May, 2006

Checks and Balances

You don't have to run a huge company to need internal controls. Every company needs checks and balances to provide protection from oversights, errors, and fraud. If the same employee is responsible for handling different phases of routine business transactions, your company's controls probably need to be improved.

Cash Disbursements
A review of cash disbursement procedures may reveal internal control weaknesses.

Situation: Ted hires an office manager to order supplies, pay the bills, and keep the company checkbook.

Possible outcome: Ted's office manager could prepare a phony in voice and pay it with a check made out to a friend or relative. Over 50% of the fraudulent disbursement cases reported in a recent study involved billing fraud.

Cash Receipts
Checks and balances are also needed for the other side of the equation, the money coming into a business.

Situation: When Tammy's business became large enough to require another office assistant, she hired someone to pick up the mail every day, open it, record any incoming checks in the cash receipts journal, and deposit the money in the bank.

Possible outcome: Tammy's employee could neglect to record some of the checks in the cash receipts journal and deposit them in his account instead of the business' account.

Cash Control
Establishing internal controls means delegating duties in a strategic way.

Situation: Maria's new employee is responsible for opening the mail. Maria's sister records the checks and deposits the money. When a new bank statement arrives, Maria reviews it carefully.

Outcome: Be segregating duties, Maria has taken steps to avoid potential losses.

Additional Steps
You can further limit your exposure to losses through some additional steps, such as frequent inventory counts, if appropriate, and periodic audits. We are experienced in helping businesses develop control and would be happy to help you business.

In a recent analysis of data from its triennial Survey of Consumer Finances, the Federal Reserve Board observed that, on an inflation-adjusted basis, average (mean) household income in the U.S. fell by 2.3% during the 2001-2004 period. During the same period, however, average net worth rose 6.3% - despite the fact that fewer families said they had saved any money out of their current incomes.

So what was behind the increase in net worth? Strong gains in the value of residential real estate holdings, for one. The rate of home ownership rose during the period, and home values appreciated significantly. At the same time, debt, particularly debt secured by real estate, also arose.

Also of interest:

• Stock ownership declined, with only about 49% of families reporting they owned stocks directly or through managed funds.
• About 505 of families had retirement accounts, the second most commonly held financial asset behind transaction accounts, such as checking or money market accounts.

Nursing home residents with very limited financial resources can receive assistance in paying for their care from the Medicaid program. But recent changes in the Medicaid eligibility rules could have an adverse impact on many individuals in need of long-term care and their families.

The Deficit Reduction Act of 2005 places new restrictions on transfers of assets to qualify for Medicaid coverage. As under prior law, individuals who have transferred assets to family members during a "lookback" period will be ineligible for Medicaid coverage for a certain period of time. However, the new law:

• Extends the lookback period from three years to five years for transfers to individuals, making it the same as the lookback period that applies to transfers to trusts.
• Starts the period of ineligibility when the individual would have qualified for Medicaid coverage if not for the transfer.

The second change mean s that a person who has run out of funds to pay for long-term care and applies for Medicaid will be penalized with a period of ineligibility based on any transfers made during the previous five years. The unanswered question: Where will the funds of that person's care come from during the penalty period? Previously, the penalty period began at the time of the transfer.

While the new federal law applies to transfers made on or after February 8, 2006, the states have additional time to enact conforming laws. This may offer a brief planning window.

Technology is getting more complicated! - and hackers more sophisticated - every day. How can you protect your data infrastructure? Using passwords and lots of them, is one way to increase security.

To provide the maximum protection, passwords should be changed frequently. And they should be easy to remember - but difficult to crack. Here are some pointers.

Bad passwords:
:-) Use the names of family members or pets.
:-) Have words that can be found in the dictionary (including foreign words)
:-) Incorporate birthdays, anniversaries, or Social Security numbers.

Good passwords:
:-) Are at least eight characters long.
:-) Combine upper and lower case letters, numbers, and symbols.
:-) Have similar looking numbers and symbols in place of letters.

Another tip: String together the first letters of the first words of a favorite song or poem, remembering to mix in a few numbers.

If you're helping to pay college bills - or you're saving up so you can help when the times comes - you may want to study a new federal law* that includes provisions affecting government-sponsored student loans and college savings programs. Most changes take effect July 1, 2006.

Chapter I: Interest Rates

Stafford loans for student borrowers currently feature low, variable interest rates. They are tied to the 91-day T-bill and are set each July 1. As of July 1, 2006, the interest rate on new Stafford loans will be fixed at 6.8%. Loan origination fees will be phased out beginning this year (with completion in 2010).

