No? How do you know? I want you to take 2 minutes and of the following choices rank what you think are the most effective methods to detect fraud. Your dealership is worth 2 minutes and the answer may surprise you. Choose the top two methods of detecting fraud from the following list.

Step 1 – Choose your top 2

• External Audit
• Internal Audit
• Management Oversight
• Surveillance and Monitoring
• Notification by Police
• Confessions
• Tips
• IT Controls
• By Accident
• Account Reconciliations
• Document Examination

Step 2 – Assign Percentages

Now that you have the two best methods in your head, just assign a percentage as to how often they are the method that discovers the fraud in comparison to all others.

Step 3 – Compare your results

The ranking of initial detection can be found in the Report to the Nations published every other year by the Association of Certified Fraud Examiners. You can get your own free copy at http://www.acfe.com/rttn/rttn-2010.pdf

1. Tips 35.8%

2. Management Review 15.4%

3. Internal Audit 11.6%

4. By Accident 11.2%

5. Account Reconciliation 8.2%

6. Document Examination 6.0 %

7. External Audit 5.2%

8. Surveillance and Monitoring 2.6%

9. Notified by Police 2.5%

10. Confessions 1.0%

11. IT Controls .5%

I am always humbled that an audit we conduct (ranked #7) as CPA’s has less chance of detecting fraud than by accident (ranked #4), but as you know that is not what an audit is designed to do. Think about that when spending your accounting dollars and choose your scope of services wisely. This report also tells me that a very simple and powerful tool is not being used by many dealers, a Whistleblower/Tip Hotline. This accounted for over 35% of all detected Fraud

Many years ago I worked for a National Bank, and one item that was at the bottom of every HR document was the Anonymous Whistleblower Hotline. While that policy was quite robust as you would imagine from a large national bank, it doesn’t have to be that complex.

First of all, do you have a policy on tipping off management or ownership about fraud? If so, are the employees aware of it? What is the process?

If not, I strongly recommend that you implement one. Just look at the data, of everything that you can actually do as an owner/operator, nothing will give you the results like a tip hotline.

Now, other methods may be good in the general course of business being that they may be Preventive, but having a tip policy in place, and following it costs you very little money and almost no time.

There is much more to this discussion than I will talk about here, but please call me if you have any questions. I can also refer you to credible companies that provide this service on an outsourced basis.

John E. Donaldson, CPA
Potter & Company, P.A.
www.gotopotter.com/dealerships
704-926-3300

Will It Happen  

I get asked by clients if I think it will make it into the congressional budget and actually pass. I didn’t think it would happen in the past two years due to the strong lobbying efforts from NADA, the Pharmaceutical industry, Big Oil and a few other interested parties. But the landscape is changing for many of the big industries, and the political battles that will be fought will only be the ones that have the largest return on investment.

Just Yesterday 

While oil companies are making record profits, they constantly are coming under scrutiny for all the tax incentives and “loopholes they exploit”.  Just yesterday S.940 “Close Big Oil Tax Loopholes Act” failed to pass a procedural vote. This is a win for the Oil companies. My point is that LIFO may not be the big issue that non-dealership industries want to help carry the torch on in the next couple of months.

Less Dealers are Using LIFO

In 2009 and 2010 many dealers elected off of LIFO and spread the income effect over a 4 year period. This was necessary for many due to the lack of cash flow and sustained taxable income due to the erosion of LIFO layers. Remember that many of the publicly traded dealer groups generally do not use LIFO because they want their earnings per share to be as high as possible for shareholders. So realistically, when you look at NADA’s membership and dealer special interest groups as a whole, I suspect that the percentage of dealers that use LIFO is substantially less than it was in 2007 and 2008.

Income Effect of LIFO Termination

Based on the escalating projected savings in the 2012 proposed budget, it seems that the administration anticipated there will be a phase out of the LIFO income deferral and not just have it taken in 1 year.  I suspect that it likely would be at least 4 years but could be more considering the substantial impact to some businesses.

So once again, there is no crystal ball regarding LIFO Repeal, but I think there has never been a more opportune time for an administration to try and get repeal pushed through congress.

