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Important changes to securities industry continuing education

11.18.22

Read this if you are a broker-dealer. 

Effective January 1, 2023, the Financial Industry Regulatory Authority (FINRA) and other industry self-regulatory organizations adopted certain changes to the securities industry continuing education (CE) and registration rules to train registered persons more effectively.

These upcoming changes, which include the annual Regulatory Element for each registration category and the extension of the Firm Element to all registered persons, are expected to help make sure all registered persons receive timely and relevant training. See below for some of these changes.

Annual Regulatory Element for each registration category Extension of Firm Element
of all registered persons

Annually, by December 31st, registered persons will be required to complete the CE Regulatory Element

Registered persons will receive content tailored specifically to each representative or principal registration category they hold

Failure to complete the Regulatory Requirement annually will cause the registered person to be automatically designated as CE inactive by FINRA

The CE rules have been amended to:

  • Extend the annual Firm Element requirement to all registered persons
  • Allow firms to consider their training programs relating to the anti-money laundering compliance meeting toward satisfying an individual's annual Firm Element requirement

The current minimum Firm Element training criteria has been revised to require the training to cover topics related to professional responsibility and the role, activities, or responsibilities of the registered person


Firms should begin to prepare now for these changes. FINRA and the CE Council are committed to developing resources and guidance to support firms as they assess their education needs and develop their training requirements. FINRA is committed to providing more information as it becomes available. 

What can you do now to comply with these upcoming rule changes by January 1, 2023?
Review FINRA’s Regulatory Notice 21-41 and FINRA’s CE Transformation resource page to become familiar with upcoming changes. Review the 2023 Regulatory Element topics on FINRA’s website.

If you have any questions about your specific situation or would like more information, please contact our Broker-dealers team. We're here to help. 

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The Ramifications of Fraud and How You Can Prevent it

Welcome to part two of our article on nonprofit fraud. If you missed our first installment, you can read it here.

You’ve just become aware of a fraud that has occurred at a nonprofit in your community. As someone who cares about the community and the nonprofit sector, you start to wonder, “What is going to happen to that organization”?

While the ramifications can differ in each case, they probably will include some, if not all, of the following:

  • The board and management will want to understand how the fraud happened, and what management is doing to prevent it from ever happening again.
  • The community is going to look to the board for answers, and wonder why the organization didn’t have controls in place to prevent the fraud.
  • Management will be expected to explain to the board where the breakdown in controls occurred that allowed the employee to steal from the organization.
  • The board knows it has a fiduciary duty to oversee the organization and its internal controls and assets. They aren’t sure what they should have done differently, given that they’re volunteers doing this community service in addition to their “day jobs.”
  • The board and management will want to reach out to donors to assure them that their contributions to the organization are going to be recovered if possible, and that controls are being improved to help safeguard future gifts.

This organization could potentially lose major donors if they believe there are not enough controls in place to ensure their dollars are being spent according to their wishes. If enough donors are negatively affected by this event and choose not to support the organization, its very survival may be at stake, thus impacting those in the community the entity serves.

Management will now have to divert time and other resources not only to implement stronger internal controls to help ensure this does not happen again, but also to reassure the board and the public that the organization is well protected to prevent future fraud.

Fraud can be extremely costly to an organization, not only from a financial perspective, as often the organization will not recover the stolen funds, but also from the loss of an organization’s reputation as a trusted charity. This can be even more devastating. The organization may never recover in the public’s eye, risking their relationships with not only their long-time donors but also new and future donors.

What can you do?

So, what can you do to help prevent fraud from recurring, or to detect it quickly if it does? Here is a simple, yet effective three-step process:

  1. Consider the risks of fraud and determine where it is more likely to occur.
  2. Look closely at the internal controls the organization currently has in place and determine whether they address these risks sufficiently.
  3. Identify gaps where controls are inadequate, and identify controls to be put in place where they are most needed.

Organizations can also consult their auditors to seek advice and guidance on how to implement these very important internal controls. It may be prudent to review previous audits to see if auditors have brought risks to management’s and the board’s attention, and if they provided recommendations on how to improve their current control structure.

The silver lining? The board and management now have a keener sense of the risks of fraud in the nonprofit environment, which should contribute to an engaged dialogue among the board, management and the auditors about how to develop and implement cost-effective controls that protect the organization’s assets.

