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Monthly Archives: April 2015

New Issues to Consider in Business Interruption Risks by Daniel Hughes, CPA/CFF/CGMA

Posted on April 29, 2015 by Daniel Hughes

In today’s hyper-connected environment, businesses can no longer depend solely on their own staff and operational efficiency to achieve performance goals.  Rather, global businesses must rely increasingly on outside suppliers and other vendors, including parts manufacturers, distributors and call centers, whose products and services are critical to a business’s ongoing operation.  Should the vendor or supplier experience a disruption in its operations, due to fire, flood, natural disaster or utility service stoppages, the resulting interruption could foreseeably crimple the company that relies on it.  Moreover, today’s businesses face an increased risk of business interruption due to non-physical events, such as cyberattacks, which could impede a third party’s operations and bring the business to a halt.

 

To keep up with this changing risk environment, business should regularly reassess their business-interruption insurance policies.   How much coverage is enough depends on an entity’s business risk, the industry in which it operates and its reliance on third-parties to conduct its operations.  For example, a law firm is inherently less hazardous than a chemical manufacturer that handles flammable materials. Similarly, companies with geographically diverse facilities may also appear less risky to insurers than those with geographically concentrated facilities in areas prone to civil unrest or natural disasters.  However, a law firm will face significant business losses and reputational damages should the system it relies on for storing client files becomes the target of a cyberhack.

 

Recent data breaches at national retailers, banks and health care facilities demonstrate that no regulations or financial backing is enough to protect businesses from cyber threats.  In fact, despite 2014’s record number of data breaches, estimated at two per day, the number and sophistication of cyberattacks are expected to increase in the future.  This puts businesses in a very difficult predicament, not only with their customers, but with their vendors and suppliers as well.

 

According to insurance brokerage and risk-management firm Aon, the average cost incurred as a result of a data breach is $7 million in direct costs and damages, including business interruption costs and legal expenses.

 

No matter who or what triggers an interruption in business operations, calculating claims requires the same formula based on lost gross earnings.  These estimations will help businesses determine the coverage limits that are best suited to their needs.  Required premiums will depend on such factors as the amount of coverage the business seeks, the desired deductible and how much exposure to hazards the company faces, internally and externally, and how much risk it is willing to accept.

 

Should a business need to file a claim, it should do so with the goal of collecting 100 percent of a defensible claim rather than 50 percent of an inflated number.  Proper documentation and accounting procedures are key to defending claims and negotiating appropriate settlements.

 

The Forensic Accounting and Business Insurance Claims practices of Berkowitz Pollack Brant has more than three decades of experience helping Florida businesses prepare for and maximize financial recovery from insured perils.

 

About the Author: Daniel S. Hughes, CPA/CFF/CGMA, is a director in Berkowitz Pollack Brant’s Forensics and Business Valuation Services practice.  He can be reached in the CPA firm’s Miami office at (305) 379-7000 or via e-mail at info@bpbcpa.com.

Keeping Your Law Firm Safe from Cyber Threats by Martin Prinsloo, CPA, CISA, CITO, CFF

Posted on April 24, 2015 by Martin Prinsloo

According to a recent study conducted by risk-management firm Marsh, lawyers are not well prepared to protect against nor respond to data breaches. Despite the global rise in cyber attacks, almost three-quarters of law firms surveyed have not taken steps to assess the cost of a data breach. In fact, many law firms have already been hacked, unknowingly, exposing sensitive, privileged client records and creating a mountain of liability issues for the firm.

 

As is well known, attorneys have an ethical obligation to maintain client confidentiality. The information they are charged with protecting can include clients’ proprietary corporate information, including trade secrets, intellectual property and future offerings dates and details; as well as personal data, including inventories of assets, estate plans and financial accounts. In response to increasing cyber threats, the American Bar Association passed a resolution in 2014 encouraging “all private and public sector organizations to develop, implement and maintain an appropriate cyber-security program… tailored to the nature and scope of the organization and the data and systems to be protected, and…test a response plan” for possible and real data disclosures.”

