Advice and information to
PUBLISHED BY Pannell Kerr Forster of Texas, P.C. help you manage your business
THE SCREEN TO
VOLUME 4 ■ ISSUE 3 ■ 20 04
Life’s major events
and their financial
The Leading Edge
Dear Friends and Colleagues: Menu of Services
Welcome to the spring 2004 edition of The Leading Edge, your source for news and Audit and Accounting
information affecting today’s business marketplace. • Audits, reviews and compilations
• Transaction services
• Evaluation and implementation of internal
Our cover story for this issue focuses on one of today’s most discussed and debated control systems
topics—computer fraud. It seems that you can’t turn on the television or open a • Employee benefit plan audits
newspaper without being bombarded by the latest reports of fraud and the many • Systems consulting
• Mergers and acquisitions
issues associated with it, including the electronic component so prevalent in our daily • Special agreed-upon procedures
lives. While debate continues within the federal government on how to address and • Operational Audits
combat this issue, one fact remains certain: we should remain continuously aware of • Forensic Accounting / Fraud Investigations
the immense consequences of fraud in business as well as in our personal lives. Business Process Consulting
With this issue, we present two complementary articles on detection and prevention
• eCommerce strategy consulting and implementation
of fraud. Gregory Price, a shareholder and director for the firm, discusses the warn- • Operational process improvement
ing signs to watch and how to avoid situations where fraud may occur – no easy feat • Entrepreneurial planning and business
for many of us, but just another day at the office for forensic accountants in plan development
• Business process measurement
“Forensic accountants: the CSIs of the business world.” Next, Jennifer LeBlanc, an
• Valuation services
audit senior manager with our firm, takes a very practical approach in her article
“What’s all the buzz about fraud?” and examines current regulations (some conflict- Entrepreneurial Solutions
ing!) and how they impact our audits of financial statements. • Healthy Start Package for business start-ups
• Outsourced controller & CFO
• Cash flow management
Changing gears a bit, one of the newest estate planning tools available to us is • Payroll processing
long-term care insurance, but how many of us really know whether this is something • Accounting software support
that makes sense for us personally? We’ve all heard the phrase “insurance poor,” so • PKF virtual advisor
is long-term care insurance just another added component to an already overcrowd- Information Technology Consulting
ed family of policies? It all depends on your personal situation, of course, and the
• Application software selection assistance
level of risk you’re willing to take. Through “Do you need a long-term care insurance • Business system design and implementation
policy?” two members of our Tax Department, Brad Whatley, shareholder/director, • Hardware selection and implementation
and Alison Muecke, manager, examine the pros and cons of managing future risk • Network infrastructure evaluation and
using these types of policies. I think you will walk away much more informed and
educated about this planning opportunity for the well-being of you and your family. Litigation and Insolvency
• Bankruptcy and insolvency consulting
In other firm news, PKF Texas is immensely proud of its staff who continue to excel • Insurance claims
and exceed expectations, not only in the office, but in our community as well. That’s • Intellectual property disputes
• Divorce proceedings
why we are very pleased to report that our team who participated in the American • Lost profits
Heart Association’s Heart Walk raised more than $8,700 to support the association’s • Accounting malpractice
educational programs. Find out more about this effort, and what else is going on at • Tax controversies
our firm, in “PKF Texas At a Glance.” Tax
• Federal, state and local planning and compliance
As the school year draws to a close and summer nears, I wish you and yours the best • Outsourced corporate tax services
for the upcoming vacation season. • Research and development tax planning
• Cost analysis and accounting for buildings and
• Tax controversy management and resolution
• Estate, gift and tax trust planning
• Business succession planning
Warren W. Cole
• Global tax minimization planning and
• Tax advantages for exporters
• Transfer pricing studies and planning
• Withholding tax compliance and planning for
pannell cross-border payments
kerr • Income and estate planning and compliance for
resident and non-resident aliens
forster • US expatriate individual income taxation
of Texas, p.c.
2 VOLUME 4 ■ ISSUE 3 ■ 2004
VOLUME 4 ■ ISSUE 3 ■ 200 4
The Leading Edge c o nte nt s
The Leading Edge Alliance is an international
organization of large, independently owned
accounting and consulting firms. Our members
are top-quality firms from around the country features
with deep client relationships and strong ties
to the community.
Alliance firms provide their clients with an 7 COVER: Computer forensics
unbeatable combination: the comprehensive
size and scope of a large national company,
Go behind the screen to investigate tech DNA
along with the continuity, consistency and
quality service of a local firm.
With 40 member firms ranging in size from
13 Fair Labor Standards Act
$7 million in revenue to more than $40 mil- Are you in compliance?
lion, the combined revenues of Leading Edge
Alliance firms total more than $650 million
with more than 4,000 staff. Twelve of the
firms are in “The 2003 Accounting Today Top 16 Life’s major events and their financial implications
100 Firms,” with 10 more just below the rev-
enue required for entry into the Top 100. Your personal milestones can affect your bottom line
Many of the participating managing partners
have established themselves as leaders in
the public accounting profession; others are
emerging as the trendsetters and trailblazers
for the future of public accounting.
Leading Edge Advisory Committee
KGN Financial Group
Lattimore Black Morgan & Cain, P.C.
Lurie Besikof Lapidus & Co. LLP 4 Forming strategic alliances can improve business
Pannell Kerr Forster of Texas, P.C.
Elizabeth Reed 5 Detect and prevent computer intruders
Postlethwaite & Netterville
The Leading Edge Alliance 6 Payroll: Are you ready to outsource?
in affiliation with
Custom Publishing Group (CPG)
Ann M. Gynn and Wendy A. Hoke 9 News and information from our firm
18 Client Edge: The Nasher Sculpture Center
Stacy Vickroy, Trishia Karsnak
Graphic Designers From zero to big business in 60 days
Custom Publishing Group (CPG)
Editorial & Design Services
19 The Leading Edge Alliance Members
The Leading Edge is published quarterly by Custom
Publishing Group, 812 Huron Road, Suite 201, Cleveland,
Ohio, 44115, (216) 523-1212, FAX (216) 241-5458.
Periodicals postage paid at Cleveland, Ohio. Winner 2003 AGD award for publication design
THE LEADING EDGE 3
Forming strategic alliances can improve business
trategic alliances are gaining popu- among these organizations. “I had a
S larity as more businesses try to
maximize their attraction in new mar-
conversation with some colleagues
with the same concern. The Leading
“MOST OF THE TIME,
kets and improve services while mini- Edge Alliance grew out of dissatisfac- WHAT MAKES A
mizing financial risk. tion of the disparities seen by the three STRATEGIC ALLIANCE
Gary Shamis, managing partner at founding accounting firms—SS&G,
Leading Edge accounting firm SS&G EKH&S in Denver and Kostin Rufkess UNIQUE IS THAT
Financial Services in Cleveland and & Co. in Connecticut,” he says.
THERE IS SOME
one of the founders of Leading Edge Those three firms talked to others of
Alliance, says the purpose of these a similar size, client base and philoso- FINANCIAL REWARD.”
formalized agreements between com- phy. Ultimately, 18 firms joined four
panies or organizations is to combine years ago to create Leading Edge — GARY SHAMIS, SS&G FINANCIAL SERVICES
certain resources and create win-win Alliance. Today the organization has 40
business scenarios. member firms across the country.
“Most of the time, what makes “We have broadened our service base The firms are similar in size, type of
a strategic alliance unique is and can now offer more to our clients,” clientele and philosophy and share
that there is some financial says Shamis, including providing the similar service issues.
reward,” he says. For example, during quarterly Leading Edge magazine. The Leading Edge has broadened
the 1980s, a lot of accounting organi- There are some precautions neces- services to expand its presence through
zations were merging to remain a sary to ensure your alliance will suc- Kreston International, a global net-
viable alternative to the then-Big Eight ceed. “With the Leading Edge, we work of experienced independent
accounting firms. “Most firms, in order have geographic exclusivity, so we accounting and business advisory
to compete on a local basis, needed don’t directly compete against other firms, and formed alliances with pay-
some national and international member firms in our market.” roll companies, and investment bank-
resources and exposure. They joined Criteria for membership requires ing and technology groups. “These are
together because of the locations of that the firm be a market leader all alliances that enhance our capabili-
where they conducted business.” (among the top three) with a largely ties and expand the services we can
Over time, huge disparities grew privately held client base. deliver to our clients,” says Shamis. e
10 TIPS ON STRATEGIC ALLIANCES
Make sure Make sure the Get your agree- Partner with When problems
1 there’s a
4 cultures of the
5 ment in writing.
