictively endorsed?
6. Is the monthly bank statement received and reviewed by someone other than the person handling the cash and checks?
7. Is the monthly bank reconciliation completed by someone other than the person handling the deposits or with check-signing authority?
8. If there are discounts/coupons, are they approved by management?
9. Are returns, voided transactions, and credit memos greater than 10% of all sales transactions?
10. Do cash transactions exceed 20% of all sales transactions?
11. Are actual, itemized receipts required for reimbursement?
12. Is a detailed list of names of guests and the type of business activity or entertainment required for expense reimbursement?
13. Are employees encouraged to report concerns about fraudulent activities?
Save the date for our free seminar on cyber liability and crime!
When: Tuesday, April 30th, 2013 from 10 AM- 12 PM
Where: Hilton Garden Inn, 8600 Northpark Drive, Johnston, IA 50131
We hope to see you there!
By: Mark Gardiner, CPA, CFE, Partner| email
Occupational fraud is a scheme in which an employee abuses the trust placed in him or her by an employer for personal gain. Its formal definition is: The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.
Asset misappropriation schemes were the most common type of occupational fraud, comprising 87% of the cases reported to the Association of Certified Fraud Examiners in their 2012 Report to the Nations on Occupational Fraud and Abuse. Financial statement fraud schemes made up 8% of these cases but caused the greatest amount of losses. Corruption schemes occurred in approximately one-third of the cases.
Nearly half of the organizations reporting to the Association of Certified Fraud Examiners did not recover any losses that they suffered due to the fraud. The very nature of fraud involves efforts at concealment, with many of the frauds never being detected, and of those that are, the full amount of losses might never be determined or reported.
External audits should not be relied upon as an organization’s primary fraud detection method. Such audits were most commonly implemented control in their study; however they detected approximately 3% of the frauds reported and ranked poorly in limiting fraud losses. Providing individuals a means to report suspicious activity is a crucial part of an anti-fraud program. Fraud reporting tools for an organization, such as hotlines, should be set up to receive tips from both internal and external sources and should allow anonymity and confidentiality. Occupational fraud is more likely to be detected by a tip than by any other method. The majority of tips reporting fraud come from employees within the victim organization.
Talk to your audit team to discuss ways to implement anti-fraud measures.
Reprinted with permission – The Association of Certified Fraud Examiners
By: Dennis Gardiner, CPA, Partner| email
- Short crop and free storage programs will have an impact on future operating results.
- Reduced local income; possibly some local losses. Regional income even higher than last year. Tightening of belts, particularly for expenses.
- Continued investments in grain storage, fertilizer plants and feedmills, but a tempering of asset additions if the drought continues.
- Continued use of 50% bonus depreciation.
- Maximizing the benefit of the domestic production activities deduction (Section 199), which will have many different applications. Several will still retain the benefits, but more will allocate the benefit to the patron members.
- Continued growth in the use of non-qualified patronage allocations.
- Returning more earnings to the patron-owners than what has been done in the past few years; revisiting the question: “how much retained savings is enough?”
- More conversions to “limited cooperatives” (501A in Iowa/308B in Minnesota), or finding other avenues through the articles of incorporation and by-laws to allow for preferred stock, and potentially, outside equity.
- Cooperatives will look to outside equity to maintain a strong balance sheet; provide more borrowing ability or to fund capital expenditures.
- Greater use of technology in delivering services and communicating with patrons.
- More merger and joint venture discussions; leveraging the strengths of each cooperative for the benefit of both.
- Continued struggles in finding and retaining experienced staff.
- Changes to the audit opinion report – stay tuned!
By: Mark Rodruck, CPA, Partner| email
A multiemployer pension plan is used by an employer to provide a benefit to their employees in a plan that is shared with multiple employers, usually in similar industries. Under previous accounting principles, employers were only required to disclose their contributions to the plan without disclosing the funded status of the plan.
With ASC No. 2011-09, Disclosures about an Employer’s Participation in a Multiemployer Plan, the Financial Accounting Standards Board (FASB) will ensure that financial statement users will have more information regarding the employer’s pension commitments and the financial health of the plans.
