DGC Enewsletter 1-10

How Audits Help Uncover Hidden Risks
By William Jenczyk, CPA

In today’s challenging economic environment, the value of audited financial statements has increased exponentially. An audit is a great way for management to focus on environmental and operational risks that don’t ordinarily come to the forefront during the day-to-day operations of a company. For audits conducted on 2009 financial statements, auditors will likely be focused on a few key business and fraud risks. Being prepared for their inquiries will help to get through your audit efficiently, and it will help management address ongoing business risks.

Asset Valuation
A key risk that auditors will be addressing for 2010 audits will be the valuation of significant assets. The valuation risk can affect assets as different as accounts receivable to land and buildings. An auditor will have to consider whether receivables are fully collectible, which is a much more challenging task when many businesses are facing credit and cash flow challenges. Under certain circumstances, an auditor must also consider whether fixed or intangible assets have become impaired. An impairment is considered to have occurred when there has been a permanent decrease in the value of a fixed or intangible asset that brings its value below the amount the asset is carried at on the company’s books. When an impairment takes place, the asset is written down to its impaired value and an impairment loss is recognized on the income statement.

Going Concern
Under normal circumstances a business is considered to be a “going concern”; that is, the assumption is made that the business will continue to operate for the foreseeable future. When circumstances dictate that this assumption may not be valid, an auditor will consider whether the company has the ability to continue as a going concern. Factors that may indicate that the company may not be able to continue as a going concern include negative trends, such as recurring operating losses or negative operating cash flows, loan defaults, the need to refinance significant debt, loss of a significant revenue source or other similar matters. Some significant factors that auditors will be considering include:

Loan Maturity
Prior to the credit meltdown a company was generally able to assume that it would be able to refinance maturing debt. Today, credit is more difficult to obtain, and the assumption that maturing debt will be renewed or refinanced can no longer be made without corroborating evidence. New debt will likely come with significantly higher costs and more stringent requirements. Debt maturing within twelve months of the financial statement date may lead to consideration of whether an entity has the ability to continue as a going concern. Management should be considering its refinancing options well before the maturity date of its debt, and they should be working closely with their banker to ensure that there are no surprises.

Loan Covenant Violations
Many debt agreements contain performance or restrictive loan covenants. It is likely that 2009 will result in many borrowers being in violation of their loan covenants, which will result in a default occurrence under the terms of the loan agreement. In the past, a company would frequently be able to obtain a waiver to cure the violation, but this cycle may prove to be different. Lenders may be more aggressive in dealing with covenant violations, and if a waiver is not obtained, the debt will be treated as a demand loan on the company’s financial statements.

Other Going Concern Indicators
Other circumstances include recurring operating losses, operating cash shortfalls, loss of a significant revenue source and significant vendors experiencing financial difficulties. Management’s early awareness of these factors will provide the best opportunity to overcome these challenges and to respond strategically. Failure to address these issues will increase the chance that the business will fail to continue as a going concern.

Fraud
In difficult economic times, the temptation to commit fraud increases and individuals may find it easier to rationalize their behavior. Management must do all that it can to reduce or eliminate the opportunity. Your auditors can assist you in recognizing and identifying significant or material weaknesses in internal controls.

Now more than ever, responsible managers must recognize risks and opportunities. An audit is an excellent tool for helping management be both proactive and prepared. To find out more about what your auditors will be looking for, or to find out why an audit is a good idea for your organization, talk to your DGC audit representative.

Lobbying Law May Throws New Wrench in the Works for Nonprofits
By Todd Ellis, CPA

On January 1, 2010, the new Massachusetts Act to Improve the Laws Relating to Campaign Finance, Ethics and Lobbying went into effect. The Act was intended to restore public trust in elected officials after a rash of scandals. In a nutshell, it bans gifts of "substantial value" to public officials, provides a stricter definition of lobbying, and expands the enforcement powers of the state. However, it may also have some less desirable effects on organizations that rely on communication with members of government to accomplish change in accordance with their mission.

Of particular concern to nonprofit organizations are the changes to lobbying rules. The Act makes a clear distinction between "legislative" and "executive" lobbying more specifically than in the past. (Definitions can be found at www.mass.gov/legis/laws/seslaw09/sl090028.htm ). This means that some nonprofits, depending on how they communicate with various branches of state government, may now have to register as lobbyists.

Although lobbying that is "incidental" to a person's professional activities is not subject to the registration requirements, the threshold for qualifying as "incidental" has been lowered. Under the Act, lobbying will not be considered incidental and will require registration if:
• activities exceed 25 hours
• in a six month reporting period
• for an employee of a nonprofit organization that receives compensation of more than $2,500 in that six month period

For example, this means that the executive director of an organization who surpasses this threshold may have to register with the Massachusetts Secretary of State's Office as a lobbyist. Registration is a relatively simple process that can be done online at the Secretary's website. Registrants must pay a $100 fee, participate in an online educational seminar and meet a semi-annual requirement to account for any lobbying activity.

