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Weekly National News

June 16, 2017

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FASB Nears Release of Final Standard on Hedge Accounting

(Compliance Week) June 7, 2017 – Add a new standard on hedging to the onslaught of accounting changes companies will have to deal with in the next few years as the Financial Accounting Standards Board prepares to issue its third and final new standard dealing with financial instruments. After wrapping up its redeliberation of comments on a 2016 exposure draft, FASB expects to publish its final Accounting Standards Update on hedge accounting in August 2017. The new standard is expected to take effect for public companies in fiscal years beginning after Dec. 15, 2018. That means calendar-year companies will begin applying it in 2019, a year after companies adopt new revenue recognition rules and the same year companies will adopt new lease accounting rules.
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76 Countries, but Not the U.S., Sign OECD BEPS Convention to Curb International Tax Avoidance

(Tax Prof Blog) By Paul Caron, June 8, 2017 – Ministers and high-level officials from 76 countries and jurisdictions have signed or formally expressed their intention to sign an innovative multilateral convention that will swiftly implement a series of tax treaty measures to update the existing network of bilateral tax treaties and reduce opportunities for tax avoidance by multinational enterprises. The new convention will also strengthen provisions to resolve treaty disputes, including through mandatory binding arbitration, thereby reducing double taxation and increasing tax certainty.
readmore

 

FINRA to Release More Guidance on Bad Brokers

(Think Advisor) June 12, 2017 – The Financial Industry Regulatory Authority plans to publish in the coming months additional guidance regarding broker-dealers’ supervisory obligations related to brokers that may “pose higher risk,” Robert Cook, the self-regulator’s CEO, said June 12. “Our intention is to provide firms with a better understanding of what our expectations are on how they should go about identifying brokers who may merit heightened supervision and about what the elements of heightened supervision might be,” Cook said during remarks at Georgetown University’s McDonough School of Business Center for Financial Markets and Policy.
readmore

 

Why Bots Are Only the Beginning for AI in Accounting

(AccountingWEB) By Yohan Varella, June 9, 2017 – Accounting professionals are now fully adapted to absorbing brand-new technology in every aspect of their lives, and artificial intelligence (or machine learning) will be no exception. With the advent of chat bots and automated data-entry tools, using AI for accessing data is becoming more and more common between accountants, and its adoption will soon be mainstream. But the big question that accounting professionals are probably asking themselves is: “What about the next game-changer AI innovations? And how will they impact me?”
readmore

 

Companies Spending More Time on SOX Compliance

(Journal of Accountancy) June 12, 2017 – Compliance with the Sarbanes-Oxley Act of 2002 was increasingly time-consuming for most U.S. public companies in 2016, but a large portion of company leaders continue to say that the compliance work has improved their internal control over financial reporting structure, a new survey report shows.
readmore

 

Timing is Everything: IRS Raises Stakes for Employers Who Delay FICA Taxation of Deferred Compensation

(National Law Review) Deborah Andrews, June 12, 2017 – Employers, both for-profit and tax-exempt organizations, often overlook the complex FICA tax rules applicable to deferred compensation. Unfortunately, this oversight now can be a real problem for the employer.
readmore

 

How to Detect Accounts Payable Fraud

(CPA Practice Advisor) June 12, 2017 – No matter how big or small a company, every dollar spent goes through accounts payable. Because of this, accounts payable is one of the areas of the business most vulnerable to internal and external fraud. Between vendors, suppliers, rent payments, and more, businesses need to be vigilant about monitoring their finances.
readmore

 

How to Field Employee Complaints About New Leadership

(The Business Journals) June 13, 2017 – When you hire competent leaders to improve your business’ performance, it may very well ruffle some feathers. Here are some things to keep in mind as they start doing their work.
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'New Normal' for Healthcare Cost Trend: Single-Digit Growth

(Health Leaders Media) June 13, 2017 – In the employer-sponsored insurance market, swings between single-digit and double-digit growth in the annual cost to treat patients appear to be over, a new 2018 medical cost trend report says. A report from PwC concludes single-digit growth is the "new normal" for healthcare cost in the employer-sponsored insurance market. "The era of volatile swings and double-digit growth in employer medical costs appears to be ending. With medical cost trend hovering in the single digits for several years, the industry has been waiting for the inflection point when spending will take off. But that spike appears unlikely to happen," says the report, "Medical Cost Trend: Behind the Numbers 2018."
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FASB Nears Release of Final Standard on Hedge Accounting

(Compliance Week) June 7, 2017 – Add a new standard on hedging to the onslaught of accounting changes companies will have to deal with in the next few years as the Financial Accounting Standards Board prepares to issue its third and final new standard dealing with financial instruments.

