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A recent article in The Wall Street Journal  ("When You're Most Vulnerable to Fraud" by Rob Johnson) told the stories of two small businesses that were victims of employee fraud. One was a $10 million manufacturing concern in Salem, Va whose chief operating officer pocketed over $300,000 that was supposed to go to the IRS to cover payroll taxes. The other was a $6 million videoconferencing company in Memphis, TN that was the victim of a bookkeeper who stole over $260,000 in the form of bogus bonuses and commissions. In both cases, the business owners were experiencing rapid growth with record sales at the time of the fraud. As the article points out, small business owners are at the most vulnerable to employee fraud when times are great and they have less time to focus on the company's finances and administration, oftentimes relying on one key individual for these tasks.

In his book, The Danger Zone, Lost in the Growth Transition, Jerry Mills, founder and chief executive officer of B2B CFO Partners, devotes two chapters to the problem of employee fraud, describing many instances of employee theft that he has dealt with over the years. Most of these cases were aided by the business owner unintentionally placing the employees in a position to steal from the company due to concentration of duties and a lot of trust put in one person.

Embezzlement is a big problem for small business. The Association of Certified Examiners (AFCE) reports that 31% of all business frauds nationally were in companies wih fewer than 100 employees with another 23% happening in companies with under 999 employees. Additionally, the losses tend to be larger in small companies ($150,000) than in large($84,000), more than likely due to less formal financial controls.
So what can a small business do to mitigate the chances of employee fraud? While there is no "silver bullet" to completely eliminate the chances of fraud, there are ways to prepare a strategy to help reduce or minimize fraud in a company. The AFCE offers the following tips:

  - If you're delegating responsibility for accounts receivable and accounts payable, don't put the same person in charge of both, even if that means you have to hire and additional employee.

  - Be aware of employees who are involved with your coampny's finances and never take time off. Embezzlers rarely take vacations for fear their theft will be discovered by someone filling in.

  - One common internal fraud is kickback's involving vendors, so stay alert to unusually close relationships between employees responsible for finances and suppliers and customers.

  - Be the first person to open your monthly business bank statements. Even if you don't have time to examine them closely, your attention sends a strong message. When reviewing your bank statements, take a look at the actual canceled checks to confirm where the money actually went.

  - Look at receipts for deposits of both federal and state taxes.

  - Maintain an open-door policy that encourages employees who have suspicions about misappropriations or questionable spending to tell you in confidence.

Additionally, I would recommend small businesses to have a seasoned senior-level executive watch over the shoulder of their controller or other employees responsible for the company's finances. This person should visit the business at least once per month to look into the computer system and look at the details of the financial statements and just walk around the building or plant to see what is happening with the company. The business owner should meet regularly with this person to receive input as to what is happening with the business. The accounting and other staff should be told that this professional is looking over things on a regular basis. This should help reduce the temptation to steal.

Finally, the business owner should be a positive role model, setting the tone for integrity, trust, ethical behavior and equitable management. Business owners should not give their employees an excuse to be dishonest or unethical because they perceive the owner acts that way by taking company cash without proper documentation. Owners that operate under the adage that "This is my company and my money, and I will use it as I see fit" may find themselves in a situation where the old saying of "perception is reality" comes true. Business owners should not want a negative perception to become reality and should set the right example and be the leaders that people can look up to and respect at all times.


 
     

The NFIB Research Foundation released a report this month titled Small Business Credit In A Deep Recession. The report presented relevant data obtained from a random sample of 751 interviews of small business owners (small business was defined as businesses with 1 - 250 employees) pertaining to small business credit access.The interviews were conducted from mid-November to mid-December 2009.  Some of the findings of the study were as follows:

 - 55% of small businesses attempted to borrow in 2009, with 40% of those having all of their credit needs met. 10% had most of their needs met and 21% had some of their needs met. 23% were unsuccessful in getting any of their credit needs met. The most common planned purpose for rejected credit was to fill cash flow needs.

