Dan Hursh remembers a scheme that left one man dead and a group of doctors
short $3 million.
A group of Michigan-based physicians made the mistake
of giving complete control of their financials to an attorney/certified
public accountant. The man set up his own management company and for more
than six years fabricated consulting charges, invoiced the physicians, and
paid himself from the doctors’ funds.
The attorney/CPA started small and, as he gained
confidence, committed greater degrees of fraud. To maintain the scam, he
altered financial statements and tax returns, which he provided to the
doctors. Before the doctors could catch on, the employee committed suicide.
“This is an extreme example of a company’s
lack of properly segregating duties,” says Hursh, tax partner in the
Cleveland office of Plante & Moran PLLC, an accounting and consulting
firm with offices in Michigan, Ohio, and Illinois. “The lesson is
that owners or senior management need to be involved. They can’t
assume the CFO or controller knows everything that’s going on.”
Accounting mistakes of all sizes, from seemingly small
errors to major lapses in judgment, have the potential to destroy
businesses. The good news is that, with a little foresight, most of these
mistakes can be avoided. Here are three of the most common accounting
mistakes companies make and how to prevent them.
1. Breakdowns in internal
controls
The most prevalent problem with internal accounting
controls is improper segregation of duties, says Mark Schikowski, partner,
accounting and auditing services, at Cohen & Co. Ltd. “The
greater degree of separation of duties you have, the better you can avoid
problems,” Schikowski says.
For instance, the employee handling cash
shouldn’t oversee accounts receivables. “If employees do both,
they can mask a lot of things on their own,” says Schikowski, who
works in the Akron office of the Cleveland-based firm.
There are many internal controls a company can use. One
procedure is to mail bank statements to the owner’s home rather than
the office. This lets the owner peruse the statement before anyone in the
office who might slip out checks or commit fraud, Schikowski says. Another
is to require one or two authorized signatures on checks of a certain
amount, instead of rubber-stamping all checks. Additionally, companies
should take regular inventory of fixed assets, prepare accounts receivable
aging reports (which note delinquent vendors), and authorize and document
expenditures.
2. Oversight of tax
incentives
One of the biggest corporate accounting gaffes is not
taking advantage of tax credits and exemptions.
“When it comes to state taxes, smaller companies
don’t really understand or aren’t aware of tax credits,”
says Julie Corrigan, senior manager of the state and local tax practice at
Plante & Moran.
One area with a loophole on corporate property tax
returns is inventory. Ohio, unlike some states, taxes inventory. But Ohio
has a “for-storage-only” exemption. “If your inventory
comes from out of Ohio, nothing happens to it [while it’s in your
possession], and then it’s shipped to a customer outside of the
state, it shouldn’t be taxed in Ohio,” Corrigan says.
Another frequently overlooked credit is the job
creation tax credit. Companies need to apply in advance to the Ohio
Department of Development, stating the jobs and facilities they plan to add
and the projected increase in revenue from those jobs and facilities in the
next three years. If the Ohio Tax Authority agrees with the information,
companies receive credits on state and local tax returns.
A more costly oversight can result when companies
conduct business outside the state. Many overlook the fact they are exposed
to taxes in other states.
Hursh handled a voluntary disclosure for a
Michigan-based manufacturer in the construction industry that neglected to
pay taxes in 20 to 25 states where it sold goods. “We came forward
[on behalf of the client] to the tax departments, accepted a voluntary
sales tax going back four years and paid interest, but not
penalties,” Hursh says.
Tax write-offs also cause problems for some business
owners who are shortsighted about the benefits. “People get focused
on the tax payoff and forget the big picture: Is [the decision]
economically viable?” says E. Roger Stewart, a certified public
accountant and shareholder of Cleveland-based law firm McCarthy, Lebit,
Crystal & Liffman Co. LPA. Business owners who buy luxury sport utility
vehicles are an example.
Because larger SUVs qualify under tax law as trucks,
some owners claim them as business write-offs. But they don’t
consider the cost of insurance and gas, in addition to the hefty price tag
associated with the vehicle itself. “They spend twice as much getting
a perceived tax advantage,” Stewart says. “Maybe a $25,000 van
or truck would be better.”
3. Hiring and personnel
blunders
Some business owners avoid hiring accountants and
other professionals, such as lawyers, to save money, Stewart says.
It’s also not uncommon for small-business owners
to appoint a spouse, family member, friend, or trusted associate as
accountant. While these people may be educated or work well alongside the
other employees, they might not have sufficient accounting experience.
One way for companies to ensure they’re making
the best business and accounting decisions is to appoint an advisory board,
Gaino says. Composed of people with experience in marketing, human
resources, operations, finance, and other disciplines, an advisory board
supplements the skills of business managers. “You can bring people on
board with a depth of knowledge in accounting matters,” Gaino says.
“They can often hold the controller more accountable [than an owner
can] for the accuracy and depth of financial reporting.”
Neglecting to rely on the right professionals can also
be problematic for companies involved in complex deals or joint ventures
with other businesses. “Someone needs to evaluate what each partner
brings to the table,” says Kimon P. Karas, a shareholder with
McCarthy Lebit. “An independent accountant can provide unbiased
information on how the venture is doing.”