After wrapping up its redeliberation of comments on a 2016 exposure draft, FASB expects to publish its final Accounting Standards Update on hedge accounting in August 2017. The new standard is expected to take effect for public companies in fiscal years beginning after Dec. 15, 2018. That means calendar-year companies will begin applying it in 2019, a year after companies adopt new revenue recognition rules and the same year companies will adopt new lease accounting rules.

The hedge accounting standard is one of three FASB developed over several years to overhaul the accounting for financial instruments. Initially undertaken as a single standard, FASB chose to break the project apart into three separate standards — one governing the classification and measurement of financial instruments, one adopting a new forward-looking approach for recognizing loan losses, and now the hedging standard. The classification and measurement standard also takes effect in 2018, followed by the new “current expected credit loss” model for accounting for loan losses in 2020.

Unlike many of the major new standards that involve a mountain of new — and in some cases complex — accounting requirements, the hedge accounting standard is meant to make a traditionally complex area of accounting simpler. Hedge accounting, a common cause of restatements historically, has been regarded as one of the more difficult areas of accounting because of the complexity of prescriptive requirements that command rigid compliance with detailed terms.

FASB Chairman Russ Golden said in a statement the board received “overwhelmingly positive feedback” to the proposed changes to the hedge accounting model both from preparers and investors. “The resulting standard will better align the accounting rules with a company’s risk management activities, better reflect the economic results of hedging in the financial statements, and simplify hedge accounting treatment,” Golden said.

FASB says the new standard will refine and expand hedge accounting both for financial risks, such as interest rate risks, and commodity risks. The economic results of hedge activity will be presented in a more transparent way, the board says, both on the face of the financial statements and in the footnotes.

The board began its long and winding journey to new hedge accounting rules with a proposal in 2010 during the convergence era, where FASB was working with international accounting standard setters to try to make rules more consistent across jurisdictions. That 2010 proposal addressed not only derivates but all financial instrument accounting. Feedback to that all-encompassing proposal prompted the board to break the project apart and ultimately to put hedge accounting on the back burner.

The board resurrected hedge accounting simplification in 2016 with a proposal that focused on targeted improvements to existing GAAP rather than wholesale changes to the entire approach to accounting for derivatives. The board received only 60 comments to that proposal.

 

 

 

 

 

76 Countries, but Not the U.S., Sign OECD BEPS Convention to Curb International Tax Avoidance

(Tax Prof Blog) By Paul Caron, June 8, 2017 – Ministers and high-level officials from 76 countries and jurisdictions have signed or formally expressed their intention to sign an innovative multilateral convention that will swiftly implement a series of tax treaty measures to update the existing network of bilateral tax treaties and reduce opportunities for tax avoidance by multinational enterprises. The new convention will also strengthen provisions to resolve treaty disputes, including through mandatory binding arbitration, thereby reducing double taxation and increasing tax certainty.

The signing ceremony for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS took place during the annual OECD Week, which brings together government officials and members of civil society from OECD and partner countries to debate the most pressing social and economic challenges confronting society. In addition to those signing June 8, a number of other jurisdictions are actively working towards signature of the convention and more are expected to follow by the end of 2017.

The signing ceremony marks an important milestone in the international tax agenda, which is moving closer to the goal of preventing base erosion and profit shifting (BEPS) by multinational enterprises. The new convention, which is the first multilateral treaty of its kind, allows jurisdictions to transpose results from the OECD/G20 BEPS Project into their existing networks of bilateral tax treaties. It was developed through inclusive negotiations involving more than 100 countries and jurisdictions, under a mandate delivered by G20 Finance Ministers and Central Bank Governors at their February 2015 meeting.

“The signing of this multilateral convention marks a turning point in tax treaty history,” said OECD Secretary-General Angel Gurría. “We are moving towards rapid implementation of the far-reaching reforms agreed under the BEPS Project in more than 1,100 tax treaties worldwide, and radically transforming the way that tax treaties are modified. Beyond saving signatories from the burden of re-negotiating these treaties bilaterally, the new convention will result in more certainty and predictability for businesses, and a better functioning international tax system for the benefit of our citizens. The signing also shows that when the international community comes together there is no issue or challenge we cannot effectively tackle.”

The OECD/G20 BEPS Project delivers solutions for governments to close the gaps in existing international rules that allow corporate profits to disappear or be artificially shifted to low or no tax environments, where companies have little or no economic activity. Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually, or the equivalent of 4-10% of global corporate income tax revenues. Almost 100 countries and jurisdictions are currently working in the Inclusive Framework on BEPS to implement BEPS measures in their domestic legislation and bilateral tax treaties. The sheer number of bilateral treaties makes updates to the treaty network on a bilateral basis burdensome and time-consuming.