 

In the current IT landscape, law firms cannot afford to ignore security threats nor avoid security audits to identify weaknesses in some of the most common sources of data breaches.

 

Employee Misuse

Insiders, including current and former employees, are, perhaps, the most dangerous threat to a law firm’s data security. These internal vulnerabilities often have unrestricted access to privileged information that could compromise sensitive data, cause the firm significant reputational harm an open it to the possibility of dangerous lawsuits. By establishing a system of policies and procedures with controls, checks and balances, and a hierarchy of data based of level of risk and sensitivity, law firms can mitigate the risk of insider misuse. Data should be accessible only on a “need-to-know” basis (based of employees’ roles within the firm), and there should be processes in place to revoke an employee’s access as quickly as possible, when needed. Moreover, these internal controls should be tested regularly to further ensure that established policies and procedures are enforced and followed.

 

Weak Passwords

One of the most common threats to any business’s IT security is a lack of strong passwords and authentication methods required to access data. Lawyers should consider using unique passwords, such as those that are eight characters or longer and that include a mix of upper and lowercase letters, numbers and special characters. Additional steps should be taken to avoid using the same password for multiple websites. Keeping passwords saved on a computer or written on a piece of paper do very little to enhance security. With a password manager, users can store login information securely on a desktop application and quickly recall credentials to enable access to a website or data. Many of these applications also offer password generators to help users create strong passwords that they may sync across all of their devices and that will alert users when they use duplicate passwords for multiple websites.

 

In addition, law firms should consider using two-step authentication to verify user access and provide an added layer of defense against data breaches.

 

Physical Theft of Laptops and Mobile Devices

The convenience of laptops and mobile devices comes with an equally threatening risk of theft. In the wrong hands, stolen devices can be hacked to reveal personally identifiable information and financial accounts of clients and firm employees. The result of such a disclosure could put the firm and its casework in jeopardy. Protecting against the theft or loss of mobile devices is not an easy task beyond tips such as never leaving devices unattended or installing applications, such as FindMyiPhone, to track a device’s location, when the device is turned on. Conversely, protecting data against unlawful access or accidental loss can be achieved easily when lawyers encrypt all of their devices, including laptops, tablets, smart phones and USB thumb drives.

 

Malicious Attacks, Intrusions and Malware

Web-based attacks on a firm’s servers and desktops result in the most costly breaches to data security. Moreover, these attacks often go unnoticed for weeks or months, during which time the costs of losses can rise dramatically. Relying on firewalls, patching software and keeping anti-virus software up to date, are good methods for maintaining strong perimeters. However, firm should also institute training programs to ensure employees understand and recognize the many ways in which they can enable and spread these attacks.

 

Presenting a strong defense against data breaches requires law firms to institute appropriate policies and procedures and teach staff at all levels of the organization about the importance of computer security. An investment in on-going training, testing and security audits will go a long way to keep data and devices safe and help firms uphold their reputations.

 

Berkowitz Pollack Brant’s Forensic Technology Services group has specialized experience and certification unraveling and analyzing electronic data used in forensic accounting, investigations and litigation. Firm members work with clients, including law firms, to assess IT environments and retrieve, preserve and testify regarding electronically stored information used in legal proceedings.

 

About the Author: Martin Prinsloo, CPA, CFE, CISA, CITP, CFF, is a member of Berkowitz Pollack Brant’s Forensic and Business Valuation Services team. He can be reached in the firm’s Miami office at 305-379-7000 or via email mprinsloo@bpbcpa.com

 

 

The Rise in Late-Life Divorces and Resulting Financial Impact by Sandi Perez, CPA/ABV/CFF, CFE

Posted on April 22, 2015 by Sandra Perez

According to a 2014 study by Bowling Green University’s National Center for Family and Marriage Research, the divorce rate for Americans over 50 has doubled since 1990.  For those over 65, the rate is even higher.  With this rise in graying divorces comes an assortment of unique challenges related to divvying up assets, including often-sizable investments and retirement plans acquired and allowed to grow during marriages span that spanned 20 years or longer.  Moreover, by this stage in a marriage, much of an individual’s business and personal matters are so closely intertwined that untangling them can be a difficult process.  This is especially true when considering the ease with which one may comingle and hide assets from a soon-to-be ex-spouse.