If you have any questions, please feel free to contact us at any of our four locations.

John E. Donaldson, CPA
Potter & Company, P.A.
www.gotopotter.com/dealerships
704-926-3300

Do dealers really get in trouble for this?

YES!!!!

BALE CHEVROLET COMPANY, APPELLANT v. UNITED STATES OF AMERICA, APPELLEE.

You can read about this case at http://caselaw.findlaw.com/us-8th-circuit/1537063.html. Basically after a long and drawn out court case it was finally decided (fully) in 2010 for a case started in 2009 and pertained to the 2000 tax year. Believe me; you do not want to go through what Bale Chevrolet went through.

The government basically established that they only have to have a reasonable justification to assess penalties for intentional disregard. In the case of Bale, the government dropped the $100,000 penalty, but would not pay for the legal fees because the IRS had reasonable justification for assessing the penalties.

There are many other cases where the penalties are not dropped, but my point is that if you aren’t diligent in your policies, procedures, and execution of them regarding this reporting requirement you may still be incurring a substantial cost for defending yourself.

 Who has to file a form 8300?

1. Any dealer who receives more than $10,000 in a transaction.
2. Any dealer who receives a series of payments totaling more than $10,000.
3. Any dealer who “Suspects” that someone is trying to circumvent the reporting requirements..

What is cash?

1. U.S. and foreign coin and currency received in any transaction.
2. A cashier’s check, money order, bank draft, or traveler’s check having a face amount of $10,000 or less that is received in a designated reporting transaction (sale of vehicles is a designated reporting transaction) or that is received in any transaction in which the recipient knows that the instrument is being used in an attempt to avoid the reporting of the transaction.

What if you don’t report it?

First of all, these are fairly straightforward rules for dealers to follow, and when in doubt, just file one. It does not cost anyone anything other than a little time and a postage stamp. The minimum penalty for failing to comply is $25,000.

Real Example: While doing year end work at a client, a customer has $2,000 in currency and 3 cashier checks totaling $7,000. The total of all is $9,000. The customer made a comment stating that he did this so it wouldn’t be reported. My client informed him at that point that they had to file one regardless of the amount.

Compliance reminder:

You must give a written or electronic statement to each person named on a required Form 8300 on or before January 31 of the year following the calendar year in which the cash is received. The statement must show the name, telephone number, and address of the information contact for the business, the aggregate amount of reportable cash received, and that the information was furnished to the IRS. Keep a copy of the statement for your records. I recommend doing this via certified mail so you have a receipt for your records.

Where to get the Form?

You can download the most current of form 8300 at the IRS website http://www.irs.gov/pub/irs-pdf/f8300.pdf  . Also there are specific instructions you need to read and follow so that the form is properly filed

If you have any questions, please feel free to contact us at any of our four locations.

John E. Donaldson, CPA
Potter & Company, P.A.
www.gotopotter.com/dealerships
704-926-3300

How many of you have a calendar tax year? Did you know that that was an election made with your first return? Cash or Accrual, Cost, Lower of cost or market, LIFO FIFO and the list goes on and on.  

Why in the world does this matter?

When elections are made by you (not your accountant, attorney, or friend) they bind your dealership to terms that you agreed to. Generally it is standard practice to have certain elections for your company and not others. BUT WHAT HAPPENS WHEN IT ALL GOES WRONG!!!

 S-Corp Elections

Consider a common election that many of you have either made or may make to elect to be a subchapter S Corporation (S-Corp). If not properly made, and you may be taxed as a C-corp. This could be disastrous and is almost impossible to fix in the first year. Imagine that you start a company, incur a ton of expenses in the first year like all small businesses and then cannot take those expenses as a loss personally or against future gains. I would be furious. Or on the other hand, what if you made a lot of money (a good problem) but now are taxed at the C-corporation’s rates, and nothing passes through. A bad answer.