9 crop up, and
financial incentive. two organizations A strategic alliance that serve the same they will, sit down
are similar and share is as serious as a types of clients. immediately to solve
Make certain common service business partner- them.
2 the trust level philosophies and ship, so it demands Have a
between your core values. a contract.
8 champion of Be willing to
businesses is high. the alliance in each
10 say no to the
Find a company company to keep the deal if you have
3 companywith a
that can handle
the extra business
alliance visible and
to help celebrate the
future success. e
already successful. and grow with you. successes.
4 VOLUME 4 ■ ISSUE 3 ■ 2004
Detect and prevent computer intruders
By Jeffrey S. Locketz, CPA, CNA and Yan L. Kravchenko, CISSP, MCSE
usiness information systems are so The firewall should function only as
B integrated in our offices that: the first line of defense against attacks
from the Internet. Think of it as a lock
• e-mail is as essential as the telephone;
• the Internet is a critical information on a door, protecting the organization’s
resource; and private network from the public net-
work (the Internet). Just as you may tug
• the organization’s Web site allows us
on the door handle and turn the knob
to gain international exposure and
to ensure the door is locked, you
should periodically test the firewall.
How secure is this critical
Testing the firewall
Testing the firewall is accomplished using within computer systems and networks
According to the CERT® Coordination
Center (The Center of Internet Security
a procedure known as penetration testing and analyzes this information for symp- HACKERS RANDOMLY
(self-hacking), an attempt to break into toms of security problems. IDS tech-
Expertise), the number of computer SELECT THOUSANDS OF
the organization’s private network. nologies allow organizations to protect
security violation incidents is growing
Penetration testing can reveal prob- themselves from losses associated with
at an alarming rate. In 2003 alone, INTERNET ADDRESSES,
lems with misconfigured and vulnera- network security problems.
CERT/CC recorded more than 137,500
incidents. That’s a 68 percent increase
ble areas, such as: There are two varieties of IDSs: SEARCHING FOR
• firewalls, • Network-based IDS (NIDS) is
from 2002 and 162 percent increase WEAK SYSTEMS
from 2001. What makes these statistics • servers, designed to support multiple hosts
even more staggering is that most inci- • routers and and uses probes located on local
dents still go unreported and some- • other devices visible from the public area network (LAN) segments that 6. Install and configure
times even undetected. network. report to a monitoring workstation. an IDS to monitor all
The consequences of each incident • Host-based IDS (HIDS) is software traffic outside the
may have any number of effects on an Additionally, penetration testing is installed on a host device (i.e., server, firewall. The IDS logs should
organization, including: useful in understanding the information firewall, router, etc.) set up to detect be reviewed on a regular basis.
• loss of time and productivity related available to hackers, thus avoiding illegal actions within that host. If an attack is detected, network
to system recovery and restoring becoming an easy target. administration should be notified
normal operation; The solid defense so they can take corrective action.
If your organization got hacked, To harden an organization’s defenses 7. Replace the firewall if the vendor
• loss of revenue;
how would you know? against Internet threats, the organiza- no longer supports it.
• loss of business goodwill through New ways of hacking are developed tion should:
bad public and business relations; every day; therefore the organization 1. Install a firewall to protect its Protect your system
• loss of ability to effectively compete must assume any firewall can and will private network from the Internet. Your network is a vital part of your
in the market place; and be broken. For this reason, the informa-
2. Maintain the firewall with the latest business, and information stored in
• exposure to legal liability. tion security industry does not consider computers must be protected. If you
software and patches.
any single technology foolproof against don’t protect the network, which holds
In 2003, CERT/CC reported more than hackers. Without appropriate detection 3. Configure the firewall to reject
all incoming traffic not deemed such confidential information, you may
3,700 new system vulnerabilities. Hacker technologies in place, most security be accused of negligence. Adequate
communities are growing, even high incidents would go undetected. necessary for business operations.
This means closing access to all protection and follow through is the
school and college students without any best defense. e
advance knowledge of technology have Intrusion Detection System (IDS) unnecessary Internet services.
the ability to break into systems. Hackers IDS technology is capable of detecting 4. Perform penetration testing on the
Jeffrey S. Locketz is a partner with Lurie Besikof
randomly select thousands of Internet activity that may lead to a security firewall at least four times a year to Lapidus & Company LLP. Yan Kravchenko is a
addresses, searching for weak systems. breach, including an attempt to bypass disclose any new vulnerabilities. manager with LBL Technology Partners.
the firewall. IDS systems help organiza- 5. Review the results of the
The frequent misconception tions prepare for and deal with attacks penetration tests, mitigate any of
The belief that an organization’s firewall by detecting an illegal entrance into a the vulnerabilities found and
is its only and best defense against computer system. It collects informa- re-scan the firewall once necessary
hackers is certainly a misconception. tion from a variety of vantage points changes have been made.
THE LEADING EDGE 5
Payroll: Are you ready to outsource? ★
By Robyne Germany, CPA
ne of the most frustrating aspects of 4. Do you have employees working in companies will deposit and pay taxes
O running a business is dealing with
payroll. Most small- to medium-size
5. Have you made multiple errors in
on a company’s behalf as part of its ser-
vice agreement, if it fails to remit and
business owners will agree: everything calculating your payroll that have file tax reports timely and accurately,
about payroll is a nuisance. Not only do been questioned by your employees? the employer will be assessed. The IRS
owners have to be mindful of changes 6. Do you spend more time calculating recommends the employer inquire
in personnel; deadlines; and federal, payroll and addressing various pay- whether the payroll service company
state and local tax requirements, but roll issues than you spend concen- has a fiduciary bond to protect the
calculating payroll itself can be time trating on your core business? employer in the event of default.
consuming and tedious. A “yes” answer to at least two of It’s important to establish a relation-
Other headaches also exist, from these questions may tell you the time is ship with a payroll service company that
issuing payroll checks and ensuring tax right to consider outsourcing payroll. A can grow as the business continues to
filings are made, to remaining 100 per- professional payroll service can be an expand. Business owners should obtain
cent error-free. Employees are much attractive alternative to an in-house references for payroll providers from
more forgiving when errors occur in function. Not only does a service take trusted associates, such as accountants,
their paychecks or W-2s. However, con- the hassle out of calculating payroll and attorneys and customers. Business own-
tinuous mistakes may cause an employ- issuing checks, but a service can remit ers should then research each payroll
• REDUCTION IN PAYROLL COSTS.
ee to lose faith. The Internal Revenue payments to various taxing authorities, service provider as to:
Outsourcing to a payroll service
Service, on the other hand, is not near- and prepares and files annual federal • COMMUNICATION OF PAYROLL
company can reduce the direct costs
ly as forgiving. The IRS estimates that and state tax forms, including 941s and INFORMATION – There should be a
of processing payroll. Many payroll
one out of every three employers is W-2s. A professional service also tracks choice in transmission via PC, fax,
services charge an average of $3 per
charged for a payroll mistake. If a com- various benefits such as vacation and Internet or modem.
paycheck. For companies with
pany is not careful, the penalties can sick pay, 401(k) benefits and employee • AVAILABILITY OF PAYROLL INFORMATION –
fewer than 100 employees, the cost
severely affect not only its bottom line, advances. 24/7 access is very important, with
can be much less than a full-time
but its reputation as well. In the past, many companies shied the provider offering clear instruc-
As companies continue to grow, away from using a service due to the tions on available reports, proce-
many business owners want to know if amount of control the company would • CREATION OF MORE FREE TIME.
Outsourcing payroll not only allows dures for correcting mistakes and
it’s time to consult a payroll expert or have to give up. Today, many service customer service inquiries.
service. The take-charge, entrepreneur- companies offer a business owner access business owners to concentrate on
growing their core business, but it • COSTS OF SERVICE – All the costs for
ial spirit that many owners possess to his or her payroll records 24 hours a
frees up administrative staff to processing payroll from the initial
often prevents them from recognizing day through the Internet, allowing the
pursue more value-added activities. setup to the filing of annual W-2s
when it’s time to leverage certain correction of mistakes that were made
should be reviewed.
administrative tasks to other employ- during the transmission of data or in the • FEWER TECHNOLOGY HEADACHES.
ees, either inside or outside the organi- calculation itself. While many owners Business owners no longer have
to worry about whether the most The decision to outsource payroll to
zation. For this reason, it’s important to embrace this level of accessibility, others
recent version of payroll tax tables a third party is not an easy one. It takes
assess their payroll situation by asking place all confidence in the payroll service
is updated or if the company’s a great deal of research to find the right
these six questions. company to perform its expected duties.
accounting software can handle company for your business. But once
1. Was your company assessed a pay- A business owner can choose his or her
current payroll needs. the decision is made to turn payroll
roll tax penalty related either to a level of involvement in the process.
processing over to the experts, business
failure to remit taxes on time or for According to SurePayroll, a national
Before deciding whether outsourcing owners can get back to doing what they
paying an incorrect amount? payroll service company focused on
payroll is the right choice for your busi- do best—growing their business. e
2. Do you find it difficult to remember small businesses, some other benefits to
when to remit unemployment taxes using a payroll service company include: ness, there are some factors to consider.
