IMS is assisting artists with their business needs to include proposal writing for investment, business plans, contract negotiations, bookkeeping, tax preparation and due diligence.
Recommendations to other service providers include:
- Bombs & Babies Music Publishing and studio in North Hollywood for artists looking for a multi platinum Grammy award winning producer.
- Merrill Lynch and Morgan Stanley for clients seeking investment information and services.
- SongCare for conducting royalty audits and obtaining refunds.
- Raul Carrega, CPA for financial audits.
The Internal Revenue states that every organization exempt from federal income tax under IRS Code section 501(a) must file an annual information return (the Form 990). As with most tax legislation, there are exceptions; (for this example) churches and religious nonprofits. These organizations while not required to file the Form 990 may wish do so in an effort to demonstrate transparency, but more importantly, to raise money.
With a large number of nonprofits competing for the same pool of donors, Maureen Butler, a CPA states in the Journal of Accountancy that in her belief and widely shared by others, that each nonprofit needs to be strategic in communicating its mission, marketing, and fundraising efforts. Although the Form 990 is an information tax return, it can also serve as a key component of the nonprofit’s overall marketing plan designed to enhance its fundraising efforts. Overall, the Form 990 provides a snapshot of the financial health, governance, and operations of these nonprofits:
Who Are the Primary Viewers of Form 990?
Donors and Grantors
Creditors and Banks
Vendors and Service Providers
What do these viewers have in common? All use Form 990 to make decisions that affect the organization's ability to obtain funding, provide services, maintain proper governance, and, ultimately, achieve the goals for which the nonprofit exists. Information provided on the Form 990 makes a compelling argument for the nonprofit by restating its particular mission and program accomplishments.
Technology by way of the internet has provided would-be donors with the ability to conduct due diligence of their own by examining how much a charity pays its executives, what percentage of donations goes to overhead, how much is given to each project (cause) it supports, how much is spent on fundraising efforts and more. For example, websites like Charity Navigator, Charity Watch and Guide Star are providers of such information. While many (not all) charities are happy to use this internet platform, the primary objective of these sites is to act as “Watchdogs” often monitoring tax-exempt organizations, asking tough follow-up questions and exposing corruption when they find it.
John Montague in the Cardozo Law Review found that in 2011, donors gave $298 billion to nonprofits, and the largest percentage, 32% went to religious organizations. As such, donors who participate in “Kingdom Projects” through local church giving often have little idea of what is happening to their money. In fact, many churches maintain little or no oversight (weak controls) compared to for-profit businesses. Thus, the lack of strong internal controls and minimal oversight has led to “unscrupulous” church leaders “using charitable gifts to enrich themselves.” Montague in a “kind” way describes this action as pushing the boundaries of “reasonable compensation.” However, donors in several legal actions have viewed this “enrichment” as a misappropriation or misdirection of funds.
Accountability / Form 990
In 2008, the Form 990 was redesigned to include a question regarding significant theft or embezzlement. Part VI, Section A, Question 5 of the Form 990 asks “Did the organization become aware during the year of a significant diversion of organization’s assets?”
A diversion of assets encompasses theft, embezzlement, or any unauthorized use of the association's assets. It can involve any person, regardless of whether he or she is an officer, director, key employee, volunteer, or independent contractor. The definition also includes diversions by investment advisors and recipients of grant funds.
Katrina Walker, J.D. in a Washington Post article published in October of 2013, stated that more than 1,000 nonprofit organizations had experienced such a significant diversion of assets and that many of these cases were attributed to frauds of theft or embezzlement.
A significant diversion occurs when the gross amount exceeds the lesser of 5% of gross receipts, 5% of total assets at year end, or $250,000. Significant diversions must be reported no matter who is involved whether it be an officer, a director, an employee or an unrelated third party.
As demonstrated here, the IRS Form 990 has many uses. While its initial objective was for nonprofits to disclose amounts raised, monies spent, etc., several charities have found ways of benefiting from the disclosure by capitalizing on the amount of good that's being done with funds raised while others face scrutiny for doing so little.
Maureen Butler, CPA, Ph.D and Brian Butler – Journal of Accountancy, Dec. 2016 “Telling the not-so-profit story through Form 990."
John Montague – Carodozo Law Review, Oct. 2013 “The Law and Financial Transparency in Churches: Reconsidering the Form 990 Exemption."