Cash and Accrual Methods

Another common election to be considered is Cash or Accrual basis of accounting. Most dealerships will have to use Accrual….STOP READING, FLIP TO PAGE 2 OF YOUR RETURN AND CHECK THIS. The accrual method is mandatory for dealerships that have gross receipts in excess of 1 million. That includes almost anyone who has a dealership, BHPH and some wholesalers. The IRS does not have to audit you immediately. This can be disastrous, and without a long and drawn out explanation, you may be playing with fire. Several dealers in NC have had to shut the doors for errors like this.

Cost, LOCM, and LIFO

Inventory methods can be used to decrease values of inventory. If you have significant inventory, it is worth it evaluate if one method would be better than others. If I were to hand you 10k today instead of a year from now, would you take it? Of course you would. These are elections that can help you. Many just pass on this because they don’t understand it.

How can you correct this?

There are ways to correct invalid elections and methods, but it requires a skilled accountant who is familiar with your business. Usually if there is an income effect it can be spread over several years to minimize the impact. Sometimes there is nothing that can be done, some are not correctable with amended returns, and you may have to pay a hefty price. The best strategy is to have it done correctly in the first place so there are no issues.

John E. Donaldson CPA

Potter & Company, P.A.

www.gotopotter.com/dealerships

704-926-3300

Many dealers create a Related Finance Company (RFC) to basically convert the recognition of income from Accrual to the Cash basis of accounting. This is where the risk and reward of operating a BHPH dealership get blurred. The fact of the matter is that a RFC is a separate company and should be operated as such. This includes many fixed operating costs that are not easily overcome. Think of all the fixed cost you already have in your dealership without selling a single car. Electricity, Property taxes, Rent, Accounting, and Legal are only a few of the normal expenses that a dealer has at bare minimum. That is just to keep the doors open. It would stand to reason that these are many of the same expenses that in most cases should be duplicated just to operate a finance company.

Generally when dealers ask me when it makes sense to start a RFC, I tell them around One Million in receivables. That may sound like a lot, but that is where the savings breaks even with the additional costs incurred to structure and properly run the RFC.

Let’s look at the Cash Flow of selling vehicle retail vs. selling it BHPH. It will be one vehicle with a cost of $2,000 and the sales Price of $5,000. We will also assume a $500 down payment for the BHPH scenario.

So immediately you realize that BHPH can be a real cash drain. So what can be done? You can set up a RFC. Now let’s further my example and assume that your notes receivable are 1 Million dollars.

This means that you will net a benefit of $5000 by setting up a RFC. But does that make sense? You can look for yourself above and probably rationalize that you could do better in one area or another, but realistically you will be close to the above result. My point is that you don’t want to create a lot of additional structure if it isn’t going to net a significant benefit. You will incur a lot of time managing the RFC. This is time spent by you to do the proper paperwork, title work, sale, and transfer etc. If I were to tell you that you spent approximately 5 additional weeks of your time in a year managing the RFC and only got paid $5,000 for it you would be very upset. That additional time could probably have made you more money doing something else and been much less of a headache.

Now look at an example with additional notes receivable. Notice that the fixed cost remains the same.

That is a different picture isn’t it? The overall time managing the RFC does not change. In reality your fixed costs may rise slightly, especially if you have to hire someone to manage the RFC for you, but the more it grows the more it makes sense from a financial perspective.

What I have seen lately 

Some dealers are exploring if they should do something prior to doing it and others are not. It is always best to have all possible information prior to making any big decision. You can cause yourself a lot of work and heartache by creating complexity that is not necessary. Keep in mind that corporate structuring is not something that should be taken lightly and a RFC is only one factor in a much larger picture. When speaking to your CPA and Attorney, they should always be able to tell you if not doing something is the correct course of action.

Click here for more Dealership Articles

John Donaldson, CPA

704-926-3300

jdonaldson@gotopotter.com

www.gotopotter.com

This now-clear green trend provides telling data for contractors still suffering with uncertainty in the new home construction market. The trend is also apparent in commercial and governmental arenas as corporations, universities and municipalities advertise their good citizenship while addressing environmental issues and cost-cutting opportunities.   

How does a construction company go green and take advantage of green trends? Here are five ways to kick-start the process: 

• Review the materials and products you currently use in traditional projects.
• Learn the tax incentives available for green building and energy products.
• Be an entrepreneur.
• Look for a partner.
• Educate and analyze.