The new multilateral convention will solve this problem. It will modify existing bilateral tax treaties to swiftly implement the tax treaty measures developed in the course of the OECD/G20 BEPS Project. Treaty measures that are included in the new multilateral convention include those on hybrid mismatch arrangements, treaty abuse, permanent establishment, and mutual agreement procedures, including an optional provision on mandatory binding arbitration, which has been taken up by 25 signatories.

The first modifications to bilateral tax treaties are expected to enter into effect in early 2018.

The OECD is the depositary of the multilateral convention and is supporting governments in the process of signature, ratification and implementation. The position of each signatory under the convention is now available on the OECD website. By the end of 2017, the OECD will provide a database and additional tools on its website, facilitating the application of the convention by taxpayers and tax administrations.

 

 

 

 

 

FINRA to Release More Guidance on Bad Brokers

(Think Advisor) June 12, 2017 – The Financial Industry Regulatory Authority plans to publish in the coming months additional guidance regarding broker-dealers’ supervisory obligations related to brokers that may “pose higher risk,” Robert Cook, the self-regulator’s CEO, said June 12.

“Our intention is to provide firms with a better understanding of what our expectations are on how they should go about identifying brokers who may merit heightened supervision and about what the elements of heightened supervision might be,” Cook said during remarks at Georgetown University’s McDonough School of Business Center for Financial Markets and Policy.

FINRA’s objective with the guidance, he continued, is to “elaborate on existing guidance. This would not be a rule filing, so we’re not making up new rules here. Based on our conversations with firms, there’s potential value in our providing some heightened guidance about what we think they should be looking at, and frankly to give them ideas about both ways they need to think about how to identify high-risk brokers and what steps they might consider taking to better supervise” those brokers. “Firms are really the first line of defense in this problem. Their compliance departments need to play a role, a very active role, … in both reviewing the hiring of individuals, the ongoing monitoring of their trading.”

Until the guidance is released, Cook said, “it is imperative that broker-dealers continue to work with us to reduce the risk of misconduct and ensure that investors can have confidence in their investment professionals.”

The group is looking to raise fees, consider more severe sanctions and further restrict firm and advisors with disciplinary issues.
Cook noted in his speech, “Protecting Investors From Bad Actors,” the regulatory programs FINRA now has in place and is “continuing to develop.”

While “statistics demonstrate that bad actors who cause customer harm account for a small percentage of the industry,” Cook said that during his listening tour during the first year as CEO, “many firms have urged that FINRA be aggressive in dealing with bad actors” as the “damage caused by even a few bad actors can hurt not just the investors involved, but the reputation of the entire industry.”

Cook said he shared “this sense of urgency.”

FINRA Zeroing In on Hiring, Retaining of High-Risk Brokers

As noted in FINRA’s 2017 exam priorities letter, Cook noted that the self-regulator is paying particular attention to firms’ hiring or retaining of high-risk brokers, including whether firms establish appropriate supervisory and compliance controls for such persons.

“We are looking at whether firms develop and implement a supervisory plan reasonably tailored to detect and prevent future misconduct by a particular broker based on prior misconduct and regulatory disclosures,” he said.

FINRA is also zooming in on firms “with a concentration of brokers with significant past disciplinary records or a number of sales practice complaints or arbitrations,” he noted.

Yet another approach FINRA has taken on the bad-broker front is launching a new “dedicated unit” to centralize the identification and monitoring of high-risk brokers.

“This unit is composed of examiners and managers with the specialized skills and experience necessary for dealing with this broker population,” Cook said. The unit “works closely with examiners in our district offices and a team of enforcement lawyers who act quickly to bring disciplinary actions if misconduct is identified. These additional resources — which augment the focus on high-risk brokers that continues across the rest of our exam program — should enable us to improve our identification efforts and double the number of examinations we conduct in the program this year as compared to 2016.”

FINRA’s “membership application program” is also identifying “new and continuing member applicants that employ, or seek to employ, brokers with problematic regulatory histories, and is considering carefully whether these applicants have the experience and controls to adequately supervise these brokers.”

Steps taken by FINRA’s Board in May, Cook said, include proposing a rule amendment to require brokerage firms to adopt heightened supervisory procedures for individuals while a disciplinary case is pending appeal.

Cook noted that FINRA set up an internal senior staff working group last year “to consider new approaches to identify and address the risk of broker misconduct,” and that FINRA’s Board of Governors has formed a special working group, led by former Securities and Exchange Commission Chairwoman Elisse Walter, to focus on FINRA’s oversight of high-risk brokers.

