Twenty Mistakes that CPAs Make

Some workplace mistakes cost us dearly

Twenty Mistakes that CPAs Make

Here are twenty mistakes that CPAs make:

  1. We hire people without sufficient knowledge and temperament
  2. We accept more work than we can possibly perform
  3. We don’t cull our bad clients (which contributes to #2.)
  4. We work without taking breaks
  5. We don’t exercise
  6. We try to be experts in too many industries
  7. We use outdated computers and software (e.g., we are not paperless)
  8. We don’t plan our continuing education (and take anything we can find at the end of the year)
  9. We have no strategy, moving from one engagement to another because it’s pressing
  10. We work sitting down all day (when standup desks are available)
  11. We bill our clients months after the service is provided (rather than a couple of weeks)
  12. We allow email to drive our day (we are reactive)
  13. We don’t express sincere appreciation to our peers and employees (those fully deserving of “thank you!”)
  14. We don’t use engagement letters to define our work
  15. We have no exit strategy, hoping someone will knock on our door and offer to buy the practice
  16. We ignore those we love (because we are overworked and irritable)
  17. We don’t stay current on evolving standards
  18. We don’t fire unproductive or difficult employees
  19. We don’t deal with problems (bad clients or employees) because doing so is awkward
  20. We never pause to evaluate our lives
Twenty Mistakes that CPAs Make

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Since  1984, I have worked in public accounting, a profession I dearly love. One thing I’ve noticed about CPAs is we are too immersed in our work–to a point of blindness. We don’t step back and evaluate what or how we do things. Would we be better off if we intentionally removed certain responsibilities? Might we not be even more profitable and happier? 

Two things–more than anything else–will sap your energy and productivity: (1) difficult clients and (2) unproductive or difficult employees.

The 80/20 rule is applicable in our profession. We make 80% of our money from 20% of our work. And 80% of our headaches come from 20% of our clients and employees. (Were you awake last night thinking about one of these?) While the exact percentages may not be true for you, the concept is highly relevant. 

I’ve given you twenty mistakes that CPAs make. Are there others you would add?

If you found this article of interest, see my post What Keeps CPAs Awake at Night.

Understanding the New Nonprofit Accounting Standard

This is the first significant change to nonprofit accounting in over 20 years

Are you ready to implement FASB’s new nonprofit accounting standard? Back in August 2016, FASB issued ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities. In this article, I provide an overview of the standard and implementation tips.

new nonprofit accounting

New Nonprofit Accounting – Some Key Impacts

What are a few key impacts of the new standard?

  • Classes of net assets
  • Net assets released from “with donor restrictions”
  • Presentation of expenses
  • Intermediate measure of operations
  • Liquidity and availability of resources
  • Cash flow statement presentation

Classes of Net Assets

Presently nonprofits use three net asset classifications:

  1. Unrestricted
  2. Temporarily restricted
  3. Permanently restricted

The new standard replaces the three classes with two:

  1. Net assets with donor restrictions
  2. Net assets without donor restrictions

Terms Defined

These terms are defined as follows:

Net assets with donor restrictions – The part of net assets of a not-for-profit entity that is subject to donor-imposed restrictions (donors include other types of contributors, including makers of certain grants).

Net assets without donor restrictions – The part of net assets of a not-for-profit entity that is not subject to donor-imposed restrictions (donors include other types of contributors, including makers of certain grants).

Presentation and Disclosure

The totals of the two net asset classifications must be presented in the statement of financial position, and the amount of the change in the two classes must be displayed in the statement of activities (along with the change in total net assets). Nonprofits will continue to provide information about the nature and amounts of donor restrictions.

Additionally, the two net asset classes can be further disaggregated. For example, donor-restricted net assets can be broken down into (1) the amount maintained in perpetuity and (2) the amount expected to be spent over time or for a particular purpose.

Net assets without donor restrictions that are designated by the board for a specific use should be disclosed either on the face of the financial statements or in a footnote disclosure.