Today, almost every major trade supplier has a line of green products that they are anxious to deploy. Many are offering rebates on these products to encourage interest from buyers. Meet with supply representatives to educate yourself about buying opportunities and to understand the benefits of these products in terms of cost savings and efficiency for you, as well as for your customer – the end user. Question why these products are being introduced and how their benefits translate to the building owner over the long-term.The tax laws, particularly those passed as part of the American Reinvestment and Recovery Act, continue to include tax reductions, credits and other cost-saving opportunities for projects related to renewable energy systems, employee training and education initiatives, or new job creation programs. These are all viable projects that businesses can use to benefit from new tax incentives.Capturing the entrepreneurial spirit may sometimes simply mean looking at a challenge from a new angle. For example, while awaiting improvement in new housing demand, some developers have built solar farms on what otherwise would be idle land inventory. By selling the energy harnessed by the farm to a utility or other nearby consumer, a new cash-flow stream has been created to cover the carrying costs of the development until market conditions become more favorable.In time, as demand heats up, the solar panels can be rearranged and incorporated into the development design. This approach enables these developers to hold inventory longer and create a residual revenue stream.Without adding too much stress to your life, consider taking on a business partner. In New Jersey, the Department of Transportation and the Economic Development Authority are partnering with builders that can make development reform legislation a reality and move objectives forward.For instance, to upgrade mass transit capabilities, hub locations in certain urban areas are receiving ownership and building incentives to attract property owners (to absorb the properties into the market) and builders to develop the projects.Such high-density projects are being built in partnership with contractors and with green incentives numbering well beyond those offered on projects just three years ago.Change and uncertainty often bring anxiety. As a result, builders will need to educate themselves, their workers and customers about the benefits of a green project. Customers will need to see cost justifications, not just expected positive social impact, for green changes.Bankers, appraisers and insurance professionals should be part of the process. Pro formas, budgets and cost estimates should be reworked so that the project’s return on investment and profitability benchmarks are met.

Real estate investors and builders as well as financial statement preparers need to be well-informed and prepared for the impact International Financial Reporting Standards (IFRS) will have on financial statements.

The Securities and Exchange Commission has developed a proposed roadmap to help U.S. companies make the transition to IFRS. Since the release of the proposed roadmap in 2008, the SEC has yet to commit to the adoption of the international standards.

However, the convergence of U.S. generally accepted accounting principles (U.S. GAAP) and the international standards has recently changed gears and increased in momentum.

Over the next couple of years, monumental changes will have a costly and significant impact on all industries and companies reporting under U.S. GAAP. Arguably, the real estate industry is close to the top of the list.

Prominent changes to U.S. GAAP have resulted from convergence.

Business combinations and noncontrolling interests are possibly the most important convergence issues currently pertaining to real estate because the new standards have had a significant impact on real estate developers and investors.

Also, new U.S. GAAP pronouncements have already affected fair value guidance because U.S. GAAP and IFRS have differing definitions and usages of fair value.

Regardless of the SEC’s ultimate decision to either stick with U.S. GAAP or shift to IFRS, the accounting rules are changing for real estate companies in the near future. These companies should be aware of the following examples of major reporting issues resulting from the adoption of IFRS or the convergence of U.S. GAAP and IFRS.

Accounting for Investment Properties

When real estate companies adopt the international standards, one of the most significant accounting policy elections is the recognition of investment properties. Investment properties are initially measured at cost in accordance with International Accounting Standard (IAS) 40. However, IAS 40 provides for an election on subsequent measurement as follows:

• Fair value model – If the fair value model is elected, all investment properties must be measured at fair value unless it is indeterminable. Changes to the fair value from period to period are recognized in profit or loss.
• Cost model – If the cost model is chosen, generally, investment properties are measured at cost in accordance with IAS 16, Property, Plant and Equipment. However, if the cost model is elected, the fair value of the investment properties must be disclosed in the notes to the financial statements, with very limited exceptions.

Certain properties are specifically excluded from being classified as investment properties in accordance with IAS 40.