As part of the audit, the auditors may point out one or more shortcomings in controls that they believe constitute a “material weakness.” While that may sound ominous, it merely means (in auditing jargon) a situation involving a reasonable possibility of a material misstatement of the financial statements. Auditors tend to set the bar low when it comes to classifying deficiencies that create fraud risks as material weaknesses, for the simple fact that users of the financial statements (donors, lenders, other funders) tend to have a lower materiality threshold with respect to misstatements caused by theft.

It is also important to remember that control deficiencies noted in previous audits that may not have been considered material weaknesses in the past may be considered that way today, as expectations of management’s actions regarding fraud prevention and detection go up every time a nonprofit fraud incident hits the media.

Every organization that has more than one person (including board members) associated with it has the opportunity to segregate incompatible duties at some level to help protect assets. At times, organizations don’t have such segregation in place, but instead have implemented compensating controls, such as detailed review of monthly financial statements by the appropriate level of management and/or the board. If this is the case, the organization should ask itself the following questions in order to avoid over-relying on this compensating control:

  • How does this compensating control work? Who reviews the financials, what is their experience level, and how do they document their review to confirm that it’s being done?
  • How often do you question expenditures, and are these questions and their answers evaluated and documented? It is important to remember here that a fraudster would be working hard to escape detection by this compensating control.
  • If the compensating control is a detailed review compared to budget:
    • Who is involved in building the budget?
    • What are the controls that would protect against a fraudster building their theft into budgeted expense line items?

Take a proactive fraud risk assessment and response like the one described here to give you reasonable comfort proper controls are in place to prevent and/or detect fraud. This isn’t about being paranoid – it’s simply a matter of prudently carrying out your fiduciary and management responsibilities to protect the organization you feel so strongly about.

Remember, the one characteristic that every financial theft in history shares—someone was trusted at some point.

Article
The ramifications of fraud and how you can prevent it

It’s Monday morning. You grab a cup of coffee and flip on the local morning news before you get ready for work. The lead story catches your attention “Local Accounts Payable Manager Steals Thousands.” Based on your experience as a board member of a nonprofit organization and the prior fraud you’ve heard about in the community, three things come into your mind:

  1. The fraud involves either a nonprofit organization or local government.
  2. The Board will come out and say how shocked they are – Fred has been here forever, and we trusted him!
  3. The Board will state they have now put in place proper controls to ensure this will never happen again.

And you may be close to the mark. Nonprofits and governmental organizations often have a higher risk of fraudulent behavior and theft due to their limited resources and ability to implement strict fraud prevention controls. What makes these organizations so susceptible?

  • They frequently run on tight or breakeven budgets, which means they have difficulty hiring enough people to implement strict internal controls.
  • They often have a salary structure that is lower than that of for-profit companies, creating incentive for employees to commit theft in order to make ends meet.
  • They are sometimes targeted by unscrupulous individuals who know that they likely lack the resources available to stop them.

In addition, nonprofits often seek to hire people who believe in the mission. While this can lead to tireless, dedicated employees, certain side effects of this approach may come into play and increase the risk of theft. For example:

  • The passion for, and shared commitment to, the mission at many nonprofits give rise to a culture of trust. This culture of trust may cause the organization to be less likely to implement checks and balances critical to sound internal controls.
  • New employees are sometimes drawn to a specific nonprofit organization because they have experienced some of the challenges which the organization was formed to address. Working for the organization may help them in some ways, but it may also create more financial strain for them or family members, increasing the chances of them committing illegal acts.

There are three elements that must be present for fraud to occur. These are the three sides of what is collectively called the fraud triangle: opportunity, incentive, and rationalization.

  • Opportunity: an employee working at a nonprofit may have opportunity if they are a trusted employee and resources are limited, causing the internal controls to be less robust than they should be.
  • Incentive: the incentive is in place when an employee, as mentioned above, has unexpected events happen in their life that may pressure them into committing fraud.
  • Rationalization: the employee rationalizes that they need the money for their family to survive. This often starts as “I’ll just borrow the money until payday”. Unfortunately, payday arrives and the funds aren’t available to be repaid; in fact, they need to “borrow” just a little more.

Let’s be clear, though – many nonprofits, regardless of size, have appropriately designed and implemented controls that properly protect the organization from the risks of fraud.

Soon we’ll look further at the ramifications frauds can have for nonprofits and how any organization—even small nonprofits, can put certain internal controls in place, to reduce the chances they’ll be the next organization in the headline story of the morning news.

