COVID-Related Fraud Risk on the Rise
Feb 19, 2021
Many small business owners do not believe their businesses can or will fall victim to occupational fraud. Due to this belief and budget restrictions, many small businesses do not make this a priority, which leaves them vulnerable.
According to the Association of Certified Fraud Examiners’ 2020 Report, financial statement fraud is the costliest type of occupational fraud affecting organizations. Financial statement fraud is not only costly from a fiscal standpoint, but it also impacts trust within the organization, the community, and with investors.
The rapid advance of COVID-19 has placed a significant strain on organizations and individuals alike. Donald R. Cressey’s fraud triangle theory includes the three major factors that are commonly present when financial statement fraud occurs: Pressure, Opportunity, and Rationalization.
Here is how COVID-19 has impacted these factors:
Pressure – Organizations are facing challenges never experienced before. COVID-19 has left many facing revenue loss, supply chain disruptions, and employee wellness concerns. All these factors, and more, are causing undue pressure to meet financial expectations.
Opportunity – While organizations are receiving state and federal funding to cope with the financial impact of COVID-19 disruption, there are dramatic shifts in operations with remote working and a reduction of in-office staff. This means internal controls are reduced and accessibility increased. These become prime opportunities for fraud.
Rationalization – Mounting stress impacts individual decision-making skills, leading people to rationalize actions they would otherwise regard unacceptable or illegal. Employees may rationalize they are “owed” financial support because of the work they do.
Some potential areas to consider when thinking about your organization include:
- Revenue recognition – The timing and amount of revenues recognized.
- Allowances and reserves – Changes in methodology and unusual adjustments.
- Valuations – Significant estimates used in projections, declining cash flows, and idle assets.
- Treatment of expenses – Expenses are recorded in the proper period.
- Disclosures – The adequacy and sufficiency of disclosures.
- Margins – Reasonableness of margins given the current year operations.
- Internal control – Opportunity for control override.
These are just a few of the common ways for financial statement fraud to occur. While we all work diligently to recover from the COVID-19 disruption, we need to be aware of the heightened risks and adjust our processes and tasks to monitor for this risk.
If your company needs assistance, William Vaughan is here to assist you.
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Juli Seiwert, CPA
419.891.1040 | juli.seiwert@wvco.com
Categories: Audit & Accounting, COVID-19
Small Business Audits to Increase by 50% in 2021
Jan 26, 2021
As many small businesses are already preparing for complex accounting issues as a result of COVID-19 relief funds from the 2020 CARES Act, the IRS announced their intent to increase audits by 50%.
These audits and their repercussions could be targeted at businesses that have historically been overlooked including family-owned operations, online businesses created as a result of the pandemic, and investment funds.
De Lon Harris, the IRS deputy commissioner of examination for small businesses, recently noted, “[we] are focusing our efforts to increase compliance activity in this area of not only partnerships but also investor returns related to pass-throughs.”
The IRS can audit returns up to 3 years old, and if significant problems are found, are able to look further into past filings. With new audit procedures passed by Congress in 2015, the IRS is able to collect any underpaid taxes directly from the partnership instead of tracking down each investor. The agency is placing 50 new specialized auditors on these cases beginning in February in order to meet the projected increase.
Here are a few tips to prepare you and your business for the possibility of an audit:
- Maintain clear records – Accurate and adequate documentation makes an auditor’s job easier and may reduce the chance of further inquiry.
- Make estimated tax payments – Businesses expecting to owe more than $500 should be making quarterly payments. Failure to do so can increase your chance of being audited.
- Impact of the Bipartisan Budget Act of 2015 (BBA) – Review of businesses’ formation documents, elections, and governing documents will help to determine if you will be subject to the Centralized Partnership Audit Regime and how it will impact your business.
- Enlist the experts – Seek guidance from a CPA to ensure your returns are filed timely and accurately, to help you determine if estimated payments are needed, and to resolve possible red flags due to questionable reporting.
Should you have questions about your specific situation, please contact your William Vaughan Company advisor or reach out to our contributor, Juli Seiwert in our firm’s audit department.
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Juli Seiwert, CPA
Audit Senior Manager, William Vaughan Company
juli.seiwert@wvco.com | 419.891.1040
Categories: Audit & Accounting, COVID-19
Grant vs. Debt Accounting For PPP Funds
Jan 15, 2021
Over the past several weeks’ companies have started to receive notification of forgiveness of their PPP loans. As you begin to think about how you will account for your loan and forgiveness, it is important to remember proper GAAP accounting. As we noted in our prior blog, Accounting for PPP Loan Proceeds, the legal form of a PPP loan is debt. However, the PPP loan does include a forgiveness component which under certain scenarios permits treating the proceeds as a grant and following IAS 20 Accounting for Government Grants as an option. To be treated as a grant, the proceeds must be reasonably assured they will comply with the eligibility and forgiveness requirements. The biggest difference between the two options is under grant accounting, the income is recognized as the costs are incurred and for debt accounting, the gain is recognized when the entity is notified of forgiveness.
PPP loans should be derecognized when the debt is extinguished, in accordance with the guidance in ASC 405-20, Liabilities: Extinguishments of Liabilities. Under this guidance, debt is extinguished when either the debtor pays the creditor, or the debtor is legally released from being the primary obligator. As a result, when treating the PPP loan proceeds as debt you recognize the income in the year the company is notified of forgiveness. For any business with a 12/31 year-end who receive notification after such, even if the financial statements have not been issued, the gain should be recognized in 2021. If a company wants to recognize the gain during the fiscal year 2020 they should consider grant accounting.