Robyne Germany is an audit senior manager at
to the various federal, state or local • ACCURATE PAYROLL TAX LIABILITY First, the IRS wants business owners to PKF Texas.
taxing agencies? CALCULATIONS. Most payroll service know that the employer is ultimately
3. Does your payroll consist of full- companies provide a tax guarantee, responsible for the deposit and pay-
and part-time, hourly and salaried ensuring that there will be no penal- ment of federal taxes, as well as the
employees who are all paid at vary- ties and taking responsibility for timely filing of quarterly and annual
ing times during the month? penalties if they do occur. reports. While many payroll service
6 VOLUME 4 ■ ISSUE 3 ■ 2004
id you know that approxi-
THE SCIENCE OF
D mately 70 percent of all doc-
uments never appears on paper?
that 93 percent
WHAT’S SEEN And communication of all corpo-
rate is conduct-
AND UNSEEN ON ed electronically?
There is wealth of data that
YOUR COMPUTER only exists a electronically. Cell
BY WENDY A. HOKE phones and PDAs store data that
never get printed. A printed copy
of an e-mail is not an e-mail, it’s simply a printout. The actual
electronic mail contains metadata — internal information includ-
ing dates, times, where it traveled and what networks it touched.
Word documents contain metadata that detail how long
the document has been open, who created the original, how
many times it has been opened and when it was created.
The bottom line is that additional information can be derived
from electronic data, helping business owners, attorneys and
forensics experts retrieve information valuable to them.
Electronic discovery is a means to get the information on
someone’s computer or to retrieve electronic files for litigation.
“We’re at a revolution in the way litigation is practiced in
terms of discovery,” according to Damon Hacker, director of
SS&G Technology Consulting, an affiliate of Leading Edge
accounting firm SS&G Financial Services.
“There’s a lot of case law in favor of attorneys retrieving
files for discovery in electronic format,” he says.
Computer forensics is a specialty of electronic discovery.
“It looks at all the ‘stuff’ on a computer that you see—docu-
ments and e-mails—and the stuff you don’t see—such as
deleted files. We can acquire all of the information that is on
a computer, network or system in a forensically sound fash-
ion. All of those things—both seen and unseen—may have
relevancy to a case,” says Hacker.
The term forensics is deliberate. Just as hair, fiber and
blood samples are collected from a crime scene to test for
DNA and find a suspect, a computer’s DNA can be collected.
“When you print a file, the actual image of the printed file
gets saved on your computer’s hard drive. The computer has
taken a snapshot and stored it. The register keys contain
information about what was installed on the computer, what
has been removed, any external devices that have been con-
nected and any networks you’ve attached to,” he says. All of
this information is lumped into one category that computer
forensics experts call “artifacts.”
continued on next page
THE LEADING EDGE 7
continued from previous page rules of discovery. We have a protocol ensuring that “WE TAKE A Current case law
nothing is divulged to an opposing party until it’s Although computer foren-
Why you should care
gone through review and has been approved as dis- SNAPSHOT OF sics sounds a little like Big
Computer forensics, which has been around for 30 WHAT THE Brother, a number of court
covery or stamped as privileged,” he says.
years, has been used primarily by the federal govern-
ment, FBI and CIA. Traditionally, it only was used in
Business owners need to know about computer COMPUTER cases already have dealt
forensics because they need to think ahead. LOOKED LIKE AT with related issues, includ-
litigation when the electronic data was thought to
“It could be consider as a violation of privacy rights. A
hold a smoking gun, explains Hacker. THE TIME.” ing the rights of employ-
lot of employees feel they still have a right to privacy and ers, cost sharing, proper
“It was esoteric, expensive, time-consuming and — DAMON HACKER
the courts are leaning that way. But it’s also easy to say in methods and privacy.
interruptive to an organization. But in the last five
a written policy that any computer activity on employer Among the decisions is the opinion in Gates Rubber
years, attorneys have woken up to the fact that this
computers can be searched,” says Hacker. Co. v. Bando Chemical (1996), which states that if you
makes a lot of sense. There’s a lot of information you
Computer forensics can be used in criminal, civil go about computer forensics in the wrong way, it is
can glean from computer forensics. More importantly,
and administrative cases. Examples include: conceivable that evidence will be thrown out. “The
if you don’t use computer forensics and electronic dis-
• wrongful termination judge was highly critical of the experts because they
covery, it could be considered malpractice.
• network penetration didn’t do it right,” says Hacker.
“The day that happens, the electronic discovery
• sexual harassment In Simon Property Group (SPG) v. MySimon (April
industry will explode. In 2004, the industry is expect-
• intellectual property disputes 2003), the judge ordered that “based on the newly dis-
ed to generate about $2 billion. Computer forensics
• contract breaches/disputes covered evidence—evidence which SPG should have
represents about a tenth of that industry.”
• validated date and time for a particular docu- produced before the August 2000 trial—MySimon is
The field is far more efficient and affordable than it
ment’s creation entitled to a new trial on all of the issues and not just on
used to be. Forensics is often done in the evenings or
• tracked e-mail/Internet history the issue of corrective advertising damages.” The judge
off hours, and then followed up with analysis.
• illegal activity (used as contraband) such as trad- also indicated that sanctions against SPG would be
In the standard course of litigation, attorneys for
ing child pornography appropriate in light of its withholding key evidence—
both the plaintiff and defendant can receive hundreds
Business owners can proactively or reactively mon- documents that revealed that SPG’s senior management
of boxes of documents. Often, they hire a litigation
itor usage but are best served by having a clearly stat- had made decisions in the summer of 2000 that contra-
support person to transcribe what is on paper into the
ed Internet and fair usage policy. dicted the positions it took at the August 2000 trial.
computer so the information is searchable. “This is
“Let employees know that they should not expect And most recently, U.S. District Judge Shira A.
very costly and time-consuming. Forensics is better
privacy. They are using your resources and those Scheindlin of the Southern District of New York ruled
tailored to the case. Instead of coming back with 7,000
resources are supposed to be used for business pur- in Zubulake v. UBS Warburg that the plaintiff and the
documents, you’ll be able to receive the 3,000 elec-
poses only,” Hacker says. defendant would have to share the cost of the restora-
tronic documents relevant to the case,” says Hacker.
One way most people try to hide their inappropri- tion of e-mails from the defendant’s back-up to present
More and more attorneys who are familiar with and
ate activities is by connecting to the company network evidence of discrimination, but that the bulk of the
have used this technique have found that it is changing
and using the company’s Internet to access their home expense (75 percent) should be paid by the defendant.
the way they practice—and they’re not going back to han-
computer and download images, visit sites and move But what’s even more important is that in her July 24,
dling discovery and documents the old-fashioned way.
contraband. 2003, opinion, Scheindlin stated, “The point is simple:
“We’re trying to educate business owners and attor-
“Your rights as a business owner extend to those technology may increasingly permit litigants to recon-
neys about what computer forensics can and cannot
home computers, but only if you’ve stated clearly in a struct lost or inaccessible information, but once restored
do,” says Hacker. “It can’t get something back that’s
policy that there is no expectation toward privacy to an accessible form, the usual rules of discovery apply.”
not there. We’re very careful not to circumvent the
involving any work done at home or the office.” “This has been a huge wakeup call to the legal pro-
Hacker recommends that you treat every case, even fession,” says Hacker.
MORE RESOURCES if it’s simply administrative, as if it’s going to court. “You
need to protect evidence and ensure there’s a chain of Helpful resources
“DESIGNING A DOCUMENT STRATEGY,” custody and that it’s reproducible. You may discover a Although computer forensics is a fragmented industry,
BY KEVIN CRAINE, MCGREW AND MCDANIEL situation that was simply going to be a reprimand is Hacker recommends talking to your accountant or
GROUP (2000), describes a five-phase worse than you thought and you’ll want to sue,” he says. lawyer because he or she will know who can help.
process that guides readers through the Traditionally, business owners thought computer “If you think you’re in this situation, get an expert
design of document strategy tailored to forensics was very expensive and would involve seiz- and at least image the files. If you decide to shelve the
their particular situations. ing computers for two weeks or two months, which case for two years, you still will have the information if
could put a company out of business. But that’s not you need it. If you don’t, you’ll be overwriting the infor-
“U.S. NEWS & WORLD REPORT: how it works today, Hacker says. mation and possibly spilling the evidence.”
