Well, we are through the first half of the year (some of us with a few more scratches than others) and many of you have already started to think about how you are going to fare the rest of the year in relation to your projections. While you are going through that exercise, I urge you to make sure you are taking a good look at any financial loan covenants contained in your debt agreements to make sure you are not in line for any surprises at the end of the year.

It wasn’t two years ago that if you blew a loan covenant you could call your banker and get a “don’t worry about it, I’ll get you a waiver letter tomorrow” type of response. Today, that phone call will lead to increased costs, including waiver fees and increased interest rates, as well as the potential for increased scrutiny by your lending institution.

I’m sure none of this comes as a surprise to you, but you would be surprised at how many people are still blindsided when this happens to them. It doesn’t matter how good your relationship is with your banker – that person may not be making the decision as to whether to increase your interest rates, tighten your covenants, or throw you into workout if you trip up on a covenant.

Can you imagine waiting over a year for the bank to decide whether or not they are going to extend your credit facility? How will that impact how you run your company? Sadly, I’ve seen this several times over the past couple years and it doesn’t seem like it’s going to come to an end anytime soon.

So what does this mean for you? What can you do now to prevent this from happening in the future? Well, there are several things you should be doing and other things you can do when the opportunity arises.

1. Make sure you are continuously monitoring your covenants, especially if your operating results are below expectations.
2. If you haven’t done so already, project out your earnings for the rest of the year and calculate covenants based on your projections. Are your shareholders expecting a distribution this year? Do you have any major capital needs in the near term? Make sure you are evaluating your capital needs to make sure there is enough capital available to fulfill operating needs while maintaining the liquidity required by the bank.
3. Finally, if you see yourself getting into trouble, reach out to your banker.

This isn’t the time to hide results hoping that the next week, month, quarter is going to pull you out of trouble. The earlier the bank hears from you, the more options you might have. It is much less painful to start evaluating options before you blow your covenants as opposed to after.

If you are currently, or are going to be, refinancing your debt, make sure you are evaluating the proposed terms offered by the bank. Make sure your projections are realistic and conservative, as the bank is going to base your covenants on those numbers.

So what does this all have to do with fraud? The answer to that question is, as you would expect, “it depends”. The reason I say that is that if you are very close to your numbers, and are involved with the financial reporting to the bank, your fraud risk in this area may be low. However, if you are not directly involved in the finances or your company, and therefore not necessarily aware of how your company is “making” its numbers, you may be opening yourself up to some exposure. I am sure you are aware that an organization can be held responsible for the actions of its employees even if it was unaware of those actions. Ignorance of the law is not a defense, and for organizations that do not have anti-fraud programs in place, the penalties can be severe.

If you are not directly involved with dealing with the bank, be sure to follow up with your CFO/Controller and see how things are going. On occasion, you should take a look at what’s being reported to the bank to make sure it is in line with what is being reported in your regular management reports.

There are too many areas where organizations leave themselves open to fraud exposure, and this is one of the areas that may be overlooked. Make sure you are protecting yourself and your assets by monitoring the areas where there may be more exposure than you think.

By John Surrette, Jr., CPA, CFE, MBA
Senior Audit Manager

Labels: Banker, Fraud, KLR, Loan Covenants, Loans, Refinancing, Surrette

Isn’t all this state and local budget talk confusing? The state says they have a budget crisis so they need to cut back on payments made to the cities and towns. Then the cities and towns say they have a budget crisis because they aren’t getting state payments. Then the cities and towns say they will be forced to raise taxes because of the horrible things the state is doing to them. Isn’t this just a shell game with who is going to be the bad guy and tell the taxpayers they need to pay more?

I’m not sure all this hide and seek with the tax increases is fooling anyone. The real problem in any budget (yours, mine, or the governments) is spending more than what’s in the checkbook. Why oh why do our elected officials constantly make the budgets they control so tight. (that’s right – they control the budgets) Think about it. It’s big news when there’s a balanced budget. Shouldn’t that be the worse case scenario? Don’t you try to have a little cushion in your home finances (in case something goes wrong)? Common sense says that any budget without a surplus is a recipe for disaster. And guess what, we are seeing the disaster.