Sample Presentation of Net Assets

Here’s a sample presentation:

Net Assets
Without donor restrictions
  Undesignated $XX
  Designated by Board for endowment     XX
     XX
With donor restrictions
  Perpetual in nature     XX
  Purchase of equipmentXX
  Time-restrictedXX
XX
Total Net Assets$XX

Net Assets Released from “With Donor Restrictions”

The nonprofit should disaggregate the net assets released from restrictions:

  • program restrictions satisfaction
  • time restrictions satisfaction
  • satisfaction of equipment acquisition restrictions
  • appropriation of donor endowment and subsequent satisfaction of any related donor restrictions
  • satisfaction of board-imposed restriction to fund pension liability

Here’s an example from ASU 2016-14:

nonprofit statement of activities

Presentation of Expenses

Presently, nonprofits must present expenses by function. So, nonprofits must present the following (either on the face of the statements or in the notes):

  • Program expenses
  • Supporting expenses

The new standard requires the presentation of expenses by function and nature (for all nonprofits). Nonprofits must also provide the analysis of these expenses in one location. Potential locations include:

  • Face of the statement of activities
  • A separate statement (preceding the notes; not as a supplementary schedule)
  • Notes to the financial statements

I plan to add a separate statement (like the format below) titled Statement of Functional Expenses. (Nonprofits should consider whether their accounting system can generate expenses by function and by nature. Making this determination now could save you plenty of headaches at the end of the year.)

External and direct internal investment expenses are netted with investment income and should not be included in the expense analysis. Disclosure of the netted expenses is no longer required.

Example of Expense Analysis

Here’s an example of the analysis, reflecting each natural expense classification as a separate row and each functional expense classification as a separate column.

expenses by function and nature

The nonprofit should also disclose how costs are allocated to the functions. For example:

Certain expenses are attributable to more than one program or supporting function. Depreciation is allocated based on a square-footage basis. Salaries, benefits, professional services, office expenses, information technology and insurance, are allocated based on estimates of time and effort.

Intermediate Measure of Operations

If the nonprofit provides a measure of operations on the face of the financial statements and the use of the term “operations” is not apparent, disclose the nature of the reported measure of operations or the items excluded from operations. For example:

Measure of Operations

Learning Disability’s operating revenue in excess of operating expenses includes all operating revenues and expenses that are an integral part of its programs and supporting activities and the assets released from donor restrictions to support operating expenditures. The measure of operations excludes net investment return in excess of amounts made available for operations.

Alternatively, provide the measure of operations on the face of the financial statements by including lines such as operating revenues and operating expenses in the statement of activities. Then the excess of revenues over expenses could be presented as the measure of operations.

Liquidity and Availability of Resources

FASB is shining the light on the nonprofit’s liquidity. Does the nonprofit have sufficient cash to meet its upcoming responsibilities?

Nonprofits should include disclosures regarding the liquidity and availability of resources. The purpose of the disclosures is to communicate whether the organization’s liquid available resources are sufficient to meet the cash needs for general expenditures for one year beyond the balance sheet date. The disclosure should be qualitative (providing information about how the nonprofit manages its liquid resources) and quantitative (communicating the availability of resources to meet the cash needs).

Sample Liquidity and Availability Disclosure

The FASB Codification provides the following example disclosure in 958-210-55-7:

NFP A has $395,000 of financial assets available within 1 year of the balance sheet date to meet cash needs for general expenditure consisting of cash of $75,000, contributions receivable of $20,000, and short-term investments of $300,000. None of the financial assets are subject to donor or other contractual restrictions that make them unavailable for general expenditure within one year of the balance sheet date. The contributions receivable are subject to implied time restrictions but are expected to be collected within one year.

NFP A has a goal to maintain financial assets, which consist of cash and short-term investments, on hand to meet 60 days of normal operating expenses, which are, on average, approximately $275,000. NFP A has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, as part of its liquidity management, NFP A invests cash in excess of daily requirements in various short-term investments, including certificate of deposits and short-term treasury instruments. As more fully described in Note XX, NFP A also has committed lines of credit in the amount of $20,000, which it could draw upon in the event of an unanticipated liquidity need.