Katrina D. Walker, J.D., AICPA, The Tax Advisor, June 2014 “Charitable Diversions: Tax Implications and Tips for Addressing Them”
With so many nonprofits asking for donations, here a few tips to remember when giving:
- Be proactive in your giving: Have targeted goals and give to those charities that best reflects your interests.
- Eliminate the middleman: Do not take the calls nor respond to questions from telemarketing campaigns. Remember, many of these telemarketers are employed not by the charity but by a third party.
- Be careful of soundalike names: Know the difference between the Children’s Defense Fund and the Defend Children Fund.
- Confirm 501(c)3 status.
- Check the charity’s commitment to accountability and transparency: Look at websites providing information on salaries and fundraising activities.
- Obtain copies of charity’s financial records: At a minimum request the charity’s Form 990 for the past three years.
- Review executive compensation: The reported average compensation for a CEO is $150,000. Keep in mind that a well compensated CEO is not a bad thing if the charity is performing well.
- Start a dialog with the charity: Before giving, learn about the charity’s accomplishments, goals and challenges.
- Concentrate your giving: Diversification is not the key! Donations made to a single entity have a greater impact of bringing significant change.
- Share your intentions: Make the effort to be a committed partner and support your charity for the long term. Eliminate the charity having to waste resources by sending numerous solicitations.
Think your safe? Think again. In a recent survey, 84% of respondents to Kroll’s latest Global Fraud Report had fell victim to at least one instance of fraud in the last 12 months. In fact, findings from the Kroll report reveals the biggest fraud threat to companies comes from within. To that effect, the Association of Certified Fraud Examiners (ACFE) in their report from 2016 stated that fraud was most often caused by first-time offenders and that only 8.3% of fraudsters had previously been fired from their last job for fraud related conduct. Although companies do their best to hire the right people, legislation oftentimes precludes employers of what they can divulge regarding an employee’s conduct in the workplace.
Fraud from Within
Companies that experienced fraud where the perpetrator was known, four in five (81%) suffered at the hands of at least one insider. One in three victims (36%) experienced fraud at the hands of a member of their own senior or middle management, 45% at the hands of a junior employee, and for 23%, the fraud resulted from the conduct of an agent or intermediary.
Fraud on the Rise
The incidence of Fraud continued to climb in 2017. 84% of surveyed executives reported their company fell victim to at least one instance of fraud in the past 12 months. This represents a continuous, year-in-year rise since 2012, when the reported incidence was 61%.
Employee Turnover is a Serious Problem
Not widely known, employee turnover constitutes a high risk. Executives responding to the survey believe that high staff turnover is the main driver of increased exposure to fraud, with one in three (33%) citing it as being a problem.
Fraud in the United States
In the United States, 75% of companies responding to the survey were affected by at least one incident of fraud in the past year. The survey also showed that the U.S. has a substantial problem with insider fraud: where the perpetrator was known. 40% of American respondents said that a senior or middle manager had been a major player in at least one such crime, noticeably above the global average of 36%.
Threat of Fraud Overseas
Overseas, 72% of companies in the past year were dissuaded from operating in a particular country or region because of the heightened exposure to fraud. Latin America was the region which saw the most businesses turn away, followed by Africa, a close second.
Excerpts (edited from Kroll Global Fraud Reports: 2015/16 and 2017/2018
You don’t have to be on “Undercover Boss” to find out what’s happening inside your business? Data Analytic software allows for the quick identification of discrepancies in the accounting department. The “brains” of the operation. Sure, knowledge of Excel and accounting helps, but wouldn’t it be great knowing that your Payables department is doing everything right? And if errors, typos or miss-keyed entries do exist, wouldn’t it also be nice to know, these problems can be quickly fixed? On the downside, you may also learn that a 10-year employee with family medical problems has been stealing from you for the past two years.
Benefits for lenders includes:
- Knowing if the borrower has held on to invoices, purposely waiting to the subsequent period before posting. In effect, the borrower is trying to improve its cash position by showing a smaller amount of liabilities.
- The lender can know (with certainty) if the borrower has misrepresented its posted earnings. This can be solved by using the Beneish Model to compare financial statements from previous periods.
Benefits to business owners:
- Testing for duplicate payments of invoices – Was the same invoice paid twice?
- Quickly match payments on invoices that have exceeded purchase order amounts – Someone not paying attention
- Being able to identify abnormal occurrences - Knowing if the “outlier” is fraud or misentered data
- Quickly identify open or unpaid invoices – Compare at period end invoice amounts to payment amounts
- The ability to manage invoices and check customer balances through the aging of receivables
- Compare invoice date to shipping date – How close are the dates within reason?