 

In many ways, the issues facing late-life divorcees are very similar to those experienced by their younger counterparts.  However, a couple’s age, health and even their grown children can negatively influence the divorce process and the way in which each spouse emerges from the dissolution of the marriage.  To protect the interests of both parties and ensure each leaves the marriage with their fair share of assets, couples should consider engaging professional counsel, including divorce attorneys, trust and wills attorneys and forensic accountants, to address the following issues specific to late-life divorces.

 

Retirement and Estate Plans

For older couples, the later in life their divorce, the less time they will have to recover financially.  In the current economic environment, it is common for one or both spouses to continue working past the age of retirement.  However, when a divorce occurs, the working spouse(s) often desire to retire, close shop or sell their businesses to enjoy their golden years.  The result of this will change each party’s future income and lifestyles significantly, with both sharing in reliance on Social Security, retirement assets and savings.

 

It is important that both parties have a clear understanding of how retirement and benefits plans were originally established and the tax consequences of keeping, selling or dividing those assets.  Legal and financial professionals should be engaged early to analyze each document carefully to determine the impact of distribution under various scenarios.

 

Similarly, older couples headed for divorce should collect their wills and estate plans and ensure their beneficiaries are up-to-date prior to filing.   It is important that they have their trust and estate lawyers work with their divorce lawyers at the beginning of the process, especially if the division of assets will result in a material changes to the wills.  Often, these changes do not occur until after the divorce is finalized and assets are distributed. However, due to the advanced age of a late-life divorcee, waiting to alter wills may not be the most prudent option.

 

Health

Due to the advancing age of late-life divorcees, there is an increased likelihood that one or both spouses will have health issues.  The divorce process can exasperate these medical matters and put additional stress on already fragile physical and emotional states.  It is important that divorcees be direct in disclosing illnesses with their legal and financial counsel and address the need for ongoing medical care in the divorce agreement.  When an individual enters into a divorce with a serious illness or develops one during the course of the divorce process, that party may push for bifurcation, in which the court dissolves the marriage, but the financial aspects of the divorce remain pending.

 

The Children

Unfortunately, the agenda of adult children who have sided with one parent influence the outcome of late-life divorces.  For example, there could be a new or long-standing riff between the children and one parent, or the children caring for one parent may resent the other’s lack of involvement in the daily routines of doctor visits, or they may disagree with the actions of the other parent.  In each of these cases, the children’s agenda drives the direction of the divorce negotiations and may lead to complications during settlement.

 

Remarriage

With an increase in gray divorces comes an equally growing rate of later-life remarriages.  When a late-life remarriage occurs, issues such as alimony from a prior spouse, inheritances and retirement and government benefits may make the road to happily-ever-after more complicated.   Prudent couples will consider prenuptial agreements to protect both parties and their heirs should the marriage end in divorce or death.  While open to later interpretation and attack, prenups will help to ensure that one enters into a new marriage with their eyes wide open to the other person’s assets and liabilities.  This will help both parties to build a strong foundation on which they may build a solid financial future.

 

The Family Law Services practice of Berkowitz Pollack Brant has extensive experience working with families, attorneys and the courts to simplify complex financial information prior to, during and after divorce. Its team of professionals helps to uncover hidden facts, value assets, develop case strategy and provide credible and reliable expert testimony at mediations, hearings and trials.

 

About the Author: Sandi Perez, CPA/ABV/CFF, CFE, is director of the Family Law Forensic Services practice with Berkowitz Pollack Brant.  She can be reached in the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000 or via email info@bpbcpa.com.