“We also intend to reinforce and clarify firms' existing supervisory obligations concerning brokers they employ that have disciplinary histories,” Cook added. “Among other measures, the proposals would also expand sanction guidelines to enable adjudicators to consider more severe sanctions when an individual’s disciplinary history includes additional types of past misconduct. They also would allow hearing panels, in appropriate circumstances, to restrict the activities of firms and individuals while a disciplinary matter is on appeal.”

In 2016, Cook noted that FINRA brought 1,434 disciplinary actions against registered individual brokers and firms; 1,244 individuals and 50 firms were suspended or barred from the industry. Also, in the last two years (not including 2017), the self-regulator has ordered some $124 million in restitution to harmed investors.

After identifying a high-risk firm, Cook said FINRA typically examines that firm “annually with specialized, experienced examiners, often accompanied by enforcement attorneys to facilitate follow-up action.”

The “heightened scrutiny has had an impact,” he said. Of the firms assessed as higher risk in the last five years, more than 40% are no longer FINRA members, in many cases because of regulatory action.

Too Many Designations

Kevin Keller, president and CEO of the Certified Financial Planner Board of Standards, who attended the event, asked Cook if FINRA and the CFP Board could “work together to help limit or reduce or at least help the public make the informed decision” about the nearly 170 designations that appear on FINRA’s website. 

“In addressing bad actors, many frequently use misleading or meaningless designations and certifications,” Keller said to Cook.

Cook responded: “There are a lot of designations out there. One thing new investors should be focused on is the designation and looking behind the title. That’s one of the reasons our website lists the various designations that are out there, so that you can get a better sense for what it actually means — those acronyms that come after someone’s name.”

It does require “some work on the part of the investor to unpack what kind of training and testing, what kind of continuing education requirements are they subject to. FINRA requires all those things of brokers, whether or not they have letters after their name. Certainly if they do, you want to understand what those differences are. I think we’re not prepared to get too much into the role of being the ultimate decider of which designations are good and which ones aren’t and ranking those designations somehow.”

On the other hand, Cook added, “if people are aware of designations that are being used in a misleading way, then that of course would be of great interest to us.”

 

 

 

 

 

Why Bots Are Only the Beginning for AI in Accounting

(AccountingWEB) By Yohan Varella, June 9, 2017 – Accounting professionals are now fully adapted to absorbing brand-new technology in every aspect of their lives, and artificial intelligence (or machine learning) will be no exception.

With the advent of chat bots and automated data-entry tools, using AI for accessing data is becoming more and more common between accountants, and its adoption will soon be mainstream. But the big question that accounting professionals are probably asking themselves is: “What about the next game-changer AI innovations? And how will they impact me?”

There are many benefits that AI will bring to accountants. Bill Gates thinks that these AI robots will be good for society; he even suggests governments should tax them like regular taxpayers.

The outcome of these benefits is already known: time-saving, accuracy improvement, productivity increases, reduced payroll costs, and overall affordability. Security is also not an issue because accountants will always have the final word on approving everything the AI does. The key now is not to simply know the ultimate benefits that this technology will deliver, but how it’ll deliver them.

By taking a closer look at where the accounting tech industry is going, it’s possible to connect the dots and draw a map on what’s to come for those fighting the battles in the front – the accounting professionals. There will be many procedural changes brought by AI to the way this segment operates.

One of the biggest changes will be in the area of compliance, which will be mostly affected in the way that data is processed. This means that accountants will be able to have streamlined reporting doing all the heavy tax data lifting for them.

Another huge impact will be over the data categorization. Machine learning-powered bots will single-handedly sort all information into each specific category available.

These bots can learn from the initial decisions made by the accountants and then determine the future by themselves. Plus, they will also be able to make decisions on their own, which means they won’t even need any initial feedback from accountants in most cases. That’s a major step.

Still, AI will even bring changes to the way both small and big accounting practices are organized. Administrative positions will disappear because firms will go completely paper-free and there will be a bot for every operational task to be performed. In the same way, administrative tasks once done by accountants themselves will also fade away, being replaced by all-in-one automation software.

But perhaps the biggest change that AI will bring will be upon the accounting professional mindset. It’s possible that technology-savvy accountants will soon become the standard. And not tech-savvy as in “Yes, I create great Excel spreadsheets” but as in “Yes, I can operate your entire business accounting through bots.” That’s just too big of a change to pass unnoticed.

This might even bring implications in the way that business owners see accounting professionals. They might start seeing them as the ones who have the power (knowledge) to drastically organize their companies’ financial health in a short time-lapse, which would encourage them to increase demand.

AI won’t take over the accountancy world at once. First, there must be a single tool or feature to cause the big rapture on the segment; otherwise, the adoption will be gradual.