OFFICE POLITICS IN THE ELECTRONIC AGE,”
“We take a snapshot of what the computer looked In the normal course of business, employees shred
BY DANA HAWKINS (MARCH 22, 1999)
like at the time. We still need to prove that no one documents in accordance with the company docu-
“Old bald-headed goat.” “Idiot.”
“Useless control freak pseudo figurehead
tampered with the evidence, so we set up a chain of ment retention policy. A similar retention policy
numbskull.” Beth Gunn and Alec Myers custody. We document every person who touches it should be followed with electronic files.
never figured that these e-mailed refer- along the way and all sign off saying this is where the “Attorneys are being sanctioned for not preserving
ences to their boss—casually exchanged information was and what we did with it. their clients’ information. It may not be deliberate, but
to relieve boredom—would become part “We maintain that chain of custody through the end of just by turning on the computer, you could be
of a two-year court battle. This story the case. We lock up the drive and have ways of authen- destroying important records and evidence,” he says.
details the battle that ensued. e ticating that we have an exact copy of the drive and that Make sure your company is well positioned in case
nothing subsequently has happened to it,” he says. of potential violations. e
8 VOLUME 4 ■ ISSUE 3 ■ 2004
VOLUME 4 ■ ISSUE 3 ■ 2004
Pannell Kerr Forster of Texas, P.C.
LEADING Certified Public Accountants & Professional Advisors
Forensic accountants: the CSIs of the business world
By Gregory S. Price, CPA, CFE, CISA
ome things never change … death,
S taxes and business fraud. Headlines
over the past few years included highly
publicized probes, prosecutions and
frauds of all types, but who can help us build their case,
get to the bottom of this chicanery? Your
friendly neighborhood forensic accoun- transaction by
tant: the CSIs of the business world.
While fans of the hit series CSI
(a.k.a., Crime Scene Investigators)
know all about this science, there also is
a little known, growing world of inves-
tigators who also perform complex,
painstaking analysis of crimes and look
for clues in their own pursuit of justice.
Known as forensic accountants, many
started out as external or internal audi-
tors, controllers, accountants, and even
police investigators at the local, state or
federal level. Forensic accountants also opposite. The forensic accountant is small business causes $127,500 in
are CPAs, certified internal auditors looking for one transaction that will be losses. The average scheme in the
(CIAs), certified information systems the key; the one that is a little different, largest companies costs $97,000.
auditors (CISAs) and certified fraud no matter how small the difference, that • Corruption schemes account for 13
examiners (CFEs). will open the door. Discovery of that percent of all occupational frauds
At this point, the sleuth in all of us seemingly immaterial loss is vital. and cause more than $500,000 in
would want to know what a forensic Forensic accountants build their case, losses on average.
accountant does. transaction by transaction, and usually • Fraudulent statements are the most
begin working when someone in an costly form of occupational fraud,
Forensic accounting versus auditing organization suspects a crime is being with median losses of $4.25 million
Joseph T. Wells, CPA, CFE, chairman or has been committed. per scheme.
of Austin, Texas-based Association of • Frauds committed by employees
Fraud statistics are staggering cause median losses of $60,000,
Certified Fraud Examiners
(www.acfe.org)—the regulatory body Why do we need forensic accountants, while frauds committed by man-
that governs the CFE designation— and how big is the problem of corpo- agers or executives cause median
says forensic accounting “relates to any rate or business fraud? A recent study losses of $250,000. When managers
accounting for courtroom purposes, by the ACFE found: and employees conspire in a fraud
such as valuation, divorce, bankruptcy, • An estimated 6 percent of revenues scheme, the median loss rises to
fraud or business disputes.” Industry were lost in 2002 as a result of occu- $500,000.
experts also believe accounting and pational fraud and abuse. Applied to • The average fraud scheme lasts 18
legal malpractice, arson investigations the U.S. Gross Domestic Product, months before being detected.
and the tracing of assets can be consid- this translates to losses of approxi-
mately $600 billion or about $4,500 Preventing fraud 101
ered a part forensic accounting.
Many confuse auditing with forensic per employee. With increases in forensic accounting
accounting. The two are very different. • Small businesses are the most vul- efforts to combat and prosecute fraud,
Auditing is governed by the concept of nerable to occupational fraud and why have we seen such large increases
materiality. Forensic accounting is the abuse. The average scheme in a in the number of actual reported cases,
continued on page 12
THE LEADING EDGE 9
Do you need a long-term care insurance policy?
By Brad Whatley, CPA/PFS, CFP, and Alison Muecke
hen we think of long-term care, Skilled care and personal care insurance policy is not for everyone. introduction of this bill further empha-
W the very first thought is an image
of a nursing home. Times have
remain the most common terms that
describe long-term care. Skilled care
Whether you should buy a policy
depends on your age, health status,
sizes the importance of long-term care
as a growing concern in our nation’s
changed. Long-term care now encom- refers to medical conditions requiring overall retirement objectives and health care crisis.
passes a wide variety of services, and the care of a skilled medical profession- income. As a general rule, if you have
with recent publicity surrounding many al, including nurses or therapists trouble stretching your income to pay What types of benefits are provided?
of the new insurance policies, anyone licensed with the state. Typically, this for utilities, food or medicine, or if your Types of benefits and amount of cover-
who is planning for the future should daily care is ordered by a physician and only source of income is Social Security, age cover a vast array of options. You
consider the viability and effectiveness provided in a nursing home, but also you should not purchase a policy. On must think about what resources are
of this estate planning tool. may be provided in other settings, such the other hand, if you have significant available to you, as well as benefits that
Chronic conditions or disability may as the patient’s home by using home assets you wish to protect or do not are important to your lifestyle. As men-
require one service or a combination of health care resources. wish to burden your family members to tioned previously, policies can cover
long-term care services to help an indi- Personal or custodial care is a less pay for part or all of your care, you may stays in nursing homes, adult day care
vidual compensate for limitations in his intensive treatment that helps a person be a good candidate for a policy. centers or home health care. Depending
or her ability to function independently. perform activities of daily living. These The most common misconception is on your needs, you may choose one or
As such, long-term care is designed to services may be provided in a variety of that you are already covered by Medicaid a combination of all of these benefits. It
assist a person to maintain a level of settings, including nursing homes, or Medicare. More than half of nursing is crucial to read the actual policy and
health and well-being. The services adult day care centers, retirement com- home bills are paid out-of-pocket by not just the brochure’s promise of what
associated with this type of treatment munities or at home. individuals and families, with the bal- is covered. It also is important to con-
include help with activities of daily liv- ance being provided by state Medicaid tact your insurance company before
ing, such as bathing, dressing and eating Who should buy long-term care programs. In addition, only those who entering the health care facility to deter-
which, depending on the level of need, insurance? meet federal poverty guidelines actually mine if the stay will be covered.
may involve home health care, adult day It is difficult to predict who will need qualify for Medicaid programs. Policies will be specific on what is
care or care in a nursing home. long-term care, and a long-term care covered and what is excluded. In gener-
Are there any tax advantages to al, insurance companies do not pay ben-
purchasing a policy? efits for a mental or nervous disorder, a
Yes. The majority of policies available disease (other than Alzheimer’s), an
today are tax-qualified; a portion or all alcohol or drug addiction, an illness or
of the benefits paid are not subject to injury caused by an act of war, attempt-
federal income tax. A portion of the ed suicide or intentionally self-inflicted
premiums paid for the policy also may injuries, or if treatment has already been
be deducted as a medical expense. For paid for by the government.
the 2003 tax year, the deductible
amounts with scalable categories by age Estate planning is key
include: Now that you are a bit more educated
40 and under . .$250 on the issues surrounding long-term
41-50 . . . . . . .$470 care insurance, using this knowledge to
51-60 . . . . . . .$940 plan for the future should be an integral
61-70 . . . . . . .$2,510 component to continuous estate plan-
71+ . . . . . . . . .$3,130 ning. Your CPA and financial adviser is
These policy premiums are equipped to help you understand the
deductible on Schedule A only to the advantages and limitations of these
extent that they exceed 7.5 percent of policies, and help you evaluate your
the taxpayer’s adjusted gross income own personal situation to reap the most
(AGI). For that reason, many taxpayers benefits for you and your family. e
will not be able to deduct them. Self- ®
employed individuals may, however, Brad Whatley, CPA/PFS, CFP ‚ is a shareholder/
director in the Tax Department for PKF Texas,
deduct the full amount as they do for
and can be reached at firstname.lastname@example.org.
their own health insurance premiums. Alison Muecke is a manager in the Tax Department.