 

Florida Businesses Must File Annual Reports by May 1, 2015 by Angie Adames, CPA

Posted on April 21, 2015 by Angie Adames

The Florida Division of Corporations requires all businesses to file annual reports and pay a $150 fee, which may vary depending on the type of entity, to maintain active status with the Department of State.  Failure to file by the May 1, 2015, deadline will result in a $400 penalty imposed on all for-profit corporations, limited liability companies, limited partnerships, and limited liability limited partnerships.
To file an annual report and pay the required fee, Florida entities should visit www.sunbiz.orgor, if additional assistance is required, contact their tax consultants before the filing deadline.
About the Author: Angie Adames is a senior manager in Berkowitz Pollack Brant’s Tax practice.  She can be reached in the Miami CPA firm’s offices at (305) 379-3000 or via email at info@bpbcpa.com.

Buying or Leasing an Automobile in 2015? Know Depreciation Deduction Limits by Dustin Grizzle

Posted on April 20, 2015 by Dustin Grizzle

Each year, the IRS releases depreciation deductions limits for owners of passenger automobiles, trucks and vans first placed in service by the taxpayer during the calendar year as well as the amount to be included in income by lessees of passenger automobiles first leased during the calendar year.

 

For 2015, the dollar amount of the depreciation limitations for passenger automobiles placed in service during the year is $2,160 for the first year, $5,100 for the second tax year, $3,050 for the third year and $1,875 for each succeeding year. For trucks and vans, the depreciation limitations for the first three tax years are $3,460, $5,600 and $3,350 and $1,975 for each subsequent year.

 

For leased automobiles, trucks and vans, taxpayers face a reduction in the deduction allowed, which requires lessees to include in gross income an inclusion amount based upon the fair market value of the vehicles.

 

Additionally, taxpayers should be aware that due to Congress’s December extension of expired tax provisions retroactive to the beginning of 2014, they may take bonus depreciation on vehicles places in service in 2014.

 

Taxpayers considering buying or leasing passenger cars, trucks or vans in 2015 should meet with the tax advisors to plan appropriate strategies for maintaining tax efficiency during this calendar year.

About the Author: Dustin Grizzle is a senior manager in Berkowitz Pollack Brant’s Tax Services practice. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

 

Recognizing Fraud in the Construction Industry by Richard A. Pollack, CPA

Posted on April 17, 2015 by Richard Pollack

According to the Association of Certified Fraud Examiners’ (ACFE) 2014 Report to the Nations, fraud continues to plague the construction industry. Exacerbating the problem is a sector-wide failure to implement strong internal controls and reliable methods for detection, often due to the perceived expenses of such preventative measures. However, these expenses are, in reality, minor compared to the amount of monetary and reputational losses a business will suffer as a result of fraudulent activities.

 

The first step in stopping fraud in its tracks requires project owners, contractors, engineers and other involved parties to recognize the potential risks and common schemes at each level of the construction process. This includes looking within their own organizations, especially when considering that internal threats often pose the greatest risks.

 

For simplification, the construction process can be separated into four phases: design, bid, build and completion. Depending on the size and complexity of a project, each stage comes with its own set of schemes, which may be difficult to spot to the untrained eye.

 

Design Phase

The design phase is of paramount importance in establishing the scope and budget of any given project. Inaccuracies can result in change orders, cost increases and delays to completion.

 

A common example of design-phase fraud involves the overestimation of costs for labor and materials. These schemes help perpetrators create an environment that facilitates their ability to commit theft and receive kickbacks from suppliers. Other fraudulent activities can include the manipulation of project specifications and use of bribes to influence the construction process and favor one contractor over another.

 

Bid Phase

The bidding process is intended to be a fair and competitive method for selecting the most efficient proposal from a pool of contractors. The criteria for awarding a contract may be based on costs as well as a firm’s reputation and ability to complete the work. However, during this phase, perpetrators may attempt to manipulate or influence the bidding process through a variety of measures, including collusion, kickbacks and bid-rigging schemes.