 

 

 

 

 

Companies Spending More Time on SOX Compliance

(Journal of Accountancy) June 12, 2017 – Compliance with the Sarbanes-Oxley Act of 2002 (SOX) was increasingly time-consuming for most U.S. public companies in 2016, but a large portion of company leaders continue to say that the compliance work has improved their internal control over financial reporting (ICFR) structure, a new survey report shows.

More than half of the 468 public companies surveyed by global consulting firm Protiviti said they devoted more time to complying with SOX in 2016 than in 2015. In a breakdown by company revenue, the lowest percentage of respondents reporting time increases was 51% for companies with $1 billion to $4.9 billion in revenue. The $100 million to $499.99 million revenue range had the largest percentage (61%) of companies reporting an increase in time devoted to SOX compliance.

Overall, about two-thirds of the companies reporting an increase in time devoted to SOX compliance said the time spent rose by more than 10%. Top areas of change in companies’ SOX compliance programs included:

  • Expansion of scope related to IT general controls (69% with at least moderate change).
  • Changes/increase in process control documentation for high-risk processes (69% with at least moderate change).
  • Increased scrutiny from external auditors on testing exceptions/deficiencies (68% with at least moderate change).
  • Increase in scope to baseline test more IT reports (66% with at least moderate change).

Concerns over the burdens of regulation have led Congress to consider rolling back SOX requirements for at least some companies. One provision of H.R. 10, The Financial CHOICE Act of 2017, would grant certain low-revenue public companies an exemption from SOX Section 404(b), which requires auditors of public companies to attest to, and report on, management’s assessment of its internal controls. The House has passed the bill, but its fate in the Senate is uncertain.

The Center for Audit Quality, which is affiliated with the AICPA, and other investor groups have voiced opposition to any legislation that would erode SOX Section 404(b) requirements. The Protiviti survey showed that SOX compliance efforts have brought benefits to companies. One-third (34%) of respondents said their ICFR structure has significantly improved since SOX Section 404(b) compliance was required for their company. An additional 39% said their ICFR structure has moderately improved.

Almost two-thirds (65%) of respondents said their SOX compliance process has enhanced understanding of control design and control operating effectiveness. And half said SOX compliance has resulted in continuous improvement of their business processes.

“SOX requirements and practices have changed with the times, and we’re pleased to see that many companies are reaping the benefits of their compliance efforts, which is also good news for investors,” Brian Christensen, executive vice president, global internal audit and financial advisory at Protiviti, said in a news release.

“By creating streamlined and lean processes, companies can respond to new and emerging business or regulatory challenges with agility. Conversely, those who aren’t following this model and are instead always playing catch-up may struggle to remain competitive over time.”

Three factors significantly affected SOX compliance in 2016:

  • PCAOB requirements. External auditors faced increasing inspection report requirements from the PCAOB, and 64% of respondents said their external auditors are placing more focus on evaluating deficiencies.
  • Revenue recognition. Companies are updating controls documentation to comply with FASB’s new revenue recognition standard; 26% reported extensive or substantial increases in testing of controls over application of revenue recognition policies.
  • Cybersecurity. Survey respondents showed significant growth in the number of cybersecurity disclosures made in 2016.

 

 

 

 

 

Timing is Everything: IRS Raises Stakes for Employers Who Delay FICA Taxation of Deferred Compensation

(National Law Review) Deborah Andrews, June 12, 2017 – Employers, both for-profit and tax-exempt organizations, often overlook the complex FICA tax rules applicable to deferred compensation. Unfortunately, this oversight now can be a real problem for the employer. When an employer fails to properly report and withhold FICA taxes under the deferred compensation "special timing rule" described below, their employees can face higher FICA taxes in the future. Previously, the IRS could agree to let the employer fix the FICA tax error after the statutory correction period had expired. However, according to recently released IRS Chief Counsel Memorandum AM 2017-001 ("CCM"), the IRS is ending this practice. As discussed below, this raises the stakes as employers may be held liable to employees for the mistake.

Background

Both the employer and the employee are liable for FICA taxes, which are composed of two parts:

  • The Social Security tax; and,
  • The Medicare tax.

The employer and employee portions of Social Security tax are each equal to 6.2% of wages up to a wage base limit ($127,200 for 2017). The employer and employee portions of the Medicare tax are each equal to 1.45% of an unlimited wage base. (Note: Wages in excess of a specified level may subject the employee to an additional Medicare tax which is disregarded for purposes of this article).