Alternatively, the nonprofit could present tables (see 958-210-55-8) to communicate the resources available to meet cash needs for general expenditures within one year of the balance sheet date.

Cash Flow Statement Presentation

A nonprofit can use the direct or indirect method to present its cash flow information. The reconciliation of changes in net assets to cash provided by (used in) operating activities is not required if the direct method is used.

Consider whether you want to incorporate additional changes that will be required by ASU 2016-18, Statement of Cash Flows–Restricted Cash. If your nonprofit has no restricted cash, then this standard is not applicable.

You can early implement ASU 2016-18. (The effective date is for fiscal years beginning after December 15, 2018.) Once this standard is effective, you’ll include restricted cash in your definition of cash. The last line of the cash flow statement might read as follows: Cash, Cash Equivalents, and Restricted Cash.

Effective Date of ASU 2016-14

The effective date for 2016-14, Not-for-Profit Entities, is for fiscal periods beginning after December 15, 2017 (2018 calendar year-ends and 2019 fiscal year-ends). The standard can be early adopted.

For comparative statements, apply the standard retrospectively. 

If presenting comparative financial statements, the standard does allow the nonprofit to omit the following information for any periods presented before the period of adoption:

  • Analysis of expenses by both natural classification and functional classification (the separate presentation of expenses by functional classification and expenses by natural classification is still required). Nonprofits that previously were required to present a statement of functional expenses do not have the option to omit this analysis; however, they may present the comparative period information in any of the formats permitted in ASU 2014-16, consistent with the presentation in the period of adoption.
  • Disclosures related to liquidity and availability of resources.

Using Adobe Acrobat to Convert Scanned Images to Readable Text

Some scanned documents are not searchable until optical character recognition is applied

Are you wondering how to convert scanned images into searchable text?

Some scanned documents (PDFs) aren’t searchable until optical character recognition (OCR) is applied.

In the video below, I show you how to convert a scanned document (PDF) into searchable text using OCR. But why would you do this?

Suppose you use your local scanner to scan a 100-page debt agreement. You do so because you desire to electronically search for the words “covenants” and “debt ratio.” Once you create the PDF, you hit “control F,” so you can search the document. But you get a message saying the document is not readable. What should you do? Convert the scanned pages to readable text using OCR. Then you can search for whatever words or phrases you wish. 

Once the scanned document is readable, use “control F” to activate the search box in Adobe Acrobat. Then enter the words you are looking for. This is so much easier than reading 100 pages and still not finding the information you desire.

College Aid Official Funnels Student Funds of $4.1 Million to Herself

Day 28 of 30 Days of Fraud

Theft from colleges happens more than we think. After all, aren’t these guardians tasked with looking after our children? Even in places where we expect unselfishness, sometimes there’s a bad apple. Today, we review a fraud involving a college aid official. 

The Theft

When I was a student at the University of Georgia, I needed every dollar I could find. I ate my share of cheap hamburgers and peanut butter sandwiches. In the summers, I scouted peanuts and cotton to make ends meet. So when I see a college aid official stealing student money, I wince.

theft from colleges

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A New York college aid administrator used a simple scheme to steal $4.1 million of student aid funds. How? She made out financial aid checks to nonexistent students and then endorsed them over to the name of an alias. The administrator set up a bank account in the name of the alias and deposited the checks into the bank account, allowing her to convert the checks to cash.

How long did the theft go on? Over ten years. The fraudster stole most of the money in the last two years of the scheme. As is often the case, the thief became bolder over time. 

How many fraudulent checks did she issue? Over 1,000, each to a different student.

How was the fraudster caught? A change in the accounting system required cross-referencing of financial records.

The Weakness

No one was comparing the checks written to student admission files. Legitimate students have admission and other information that can be used to verify the students’ existence.