In the past, it’s been a little too easy to raise taxes and make bad budgets go away. Now that taxpayers have had enough and are ready to push back in a big way, so, you get what we have here - the shell game of who’s going to be the bearer of the dreaded tax increase. I think the real fear is: the taxpayers will shoot the messenger.

Does it have to get this bad? The real answer is YES because our governments, at every level, spend all the money they take in and no one ever stands up and volunteers to take a cut. Have you ever seen a cut that wasn’t fought tooth and nail? Since spending is so hard to reduce, we are faced with either deficit spending or tax increases, or both. We all know this is unsustainable and just makes the problem worse later on - PS we’re living the later-on right now. Ask any homeowner who got caught up in the equity splurge; they know you can’t borrow your way out of trouble. So – does it make sense to have a budget based on ever increasing revenues? NO.

Why not try something called good financial management. That is, have revenue estimates that go up and down. Have spending that goes up and down to match. Everything can’t be by contract and entitlement – there needs to be flexibility. If governments aren’t willing to cut anything because someone will be unhappy, they have only one option left – raise taxes (again and again).

What would happen to a household if they were struggling and refused to stop going out to eat because the kids would complain? Well -- the family members could always demand raises and say their expenses forced them to do it.

By Norman LeBlanc, CPA
Tax Services Group

Labels: Board of Directors, Budget, Government Spending, KLR, LeBlanc, Tax Increases

Buried in the $940 billion health care overhaul law is a 10% tax on individuals receiving indoor tanning services. This initiative is expected to generate $2.7 billion in tax revenue over the next ten years. Of course, the indoor tanning industry is against what amounts to an increase in prices and is concerned that the tax will reduce demand for indoor tanning services. Follow this link to read more about their efforts to remove this tax from the health care bill.

Not everyone is against this tax, however. The American Academy of Dermatology applauded the inclusion of the tanning tax because of the significant health risks associated with indoor tanning. This opinion is welcome news to the government taxing authorities.

According to the Academy, indoor tanning before the age of 35 is linked to a 75% increase in the risk of melanoma, the deadliest form of skin cancer, which has also become more common in young females. Meanwhile, nearly 30 million Americans make use of indoor tanning beds each year and about 2.3 million of these people are teenagers. In the words of the Academy, the indoor tanning tax will therefore "serve as a signal from the Federal government to young people that indoor tanning is dangerous and should be avoided" said Dr. William James, President of the Academy.

He also noted that because the United States currently spends about $1.8 billion on treating skin cancers each year and $300 million on melanoma alone, the tax will significantly reduce the future costs of treating skin cancers. In a national health care system, any savings in medical costs is a savings that would have had to be paid for by taxes.

The question I wish to raise is, do we really want a more simplified tax structure in this country or do we wish to further entangle tax and Federal policy into our daily lives? Most people would prefer a simpler tax structure. Yet, we continually use taxation as a behavior modification tool.

Mortgage interest is a deduction to encourage home ownership. Children are deductible dependents to encourage families and the perpetuation of the population. Smoking is dangerous to your health, but rather than beef-up education in an attempt to modify behavior, the government(s) add more and more taxes onto the cost of a package of cigarettes. There is now so much tax associated with the sale of a package of cigarettes, that I think government officials secretly hope that smoking does not decrease – and maybe even increases. And on July 1st we are going to add a tax to indoor tanning!

While the American Academy of Dermatology will applaud the tax because it may result in less indoor tanning, wouldn’t it be better if every segment of society set as its goal to educate the population on what is dangerous and what is safe rather than resorting to these back-door behavior modification tactics? The American public is more educated than it has ever been – a greater percentage of the population attends and completes college than ever before. Why do we have to resort to taxation in an attempt to prevent people from harming themselves? I fear that the answer is that government really does not want to reduce indoor tanning, just as it does not want to reduce smoking. It really just wants the additional tax dollars. Taxes are money; money is power – and that’s the way I see it!