The Special Timing Rule and Deferred Compensation

Under the general rule, wages are usually subject to FICA tax when they are paid. However, a special timing rule applies to a nonqualified deferred compensation plan ("NQDC plan"). A NQDC plan is generally an arrangement, other than a qualified employer plan (e.g., a 401(k) plan) in which an employer agrees to pay compensation in the future to an employee. Under the special timing rule, compensation deferred under a NQDC plan may be subject to FICA tax when the employee has a vested right to the compensation. Once the deferred compensation is taken into account for FICA tax purposes under the special timing rule, the compensation and related earnings are then free from any additional FICA tax when actually paid to the employee. This rule is referred to as the "nonduplication" rule.

The special timing rule benefits both employers and employees. At the time the deferred compensation is taken into account for FICA tax purposes under the special timing rule, the employee is often still employed and has wages in excess of the wage base limit for purposes of calculating the Social Security tax. Therefore, under the special timing rule the employer and employee may pay little or no additional Social Security tax on the deferred compensation. If the employer does not apply the special timing rule, the general rule, that FICA tax is imposed when the compensation is paid, applies, which may trigger adverse tax consequences.

In a simple example, assume Executive A is 55 years old and her salary from Employer for 2017 is $200,000. On September 1, 2017, after working for 10 years for Employer, Executive A is entitled to receive a supplemental retirement benefit of $50,000 per year for 10 years starting when she retires at the age of 65.

Assume the present value of Executive A's retirement benefit in 2017 is $500,000. If Employer uses the special timing rule and takes the $500,000 benefit into account in 2017 (the year Executive A has a vested right in the benefit), the benefit will be subject to Medicare tax for 2017 because Medicare tax applies to an unlimited wage base. However, the $500,000 benefit will escape the 6.2% Social Security tax because Executive A's 2017 salary of $200,000 already exceeds the 2017 Social Security tax wage base limit of $127,200.

If Employer uses the special timing rule, then under the nonduplication rule, when Executive A starts receiving her benefits at age 65, the $50,000 payments will not be subject to FICA tax. On the other hand, if Employer ignores the special timing rule, the general rule will apply. Under the general rule, when Executive A retires, each $50,000 payment would then be subject to Social Security tax and Medicare tax. Therefore, if the special timing rule is not used, Employer and Employee A could each pay an additional $31,000 in Social Security taxes ($500,000 x 6.2%).

Corrective Options

An employer takes compensation into account for FICA tax purposes by reporting the amount on the applicable IRS Form ("Form") and submitting the applicable tax. The statutory period to amend the Form is generally three years. If an employer discovers the error within the statutory period, the employer can amend the Form to take advantage of the special timing rule and pay any additional FICA tax required under that rule.  

Unfortunately, the employer often does not discover the error until many years after the deferred compensation has vested. Prior to the issuance of the CCM, an employer could still take advantage of the special timing rule if the employer entered into an agreement ("Closing Agreement") with the IRS to make a retroactive payment of the additional FICA tax plus interest.

However, the CCM indicates the IRS will no longer enter into these Closing Agreements with employers. Therefore, if the employer is outside of the statutory period to amend the Form, the general timing rule will apply and the deferred compensation will be subject to FICA tax when paid which could mean higher FICA taxes for both the employer and the employee.

The termination of the option to enter into a Closing Agreement should be alarming to employers as the employer's failure to apply the special timing rule has led to litigation. For example, in a recent Michigan federal court case, the employer failed to apply the special timing rule which resulted in additional FICA tax for employees. The employees successfully sued the employer for the reduction in benefits.

The federal district court ruled that the language in the specific deferred compensation plan at issue obligated the employer to take advantage of the special timing rule and the court therefore ruled for the employees. However, the court also pointed out that the employer violated the purpose of the deferred compensation plan, which was to provide the employees a supplemental benefit with favorable tax treatment. Therefore, the court could have ruled in favor of the employees regardless of the specific terms of the plan.

If other courts follow this reasoning, they may find employers liable to their employees even if the language of their specific deferred compensation plan does not require the employer to use the special timing rule.

Conclusion

The special timing rule makes it possible for both employers and employees to escape paying Social Security tax on deferred compensation, which can be a huge benefit. Failure to take advantage of the rule, especially when required by the employer's deferred compensation plan, could make the employer liable to employees. Therefore, it is crucial for employers to review their deferred compensation plans and payroll practices.

 

 

 

 

 

How to Detect Accounts Payable Fraud

(CPA Practice Advisor) By Jeramy Kaiman, June 12, 2017 – No matter how big or small a company, every dollar spent goes through accounts payable (AP). Because of this, AP is one of the areas of the business most vulnerable to internal and external fraud. Between vendors, suppliers, rent payments, and more, businesses need to be vigilant about monitoring their finances.

