Monthly Archives: February 2017

Traditional CPA Auditing
vs. Forensic Auditing

Forensic-1Certified Public Accountants (CPA) are educated and experienced auditors who are accredited and licensed to examine financial statements and to report on whether others have followed policies. For example, are the financial statements presented in accordance with Generally Accepted Accounting Principles (GAAP)?

Traditionally, auditors have not been responsible for detecting fraud, but CPAs do assess the system of Internal Controls to determine effectiveness of deterrence and discovery, namely the strength of an entity’s internal controls. The amount of audit work performed is then based on the reliance the auditor places on the effectiveness of the internal controls.

The auditor will assert reasonable but not absolute assurances that the amounts presented are in accordance with GAAP. This will be based on the examination of evidential matter and conclusions based on the judgment of the auditor,

Forensic auditing deals with information gleaned from tips, unusual and unexpected relationships and occurrences, and unusual documents among other things. There is no reliance on systems and the fraud audit is heavily dependent on documents, information, technology and following the money, so to speak.

The forensic auditor’s objective is dramatically different than the traditional CPA auditor in that the objective is to discover what happened, how much was involved, over what time period, and who was responsible. A fraud audit is usually initiated by the surprised and resulting from the unexpected and/or the variance from expectations.

If you have any questions, please call 845-356-6100 x211

Dennis Kremer, CPA/ABV/CFF/CGMA, CVA

New NYS Driver’s License Requirement for Individual Tax Returns

Beginning with Tax Year 2016, New York State is requiring additional identification to help prevent identity theft.  If a New York State personal income tax return is filed for 2016 and the filer has a New York driver’s license, the following information is required.

  • License Number
  • Issue Date
  • Expiration Date
  • Document Number

old_dl_for_sample_docs

Depending on when the license was issued, the Document Number is typically found in the bottom right corner on the front of the license or on the back of the license.

All tax professionals will be requesting this information in order to comply with the filing requirements.

When submitting tax return information, please provide the required driver’s license information stated above. If you are providing a copy of the license, please be sure to provide both sides of the license. If a return is prepared for a dependent that has a New York driver’s license, the information will be required for the dependent as well. Also if you are a New York resident and you do not possess a New York driver’s license, please inform your preparer.

John Rosenberger, CPA, CGMA

Are You Paying Yourself Reasonable Compensation from your S-Corporation?

One tax advantage of setting up your company as an S-Corporation is that the income is taxed on a “pass-through basis” to the shareholders and this pass-through income is not subject to self-employment tax. Since an S-corporation’s income which is taxed at the shareholder level is not subject to self-employment tax, the shareholders instead pay both the employer and employee share of payroll taxes on their salaries through the company’s payroll system.

Owner-Compensation-in-an-S-Corporation-400x264When a business is set up as an S-corporation, shareholders assume they can pay themselves however and whenever they want to. In lieu of a salary, many shareholders compensate themselves through distributions or loan repayments, thus avoiding payroll taxes on these payments. The Internal Revenue Service (“IRS”) regulations and several court decisions have established that S-corporations need to pay a “reasonable” salary to shareholders who are officers of the corporation and who perform services for that corporation.

The obvious question that arises is what constitutes a reasonable salary for a shareholder. The IRS determines reasonable compensation on a case by case basis based upon several factors. These IRS factors include the training and experience of the shareholder, the shareholder’s duties and responsibilities within the business, time and effort devoted to the business and what comparable businesses pay for similar services. If a shareholder of an S-corporation does not take a reasonable salary, the tax courts have been known to reclassify distributions and loan payments as salary thereby subjecting the shareholder and their corporation to additional payroll taxes along with interest and penalties.

If you are considering setting up an S-corporation or are currently a shareholder of an S-corporation, please contact our office to further discuss this concept of “reasonable” compensation for shareholders.

Brian Riley

Lease Standard Reporting Changes

There will be significant changes in the way your company accounts and reports leases on your financial statements. The technical term is ASU No. 2016-02, Leases. The effective date for private companies to implement the change is for fiscal years beginning after December 15, 2019. Although that date may seem far into the future, the changes it brings are significant to the balance sheet and could have a negative impact on your loan covenants

AAEAAQAAAAAAAAabAAAAJDQ4YWFmMmNkLWZjMWMtNDFjNi04OGM3LWQ3ODQwNDZhOWFmYQ-1Currently leases are reported as either capital or operating leases. Capital leases treat leased property as though it was acquired meaning the property appears on the balance sheet as an asset along with the associated lease debt presented in current and long term liabilities. The capital lease asset is amortized over its life and the debt is reduced by cash payments against the liability balance with a recognition of interest expense. The presentation of this type of lease will remain relatively the same. The terminology changes from Capital lease to Right-of-Use Asset Finance Lease. The criteria is mostly unchanged as to which leases are categorized to this type of lease so there is very little actual change in reporting to be recognized.

The current operating lease treats lease (rent) payments as an expense directly to the income statement without any recognition of the leased property on the balance sheet. Only if there are notes to the financial statement will the reader of the financial statement be aware that there is a long-term liability associated with this type of lease.

Under the new rules, an Operating Lease will now be called Right-of Use Asset Operating Lease and an asset and liability will be presented on the balance sheet. Basically this recognition will apply to any lease that has a term great than one year and is not treated as a Right-of-Use Asset Finance Lease.

There will be no real effect on the income or cash flow statements of the financial statements but there will be real changes on the balance sheets. There will be real changes as well to loan covenant calculations. Debt-to-equity ratios increases, return of assets, current ratio and interest coverage ratios decreases. EBITDA may increase as previous operating leases may become a capital/financing lease.

It is important to understand the changes in lease reporting early and the effects it may have on financial statement covenants. This will prevent covenants from potentially failing when the new standard becomes effective. Review of this standard should be done with your lenders and CPAs so changes to finance agreements can be made prior to the effective implementation dates.

Wayne L. Martin, CPA, CGMA