By Frank Monti, CPA
Not-for-Profit Group

Labels: Dermatology, Health Care Bill, Health risks associated with indoor tanning, Indoor Tanning Tax, KLR, Monti, Tax Planning

At the end of April, an article appeared in the Worcester Telegram & Gazette critical of the compensation paid at not-for-profit organizations.

This article is certainly aimed at inflaming the public at the expense of not-for-profit organizations. The popular rhetoric these days is aimed at gaining power by pitting segments of society against one another.

But, let’s not judge the subject matter so broadly. Let’s look at a number of issues raised in the article and obtain some perspective. The author’s primary concern is that some agencies that have experienced revenue declines (presumably related to the current economy), and have had to reduce or curtail programs, have continued to increase the compensation paid to senior executives.

It is a basic financial rule of thumb that if things are moving in opposite directions (revenues going down while expenses are rising) something is wrong. So asking the question of why compensation packages are rising while revenues are declining and programs are being scaled back is certainly a reasonable question to ask. The article would have been a good one and would have provided a service to the community if that is where it ended.

What I would like to take issue with are the quotes and concepts that the author used after asking the basic question. He quoted a direct care worker whose salary is $40,000 after a 27-year career in the social services field. A quote attributed to this individual was “They call themselves nonprofits, but that’s because when they’re done paying their CEOs, vice presidents, executive team and layers of management under them, they’re consuming all of the profits.”

Obviously, this 27-year veteran is not a member of management. As a matter of fact, a direct-care worker in most social service organizations is an entry-level job. The job is only worth just so much money. I assume that this individual is actually a direct-care worker supervisor because his $40,000 salary is 25% to 40% too high for this job. And, he should not be compensated just for spending 27 years in an entry-level position – can he possibly be doing his job 40% better than a first-year direct care worker?

Note that the worker assumes that all of the profits have been dissipated by compensation and this is why these agencies are known as “nonprofits”. Those working in the industry have stopped using the term “nonprofit” in favor of the more accurate term, “not-for-profit”.

The term “not-for-profit” reflects the reality that these organizations have a mission that is different from the “for-profit” corporation. The “for-profit” corporation’s mission is to engage in a business that generates a profit for its owners. Every activity they engage in is directed toward making a profit. The “not-for-profit” organization, on the other hand, is organized for a different purpose – to address a social issue or provide health care services or education, etc. The not-for-profit’s goal or mission is not profit making, but, rather, the provision of a service to the community.

So, not-for-profit organizations are businesses just like any other business, except that their focus is not on profit generation. That does not mean that they can lose money from operating. Just as you cannot spend more than you earn, the not-for-profit organization must practice sound business concepts in order to survive and remain in business serving the community by performing and delivering on its not-for-profit mission.

Massachusetts State Senator Stephen Brewer, the democrat from the town of Barre, is quoted as saying, “if you are doing the work of Mother Teresa, you should be making the pay of Mother Teresa.” Now, Mother Teresa was an exceptional individual, but the suggestion that this quote implies is that when you work for a not-for-profit organization, your reward is more than monetary. Perhaps everyone who enjoys their career and obtains non-monetary satisfaction from performing a good job should take a reduction in compensation. Did Senator Brewer realize the negative impact this would have on income tax collections?

The opposite argument is that the mission of many not-for-profit organizations is more important to society than many for-profit companies and, shouldn’t the executives leading these important organizations be appropriately compensated for their important contributions to society? Teachers (from the not-for-profit academic industry) have long argued for increased compensation in recognition of their importance in our society. They have even printed bumper stickers that say “Cured by a Doctor? Thank a Teacher.”

Another theme in the article is that these excessive compensation packages are costing the taxpayers’ money. Since not-for-profit organizations are exempt from Federal and State income taxes, the theory is that the rest of us are picking up the tax burden when we create a tax-exempt entity. This is true. However, what the authors failed to note was that every tax-exempt entity is required to have a citizen Board of Directors that is responsible for running the organization.