Currently, there is a proposed bill to Contact her at email@example.com.
make long-term care insurance premi-
ums an above-the-line deduction
(bypassing the AGI requirement). The
10 VOLUME 4 ■ ISSUE 3 ■ 2004
What’s all the buzz about fraud?
By Jennifer LeBlanc, CPA
n a recent visit to one of my oldest, Someone is talking about me
I dearest clients, I sat down with the
longstanding company president to ask
behind my back
Someone is talking about you and it
him a few questions about his control isn’t just one person. One of the key fea-
environment. When asked to explain tures of the guidance is the addition of a
how he and his management team set mandatory meeting by all members of
the tone for honesty and lack of toler- the audit team prior to beginning the
ance of fraud, he replied (sternly), engagement. The meeting is held to dis-
“Well, if you handle money in this com- cuss the potential risks of fraud that may
pany, you have to wear a tie.” exist at your company, and the team is
I nodded and accepted this response charged with evaluating each risk iden-
with a smile that told him I understood tified. These meetings conclude with an
what he meant about this notion of action plan to design audit procedures
wearing a tie, as well as how difficult it that may address some of the key risks
must be to convey what he was really the team identified.
trying to say. After we left the meeting,
the junior staff person turned to me, You want to meet with whom?
and, in confusion and disbelief, asked, One of the most noticeable changes is yours. It might be difficult for you to auditors to increase their skepticism
“What was he saying about the tie? I the requirement that auditors discuss identify what is happening differently and carry out additional procedures to
don’t understand.” operational controls, and knowledge of during the financial audit to further increase our chances of detecting fraud.
With that same smile of acceptance fraud and fraud risks, with operations address this risk. However, you can pre- The financial audit still will not cover
that bonded me to my client a few personnel. These are the people who pare by having a clear written policy enough new ground to be relied upon
moments earlier, I replied, “Sometimes, will know if the controls put in place by about what makes a sale a sale, and as a forensic audit. In addition, if the
when you ask a difficult question, you management are actually working. For then apply those rules consistently. company has increased concerns or
get a difficult answer.” years, auditors have simply relied on Keeping important factors regarding suspicions regarding fraud risk, a finan-
Talk about difficult questions…there the documentation of controls by man- revenue recognition rules in mind, in cial audit will not be adequate. We have
are plenty of them as a result of new agement or accounting personnel. The the end, a sale is generally still a sale. increased our procedures and are work-
auditing standards from the American new guidance suggests that a short ing with management to increase our
Institute of CPAs (AICPA) that detail interview with others handling assets That is immaterial! chances of detection. However, we are
how auditors address fraud detection in within the company’s operations may Another major change to auditors’ pro- talking about a potential person or
their work. The new standard, SAS reveal deficiencies. cedures may require additional time group of people who are intentionally
No.99, “Consideration of Fraud in a This line of questioning may be commitments from your personnel. We concealing their actions. This can be
Financial Statement Audit”, was the uncomfortable for your personnel, espe- are being challenged to add an element hard to detect.
first major guidance released by the cially those who were never involved in of “surprise” to our work. This means Patience and knowledge will be the
accounting profession after the answering questions or have not ever that we can request items that were best tools in working under this new
Sarbanes-Oxley Act of 2002 was signed provided information to the financial posted during the year that don’t direct- standard. High quality service providers
into law. auditors. However, these interviews are ly affect year-end balance sheet items. will continue to invest in training and
The major features of this new stan- generally very brief and the auditor In some cases, we will purposefully technology solutions to re-engineer our
dard include the addition of a brain- should attempt to put them at ease. “We select items below our scope. We really approaches and mitigate the impact on
storming session about fraud for the are trying to gain information about have to change things up, which will audit costs, while increasing value to
audit team, interviews with non- how things really work around here so increase, at least slightly, the ability to you. Your auditor should be able to
accounting personnel in the company that we can do a better job. Also, we detect fraud. In practice, this will address your concerns and design pro-
regarding fraud, presumption of risk of have to ask some questions about the require some patience regarding pro- cedures that will provide the highest
fraud in revenue recognition and risk of fraud to all of our clients.” viding source documents for seemingly value to your company.
increased scrutiny of all management small irrelevant items. If you have questions or concerns
estimates. The standard’s general tone A sale is a sale, right?
about the impact of SAS No. 99, we
requires that auditors exercise an The new standard also requires auditors So that’s the big deal encourage you to contact us at any
increased level of professional skepti- to increase their presumption of risk When working with our clients, this time. e
cism in developing their audit proce- associated with revenue recognition. standard can allow us to assist in fur-
dures, and that the new procedures The auditor is to assume that the incen- ther identifying risk areas for the com- Jennifer LeBlanc, CPA, is an audit senior manager for
introduce an element of surprise. tive or pressure to misstate earnings pany. The process is designed to be dis- PKF Texas. Contact her at firstname.lastname@example.org.
exists in every company, including ruptive, and the AICPA has challenged
THE LEADING EDGE 11
continued from page 9
Forensic accountants: the CSIs of the business world
as well as the dollar amounts of losses? tions conducting them. the top was discordant at HealthSouth,
In short, we have not yet reached a First case in point: In my almost 24 the largest U.S. provider of diagnostic
baseline in the number of reported years of performing hundreds of vari- imaging, outpatient surgery and reha-
cases because these types of investiga- ous financial audits and several dozen bilitation services. Last year, 16 corpo-
tions are so new to the business mar- forensic engagements, only one was rate executives were charged with cor-
ketplace. The amount of unreported ever reported in the public domain. As porate crimes. Fifteen pleaded guilty,
forensic investigations is staggering. a result, how do we work to prevent including all five of the CFOs who ever
Our current reported activities are only fraud? According to the ACFE, here are worked for the company. The CEO was
a reflection of what we call the “iceberg five key areas for improvement: indicted in November 2003, the first
only a matter of time before forensic
effect” – as organizations work to fix • Hotlines are still hot. chief executive to be charged under the
accountants get their own television
their problems before they become • Implement management antifraud Sarbanes-Oxley Act of 2002’s fraudu-
show. Who knows? First there was
known to the public, only the tip of the programs and controls. lent financial certification violations.
Quincy, then CSI. In this world of real-
actual cases ever see the light of day. • Set the tone at the top. Others who fell included senior vice
ity TV, anything’s possible. e
Unlike their police counterparts, much • Develop a code of conduct. presidents, vice presidents and assistant
of the forensic accounting work goes • Establish a confirmation process. vice presidents. Gregory S. Price, CPA, CFE, CISA, is a shareholder
unreported to the general public and Second case in point: Based on a Unless the trend in corporate behav- and director at PKF Texas. Contact him at
stays within the walls of the organiza- combination of occurrences, the tone at ior and business ethics turns south, it is email@example.com.
PKF Texas Recent awards & recognition PKF Texas raises more than
$8,700 for the American
• For the third year in a row, the Houston Business Journal
at a Glance recognized PKF Texas as one of Houston’s Best Places to Heart Association
Work for the organization’s sincere commitment to Each year, PKF Texas team members
employees. participate in the American Heart Walk
• Karen Love, director of Business Development, was to raise money to fund research and
recently honored during the American Heart Association education for heart disease and stroke—
Leadership Conference with a Distinguished Service the number one and number three killers
Award. A research grant of up to $124,000 was named in of both men and women in the United States. This past year,
Karen’s honor. the teams started in June—and set their goals high—for the
• WebCPA (www.webcpa.com) named PKF Texas Webstar Walk on Nov. 1. Through teamwork and dedication to this
of the Week in recognition of an outstanding Web site! worthy cause, the teams surpassed their goal and raised
The PKF Texas site was relaunched in March 2003. $8,724 for the AHA—more than $1,000 more than the
• For the second year in a row, PKF Texas was named one already high goal.
of Accounting Today’s Technology Pacesetters. This high- Some facts that helped these teams to maintain their focus:
ly regarded list recognizes the accounting profession’s • Less than 7 percent of the AHA annual budget goes to
leading technology consultants and resellers. salaries and administrative costs; the rest goes straight into
education, community service and research.
• One person dies every 29 seconds from heart disease.
Talent & expanded service areas • Twenty-seven million children already have high cholesterol.