The new disclosure requirements are effective for annual reporting periods for fiscal years ending after December 15, 2012 for non-public entities. Pursuant to the FASB’s decisions, the new disclosures will include:
- Legal name, plan number, and employer identification number (EIN)
- The amount of employer contributions made to the plan
- An indication of whether the employer’s contributions represent more than 5% of the total contributions to the plan
- An indication if the plan is subject to a funding improvement plan
- The expiration dates of collective bargaining agreements and any minimum funding arrangements
- The most recent certified funded status of the plan, as determined by the plan’s zone status, required by the Pension Protection Act of 2006 (PPA). If the zone status isn’t available, an employer will be required to disclose whether the plan is (a) <65% funded (red zone), (b) 65 to 80% funded (yellow zone) or (c) >80% funded (green zone)
- A description of the nature and effect of any changes that affect comparability for each period in which an income statement is presented
As of the end of the most recent annual period presented, you’ll also need to disclose:
- If a funding improvement plan or rehabilitation plan had been implemented or was pending
- Whether or not a surcharge was paid to the plan
- A description of any minimum contributions required for future periods by the collective bargaining agreements, statutory obligations, or other contractual obligations, if applicable
The current recognition and measurement guidance for employers that participate in multiemployer plans is unchanged. If you have any questions about these new disclosure requirements, please contact your Gardiner Thomsen Auditor.
By: Dave Thomsen, CPA, Partner| email
- Because of drought, yields were substantially below “normal;” yields varied state to state and county to county.
- Most clients were more profitable in 2012 compared to 2011. Local savings were steady to lower and regional earnings were up considerably.
- Higher commodity prices along with increased or steady grain and agronomy volumes meant sales dollars were considerably higher in 2012 than 2011.
- Agronomy margins were as good as or better than past years.
- Grain margins decreased from the past few years because of little or no carry in the markets.
- With little or no carry in the grain markets, borrowing was down, reducing interest expense.
- Significant increases in storage revenues.
- Early year-end closes had great fall fertilizer sales and application revenues; later year-end closes down depending on moisture.
- Increased depreciation expense, a by-product of the “construction explosion.”
- The increased presence of OSHA early, then decreasing later in the year.
- “Speed and space” construction continued.
- Members’ equity studies related to redemption practices; conversion from age to revolvement by year earned.
- A lot of discussion about bringing on outside equity; a few parties have been reaching out to larger cooperatives to gauge the interest level.
- Several meetings about converting or changing the cooperative to a different corporate structure to allow outside equity.
- Large grain companies making moves into our cooperatives’ trade territories. Big moves by these companies are driving concerns for the cooperatives.
- Slowing down book depreciation.
- A quiet year in the merger arena; some discussions on joint ventures between cooperatives.
As a cooperative, you are allowed to allocate various taxable items to your members. Common items include qualified patronage and the section 199 deduction. This benefit comes with some specific rules regarding reporting to your members and reporting to the Internal Revenue Service.
When cooperatives make allocations to their members, they generally have up to 81/2 months to notify their members via a qualified written notice of allocation. For tax considerations, many cooperatives find it beneficial to provide written notice of allocation prior to the end of the calendar year if that comes before the end of the 81/2 month notification period. The 81/2 month notification period is just the maximum amount of time you have to notify your members. For instance, a cooperative with a June 30th fiscal year end would have until May 15th of the following year to provide written notice to its members, but it could choose to issue the written notice before December 31st of the current year.
The second part of the allocation process is reporting to the Internal Revenue Service. Form 1099PATR (and other 1099 forms) is reported on a calendar year basis, not a fiscal year basis. So, an allocation of qualified patronage and/or section 199 is reported on form 1099PATR in January of the year following the qualified written notice of allocation.
The June 30th cooperative that allocates on May 15th of the following year wouldn't report this activity on form 1099PATR until the following January. To state this more clearly: a June 30th, 2012 cooperative makes its qualified written notice of allocation on May 15, 2013 and reports that to the Internal Revenue Service on a 2013 1099PATR to be issued in January 2014.
If that June 30th, 2012 cooperative provides a written notice of allocation in December 2012, then the cooperative reports this activity to the IRS on a 2012 1099PATR to be issued in January 2013.
I know this can sound very confusing, but it is also very important. Should you have any questions on proper written notice of allocation or proper reporting to the IRS, please contact me.