 - In 2009, these least difficult type of credit to obtain was a credit card (73% successful) while a new credit line was the most difficult type of credit to obtain (38% successful).

 - The best predictors of success in meeting credit needs were: higher credit scores, customers of banks with less than $100 billion in assets, more properties collateralized for business purposes, and fewer second mortgages held.

According to The Wall Street Journal, the FDIC recently reported that in 2009, U.S. banks recorded their sharpest decline in total loans outstanding since 1942. Also, the number of U.S. banks at risk of failing hit a 16-year high of 702 and more than 5% of all loans were at least three months past due, the highest level recorded in the 26 years the data have been collected. The FDIC expects these problems to last through 2010.

So will the small business credit enviornment significantly improve anytime soon? Probably not. But that doesn't mean it is impossible for small businesses to obtain credit. The NFIB study indicated that small businesses were having greater success in satisfying their credit needs at smaller banks as opposed to the 18 largest institutions in the country. This may be a result of the more personal relationship the smaller banks have with their customers and personal knowledge of their businesses as opposed to the large banks' credit scoring models. If the President's proposed Small Business Lending Fund legislation is enacted, the credit opportunities at the smaller banks could improve even more.

If in the market for new credit in 2010, small business owners should first develop a quality relationship with their banker before the new credit is needed. Meet them in person, explain to them what you do, where you are going, and how you are going to get there. Show your enthusiasm regarding the prospects for your business. When it comes time to request the new credit, be prepared! Know how much credit you need, what it will be used for, and how and when  it will be paid back. Credit will be available, the key is positioning the business to be successful with its request . A solid business plan coupled with a little advanced preparation can make obtaining new credit in 2010 a reality.



    

The President has called on Congress to create a new Small Business Lending Fund that will transfer $30 billion from the Troubled Asset Relief Program (TARP) to this new program to support small business lending. The proposal would be to use the Small Business Lending Fund to offer government capital investments to community and smaller banks with an incentive structure to support new small business lending.
The program would be available only to banks with assets under $10 billion. The theory behind this is that these banks conduct the highest percentage of their lending to small business, accounting for 50 percent of all small buiness loans nationwide while making up only 20 percent of all U.S. bank assets. According to the Independent Community Bankers of America (an advocacy group for the nation's nearly 8,000 community banks), over 98% of the nation's banks have assets of $10 billion or less. The new program would be separate from the TARP program to encourage greater participation, since the banks would not face the notorious TARP restrictions such as limits on executive compensation and dividend payments, as well as requirements that TARP banks give stock warrants to the Treasury.

With the core function of the new Fund being to offer capital to qualifying banks with incentives to increase small business lending, the proposal is structured to entice banks to increase lending immediately. The government capital would come with  an initial dividend rate of 5%. By increasing their small business lending over 2009 levels over the next two years (on the basis of new lending beginning January 1, 2010), banks could receive a 1 percentage point decrease in their dividend rate on the capital for every 2.5% increase in business lending, down to a minimum dividend rate of 1%. Banks would realize this reduction in dividend rate sooner if they make early, but consistent progress towards increased lending. After 5 years, the dividend rate would be increased to encourage timely repayment. 

Banks would be eligible to receive up to 3 - 5% of risk-weighted assets in capital investment from the new Fund. Banks with less than $1 billion in assets would be eligible for up to 5% of their risk-weighted assets and banks with $1 - 10 billion in assets would be eligible for up to 3%.

The Administration is counting on the Fund's $30 billion to be leveraged by the participating banks when increasing lending, resulting in new lending amounting to several times over the $30 billion in capital provided to the banks.

Will the new fund get through Congress? If so, will banks participate? Is the demand there for quality small business lending amidst a weak economy? Time will tell, but one thing is for sure--to have a chance for a real impact, the Fund needs to be put into place quickly.