 

Red flags that may point to fraudulent bidding activities include:

 

  1. The same contractors rotating between high and low bids on different projects
  2. Bid prices fall after the introduction of a new competitor
  3. A winning bidder subcontracts work to a losing bidder
  4. A winning bidder submits excessive change orders after receiving the contract award

 

One way to help deter and prevent these schemes is to segregate the duties of the individuals involved in the bidding process. For example, owners may assign to one individual the task of developing the bid package of project details and another person to select the winning bid. Additionally, developers and owners may open the bidding process to a larger pool of contractors in order to mitigate the risk of bidding fraud.

 

Build Phase

The regular monitoring of construction progress helps to ensure that costs and timelines detailed in building contracts are on track and to address any challenges or disputes that may occur. In the building phase, fraud can occur when contractors overbill for labor and materials or bill for materials that are neither required nor received. Other risks can include theft of company assets and excessive requests and approvals of change orders.

 

Another area rife with fraud involves quality control, including the use of subpar materials and counterfeit parts, which can compromise the integrity and safety of a project. Threats can include collusion between contractors and inspectors, poor workmanship and the exchange of subpar project materials with those that contractors know will pass quality-control tests. Unfortunately, poor quality control often goes unnoticed until long after construction is complete. To mitigate this risk, project owners may consider hiring an independent company, without the knowledge of project contractors, to test and ensure quality standards are met.

 

 

Completion Phase

Despite the established processes intended to certify that projects comply with building codes and other regulations throughout the construction process, fraud can and often does occur before final delivery. Criminal activities may include inspector bribes, kickbacks from contractors to owners’ representatives and the failure of contractors to report discounts or rebates they received working on the project. Because these criminal activities are often identified after a project is complete, it is important for project owners and contractors to have appropriate controls in place at the time of contract to limit their exposure to these risks.

 

Right to Audit Remedy

To help deter and even prevent fraudulent activities from occurring throughout any stage of the construction project, owners should consider including right-to-audit clauses in their contracts.   These clauses aim to ensure compliance with contractual obligations and allow owners to specify how they expect contractors to use funds and maintain financial records, which the owner may audit at any time. In addition, such language lets contractors and subcontractors know that owners intend to monitor their activities and take the appropriate steps to identify, investigate and prosecute fraudulent schemes.

 

Rather than accepting fraud as a common business hazard, project owners, contractors and all involved parties should instead recognize that these activities and resulting losses are preventable.

 

The professionals with the Berkowitz Pollack Brant’s Forensic and Business Valuation Services practice work with owners, developers, contractors and other parties in the construction industry to mitigate risks and assist through each phase of the construction process. Their accounting and advisory services help to enhance cost-beneficial internal controls, ensure contracts contain appropriate wording and safeguards, and facilitate accurate and proper management reporting. Additionally, when claims of fraudulent activities arise, they lead investigations and provide expert testimony in related litigation engagements, as needed.

 

About the Author: Richard A. Pollack, CPA, ABV, CFF, PFS, ASA, CBA, CFE, CAMS, CIRA, CVA, is director-in-charge of the Forensic and Business Valuation Services practice with Berkowitz Pollack Brant.  He can be reached in the CPA firm’s Miami office at 305-379-7000 or via email at info@bpbcpa.com.

 

 

Doing Business Overseas? Know Changes in IRS Reporting Requirements by James W. Spencer, CPA

Posted on April 14, 2015 by James Spencer

To conform with provisions of the Foreign Account Tax Compliance Act (FATCA), the IRS introduced new reporting guidelines for U.S. companies doing businesses with foreign contractors in 2015.

 

Effective January 1, 2015, IRS Form W-8BEN-E replaces Form W-8BEN for taxpayers making fixed and determinable, annual and periodic payments to foreign financial institutions (FFIs)  and other foreign entities.  The eight-page form allows foreign entities to demonstrate their foreign-tax status and to substantiate and certify claims for reduced rates of withholding under a tax treaty or a FATCA Intergovernmental agreement.