The Fix

A person other than the financial aid administrator should compare the student name on the check to student files to verify the existence of the student. If this control can’t be performed for each disbursement, it should be performed on a sample basis, and the persons creating and signing the checks should know their work is being monitored.

This test could be performed by someone in the financial aid office or by an external professional such as a CPA or a Certified Fraud Examiner.

The college can request from the bank the endorsement side of the cleared checks. If the back side of the checks are obtained, then the endorsements can be examined for appropriateness.

Banks Not Providing Cleared Checks

In an effort to save money, some banks don’t provide cleared checks to their clients. And very few banks (if any) provide the copies of the back side of checks. From a fraud prevention perspective, this is not good. Why? Because checks and endorsements can’t be inspected for potentially fraudulent activity. At least periodically, request some endorsements and test those on a sample basis. (The bank may require you to pay for these copies.) Additionally, as I said in another post, someone should be comparing cleared check payees to the general ledger–if not for every check, then at least on a sample basis.

Free Fraud Course

Click here for free ten-day fraud course.

 

Nonprofit Embezzlers Sell Donated Goods for Millions

Day 27 of 30 Days of Fraud

Sometimes nonprofit embezzlers sell donated goods. Today, we examine how nonprofit employees can steal assets rather than cash and how you can prevent such thefts.

The Theft

Several workers at a California Goodwill pled guilty to taking over $15 million. Their scheme involved the selling of donated goods by the barrelful to private dealers who sometimes wheeled tractor trailers up to the rear of Goodwill stores.

nonprofit embezzlers sale donated goods

Picture is courtesy of AdobeStock.com

The dealers sold most of the goods in Mexico. The thefts–involving seven primary culprits, four of whom were sisters–occurred over a twenty-year period that started in the mid-70s.

So how were the fraudsters caught?

One culprit went through a bitter divorce, and the husband disclosed the scheme to authorities.

The Weakness

The article describing this case did not provide details of the store operations, but it appears–at the time–inventories of donated goods were not properly documented. When assets, of whatever form, are not inventoried, they are more likely to disappear.

The Fix

Account for all inventories. Also, clothing that is sold in bulk should be documented. So each time a truck backs up to a store, the activity should be recorded—who received the goods, the sales price, who approved the sale, why the goods were sold in bulk. The store should have a policy that cash is not to be received for such sales.

Consider adding a whistleblower hotline. Nonprofit employees sometimes see signs of theft. Make it easy for them to report fraudulent activity. Doing so creates the camera effect

Also, install a security camera that records all loading dock activity.

Note–This case was adjudicated in the 1990s, and Goodwill has, since that time, made significant improvements to its controls.

How to Convert and Combine Word and Excel Files into One PDF

Here’s a video demonstration of how you can convert and combine Word and Excel files into one PDF

Do you ever need to convert and combine Word and Excel files into one PDF? With Adobe Acrobat DC you can do so. Here is a video demonstrating how you can convert different types of documents into one PDF.

Do (Some) Librarians Steal? Yes (and With Vigor)

Day 26 of 30 Days of Fraud

Do some librarians steal? While most don’t, some do. Today we see that some guardians of knowledge take that which belongs to the general public.

I remember my childhood librarian, Ms. Adams. She was a lady of rectitude, dignity, and uprightness. Never one to harm or take from her patrons—or the library. Theft by her? Unthinkable. The memory of her colors, in a positive way, my view these public servants. But not every librarian is Ms. Adams.

Recently I spoke to about 50 librarians about fraud prevention and was shocked by their stories of thefts from libraries. It appears library fraud is alive and well in the United States. No place is immune. The following is a story of one such librarian, Bob Rice Jr.

librarians steal

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The Theft

Bob Rice Jr. served as the director of the Revere Public Library for twenty-seven years before he pled guilty to twenty counts of fraud and embezzlement. So, how did he steal?

Mr. Rice apparently could approve purchases by issuing requisitions and purchase orders. The library paperwork would reflect the acquisition of dictionaries, for example, but the real purchase might be a Rolex watch.