Vulnerabilities in AP have serious consequences. According to the 2016 Report to the Nations on Occupational Fraud and Abuse conducted by the Association of Certified Fraud Examiners (ACFE), AP fraud accounted for nearly half of all reported fraud cases. Types of AP fraud include check tampering, billing and fraudulent expense reimbursements, with check tampering costing a median loss of $158,000 per business.

Although accounts payable fraud is an unavoidable risk that comes with doing business, there are several steps businesses can take to protect themselves and limit their financial loss. Accounting professionals play a key role in this process, as they must have the skills and knowledge to recognize the red flags of fraud when conducting an audit.

To help accounting professionals perform this task, here are the top three ways to detect accounts payable fraud committed within an organization.

Look internally

While no one wants to be suspicious of their own employees, most AP fraud is committed by an employee hiding illegitimate transactions among thousands of legitimate ones. KPMG’s 2016 Global Profiles of the Fraudster report found the typical fraud perpetrator is predominantly male, between the ages of 36 and 55, holds an executive or director level position and has been employed by the company for at least six years.

Given these facts, it’s important to be mindful of your team. Give careful consideration to any employees who may be disgruntled over pay of other potential office-related issues, as they may feel justified in stealing. It’s also important to understand what your employees may be going through – those who seem to be living beyond their means or having financial problems may feel the need to commit fraud if they’re feeling desperate. Keep an eye out for signs of reckless behavior such as frequent expensive purchases and nights out on the town.

Know your vendors

It’s essential to verify each of your vendors and review them regularly to detect AP fraud. To begin, examine every new vendor before they are added to your accounting system, confirming that you know why you’re working with them and what the company does. If you see a vendor you don’t recognize on your list, manually verify who they are and how you are using their services. You can do this simply by calling to make sure the number of the vendor is in service, and checking online to ensure the business information is legitimate.

Look out for other signs of fraud like vendor addresses that match employee home addresses or checks sent to local post office boxes or residential addresses – anything that could point to inconsistencies.

Look at every transaction

You should also look for indicators of fraudulent activity when reviewing transactions. Checks issued for round amounts without cents, payments that are in cities that are not connected to the business, transactions at odd times of day, or dramatic changes in the size or frequency of payments to a certain vendor – these are all red flags that something fraudulent can be occurring. Be sure to use a data mining tool to make the analyses easier.

If you do find any type of AP fraud within your business, you are not alone and you can be proactive to make sure it does not happen again. Set up a formal review system to monitor your list of checks before they are issued. For payments over a certain amount (depending on your business), it’s also a good idea to require a second signature on checks.

According to the 2016 ACFE report, check tampering, billing and expense reimbursement schemes last an average of two years before being detected. Consistent proactive monitoring and a strong awareness of who you’re working with could help you from being a part of this statistic, and therefore keep needed money in the pocket of your business.

 

 

 

 

 

How to Field Employee Complaints About New Leadership

(The Business Journals) June 13, 2017 – A friend of mine - Lisa - is a senior director for a $20 million small business.

She was hired a few months ago to bring some discipline and accountability to one of the fastest growing areas of the business: engineering support work for the government.

Not that things were unruly; just that whenever things grow quickly, especially in small businesses, the leadership growth often lags the business growth, causing growth pains. So after making some mistakes and annoying their biggest customer, the company decided to hire Lisa.

After about six months of steadily improving performance, the owner had a meeting with Lisa to give her some feedback (Lisa’s manager was NOT in the meeting). Apparently, the owner had received some comments from Lisa’s subordinates that she was a micromanager and was not open to suggestions from her team.

When Lisa pressed for specific examples, the owner couldn’t give her any. The meeting ended amicably, but left Lisa worried about her job, especially since her direct supervisor never told her that anything was wrong.

This entire scenario is extremely common, and since you someday hire competent leaders - like Lisa - to improve your business’ performance, here are some things to keep in mind as they start doing their work:

1. Discipline and accountability hurt, so complaints are a sign that things are working
Any parent knows that when he/she starts applying more discipline, his/her children are going to complain. The exact same thing will happen in your business.

It’s not that your employees are acting like children; it’s just that they had a certain amount of freedom that wasn’t being wielded in a way that necessarily supports the mission of your company. Your mature employees will recognize what’s going on and adapt; your less mature employees will complain because they no longer have the same freedom to do whatever they wanted to do.

2. Get specific examples to support complaints
When I was a front-line supervisor at a Fortune 500 company, a union steward brought complaints about me to my manager. When pressed for specifics, the steward said, “He supervises work at the job site, he does inspections afterwards and provides feedback, he does safety evaluations and provides feedback, etc. – why can’t he just be like the rest of the supervisors?”

My boss said to him, “So what you’re telling me is that Ingar is the only supervisor I have who is actually doing the job he was hired to do, is that right?”