 

Among the challenges included in the new BEN-E form, is the selection of an entity’s FATCA status, also known as Chapter 4 status.  An entity must make the selection on line 5 of the form, only if it is “the payee of a withholdable payment or is documenting the status of an account it holds with an FFI requesting this form.”  Withholdable payments include:

 

  1. Any payment of interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, if such payment is from sources within the United States, and
  2. Any gross proceeds from the sale or other disposition of any property of a type that can produce interest or dividends from sources within the United States (excluding payments for services) starting January 1, 2017.

 

U.S. source payments for services performed outside of the U.S. generally are excluded from withholdable payments.  One’s failure to withhold appropriately can result in a significant tax liability.  Payors unsure of whether or not withholding is required should err on the side of caution and withhold or ask questions and seek the counsel of experienced international tax advisors.

 

About the Author: James W. Spencer, CPA, is a director in Berkowitz Pollack Brant’s Tax Services practice.  He can be reached in the Miami CPA firm’s offices at 305-379-7000 or via email at info@bpbcpa.com.

The Tax Benefits of Adoption by Joanie B. Stein, CPA

Posted on April 12, 2015 by Joanie Stein

According to the IRS, growing one’s family through adoption may provide adoptive parents with a tax credit or an opportunity to exclude some of their income from taxes. The exclusion only applies when the adoptive parents received assistance from their employers to pay for the adoption through a written qualified adoption assistance program.

 

The maximum exclusion and non-refundable credit for 2014 is $13,190 per eligible child who is under 18. Both the credit and exclusion are subject to income limitations, which may reduce or eliminate the amount one can claim.

 

To qualify for either the credit or exclusion of income from taxes, adoptive parents must incur reasonable and necessary expenses, such as adoption fees, court costs, attorney fees and travel, that are related directly to the adoption of a child. Special rules apply when adopting a child who is mentally and physically unable to care for him/herself. In these instances, adoptive parents may take the tax credit even if they did not pay any qualified adoption expenses.

 

While adoptive parents may claim both the tax credit and exclusion, they may not do so for the same expenses. Moreover, if adoptive parents receive a credit that is more than their tax, they may not get any additional amount as a refund. However, in these situations, taxpayers may carry forward any unused credits from the prior year to reduce their taxes in the following five years until they fully use the credit, whichever comes first.

 

About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice. She can be reached in the firm’s Miami office at 305-379-7000 or via email at info@bpbcpa.com.

 

Why Paper is Passé and E-Filing is in when Filing Your Tax Returns by Kenneth J. Strauss, CPA/PFS, CFP

Posted on April 06, 2015 by

 

Paper is out and electronic filing is in for the 2014 tax season. According to the IRS, e-filing tax returns provides taxpayers with the following benefits:

 

  1. Security. E-filing relies on secure encryption technology that protects taxpayers’ sensitive and personally identifiable information, including social security numbers and financial accounts.
  2. Easy and Convenient. Filing returns electronically eliminates the need to search for a large envelope and costly postage. Moreover, the e-filing software provides an extra level of assurance that returns are free of errors.
  3. Payment flexibility.  Using the IRS’s e-file enables taxpayers to schedule an automatic payment of tax liabilities directly from their bank accounts before the April 15 deadline. Users can also pay due taxes online via debit or credit card.
  4. Faster refunds.  With no forms to mail and the ability to have refunds deposited directly into taxpayer’s bank account, e-filing speeds up taxpayers’ receipts of tax refunds. In most cases, the IRS issues refunds in less than 21 days.

 

In addition to e-filing, taxpayers should work with an accountant that offers secure electronic exchange of tax-related documentation. By maintaining a password-protected portal, firms such as Berkowitz Pollack Brant Advisors and Accountants enable clients to securely store and gain convenient access to proprietary records, including large QuickBook files and scanned receipts and tax forms, 24-hours-a-day, seven-days-a-week in perpetuity.

 

About the Author: Kenneth J. Strauss, CPA/PFS, CFP, is director of the Taxation and Personal Financial Planning practice with Berkowitz Pollack Brant. For more information, call (954) 712-7000 or email info@bpbcpa.com.

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