On March 10, 2010, the Financial Accounting Standards Board added a project to decide whether to permit or require investment properties to be carried at fair value.

Construction Contracts

The IFRS Interpretations Committee, formerly known as the International Financial Reporting Interpretations Committee (IFRIC), released IFRIC 14, Agreements for the Construction of Real Estate, which provides guidance on when revenue should be recognized from the construction of real estate assets.

The adoption of this interpretation (effective Jan. 1, 2009) could lead to a significant number of real estate developments being treated as “sales of goods.” A sale of goods falls within the scope of IAS 18, Revenue. It would preclude the use of percentage-of-completion accounting under IAS 11, Construction Contracts, because the sale would be recognized when an individual unit is delivered to the customer.

Impairment

IFRS has only a one-step impairment test based on recoverable amount in accordance with IAS 36, Impairment of Assets. The carrying value is compared with the asset’s recoverable amount. The recoverable amount is defined as the higher of the asset’s value in use, which is based on the discounted future cash flows, and fair value less costs to sell.

If higher, the asset is written down to the recoverable amount. As a result, impairment losses are generally recognized sooner and more frequently under IFRS. In addition, impairment losses may be reversed if recovery occurs.

While wholesale changes have yet to be seen, convergence will have a significant impact on real estate companies in the next couple of years. Being caught off guard could prove to be not only costly but detrimental. Companies should begin to prepare for these changes through education and identify any shortcomings now.

Read more in IRS Fact Sheet 2011-2

Most contractors across the United States would agree that the economy has provided both opportunity – and pain – over the past few years.

If keeping your doors open in this rocky economic climate was as easy as installing them, most contractors would still be in business today.

Unfortunately, that has not been the case for many construction businesses. The housing bubble – and burst – has seen to that. An already large glut of existing inventory, coupled with further declines in the demand for new building construction, has forced many companies into a fight, flight or fold response.

Even so, there have been some bright spots.

Berkeley Building Company’s president, Emil Frei, and Ball Construction Services’ chief executive officer, Rick Ball, each offered some insights into how the economy has affected the construction industry overall – and what their companies have done to survive these tough economic times.

“We’re a small, young company, and we mostly focus on projects valued at $500,000 or less,” Frei said. “One of the first things we encountered last year was that larger firms wanted to come and play in our sandbox. It’s been a very strange dynamic – our market’s gotten more crowded with bigger fish, but there’s less competition overall.”

Ball says his company has seen an erosion in overall construction volume in Iowa since 2008. He estimates it is down about 15 to 20 percent.

“In my experience, and that of some of my colleagues, it’s been hard trying to replace the momentum we had just a few years ago,” Ball said. “Unfortunately, we had to lay off some strategic people, and we had to critically review how our overhead was structured. We’ve also had to eliminate several components of insurance and some charitable contributions, too. We’ve spent much more time as a group trying to cultivate market leads, much more time on business development. It’s really been an ‘all-hands-on-deck’ approach for us.”

Right-sizing his company has been Frei’s main challenge.

“We’ve had to become our own general contractor and employ our own work force, which we believe offers us greater efficiencies and more control over labor and other expenses,” Frei said. “And if we do use subs, we now pay them on a 30-day cycle. We’ve observed getting paid quicker provides better incentives – and these usually translate to better project numbers and better job performance.”

Ball’s company has had to focus its business development efforts on growing lucrative sectors like health care, agriculture, bio-fuels and even convenience stores.

“We’re traveling much farther geographically for projects than in years past. For companies seeking to expand their target areas, another option to explore would be to go non-union – this could give you even more flexibility in estimating projects and staffing levels,” Ball said. “Ultimately, every job’s important, and this economy has certainly hammered that home. Owner expectations have been raised substantially, and you’ve got to focus on creating efficiencies in your organization, tightly managing your billables and cutting waste. You have to always know where your dollars are being spent – and be smart!”

Time and again, the construction industry has proven resourceful in the best of times and resilient even in the worst of times. The changing economic landscape over the past few years has proven this again.

But what can change is how companies react, adapt and overcome when adversity strikes. Those that are successful will be well-positioned when new opportunities arise once again.