Rice also purchased items that appeared to be for the library such as computer software, but he would–after receiving the goods–sell them on eBay. Then, with the cash, he would purchase items for personal use.

Lastly, in some instances, he requested reimbursements for items he never received. Those reimbursement checks were cashed and placed in his bank account.

How Rice Used the Funds

And how was the money used?

Mr. Rice purchased personal items including:

  • A model of the Star Trek’s Starship Enterprise
  • A replica Tommy Sub-machine gun
  • Robo-Pets
  • A vacuum
  • A Leica camera
  • Star Wars collectibles
  • Rolex watch
  • An ice cream making machine
  • An elephant tusk sculpture

His total theft was estimated at $236,000.

The Weakness

And what internal control weakness allowed the theft? No one was comparing the purchase orders with the payments made or to cleared checks. (This same weakness allowed a $16 million theft from a bakery.) It also appears that Mr. Rice could issue purchase orders and sign checks.

The Fix

The person authorizing payment (e.g., issuing purchase orders) should not also make the payment. Supporting documentation (e.g., purchase requisition, purchase order, bids) should be provided to a second person for review. Thereafter, the reviewer can issue the check or authorize payment.

Check signers should not issue purchase orders. For instance, board members might sign the checks, while operating personnel request the purchase.

When possible, have a central receiving department. Goods received should be recorded upon receipt by a person that did not issue the purchase order. Why? Segregation of duties. One person authorizes the purchase and another receives the physical goods. Such a procedure makes it more difficult for someone to buy products and then sell them on websites such as eBay.

Finally, require appropriate documentation (e.g., invoice) for all reimbursements. A second person should approve these payments. The person buying the goods should not also approve the reimbursement payment.

What Happened to Mr. Rice?

Though he initially denied the charges against him, Mr. Rice pled guilty to 20 counts of fraud and embezzlement. He did provide $230,000 in restitution, which led to a reduction in his sentence. He received six months in jail. 

Nonprofit Fraud: Bid-Rigging, Kickbacks and Faulty Payments

Day 25 of 30 Days of Fraud

We sometimes think of nonprofit fraud as nonexistent. After all, these are the good guys. But today we see that nonprofit theft does occur–and to the detriment of those most in need.

The Nonprofit Fraud

We think of nonprofits as lovely places where only noble things happen. But some nonprofit leaders prey on not-for-profit entities, harming the very people the organization is designed to help.

One such nonprofit leader was charged with bid-rigging, receiving kickbacks, and making fraudulent payments to vendors.

Nonprofit fraud

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The Department of Justice charged a “former director of operations at…a Manhattan substance abuse treatment center, with bid rigging, conspiracy to defraud, and income tax evasion, in connection with a conspiracy to embezzle approximately $2.34 million from the organization over an eight-year period.”

The Department of Justice stated the charges stemmed from the director “conspiring with several outside vendors to rig bids and allocate contracts awarded by”  the nonprofit “for the supply of food, meat, health and beauty supplies, baby supplies, office supplies, printed materials, janitorial supplies, and medical supplies from 1990 until at least April 1998.” According to the charge, the director “steered nearly $10 million in contracts to those vendors.”

The director was charged with taking kickbacks totaling at least $364,000 in cash or goods and services from vendors to ensure receipt of contracts. 

The Department of Justice went on to say, the director and seven vendors embezzled at least $2 million from  the nonprofit “by issuing false and fraudulent purchase orders to each of the seven vendors, who in turn issued corresponding invoices for goods and services that were never delivered or provided.”

Later, the director pleaded guilty to bid rigging, fraud, and tax charges.

What was the harm to the nonprofit’s 600 substance abuse patients? Well, money that should have aided the needy went into the pockets of fraudsters.

The Weaknesses

The first weakness was having a leader who was concerned more about his wealth than the people he served. Auditors often refer to this as the tone at the top–it’s the ethical makeup of those in charge. COSO calls it the control environment. Without a positive, honest culture, fraud is more likely to occur.