• Byron M. Hebert, CPA, joined PKF Texas as a • AHA research funds have yielded many important discov-
director in the Entrepreneurial Advisory Services eries, such as CPR, life-extending drugs, open heart
(EAS) group, a team dedicated to helping small- and surgery and the first biological pacemaker.
middle-market companies operate more profitably. With • Three Nobel prizes were awarded to researchers AHA
the addition of Hebert, the EAS group’s profit enhance- funded at key points in their careers.
ment capabilities will expand to include turnaround man- PKF Texas is already making plans for the Walk in 2004.
agement, process mapping and improvement, reengineer- Join us in this worthy cause by participating in the walk or
ing, systems implementation, and identification and through a donation and help save lives. e
tracking of key performance indicators.
• Brian Baumler, CPA, was named a shareholder
in the Audit practice.
• Recent promotions to manager include Rafael
12 Carsalade, Tax manager; Raissa Evans, Marketing man- VOLUME 4 ■ ISSUE 3 ■ 2004
ager; and Robbie Trahan, Tax manager.
FAIR LABOR STANDARDS ACT
ARE YOU IN COMPLIANCE?
O riginally enacted in 1938, the Fair Labor Standards
Act has been amended many times, but it is still
the main law affecting workers’ pay. It is the federal
statute that established protections for minimum
wage, premium pay for overtime hours of nonsupervi-
sory employees and protection of children who are
THERE’S A QUAINT It does not regulate vacation, holiday, severance or
LITTLE LAW THAT’S BEEN sick pay, meals, premium pay for weekend or holiday
work, shift differentials, pay raises or fringe benefits.
ON THE FEDERAL BOOKS
“The act encourages employers to hire more people
SINCE THE DEPRESSION. versus having current employees work more hours,”
WHAT YOU MAY NOT says Lari Braun, human resources manager at Leading
REALIZE IS THAT THE Edge accounting firm Henry & Horne in Tempe, Ariz.
FAIR LABOR STANDARDS ACT “It also ensures that people are able to earn a decent
IS STILL IN EFFECT,
AND YOUR BUSINESS continued on next page
NEEDS TO COMPLY.
THE LEADING EDGE 13
continued from previous page Interstate commerce is a very broad term, according to
Braun. To understand just how broad, consider that
Who is impacted by the FLSA? employees who are engaged in interstate commerce
“All employers who are engaged in interstate commerce or include those who:
the production of goods for interstate commerce are sub- • Produce goods (such as a worker assembling compo-
ject to the FLSA,” according to Tyler A. Ridgeway, an attor- nents in a factory or a secretary typing letters in an
ney and executive recruiter with Leading Edge accounting office) that will be sent out of state
firm Kreischer Miller in Horsham, Pa. In this age of the • Regularly make telephone calls to other states
Internet, that includes most employers, as well as: • Handle records of interstate transactions
• Businesses that are not engaged in interstate commerce • Travel to other states as part of their job
but have at least two employees and do at least • Do janitorial work in buildings where goods are pro-
$500,000 in business per year duced for shipment outside the state
• Hospitals, government agencies and schools “You’ve got to understand the overall law and what it’s
• Construction enterprises, laundries and cleaners that about,” says Braun. That includes understanding which
were in business on March 31, 1990 of your employees are exempt from the FLSA. Upper-level
• Retail enterprises with 1989 sales of at least $362,500 executives also are exempt from the FLSA. Typically a salaried
(and nonretail enterprises with sales of at least employee will be exempt if his or her primary duty consists
$250,000) that were in business on March 31, 1990 of the management of the enterprise or of a customarily rec-
ognized department or division of the enterprise, and if that
primary duty includes the customary and regular direction
of two or more other employees.
CPAs are exempt because they are classified as profes-
sional employees. “Advanced knowledge in a field of learn-
ing normally acquired through a prolonged course of spe-
cialized instruction,” says Braun.
Ridgeway advises employers to consider the following
“YOU’VE GOT TO multi-prong test when determining whether or not
employees are exempt.
LOOK AT JOB DUTIES • Are employees paid a salary? If not, employees are non-
exempt and the test is complete. If yes, the test continues.
TO MAKE SURE THEY • Are they an executive, directing the work of others?
ARE CLEARLY • Are they administrative, engaged in non-routine
office or non-manual work?
DEFINED AND YOU ARE • Are they professional, engaged in work requiring
knowledge or an advanced degree?
CLEARLY COMPLIANT.” • Are they a computer professional?
— LARI BRAUN, If you answered no to the last four questions, your
HUMAN RESOURCE MANAGER,
HENRY & HORNE
employee is non-exempt.
The final test is the employee’s salary level, according to
Ridgeway. “The salary must be $155 per week or $8,060
per year,” he says.
To be exempt, a position must pass these tests.
“Examples of exempt employees include lawyers,
department heads, executive assistants, account execu-
tives, physicians, personnel directors and tax specialists.
Non-exempt employees include clerks, bank tellers, secre-
taries, inspectors, trainees and bookkeepers,” says
Braun says that sometimes employers may try to classify
non-exempt employees as exempt to avoid paying overtime.
“You’ve got to look at job duties to make sure they are clear-
ly defined and you are clearly compliant,” she says.
The FLSA regulations are all about duties, not job titles.
14 VOLUME 4 ■ ISSUE 3 ■ 2004
IMPORTANT POINTS FOR
EMPLOYERS TO CONSIDER:
“It’s important to document titles, expectations and • 40 hours in a non-school week
work performance because if the U.S. Department of • Hours between 7 a.m. and 7 p.m. (except from
Labor comes in to investigate, they will look at duties June 1 through Labor Day, when evening hours ■ Employees cannot be exempt
and ask whether or not the employee really is are extended to 9 p.m.) and non-exempt.
exempt,” she says. The FLSA also protects children from dangerous
■ Compensatory time must be approved in
jobs, such as mining and manufacturing. “If you own advance.
Other protections a manufacturing company, your children can open
The FLSA sets a number of other protections. the mail or push a broom, but they can’t be on the ■ If a non-exempt employee attends an
Minimum wage: The federal minimum wage is factory floor,” says Braun. off-site seminar, the employer is not
$5.15 an hour. Many states also have higher mini- Other requirements: Employers must advise obligated to pay overtime if:
mum wage requirements than the federal wage. “If employees of their rights under the act. The
■ Attendance is outside of regular
your business is covered, you must pay all covered Department of Labor’s Wage and Hour Division will working hours,
employees at least minimum wage,” says Ridgeway. provide you with posters that must be displayed in a
Equal pay for equal work: “Your company also place where all employees will see, read and under- ■ Attendance is voluntary,
must provide both equal pay and equal benefits to stand them.
■ The employee does not do productive
men and women who perform the same job or jobs The FLSA does not apply to independent con-
employer-related work during the
that require equal skill, effort and responsibility,” tractors. “You need to look at who controls the seminar, and
he adds. work,” says Ridgeway. “When an independent con-
For example, in a manufacturing plant, 20 tractor does work, he or she, not the employer, must ■ The program is not directly
employees are male and have been working there control how the work is done. If the employer is related to the employee’s job.
for 10 years. In 2004, the plant hires 10 females. If controlling that process, the Wage and Hour
the workers are doing equal work, the plant can Division might determine the contractor is in fact an ■ There’s no limit on working hours for
pay the males more if they currently award raises employee,” he says.
based on an employee’s workplace longevity. If both As an employer, your recordkeeping must be dili- ■ Make sure to communicate to
a man and a woman were hired at the same time, gent. “Your company must keep records for every employees whether they are exempt or
the plant would have to pay the same rate, says employee for each pay period for the past three non-exempt. “Talk about the various
Ridgeway. years, detailing every employee’s pay rate and hours clarifications so people know,” says
Overtime pay: Non-exempt workers must be paid worked that period.” Lari Braun, human resources manager
at least one and a half times their regular pay rates at the Leading Edge accounting firm
Consequences of non-compliance Henry & Horne in Tempe, Ariz.
for overtime. “This is calculated per week and the
workweek can begin on any day established by an “Let’s say someone typically works 40 hours a week, “What sends employees to compliance
but due to job demands has been working 50 or 60 agencies is that they don’t know.”
employer. Based on 40 hours per week, an employ-
ee can work 10 hours in one day and six hours in the hours a week,” says Braun. “If people get disgrun-
tled, they might call the Department of Labor to ■ Make non-exempt employees record
next,” he says. actual hours worked. e
Compensatory time: Say a non-exempt employee make them aware,” she says.