- Detect errors in payments to vendors – Miskeyed or fraudulent entry?
- Decipher if any of your employees are also your vendors – Conflict of interest, possible fraud?
- The ability to quickly summarize user accounts – Fired employees, hackers or unauthorized access?
- Detect gaps in the journal – Incomplete data processing or hidden entries?
- Identify journal entries made on weekends – Ask why?
- Find journal entries where the balance is not equal to zero – Fraud or erroneous journal entry?
- Detect if journal entries are divisible by 1,000 or 10,000 – Possible fraud?
- Detect if nonstandard or manual journal entries were made – Fraud or end of period adjustments?
Data analytics is software used to recognize common red flags that appear in data within the client’s accounting program. A major benefit of the software is that the Fraud Examiner can now search large amounts of data (in fact, thousands of files) in minutes compared to what used to take several weeks to process the same amount of information. What the Fraud Examiner is looking for are patterns, anomalies, trends and outliers. These analytic tests are then used to detect various asset misappropriation, corruption and financial statement fraud schemes.
Why is this important?
According to the 2016 ACFE Report to the Nations, a typical organization will lose more than 5% of its revenues to fraud related activities. Cash misappropriation accounts for more than 31% of all fraud. Billing schemes, 23% with a median loss of $100k and check tampering for 11% of the reported cases with a median loss of $158k per incident.
Sorely, more than 16% of all occupational frauds are reported to have originated within the company’s accounting department. The good news is, companies conducting periodic or annual (internal or external) audits can reduce their median loss by as much as 40%.
Where do Examiners look?
The Three main areas of concern and benefits thereof when performing Data Analytics are in the company’s Accounts Payable, Accounts Receivable/Revenue Recognition and General Ledger. For example:
- Duplicate payments are easily discovered and are often recoverable.
- Unnecessary charges can be quickly identified and eliminated through a systematic analysis of vendors.
- Erroneous payments / Improper accounting can also be found and eliminated through a variety of system tests.
Accounts Receivable / Revenue Recognition
- Uncollectible accounts are identified through the use of Data Analytics.
- Fraudulent financial misstatements are uncovered through analysis.
- Skimming, both theft of cash and fraudulent shipments can be identified using data analytics.
- Nonstandard or manual entries are discovered and eliminated at the general ledger level.
- Human error is reduced when using Data Analytics to test input controls, check mathematical accuracy and overall processing analysis.
- Validity of balances are proved out (verified) using various analytical tests.
Why consider character when lending to buyers? Beyond the credit report, project numbers and repayment history, what kind of person is the buyer? How does he act and what comes out of his mouth? While you go home to your wife and two kids, is the buyer stable or is life one party after another? What kinds of people does he surround himself with? As a property owner, is he constantly involved in court actions? Is he easily reachable? Finally, do you respect the person?
Investigating further, do long-term vacancies exist in his current portfolio? What do tenants say? What is the buyer’s reputation? Does the buyer say one thing and later refuses to acknowledge what was said? Better yet, what are the conditions of their currently owned properties? Are any in disrepair? How quickly does the property owner respond to repair requests?
While these are income producing properties, and the borrower may not be someone you’d bring home to dinner, is the buyer someone you can trust? Recently, a friend who leases warehouse space for his sports program agreed to future lease terms with his landlord back in September only for the landlord to return a few days ago offering terms totally different than those previously agreed to. Has the market changed that much? No. Are the new terms unrealistic? Probably not. Can the Landlord be trusted? Definitely not? Does the Landlord respond quickly to needed repairs, no! Are the tenants considering moving at the end of their lease? A big Yes!
In the end, character counts! If the buyer is one to “screw” his tenants, who’s to say he won’t put the screws to you during difficult times.
Whether you’re investing in a startup, buying a mature business or simply writing a business plan, a thorough understanding of the companies’ financial controls is a must! How else is one to gauge what’s actually been happening and what improvements need to occur? Questions and responses to address during the examination of the business’s financial controls when conducting due diligence are:
1. Is the current business owner keeping business and personal finances separate? Is there evidence of co-mingling suggesting the financial statements may be incorrect or not accurately presented?