The second weakness was the bidding process never happened. There’s a reason for bidding: It keeps everyone honest, and it ensures the lowest price for the organization.

The third weakness was a lack of accounts payable controls (or the circumvention of such policies, if they existed). Collusion between an organization’s leaders and vendors can wreak havoc. In such cases, the vendors send invoices, but no service or product is provided. Since someone in the nonprofit is approving the invoice (with knowledge the invoice is fictitious), there is no gatekeeper, no one to prevent the theft. The person approving the invoices is aiding in the fraud.

The Fixes

First, fire unethical leaders. Nonprofits can’t afford the reputational damage.

Second, solicit (real) bids. Sealed bids should be received and opened in a public meeting.

Third, ask board members to review and vet the nonprofit’s vendor list, especially those vendors receiving payments over a certain threshold (e.g., $50,000). Alternatively, ask your external or internal auditors to verify the work of key outside vendors.

How $16 Million was Stolen from a Bakery

Is it possible to steal over $16 million from a bakery? Today we see that large sums can be taken from a small, mundane business. And the scheme can be so very simple.

The Theft

Sandy Jenkins, the controller of Collin Street Bakery in Corsicana, Texas, made off with more than just fruitcakes. He took over $16 million, so says the FBI. And what did Mr. Jenkins do with the money?

He used the funds in the following ways:

  • $11 million on a Black American Express card
  • $1.2 million at Neiman Marcus in Dallas
  • 532 luxury items, including 41 bracelets, 15 pairs of cufflinks, 21 pairs of earrings, 16 furs, 61 handbags, 45 necklaces, 9 sets of pearls, 55 rings, and 98 watches (having an approximate value of $3.5 million)
  • Wine collection (having an approximate value of $50,000)
  • Steinway electronic piano (having a value of $58,500)
  • 223 trips on private jets (primarily Santa Fe, New Mexico; Aspen, Colorado; and Napa, California, among other places), with a total cost that exceeded $3.3 million
  • 38 vehicles, including many Lexus automobiles, a Mercedes Benz, a Bentley, and a Porsche
  • And more…

How the money was stolen

You might think that stealing $16 million would require an elaborate scheme. But did it? 

Here’s an example of his method: Jenkins would print a check to his personal credit card company, but he would void the check in the accounting system. (He still had the printed check.) Then, he would generate a second check for the same amount to a legitimate vendor, but the second check was never mailed. Next, Jenkins would send the first check to his credit card company.

The result: Jenkins’ credit card was paid, but the general ledger reflected a payment to an appropriate vendor.

$16 million stolen from a bakery

The picture is courtesy of AdobeStock.com

The Weakness

No one was comparing the cleared check payees to the general ledger. 

The Fix

Someone other than those who create checks should reconcile the bank statements to the general ledger. As they do so, they should compare the cleared check payees to the vendor name in the accounting system. Some businesses have hundreds (or even thousands of checks) clearing monthly. Therefore, they may not desire to examine every cleared check. 

Alternatively, the business could periodically sample the cleared checks, comparing the cleared checks to the vendor payments in the general ledger. The persons creating checks should know that this test work will be performed. Doing so creates the camera effect. When people know their actions (in this case, the creation of checks) are to be examined, they act differently–they are much less likely to steal.

If you desire a preventive control, you could require a second-person review of cancelled checks.

Lastly, when segregation of duties is not possible, have the bank statements mailed to someone outside the accounting department such as an owner. That person should review the cleared checks before providing them to the accounting department. Alternatively, provide online access to the reviewing person. The reviewer should examine the cleared checks and provide documentation of his or her examination to the accounting department.

What Happened to Sandy Jenkins?

Sandy Jenkins was sentenced by U.S. District Judge Ed Kinkeade to serve a total of 120 months in federal prison. His wife, Kay Jenkins also pleaded guilty to one count of conspiracy to commit money laundering. Ms. Jenkins was sentenced to five years probation.