works hard on a project deadline and works 10 The Wage and Hour Division of the Department
hours Monday through Thursday. Instead of provid- of Labor enforces FLSA. “They can conduct a com-
ing overtime on Friday, the employer can give Friday pany audit with no specific complaints. If a violation
off to that employee and not have to pay overtime. is found, the company could be forced to pay over-
The key is to ensure that the worker only worked 40 time wages and several fines,” adds Ridgeway.
hours that week. Violations can include improper exempt status
“Be careful on working private deals with employees,” classification, minimum wage mistakes and overtime
says Ridgeway. “It just takes one disgruntled employee to not paid as required.
get the company reported and in a lot of trouble.” Criminal penalties can be levied in certain cir-
cumstances. “Wage and Hour representatives also the federal law, deference is given to the law that pro-
Child labor: FLSA has designed rules to discourage
can recommend changes. If an investigator shows up vides greater protection to the employee, according
children from dropping out of school. It sets the min-
at your company, be courteous and helpful but do to Ridgeway.
imum age for non-agricultural employment at 14.
not meet personally with him or her. Direct them “Remember, the FLSA applies to you,” says
Hours worked by 14- and 15-year-olds are limited to:
immediately to your company’s human resource Ridgeway. Many companies are experiencing growth,
• Non-school hours
professional,” advises Ridgeway. but are reluctant to hire more employees. Ridgeway
• Three hours on a school day The FLSA applies to all states and allows states to and Braun caution that pushing your non-exempt
• 18 hours in a school week regulate areas not covered by the act to afford work- employees without compensating could lead to a
• Eight hours on a non-school day ers increased protection. If a state law conflicts with visit from the Department of Labor. e
THE LEADING EDGE 15
LIFE’S MAJOR EVENTS AND THEIR
THERE ARE MANY STAGES IN LIFE AND IN BUSINESS WHEN WHAT YOU DO, OR DON’T DO, WITH YOUR MONEY REALLY MATTERS. In the beginning
BIRTH OR ADOPTION, MARRIAGE, DIVORCE, PURCHASE OR SALE OF A HOME OR BUSINESS, ILLNESS, DEATH OF A SPOUSE, You’ve graduated from college and you’re ready to start
RETIREMENT—ALL OF THESE MAJOR LIFE EVENTS HAVE A BIG IMPACT ON YOUR FINANCIAL LIFE. BY PLANNING AHEAD AND earning and saving money. Retirement may seem a life-
time away, but now is the time to start thinking about
ANNUALLY REVIEWING YOUR FINANCIAL SITUATION WITH AN ADVISER, YOU CAN MAKE SURE THAT LIFE EVENTS REMAIN JOY-
saving for retirement. “When starting out in your first
OUS OR, IN THE CASE OF DEATH OR DIVORCE, DO NOT BECOME EVEN MORE PAINFUL. real job, saving for retirement is something you should
be thinking about,” says David Borden, director of
investments at Leading Edge accounting firm CCR
Group in Worcester, Mass. Most businesses today have
some kind of retirement plan, such as 401(k) or 403(b),
that allows saving for retirement to be fairly painless.
“Even if you’re only saving a small amount when
you’re young, it will be well worth it,” he says.
But maybe after working a few years, you meet the
person of your dreams, and now you’re planning to
marry. “Get it all out on the table,” advises Borden—stu-
dent loans, revolving debt, child support. “Be realistic
about your income and work with a financial adviser
who can help come up with a good savings schedule.
Working with a professional helps take emotion out of
the planning,” he says.
Realize that you no longer have his-and-hers debts.
“You now have joint assets and joint liabilities. Pay the
debt off as it comes in. If you start saving now, rest
assured that you will retire someday. People who look
at retirement in their 20s and 30s will be much better
off when retirement arrives,” says Borden.
Have a frank and honest discussion about lifestyle.
There’s a tradeoff to everything. “You have to decide
what’s important to you as a couple. Is it the big house?
I know many couples that are home poor. Is that how
you want to be? Remember that there’s always room to
improve down the road. Sometimes you’re better off
going below what you can afford. The housing market
appreciates at every level,” Borden says.
“You don’t want to avoid saving for retirement and
your children’s education because all of your income is
going into a mortgage,” he says.
And once you have children, you must have a will
and an estate plan that includes all your children,
according to Peri Ann Aptaker, director of financial
planning at Leading Edge accounting firm Kahn,
Litwin, Renza & Co. in Providence, R.I. This means
reviewing your plan after the birth of every child. “You
could inadvertently disinherit them. And if you lose a
16 VOLUME 4 ■ ISSUE 3 ■ 2004
child and he or she has assets in their name, you need When a spouse dies, there is money going out and With the deferred status of student loans, families
to take care of that, too.” money coming in. If the spouse who died handled all are much better off taking out loans and letting their
All states deal with the deaths of people without the money, there’s a real education to go through for children pay them off.
wills differently. “If you don’t have a plan, you may have the surviving spouse. “In today’s environment, it’s good debt, low interest
inadvertently adopted an heir called the IRS, and Uncle Many people look at their estate plan every three to and deferred,” says Borden. “People don’t realize how
Sam goes to a lot of family reunions,” says Aptaker. five years, but so much changes during that time, much money you need to retire. A million dollars is
especially laws regulating estate plans, says Borden. not what it used to be. There is no magic number. It’s
Planning for the unthinkable “The cost of not being prepared far outweighs the cost how you want to live in retirement that matters.”
Unfortunately, one of life’s biggest financial events also of keeping the plan current,” he says. Early on, it’s better to set more realistic expecta-
is the end of a marriage. Divorce puts a big strain on The cost of a checkup (about $500) is well worth tions for investment returns. “Returns of 6 percent to
the financial future of divorcees. the money. 7 percent are more realistic than the standard 10 per-
“If you do get remarried, you can end up supporting cent. It’s better to be pleasantly surprised than disap-
two families. For a spouse paying alimony, there’s not a Pre-retirement and retirement pointed,” says Borden.
lot of incentive to get remarried. For those who do, People today are planning more, but not necessarily Planning should not be considered a fruitless exer-
they often wind up with double the monthly expenses doing it correctly. “There are all kinds of tools on the cise. Sometimes it’s your own reassurance that you’ve
and double the burden of college costs,” Aptaker says. Internet that are helpful, but not accurate and detailed made the right decisions. And as you near retirement,
When you or your spouse files for divorce, you enough to provide a clear picture for your future,” that’s reassurance that many seek.
should visit your accountant, as well as your attorney. says Borden, adding that these tools give people a “People are so scared to fully retire. Once you let go
“Understand what you may end up with and your abil- false sense of security with regard to planning. and retire, there’s no turning back and no earning that
ity to live within those means. Both parties need to be Pre-retirement, those years before actual retire- level of income any more,” says Borden.
aware of what assets they possess. If there’s a disparity, ment, are critical. The good news is that it’s never too late.
you may want to consider a prenuptial agreement for “Too many people put their children’s education Some people are more diligent about planning,
any future marriages. If you’re in a second marriage before their own retirement. When they deplete their but others need to be pushed. “If you’re nearing
and there are kids from both previous marriages, you’ll retirement funds, it’s almost impossible to save in that retirement age, sit down with your financial adviser
need to adjust your estate plan to make sure the right short period of time they have left to work,” says to see what changes you need to make to preserve
money goes to the right kid,” says Aptaker. Borden. your assets. Your adviser will help you plug the
Any change in your health that might affect your Aptaker agrees. “So many people try to pay for col- dike first and then work on the bigger issues,” says
insurability (life, health, long-term care) also needs to lege and retirement at the same time. That’s impossi- Aptaker. e
be considered. ble, and not necessary.”
LIFE CYCLE EVENTS OF A BUSINESS
I f you own your own business, that business has different
lifecycle events and financial ebbs and flows. You’ll have
peak times when you’re expanding and down times when
“You need to find the right button and put the fear of
God in them to get them to understand just how important
planning is,” says Aptaker.
to pay for something new than to pay for something that’s
already there,” says David Borden, director of investments at
Leading Edge accounting firm CCR Group in Worcester, Mass.
you need to be fiscally conservative. As a business owner, Here are some questions to ask yourself today to prevent For example, the medical profession has been particu-
you’ll need to take different financial steps for security ver- “tomorrowitis”. larly hard hit due to HMO reforms. Today, it’s not worth the
sus someone who works in middle management for a large • Do I have the right insurance? hassles to take over a practice from a retiring physician. It’s
corporation. • Have I implemented the appropriate exit strategy? much simpler to start your own, even if the business has
Many closely held business owners suffer from what Peri • What is my exit strategy? Sell, transition or leave it to been passed on to family members, says Borden.