Obviously, a simple request for specifics by my manager turned a complaint session into a praise session. That looked great on both my appraisal and in my pay increases. Without specifics, you don’t know the real story.

3. Focus on metrics
If complaints about tough management are increasing, but performance is also increasing, there’s a good chance that complaints are simply a reaction to greater accountability. That doesn’t mean turn a blind eye (not at all); but bad management does tend to depress performance. Use metrics to help you understand complaints.

4. Respect the chain of command
I encourage walking around your business to stay plugged-in and know what’s going on, but avoid providing “negative” feedback directly to your subordinates’ subordinates.

Why? First, your subordinate’s job is to manage and develop her subordinates. How is she supposed to do that when she’s not involved in conversations like this? Second, she may already know all about the specific situation and can give you a status without freaking out her subordinate.

5. Don’t freak out your leaders
Lisa is now concerned that she’s going to lose her job, despite the owner’s assurances. Instead of continuing to take the initiative as she was asked to do over the last six months, she now feels that she must prevent future unfounded complaints by stopping her efforts to improve performance.

Wow. Do you think that’s why the owner brought on a world-class leader?

Want to make sure you don’t blow this? Always get specific examples to support complaints and avoid working around your chain of command. Don’t freak out your leaders.

 

 

 

 

 

'New Normal' for Healthcare Cost Trend: Single-Digit Growth

(Health Leaders Media) June 13, 2017 – In the employer-sponsored insurance market, swings between single-digit and double-digit growth in the annual cost to treat patients appear to be over, a new 2018 medical cost trend report says.

Single-digit growth is the "new normal" for healthcare cost in the employer-sponsored insurance (ESI) market, according to a PricewaterhouseCoopers report.

For 2018, PwC projects the total annual cost growth to treat patients in the ESI market at 6.5%. When accounting for the impact of expected benefit-design changes next year such as higher co-pays, net annual cost growth is forecast at 5.5%.

"The era of volatile swings and double-digit growth in employer medical costs appears to be ending. With medical cost trend hovering in the single digits for several years, the industry has been waiting for the inflection point when spending will take off. But that spike appears unlikely to happen," says the report, "Medical Cost Trend: Behind the Numbers 2018."

Despite the healthcare industry's apparent achievement of establishing a single-digit cost trend over the long-term, more cost reduction is economically essential for the country, the report warns.

"Even with medical cost trend between 6% and 7%, health spending continues to outpace the economy. From 2011 to 2016, the average health premium for family coverage purchased through an employer rose 20%. In the same period, wages increased just 11%. This gap erodes consumers' ability to pay for other goods and services. … Nationally, as medical costs are projected to continue to grow faster than gross domestic product (GDP), healthcare will continue to take up a greater share of the economy."

With consumerism and other factors limiting healthcare-service utilization, one of the PwC report's primary prescriptions for large employers to contain healthcare costs is to press providers on service pricing.

"For medical cost trend to sink lower than its 'new normal,' health organizations and businesses will have to consider tackling the price of services as well as the rate of utilization. Heading into 2018, employers should look to new contract arrangements with providers to tackle healthcare prices without shifting more costs to employees."

2018 Medical Cost Trend Drivers

In 2018, PwC expects three factors to put upward pressure on healthcare spending:

  • Economy-wide inflation: The ongoing recovery from The Great Recession will likely boost general inflation rates, which would drive up prices of medical wages and services
  • High-deductible health plan ceiling: Growth of high-deductible coverage is slowing in the ESI market, weakening a well-used tool to contain service utilization
  • Generic drugs: Relatively few branded drugs are losing patent protection in 2018, which will limit opportunities for healthcare providers to contain costs through purchasing generic drugs

After a rollercoaster ride over the past 30 years, the rate of healthcare spending appears to be entering a period of relative stability, the PwC report says.

"Cost trend has risen and fallen in cycles, peaking after several years of double-digit increases, falling for several years, hitting a trough and then rebounding back to double digits. These cycles have tended to span about 10 years. … The latest downward trend to single-digit annual growth began even before the lower economic growth surrounding the 2009 recession and subsequent recovery. With medical cost growth hanging in the single digits for over a decade now, many employers have been expecting an inflection point when costs will once again grow at double digits. However, that spike doesn't appear to be coming."

Single-digit annual cost growth in healthcare is being maintained despite significant inflationary pressure from the broader economy, the report says. "Even as the economy now picks up steam, growth in cost trend has remained at historic lows."

In 2018, the report says hospital expenditures will account for the largest share of medical costs in the ESI market:

  • Hospital inpatient and outpatient spending: 49%
  • Physician spending: 29%
  • Prescription drug spending: 18%