The volunteer board functions as the taxpayer’s representative. They are the ones who approve the compensation packages of the not-for-profit CEO. If you have an issue with a not-for-profit organization, seek out a board member – your representative at that organization – and make them aware of your concern. You may find that they have given executive compensation a great deal of thought and have many excellent reasons why their CEO is compensated the way they are.


By Frank Monti, CPA
Not-for-Profit Group

Labels: Board of Directors, Executive Compensation, KLR, Monti, Nonprofit, Tax-Exempt Entity

You may have received a post card from the IRS or seen a news item on the Small Business Health Care Tax Credit. The IRS even has a video on YouTube announcing the program.

Quite simply, if you are an employer with fewer than 25 full-time equivalent (FTE) employees, have annual average wages of less than $50,000 and pay over half of single plan insurance for your employees you may qualify for a government credit of up to 35% of the cost of your health insurance. Remember, the key is full-time equivalents, not the actual number of employees. A full time equivalent is determined by hours and for this credit one full time equivalent is equal to working 2,080 hours per year. So if you have two part time employees each working 1,040 hours you actually have only one full time equivalent employee. Therefore, it is possible that you could have more than 25 employees and still qualify if some of them are part time.

The credit is targeted toward helping the small employer and the maximum credit allowed will go to business owners with 10 or fewer (FTE) employees and paying annual average wages of $25,000 or less. However, because the credit doesn't get completely phased out until an employer reaches 25 FTE or an average wage of $50,000 many employers will have the opportunity to benefit from this credit. This credit is projected to be available through 2013 with an increase in the benefit expected in 2014.

Even tax-exempt entities can qualify for this program! How can a tax-exempt entity enjoy the benefits of a tax-credit? The IRS has not yet issued the specific details of how this benefit will be realized but that information hopefully will be coming soon.

What to do now?

Since the credit is applicable to 2010, it is important to get some help in determining if you qualify. The five steps to follow to determine your company’s eligibility for the credit are:

1. Determine the employees who are taken into account for purposes of the credit.
2. Determine the number of hours of service performed by those employees.
3. Calculate the number of the employer’s FTEs.
4. Determine the average annual wages paid per FTE.
5. Determine the premiums paid by the employer that are taken into account for purposes of the credit.

There is a possibility that you may be able to make some modifications in your health insurance plan or the hours of your part-time employees so that the changes you make cost you less than the benefit you will receive from qualifying for this tax credit. If you think you may qualify for this tax credit and health care cost subsidy, please feel free to call us at 401-274-2001.

By Frank Monti, CPA
Not-for-Profit Group

Labels: FTE, Health Care, IRS, KLR, Monti, Not For Profit Group, Small Business

Ok - now that the new health care act is in place and we've heard all about it - I'm as confused as ever. You ? I'm sure the confusion has something to do with the act being 2,000 pages long, the myriad of provisions rolling out for the next three years, and all the challenges that are coming from the states and other groups who are mandated to pay for it.

Throughout the debate for reform, we heard that the problems were:
1. Health care is too expensive
2. Not everyone has coverage
3. The cost is rising faster than income

I do agree that we need to do something with the way health care is administered and paid for in this country but is this the right answer? First, there seemed to be a general consensus that health care is a right and necessity - and not a privilege. Well if that is true why does the reform act still link insurance coverage and health "benefits" to employment? What about the unemployed; the self-employed; retirees; or anyone else who doesn't hold a conventional job? If the real goal is to make health benefits universal, shouldn't insurance coverage and other means of payment be in the hands of the individual? Currently, the larger an employer is the lower the group premium. Why should the small employer or the self-employed get hit with higher premiums.