Aptaker, director of financial planning at Leading Edge the kids? To make that transition successful, Borden recommends
accounting firm Kahn, Litwin, Renza & Co. in Providence, • What’s the true value of my business? that you communicate and be open and honest, work with
R.I., calls “tomorrowitis.” These people: • What’s my business truly worth? an unbiased professional who can review your financial
A. Don’t think they are ever going to die. Talk to someone in your industry about how to obtain a true plan and goals, and follow through with the plan. “About 30
B. Think they always can make enough money. value, keeping in mind that a business may be worth more on percent of people who pay for a plan and go through the
C. Believe that their business is worth 10 times more than paper than its eventual price tag will show. “So many people first two steps don’t see it through implementation. All the
its actual worth. make that mistake. In today’s lower interest rate environment planning in the world won’t help unless you follow the
D. Think they can deal with planning issues later. and very pro-business economy, it’s often more advantageous plan,” he says. e
THE LEADING EDGE 17
From zero to big business in 60 days
tarting a business from scratch is no easy “Everyone was on a steep learning curve
S task. But getting a world-class museum
administratively ready for opening in a few
and we added gradually to the things we
needed. We broke the tasks down into what-
“EVERY DAY WE WOULD
short months is seemingly insurmountable. ever we needed to get the building open first; FACE A PROBLEM,
While most businesses start out smaller
with decisions made accordingly, the Nasher
then whatever was needed to get art here
safely, installed and ready for public viewing;
SOLVE IT AND THEN
Sculpture Center in Dallas, Texas, had to go and finally what was necessary to open the MOVE ON.”
from zero to big business in 60 days. museum to the public,” says Hightower. — LISTA HIGHTOWER, DIRECTOR OF FINANCE,
“It was like starting a big business from And it worked because The Nasher THE NASHER SCULPTURE CENTER
scratch with no policies, procedures or ven- Sculpture Center—dedicated to contempo-
dors,” says Lista Hightower, director of rary and modern sculpture and based on
finance for the center. She started at the the private collection of Raymond D. Working within the building itself is like
center on Aug. 18, 2003, and didn’t move Nasher and his late wife, Patsy—welcomed working in a piece of art, says Hightower.
into the gallery until one month before its 7,650 visitors on its first day. The architects and builders had major
Oct. 20 opening. “It’s a very exciting place to be right now,” design limitations—shoehorning adminis-
“This was a classic case of what comes explains Hightower. “Every day we come to trative operations into the building was a
first, the chicken or egg. So many things work and there are a million substantive great challenge.
had to be done. We needed computers, so things to do. Sometimes it’s simply nitpick- `For example, cash registers at the ticket-
we researched and purchased computers. If ing over details, but all these things are ing and admissions counters were installed
we had to send something by courier, we important.” two days before the museum opened. The
had to research a courier service. For example, Hightower needed to order admissions ticketing area would not accom-
check stock that incorporated the museum’s modate an employee who was in a wheel-
logo and looked aesthetically complemen- chair because the cash drawers were four
tary to the museum, with limited options inches. “So we were able to get the three-
that would work with financial software. inch cash registers in time for opening.
Designed by architect Renzo Piano of Every day we would face a problem, solve it
Italy and landscape architect Peter Walker, and then move on,” she says.
the entire 55,000-square-foot facility “We run a lot of different businesses in
includes the gallery, auditorium, offices and one. We exhibit art, have an education pro-
café and museum store. Situated in down- gram, offer membership and member bene-
town Dallas at the base of the city’s skyline, fits, operate a museum store, offer tours and
the Nasher Sculpture Center represents employ teams of docents and volunteers all
Nasher’s vision to create an outdoor “roof- in this one place. It’s exciting and challeng-
less” museum that serves as a public home ing to make it work.”
for his collection. Spanning an entire city The museum itself has been very well
block, the front third of the land is the received both in the United States and
building and the back two thirds is a garden internationally. “No other museum is dedi-
for exhibiting outdoor sculpture. cated solely to sculpture. Mr. Nasher had
Nasher, 82, paid for the entire center. opportunities to have his sculpture exhibit-
PHOTO COURTESY OF NASHER SCULPTURE CENTER
Hightower explains that the museum has ed in other cities. Dallas is fortunate to have
corporate sponsors for exhibitions and is him keep it here,” says Hightower. e
beginning to fundraise, but Nasher, one of
The Nasher Sculpture Center is a client of Leading Edge
the first real estate developers in the United accounting firm Lane, Gorman Trubitt in Dallas. The firm
States, continues to fund the museum. He has assisted the museum with selecting software, certain
built his first retail shopping center, personnel and conducting audit work.
NorthPark Center, in 1965 and made a com-
mitment to display his art in his develop-
ment projects. He is chairman of The Nasher
Foundation and of Comerica Bank-Texas.
18 VOLUME 4 ■ ISSUE 3 ■ 2004
T H E U N I T E D S T A T E S O F A M E R I C A
J A P A N
S C O T L A N D
E N G L A N D C A N A D A
Alpern Rosenthal Karns, Murakami & Hanashiro, LLP
Pittsburgh, PA Honolulu, HI
Argy, Wiltse & Robinson, P.C. Keiter Stephens Hurst Gary & Shreaves The Leading Edge Alliance is an alliance of major independently owned accounting
Washington, D.C. Glen Allen, VA
and consulting firms that share an entrepreneurial spirit and a drive to be the premier
Baden, Gage & Schroeder, LLC KGN Financial Group
Fort Wayne, IN Chicago, IL provider of professional services in their chosen markets. Leading Edge members are CPA
Beach Fleischman & Co. Kostin Ruffkess & Co., LLC firms that are preserving the core quality and integrity of the public accounting profession
Tucson, AZ Hartford, CT
while stimulating growth and progress through innovative practices.
Brady Ware Kreischer, Miller & Co.
Dayton, OH Philadelphia, PA
Brown, Edwards & Co., LLP Lane Gorman Trubitt, LLP
Bluefield, WV / Roanoke, VA Dallas, TX
Brown Schultz Sheridan & Fritz Lattimore Black Morgan & Cain, P.C.
Harrisburg/Lancaster, PA Nashville/Knoxville, TN The Leading Edge offers:
Carlin, Charron & Rosen LLP Lurie Besikof Lapidus & Co., LLP
Mass., Conn., RI Minneapolis, MN • Access to the best and brightest teams of business advisers—a peer-to-peer
Clark Nuber P.S. Marcum & Kliegman, LLP connection that provides the right solutions for clients.
Seattle, WA New York, NY
George Town, Grand Cayman • Innovative, practice-proven strategies for improving performance in management,
Ehrhardt Keefe Steiner & Hottman
Denver, CO Morrison, Brown, Argiz & Farra, LLP business processes, finance, operations, information technology and marketing.
Freed Maxick & Battaglia, PC
Buffalo/Rochester, NY O’Sullivan Creel, LLP • A leading knowledge resource for multi-disciplinary information and industry-specific
Fuller Landau LLP expertise responsive to clients’ unique needs.
Toronto, Ontario and Montreal, Quebec Pannell Kerr Forster of Texas, P.C.
Gifford, Hillgass & Ingwersen • The strength to attract the highest quality team members.
Atlanta, GA Postlethwaite & Netterville, APAC
Baton Rouge/New Orleans, LA
H. W. Fisher & Co. • The ability to service clients worldwide. The alliance offers accounting and consulting
London, England SS&G Financial Services
Akron/Cleveland/Cincinnati/Columbus, OH services through a global network of firms, with 245 offices in more than 68 countries.
Haskell & White, LLP
Irvine, CA Stonefield, Josephson, Inc.
San Francisco/Los Angeles, CA • The Leading Edge Alliance offers world-class business advisory expertise
Henry & Horne, P.L.C.
Tempe/Scottsdale/ Suby Von Haden & Associates and experience with innovation, progressiveness and quality.
Casa Grande/Pinetop, AZ Madison/Milwaukee, WI
Hongo Accounting, Inc. Warren, Averett, Kimbrough
Tokyo, Japan & Marino, LLC
Edinburgh/Glasgow/ Wilson, Price, Barranco,
Aberdeen/Inverness, Scotland Blankenship & Billingsley
Montgomery, AL To find out more about The Leading Edge Alliance, visit www.LeadingEdgeAlliance.com or call
Baltimore, MD Wiss & Co., LLP Karen Kehl-Rose, Executive Director, at (630) 513-9814, or e-mail LeadingEdge@core.com.
Livingston/Red Bank, NJ
Kafoury, Armstrong & Co.
Reno/Las Vegas, NV Yeo & Yeo, P.C.
Kahn, Litwin, Renza & Co.
THE LEADING EDGE 19