The aforementioned Independent Community Bankers Association (ICBA) issued a news release on February 2, 2010 supporting the Small Business Lending Fund proposal stating that " this new $30 billion small business fund would help small businesses fuel local job creation and economic stability. In fact, every dollar of capital that goes into community banks has the potential to be leveraged eight to ten times--a substantial and positive impact for both small businesses and our communities". 
It should be well worth the time of Main Street America to follow the developments of this new plan.

Sen. Max Baucus, chairman of the Senate Finance Committee recently released a detailed summary of its much anticipated version of healthcare reform. Dubbed America’s Healthy Future Act of 2009, the proposal is a 10-year program estimated to cost $856 billion paid for with $507 billion in cuts to government health programs and $349 billion in new taxes and fees. The bill does not include a government-run insurance option but does include a system of nonprofit member-owned cooperatives.  Some of the items in the bill affecting small and mid-sized businesses include:

1.       Qualified small employers (i.e. an employer with no more than 25 fulltime equivalent employees employed during the employer’s taxable year, and whose employees have annual wages averaging no more than $40,000) would receive a tax credit for purchasing health insurance for its employees. The full credit would be available only to employers with 10 or fewer FTEs with average annual wages of less than $20,000.

Phase I of the credit would be for tax years 2011 and 2012 and employers would need to contribute at least 50% of the employee’s health premium (or 50% of a small business bench mark premium, if lower). The credit would be 35% of the employer’s contribution.

After 2012, Phase II of the credit would only be available for a small employer that purchases health insurance coverage for its employees through a newly created state exchange in which all private insurers in the individual and small group markets will be required to participate. Again, the employer must contribute at least 50% of the premium; however the credit will be 50% of the employer’s contribution. The credit would last for two years.

The employer’s expense deduction for health insurance premiums paid would be reduced by the amount of the credit. Self employed individuals, including partners and sole proprietors, 2% shareholders of an S-Corp and 5% owners of a C-Corp would not be treated as employees for the purposes of this credit.

2.       Employers with 200 or more employees would be required to automatically enroll employees into health insurance plans they offer. Employees may opt out, but they must demonstrate that they have coverage from another source. States (with the approval of the Secretary of HHS) would have the option of establishing an auto-enrollment requirement for individual and small group markets.

3.       An employer would not be required to offer health insurance coverage, however all employers with more than 50 employees that do not offer coverage would be required to pay a fee for each employee who receives a tax credit for health insurance through a state exchange. Credits would be available to employees with modified adjusted gross income up to 300% of the federal poverty level. For each full-time employee enrolled in a state exchange and receiving a tax credit, the employer would be required to pay a flat dollar amount set by the Secretary of HHS equal to the average tax credit in the state exchanges. The assessment would be capped at $400 per all employees at the company.

4.       Beginning in 2013, an excise tax would be imposed on insurers if the aggregate value of employer-sponsored health coverage for an employee exceeds $8,000 for individual coverage or $21,000 for family coverage annually (amounts indexed to CPI ).  The employer would be responsible for reporting to the insurer the amount taxable to the insurer under this provision and will be subject to penalties for under reporting the liability. There is a good chance that this excise tax would be passed back to the insured company in some form by the insurer.

5.       Employers would be required to disclose the value of the benefit provided by the employer for each employee’s health insurance coverage on the employee’s annual W-2.

6.       Effective in 2010, the cost of over-the-counter medicine (other than doctor prescribed) would no longer be eligible for reimbursement through a Health Flexible Spending Account (FSA) or a Health Reimbursement Account (HRA). Also, salary reductions by an employee for a taxable year for a Health FSA will be limited to $2,000.

7.       For Form 1099 reporting, the bill would eliminate the exception for payments to corporations. Also, the class of payments with respect to which reporting is required would be clarified to include gross proceeds for property as well as services. This appears to effectively require reporting on all expenditures except for those to exempt or governmental organizations, international organizations and retirement plans.

The Senate Finance Committee will vote on this bill possibly as early as next week.