The interest rate on PLUS loans - government-sponsored loans for parents - also changes from variable to fixed rate and increase from 6.1% to 8.5% on July 1, 2006.

Chapter II: Consolidation Rules

Historically low interest rates over the past several years have made student loan consolidation very attractive. As of July 1, 2006, however, students will have to wait until they're out of college to consolidate. Also, young married couples will no longer be able to combine and consolidate their student loans.

Chapter III: Financial Aid Formulas

Federal financial aid is determined by a set formula that assumes 35% of a student's assets and 5.64% of parental assets are "available" to pay college costs. So it makes a big different who "owns" which assets. Under the new rules, Coverdell Education Savings Accounts (ESAs), 529 college savings plans, and 529 prepaid tuition programs are considered parental assets instead of student assets. This is good news for families with prepaid tuition plans. More good news: Beginning in 2007, only 20% of student assets will count in the aid formula.

Postscript: Loan Limits

Although limits won't change for all students, starting July 1, 2007, college freshmen and sophomores will be able to borrow more. Borrowing limits will also increase for graduate and professional students.

* The Deficit Reduction Acts of 2005.

When prepared on a regular basis, financial statements are an invaluable business management tool for small businesses. If you're new to the world of financial statements, you'll want to spend some time familiarizing yourself with the accounting lingo and assumptions used in preparing your company's statements. Our firm is always available to answer your questions. In the meantime, sharpen your knowledge of some basic accounting terms by solving the puzzle.

Unscramble each of the words and then copy the letters in the number square to the other squares with the same number.

Are you ready for "priority class" e-mail? Two major -email account providers are considering giving certain e-mails preferred status, which means they can sidestep the providers' spam filters and arrive with attachment and links intact. To earn this preferential treatment, sender companies must be vetted by an authentication service and pay a fee to send certified e-mails. (A portion of the fee will be paid to the account providers.)

The Federal Deposit Insurance Reform Act of 2005 increased the limit of federal bank deposit insurance (provided by the Federal Deposit Insurance Corporation) for certain retirement accounts from $100,000 to $250,000. The $100,000 coverage limit for personal bank accounts will also increase: It will be adjusted for inflation every five years beginning in 2011.

Be advised of the Fair Labor Standards Act's joint employer rules. When a company has multiple divisions, or separate companies fall under common ownership, and an employee works in more than one facility, the hours worked must be combined. If the toal exceeds 40 in a week, the excess hours must be paid at thwe overtime rate.

The Johnsons' flower shop is flourishing. In fact, business is so good that they're planning to hire their first employees, a set that means they'll have to comply with a number of government rules and regulations.

After two years of steady growth, the Johnsons have decided it's time to hire a driver and a floral designer to help meeting increasing demand. But, before they run a "help wanted" ad, they should make sure they're familiar with federal and state employment, wage and tax laws.

For one thing, the Johnsons will be responsible for withholding taxes from their employees' pay and remitting those amounts to the government. They'll also have to pay Social Security and Medicare (FICA) taxes and unemployment insurance for each employee. A record keeping system that tracks wages and withholding amounts is a must, since they will need to prepare a variety of reports.

Before beginning the interview process, the Johnsons will also want to make decisions about the benefits they plan to offer prospective employees. In addition to determining wage amounts and hours, the Johnsons will want to make sure their holiday, vacation, and sick leave policies comply with the Fair Labor Standards Act.

If you're on the verge of hiring your first employee, there are many things to consider. Keep in mind that you don't have to do it alone: We're here to help. If you would like more information, please contact us.

Question: My firm is planning to enter a new line of business and would like to form a subsidiary to isolate the new activities from our core business. We're currently operating as a Subchapter S corporation. Can an S corporation have a subsidiary?
Answer: Yes, it can. You basically have two options. One is to form a regular C corporation subsidiary, with your S corporation owning 80% or more of its stock. The other is to form a wholly owned Qsub (qualified Subchapter S subsidiary). A Qsub is not treated as separate from its parent corporation for tax purposes.

Question: I inherited a vacation home from my dad. The home is worth much more than my dad paid for it. If I sell, will all the at appreciation be taxable to me?
Answer: No. You can use the value of the home at the time of your dad's death as your cost basis, so the appreciation during his lifetime won't be taxed (This might not be the case for property inherited in 2010.)