Each borrower under the PPP program should carefully analyze its unique facts and circumstances in determining the appropriate accounting. Regardless of the accounting approach followed by a borrower they should disclose in the footnotes how the PPP loan was accounted for and where the related amounts are presented in the financial statements. Should you have questions about your specific situation, please contact your William Vaughan Company advisor or reach out to our contributor, Juli Seiwert in our firm’s audit department.
Connect With Us.
Juli Seiwert, CPA
Audit Senior Manager, William Vaughan Company
juli.seiwert@wvco.com | 419.891.1040
Categories: Audit & Accounting, COVID-19
Accounting for PPP Loan Proceeds
Jul 20, 2020
Many businesses have received Paycheck Protection Program (PPP) loans and are now asking the question, “How do I account for the proceeds and potential forgiveness related to the PPP loan?”
The legal form of a PPP loan is debt, and regardless of the expectation of forgiveness, following the guidance under ASC 470, Debt will always be an appropriate option. However, the PPP loan does include a forgiveness component, resulting in many businesses wondering if the funds could be recorded as a grant. Currently, U.S. GAAP does not contain specific guidance on how business entities should account for government assistance. The AICPA has suggested that businesses can reference other guidance such as International Accounting Standard (IAS) 20 as an accounting framework for forgivable loans. A not-for-profit entity that received a government grant should apply ASC 958-605.
How does accounting work under both scenarios?
Debt
Balance Sheet
In accordance with ASC 470 Debt, upon receipt of the funds, a liability should be recognized for the full amount and will generally be classified as a long-term liability. Interest should be accrued at 1% beginning on the date the loan was received and continue over the term of the loan.
Income Statement
Any amount that is forgiven and the entity is legally released from its obligation, would be recognized as a gain in the income statement as an extinguishment of debt. This includes any interest which is forgiven.
Cash Flow
Receipt of the loan proceeds and any repayment, the Company would present as financing activities. Any funds that are ultimately forgiven would be disclosed as a noncash finance activity. Interest paid should be presented as a cash outflow from operating activities.
Disclosures
The disclosures in the financial statements, at a minimum, should indicate the accounting treatment, terms of the agreement, and where the loan amounts are recorded in the financial statements, similar to other debt.
Grant
For those entities that are reasonably assured that they will comply with the eligibility and forgiveness criteria for the full loan, grant accounting could be an appropriate option. These entities should consider the guidance under IAS 20.
Balance Sheet
Upon receipt of the forgivable loan, a short-term liability for deferred income should be recognized. As the entity incurs the eligible expenses, the income should be recognized and the liability should be reduced.
Income Statement
In accordance with IAS 20, grant income can be presented as a credit in the income statement either as a reduction to the related expenses or it can be presented in other income.
Cash Flows
Grant proceeds received, that are expected to be forgiven, should be presented as operating activities in the cash flows statement.
Disclosures
The disclosures in the financial statements should indicate the accounting policies applied, such as funds received, amounts included in both deferred income and recognized in income during the period, how deferred amounts will be recognized, and any unfulfilled conditions. The disclosure should also reference where the loan amounts are recorded in the financial statements.
Conclusion
If an entity does not anticipate meeting the PPP eligibility and loan forgiveness criteria, the loan should be accounted for as debt. In certain scenarios, in which the entity is reasonably assured of meeting the loan eligibility and forgiveness criteria for the full loan, it may be appropriate to account for the proceeds as a government grant. Whatever option the entity decides to follow, the financial statement disclosures should be straight-forward and inclusive.
The SBA has indicated it intends to issue additional guidance to help address questions from borrowers and lenders. All entities that received a PPP loan should continue to monitor for any developments which could impact their accounting for the loan. Should you have questions about your specific situation, please contact your William Vaughan Company advisor or reach out to our contributor, Juli Seiwert in our firm’s audit department.
419.891.1040
Categories: Audit & Accounting, COVID-19
FASB Lease Accounting Standards Delayed
Jul 24, 2019
What happened?
The Financial Accounting Standards Board (FASB) voted unanimously on Wednesday, July 17, 2019, to propose delaying the effective date for portions of its major accounting standards, including ASC 842, Leases, for privately held companies and nonprofit organizations.
Also, the new proposal is expected to create two new “buckets”: (1) SEC filers other than smaller reporting companies (SRCs, as defined by the SEC) and (2) all other entities, allowing at least a two-year difference in the effective date between the buckets.
Why is this important?
For private companies, ASC 842 was previously scheduled to take effect for annual financial reporting periods beginning after December 15, 2019 (2020 for calendar year-end companies), and interim periods after December 15, 2020. However, this delay means companies now have an extra year to adopt the new lease accounting rules, subject to the FASB issuing a formal proposal for public comment before finalizing the new effective dates.
What’s next?
The FASB staff will draft the proposed amendments to existing standards and provide them to the Board to vote by written ballot, after which they are expected to be exposed for a public comment period of 30 days. The FASB expects to issue the final amendments later this year.
As we continue to consult with current clients, we highly encourage companies to proactively address the implementations of both standards as evaluation and adoption typically take longer than anticipated.
For additional insights or assistance on the adoption of the new revenue standards please contact one of the following members of our audit team at 419.891.1040
Tracie Youngless Kristin Metzger Juli Seiwert Ryan Leininger Amy Barber
Categories: Audit & Accounting