A recent article in The Wall Street Journal called attention to the constant problem for business owners of employee theft. The article noted that employee fraud tends to rise during tough economic times when employees are feeling financial pressure in their personal lives. With a lack of sophisticated internal controls, small companies are especially vulnerable. Often, affected business owners are in a complete state of denial, attributing a decrease in funds to lower sales.

In our book, The Danger Zone, Lost in the Growth Transition, author and B2B® founder Jerry Mills devotes two chapters to this subject. B2B® partners often find that many business owners unintentionally place their employees in a position to steal from the company by giving them almost total control over the company's finances and having absolute trust in them.

The book describes an actual situation Jerry encountered with one of his clients involving a controller who, over the course of a decade, had stolen over $1,000,000 from the company. The theft was nothing elaborate, but the controller had major responsibilities and had the complete trust of the owner. The company also had an independent CPA firm issue quarterly unuadited reviewed financial statements which gave the owner a certain amount of comfort related to the company's cash and inventory.  The controller wrote checks to herself in amounts of $6,000 - $8,000 per month and coded them to cost of goods sold. With her responsibilites and the company's lack of internal controls,  the theft was easy to hide from the owner. Subsequent to the discovery of the theft, the owner sold the company's assets to an out-of-state buyer and most of the company's 150 employees lost their jobs.

A recent survey by the Association of Certified Fraud Examiners found that  the  top five methods of employee fraud schemes at companies with fewer than 100 employees involved: Billing (28.7%), Check tampering (25.4%), Corruption (23.1%), Theft of cash before it's recorded on the books (20.8%) and Expense reimbursement (15.5%).

Who is watching your controller (or bookeeper, finace manager, etc. - whatever you case may be)? Often business owners are not trained to catch fraud committed by employees or are simply too busy to focus on the issue. Sometimes it is just a state of denial. Do not rely on you CPA firm's audit or review procedures to detect employee fraud as these engagements are not designed for that purpose.

As a business owner, be alert to signs of a possible problems such as employees who appear to be living beyond their means or who never take a vacation or who guard access to the accounting system. Business owners should also review all cancelled checks and look at the endorsement on the back. It's also a good idea to review the bank statement each month paying particular attention to transfers.

Often, time will not allow a business owner to properly oversee the financial functions of their business. A better solution would be to engage a senior-level executive to watch over the shoulders of your controller, allowing him or her to come into your place of business at least once a month to look into the computer system and look at the details of the financial statements. By letting your staff know that this process is in place, any temption to steal should be reduced.

No process can guarantee complete elimination of employee fraud, however there are steps that you, the business owner, can take to minimize the chance of fraud in your company. The partners of B2BCFO® are available to assist you to develop those steps.

You may think as a small business owner that the resurrection of the "Employee Free Choice Act" (which passed the U.S House of Representatives in 2007, but was defeated in the Senate) would not affect you--think again. Unions spent record amounts during the 2007 election season to elect more allies in Congress and are now looking for a return on their investment, passage of the Employee Free Choice Act. At the heart of this Act is the so-called "card-check" legislation which would make it much easier to organize and unionize your workforce.

Under the card-check method, a union collects "authorization" cards from employees and independent contractors in any manner it sees fit for as long as it takes to get 50% plus one. Obviously, the possibility of harrassment, misinformation and intimidation to get these signatures is present. Under current law, employers may voluntarily recognize the card-check method, but they also have the option of choosing a secret-ballot election overseen by the National Labor Relations Board (NLRB). Under the proposed legislation, the choice would rest only with the unions. With unions winning about half of all private ballot elections while successful on 90% of all card-check campaigns, there is not much doubt which election method they would use.

How would the Employee Free Choice Act affect your business? According to a recent article in  National Federation of Independent Business (NFIB) publication My Business, small business owners should be aware of the following:

1. There are no size exemptions for small business - Small businesses are less likely to have labor counsel, making them possibly better targets for unions. The NLRB's statistics for the fiscal year ending September 30, 2005 reveals that 20% of the private-ballot elections they conducted that year involved organizations with fewer than 10 employees and 70% involved organizations with fewer than 50 employees.