Failure to register when registration is found to be required can result in both civil and criminal penalties of various magnitudes. For those organizations that are unsure if they need to register, the Secretary of State has developed a flowchart at www.sec.state.ma.us/pre/prepdf/areyoulobbying.pdf. The Secretary's advice to those organizations that are unsure of their obligations is "when in doubt, registrer."

For assistance in complying with these and other rules of nonprofit organizations please contact Todd Ellis, CPA tellis@dgccpa.com.

Expense Reduction Series - Utility Expenses
By David Staub, CPA

Expense Reduction Series - Utility Expenses
Utility costs are often the largest overhead expense item in a company’s budget, and even small percentage reductions add significant dollars to a company’s bottom line. While the nature of utility costs vary by company, the means for reducing them are the same. A good starting point is to assess your current situation and develop strategies over the long term. A systematic approach to understanding the company’s energy helps focus efforts on how and where energy consumption occurs. This approach calls for the following applications:

Define Your Energy Options – It’s important to understand what alternatives are available before making decisions as these can affect other areas of your energy consumption (i.e. using gas to heat both air and water). Location, industry, and labor force are examples of important factors to consider when evaluating you options and needs.
Establish an Energy Cost Control Program – This is the first step towards savings. It’s important to set goals that quantify savings and timing targets. The program should have a mission statement, promote employee awareness, and evaluate energy consumption across the entire company. Monitor the results closely.
Analyze/Audit Billing Information - Typically, companies pay utility bills without question because there are limited sources of energy. Analyzing prior periods can help to understand how and where the charges come from and is important in determining what conservation approaches to take. Additionally, analyzing present and future period information helps evaluate any changes that have been made.
Use a Professional – Energy consulting is a fast growing service industry, as the service comes at no additional cost to the company. Specialists are used to evaluate the company’s energy needs and make drastic changes in order to save the company from volatile utility expenses. In most cases, the cost for such services is a percentage of the overall savings to the company.

Having discussed methods of evaluating where energy conservation is applicable, procedures can be implemented to reduce consumption. Here are some ways to reduce energy consumption:

Lighting – Lighting can account for the majority of electric costs except those companies in an industry like manufacturing. Making sure lights go off when unused is the easiest step in savings. More effective savings can been seen from removal of excessive lighting, replacing old lamps and bulbs with fluorescents, installing automatic controls and motion sensors, and upgrading high profile equipment (i.e. replace old emergency exit signs with LED signs)
HVAC – Depending on the energy source, air temperature control can be the most expensive utility in a standard office building. Outside of proper insulation and maintenance, simple solutions can be the most effective. Turning on your HVAC one hour later or turning it off one hour earlier in the day will save 11% in a standard 9 hour working day environment. Installing fans will help circulation and cut down on HVAC use.
Water – While running water is typically the least expensive utility, drinking water can be very expensive in some cases. Avoid using spring water distributors. Filtered water and purifiers can have similar tastes and are typically 1/3rd of the cost. Additionally, they are more environmentally friendly as spring water consumption is posing a threat to the world’s aquifers (8 out 10 water bottles go un-recycled).
Trash – Trash removal prices are measured by pickup frequency more so than volume. Companies can save a lot of money by investing in larger dumpsters and requesting pick-ups as needed rather than at set time frames (i.e. weekly or biweekly). Recycling is a great way to reduce trash levels and is helpful to the environment, but sometimes comes at a cost. Inquire with local governments as some offer monetary incentives for companies who initiate recycling programs.

Each article in our Expense Reduction Series will focus on a significant overhead cost category and discuss strategies that can be implemented to improve your company’s spending policies. For more innovative ways to reduce your expenses, contact your DGC representative.

Jan. 14 – Donovan Hatem Roundtable
Jan. 14 – Commercial Finance Association (CFA) - Post-Holiday Party
Jan. 21 – Association for Corporate Growth (ACG) – DealMakers Breakfast
Jan. 27 – North Shore Technology Council – New Privacy Law Deadline Looms
Jan. 28 – Cambridge Chamber of Commerce – Cambridge Leaders 2010
Feb. 4 – Prince Lobel – The Anatomy of a Wage and Hour Disaster
Feb. 17 – Greater Boston Chamber of Commerce - Executive Forum
Feb. 23 – Greater Boston Chamber of Commerce – Women’s Networking Breakfast
Feb. 25 – Association for Corporate Growth (ACG) – DealMakers 2010 Outlook Conference