If everyone paid for their health insurance themselves, it would allow each of us to negotiate a policy that fits our lifestyle best (instead of whatever policy our employer chooses), and individuals would become very conscience of their claims. One of the problems with our current system is there is no direct effect on individuals when they make a claim, i.e., the cost is the same whether someone uses is or not, so they use it as frequently as they can. Putting policies directly in the hands of the end user and having claims impact their premium will automatically make the system more efficient and hence move toward solving the three problems listed above.

Use auto insurance as an example. Can you image what a mess it would be if our car insurance were provided through our employer. Every time you changed jobs, you would need to scramble for coverage (Cobra anyone) just so you could drive to an interview. Since the cost to the individual would be fixed, we would all run to the body shop every time a rock chipped the paint or a shopping cart made a ding. By nature, we work very hard to get the lowest rates on our auto insurance and we try just as hard not to make unnecessary claims since our premiums would go up. Why can't health insurance be handled the same way? Having the cost of health insurance and all other health care payments under direct individual control will bring attention to how much a household is spending and where it's being spent. Natural economic instincts will cause people to question their health providers (i.e., keep them honest) and allow everyone to work together in providing the best service in the most efficient manner. There is some talk in Congress of moving this way but it never seems to get very far - maybe it's just too simple an answer.

By. Norman LeBlanc, CPA
Tax Services Group

Labels: Auto Insurance, CPA, Health Care, Health Insurance, LeBlanc

An article appeared in the April 22, 2010 edition of the New York Times with the headline – One-Fourth of Nonprofits are to Lose Tax Breaks. Of course, headlines are crafted to create interest and sell newspapers, and this one is no different. Let’s examine the issue – along with some other issues that are noted in the article, although these are not necessarily the author’s primary points.

The article notes that the IRS has some 1.6 million charities that do not file an annual information return with the Service because they have been exempted due to their small size. This has been a great benefit to the numerous Little Leagues, dance schools, etc. who are tax-exempt organizations, but whose level of operations is so small that Congress has not wanted to burden them with any more red tape than necessary. However, in 2006 a law was passed requiring these 1.6 million organizations to go onto the internet and complete a small form indicating if the organization was still operating and, if so, to provide the names of the board officers. The IRS has not heard from 400,000 of these organizations and is poised to revoke their tax-exempt status if it does not hear from them by May 15, 2010.

The article reports that this new law was “embedded in the 393 pages of the Pension Protection Act of 2006”. While the article also reports that every organization had three years to comply with this new reporting requirement (thus the concern now that 2009 has ended and the three-year reporting deadline ends on May 15, 2010) the article clearly implies that sticking this new law into almost 400 pages of a law about pensions is unfair. In my opinion, the author should be more concerned with how this law was passed than with its consequences.

The article then mentions a company that has been operating improperly since 2005, but now has retained an accountant to assist them in filing all of the appropriate forms retroactively. I’m sorry, but I have little sympathy for this organization. The headline talks about the loss of tax breaks – I think that organizations that receive tax breaks have a responsibility to operate properly so that society can monitor them and verify that they are operating in a manner that justifies the tax breaks they enjoy. If it were not for this law, this organization would probably continue operating below the radar.

Loss of tax-exempt status is a serious concern. I don’t want to see any legitimate tax-exempt organization that is contributing positively to our great society, lose their tax-exempt status. However, the IRS sent out over 650,000 letters to organizations that they had not heard from in 2007. In addition, there have been numerous news articles and public notices such as this one attempting to inform those involved with smaller nonprofits that the law has changed. It would be unfortunate for any of these organizations to have to deal with the loss of their tax-exempt status. But would it be unfair, as the article suggests? I don’t think so. Enforcing the rule of law is one of the backbones of this country. The nonprofit industry has had 1.6 million organizations operating for decades without any oversight. I am pleased that these organizations are now subject to minimum reporting, identification, and oversight.

If you are affiliated with a small nonprofit and you have no idea what this article was about, please contact us immediately!


By Frank Monti, CPA
Not-for-Profit Group

Labels: Accounting, CPA, IRS, KLR, Lose Tax Breaks, Monti, Nonprofit, Not For Profit Group, Pension Protection Act of 2006