2. There is no time limit on card collection - The union can hold cards until they get 50% plus one, regardless of how long it takes.

3. You may never know your business is being organized until it's over - The organization effort could be conducted completely underground without your knowledge. Even if you did find out, employers would be under major restrictions about what they could say during the union organization drive.

4. Right-to-work states offer no protection from card checks - The Employee Free Choice Act would preempt state law.

5. Independent contractors are fair game in card collection - Under the proposed legislation, independent contractors can count toward a majority of workers necessary to unionize a business.

Business owners should stay abreast of the developments in this legislation and contact their legislators regarding their opinions.

A long-standing struggle between the IRS and business taxpayers could get a bit dicier next year with the new increased Democratic majority in Congress and the Obama administration possibly set to change the law related to proper worker classification.

Last year, President-elect Obama introduced a bill in the Senate (S.2044: Independent Contractor Proper Classification Act of 2007) that would eliminate the safe harbor defense of "industry practice" as a justification for classifying workers as independent contractors. Under current law, a business may be able to treat a worker as an independent contractor if it can demonstate that it is a long standing industry practice to treat the worker's position as an independent contractor and the business did not treat any worker in the same position or a substantailly similar job position as an employee and the business filed all federal tax returns and information returns (including Forms 1099) for the year consistent with its treatment of the worker as an independent contractor.

The bill would also require the Secretary of the Treasury to establish a procedure for workers to petition for a determination of their status as employees or independent contractors and prohibit employers from retaliating against workers filing a petition. Additionally, the bill would require a workplace notice informing workers of their right to seek a status determination and would require employers to notify their independent contractors of their federal tax obligations.

House members Jim McDermott (D-WA) and Richard Neal (D-MA) introduced similar legislation this year stating they would try to push the measure early next year as one of the first orders of business after a stimulus package. This bill would go even further than Obama's Senate bill by levying an additional $10,000 fine per misclassified worker.

Since 1988, the IRS has engaged in an aggressive payroll tax collection program for determining a worker's classification. Estimates of federal revenue loss attributed to worker misclassification have been as high as $4.7 billion a year.

Businessowners should pay close attention to the developments in this issue as the tax bill for misclassified workers could be substantial. The total additional tax costs incurred (including penalties and interest) are commonly double the amounts potentially saved by claiming independent contractor status.

In light of the recent debate over fair value accounting and to what extent it contributed to the current financial crisis, below is a quick summary of the basics of the concept. 

Fair Value Basics Explained*

• What is fair value accounting? Fair value accounting, also called "mark-to-market," is a way to measure assets and liabilities that appear on a company's balance sheet and income statement. Measuring companies' assets and liabilities at fair value may affect their income statement. SFAS 157 was issued in 2006 by the Financial Accounting Standards Board (FASB) effective for fiscal year 2008. SFAS 157 defines in one place the meaning of "fair value."
  
  
• Why is it important today? Huge losses reported by financial firms on subprime assets have led to a debate over the implementation of SFAS 157 in circumstances where markets collapse and price inputs aren't readily available.  In the current crisis, banks and investment banks have had to reduce the value of the mortgages and mortgage-backed securities to reflect current prices.  Those prices declined severely with the collapse of credit markets as mortgage defaults escalated.
  
  
• What is FASB? FASB is the independent U.S. accounting standard-setting body based in Norwalk, Conn., that sets U.S. generally accepted accounting principles used by all U.S. publicly-traded companies.   
  
  
• How does mark-to-market work? SFAS 157 provides a hierarchy of three levels of input data for determining the fair value of an asset or liability.
  • Level 1 is quoted prices for identical items in active, liquid and visible markets such as stock exchanges.
  • Level 2 is observable information for similar items in active or inactive markets, such as two similarly situated buildings in a downtown real estate market.
  • Level 3 are unobservable inputs to be used in situations where markets don't exist or are illiquid such as the present credit crisis. At this point fair market valuation becomes highly subjective.
  