2. Has the business conducted background checks before hiring? Background checks are extremely important for employees whose duties involve finances, such as bookkeeping, accounting, payroll or the handling cash. Another question to ask is, who’s actually employed? Does the company employ relatives of the business owner who are on the payroll in name only? For example, the owner’s son away at college but draws a salary.
3. Does the business or will your business create monthly cash flow projections? If the business has forecasted its cash flows, have there been recent occurrences where the actual cash flow has fallen short of projections? Have there been legitimate one-time incidents, poor forecasting, economic downturns or even fraud?
4. Has the business reviewed its monthly bank statements in detail? All businesses should conduct a monthly reconciliation of their bank statements, not only for accuracy but to deter incidents of fraud from occurring.
5. Is the business reviewing all credit and debit card statements for accuracy? The more employees that have company credit cards, the greater the chance of fraud. Employees should be required to document all business expenses with detailed receipts. Employees must understand that using company issued credit cards for personal use is grounds for termination.
6. Does the business have an inventory control system? Inventory is often damaged, stolen, lost or never received. Has the business appointed an individual to inspect and count incoming and outgoing shipments? Does the invoice match the bill of lading? Is the business conducting periodic inventories? Are there procedures in place to track parts, materials, work in progress and finished products using people from a department other than those working directly in the warehouse?
7. Are invoices being reviewed before payment? Prior to making payment, invoices must be reviewed by matching the detailed invoice to a purchase order for the product or service received. In addition, it is recommended that the company maintain a list of “approved vendors.” Be aware of duplicate invoices, new vendors or multiple invoices from the same vendor. Does the company periodically verify and maintain detailed information on its vendors? Does the vendor use a PO box or have an actual “Brick and mortar” location?
8. Have the company required vendors to submit detailed invoices? These same vendors must accurately detail the description, amounts, etc. on invoices provided to the business for payment. Again, in some cases, there needs to be a purchase order in place corroborating the necessary purchase.
9. Who’s signing the checks? Require the signer of all outgoing checks and payments to be an employee other than the maker of the check.
10. Is the payroll being properly reviewed? Is the payroll processed by an outside party? If so, are their statements reviewed for accuracy? Be on the lookout for abnormal amounts or names of employees that you are not familiar with. Are timesheets signed by supervisors? Watch for hourly or salary changes that should be accompanied by proper documentation before agreeing to pay a differing amount.
11. Are financial duties being delegated to multiple employees? Upon examination, are you finding more than one person in charge of the company financials? This would include areas such as bookkeeping, payments and payroll. Payroll and payment processing should be done by employees other than those involved in the ledger or actual accounting process.
12. Employees involved with the companies’ finances require extra scrutiny. These same employees must be required to take annual vacations, having another person in the department stand in and assume these duties during the absence. This has paid off for many employers as embezzlement is often discovered this way.
13. What is the level of debt? How much the does the company owe? How much of the debt is the owner’s responsibility and how much of the debt belongs to the company? What is the current ratio? (Current Assets / Current Liabilities) or the debt to equity ratio? (Total Liabilities / Shareholders’ Equity)
14. Has the business planned ahead for additional financing? Simply, what have been the short term and long term fiscal needs of the company? Are they being addressed? Are lenders in place should the need arise? Is the company in a financial position to keep the cost of additional capital to a minimum?
To make this writing due diligence relevant, modifications to include deletions, additions and changes to the wording have been made. My work was inspired by the SCORE article written on September 7, 2017.
In the process of creating a useful and positive business plan that will be read by potential lenders, knowing that you may only get one chance, the following items must be referenced within the "first two pages" of your business plan. They are:
Did you know:
1) As per your contractual agreement, you are entitled to audit your Publishing and Record Companies on a yearly basis, and to review the accuracy of your Royalty and Publishing statements. Do you know by not auditing on a yearly basis, you are losing precious years of your royalty streams and if it was discovered that your past royalties are incorrect, you forfeit your rights on collecting past years incorrect income. Audit every year!
2) Record & Publishing Companies are keeping MILLIONS of DOLLARS $$$ in their Suspense Reports, which could belong to you!!! So let Audit Time do the Audits for you, and find your missing royalty stream. Ali Adawiya from SongCare / Audit Time has been in the business since 1969.
Jerry Ipsen has teamed up with Raul Carrega, CPA and Ali Adawiya to assist in the recovery of monies owed to you!
Jerold Ipsen is a Certified Fraud Examiner consulting to business and nonprofits as well as providing due diligence for commercial real estate.