  
• What does SFAS 157 apply to? The fair value accounting standard SFAS 157 applies to financial assets of all publicly-traded companies in the U.S. as of Nov. 15, 2007. It also applies to non-financial assets and liabilities that are recognized, or disclosed, at fair value on a recurring basis. Beginning in 2009, the standard will apply to other non-financial assets. SFAS 157 applies to items for which other accounting pronouncements require or permit fair value measurements except share-based payment transactions, such as stock option compensation.

As reported in The New York Times this week, the Securities and Exchange Commission this week issued an interpretation of SFAS 157 that could make it easier for banks to report smaller losses. Basically, the interpretation gives banks more leeway in using the more favorable Level 3 approach to value securities instead of Level 2 in the case of an inactive market that consists of only "forced or disorderly" transactions.

The move by the SEC drew priase from the American Bankers Association, which had complained that auditors were forcing banks to value assets at unrealistically low "fire sale" prices, rather than at the higher values the banks believe the assets should be worth in an orderly market.

Some congressmen had pressed to order a suspension of the fair-value rule as part of the bailout bill that the House defeated earlier this week but may be revived later in the week. That bill stopped short of that, but did require a study of the rule and authorized the SEC to suspend it.

* Source: The American Institute of Certified Public Accountants

  For business owners, much of the future success they will achieve or the future pain they will feel or the results of the future exit strategy from the company will be predicated by how well they are able to manage the time of all those who work within their organization. Consequently, this graph will be very important to an entrepreneur as their company grows: 

 
Nationwide, B2B CFO® observes that too many business owners feel they are pulled down into administrative (minding) tasks, which take them away from their finding activities and the ability to grow the company and to stay ahead of the competition.
 
Our firm helps identify the roles of people within organizations like "Finders, Minders or Grinders". Our philosophy is documented in The Danger Zone, Lost in the Growth Transition, by Jerry L. Mills, the Founder & CEO of B2B CFO®. The brief excerpts below from the book will help explain some of our consulting philosophy.
 
  Finders (Business Owners) Live in the Future   
"Finders are the leaders of the company. They are not necessarily the people who lead all company employees on a daily basis. Finders demonstrate the type of leadership that 'pulls' people into the future - employees, current customers and future customers."
 
"A good Finder spends most of his or her time building relationships and 'pulling' others into the Finder's future. The success of any company is due to the relationships that the Finder is able to make with others. Building relationships takes time and is typically the best time the Finder can spend in helping a company succeed. Show me a Finder who will spend 30 to 40 hours a week in finding activities and I will show you a company that will have significant increases in sales in the future. Conversely, show me a Finder who stops spending time in finding activities and I will show you a company that is starting the inevitable cycle of getting into financial trouble."
 
Minders Live in the Past  
"Minders are the key administrative people of the company. A Minder may be the company's controller, bookkeeper, finance manager, CFO, IT Director, IT Manager, etc."
"Finders typically do not have the accounting, IT or other background to work extensively in minding activities. By nature, Finders detest this work. They resent the fact that they have to spend their time in countless meetings, working on cash flow, hiring and firing people, meeting with accountants, attorneys, bankers, etc."
 
Grinders - Today is all that Matters
"Grinders are people who do the physical work of the company. In a manufacturing company, the Grinder is the person who makes the widgets. The people making the phone calls are the Grinders in a telemarketing company. The Grinders put the cars together in an automobile manufacturing plant.
 
One of our goals is to help Finders escape the minding trap. We delight in helping Finders discover an extra 15 or 20 hours a week of finding time. There are a lot of minding titles that explain what B2B CFO® does, such as CFO, Chief Financial Officer, part-time CFO, virtual CFO, temporary CFO, interim CFO, Controller, etc. Regardless of what you call us, we are here to help owners of emerging and mid-market companies gain financial and goal clarity which leads to an increase in profits, cash and company value.