Article
Fraud – why it can happen to you and what to know when It does

Read this if you are a Maine business or pay taxes in Maine.

Maine Revenue Services has created the new Maine Tax Portal, which makes paying, filing, and managing your state taxes faster, more efficient, convenient, and accessible. The portal replaces a number of outdated services and can be used for a number of tax filings, including:

  • Corporate income tax
  • Estate tax
  • Healthcare provider tax
  • Insurance premium tax
  • Withholding
  • Sales and use tax
  • Service provider tax
  • Pass-through entity withholding
  • BETR

The Maine Tax Portal is being rolled out in four phases, with two of the four phases already completed. Most tax filings for both businesses and individuals are now available. A complete listing can be found on maine.gov. Instructional videos and FAQs can also be found on this site.

In an effort to educate businesses and individuals on the use of the new portal, Maine Revenue Services has been hosting various training sessions. The upcoming schedule can be found on maine.gov

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New Maine Tax Portal: What you need to know

This is our second of five articles addressing the many aspects of business valuation. In the first article, we presented an overview of the three stages of the value acceleration process (Discover, Prepare, and Decide). In this article we are going to look more closely at the Discover stage of the process.

In the Discover stage, business owners take inventory of their personal, financial, and business goals, noting ways to increase alignment and reduce risk. The objective of the Discover stage is to gather data and assemble information into a prioritized action plan, using the following general framework.

Every client we have talked to so far has plans and priorities outside of their business. Accordingly, the first topic in the Discover stage is to explore your personal plans and how they may affect business goals and operations. What do you want to do next in your personal life? How will you get it done?

Another area to explore is your personal financial plan, and how this interacts with your personal goals and business plans. What do you currently have? How much do you need to fund your other goals?

The third leg of the value acceleration “three-legged stool” is business goals. How much can the business contribute to your other goals? How much do you need from your business? What are the strengths and weaknesses of your business? How do these compare to other businesses? How can business value be enhanced? A business valuation can help you to answer these questions.

A business valuation can clarify the standing of your business regarding the qualities buyers find attractive. Relevant business attractiveness factors include the following:

  • Market factors, such as barriers to entry, competitive advantages, market leadership, economic prosperity, and market growth
  • Forecast factors, such as potential profit and revenue growth, revenue stream predictability, and whether or not revenue comes from recurring sources
  • Business factors, such as years of operation, management strength, customer loyalty, branding, customer database, intellectual property/technology, staff contracts, location, business owner reliance, marketing systems, and business systems

Your company’s performance in these areas may lead to a gap between what your business is worth and what it could be worth. Armed with the information from this assessment, you can prepare a plan to address this “value gap” and look toward your plans for the future.

If you are interested in learning more about value acceleration, please contact the business valuation services team. We would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations.

Next up in our value acceleration series is all about what we call the four C's of the value acceleration process. 

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The discover stage: Value acceleration series part two (of five)

This is the first article in our five-article series that reviews the art and science of business valuation. The series is based on an in-person program we offer from time to time.  

Did you know that just 12 months after selling, three out of four business owners surveyed “profoundly regretted” their decision? Situations like these highlight the importance of the value acceleration process, which focuses on increasing value and aligning business, personal, and financial goals. Through this process, business owners will be better prepared for business transitions, and therefore be significantly more satisfied with their decisions.

Here is a high-level overview of the value acceleration process. This process has three stages, diagrammed here:

The Discover stage is also called the “triggering event.” This is where business owners take inventory of their situation, focusing on risk reduction and alignment of their business, personal, and financial goals. The information gleaned in this stage is then compiled into a prioritized action plan utilized in future stages.

In the Prepare stage, business owners follow through on business improvement and personal/financial planning action items formed in the discover stage. Examples of action items include the following:

  • Addressing weaknesses identified in the Discover stage, in the business, or in personal financial planning
  • Protecting value through planning documents and making sure appropriate insurance is in place
  • Analyzing and prioritizing projects to improve the value of the business, as identified in Discover stage
  • Developing strategies to increase liquidity and retirement savings

The last stage in the process is the Decide stage. At this point, business owners choose between continuing to drive additional value into the business or to sell it.

Through the value acceleration process, we help business owners build value into their businesses and liquidity into their lives.

If you are interested in learning more about value acceleration, please contact the business valuation services team. We would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations.

Read more! In our next installment of the value acceleration blog series, we cover the Discover stage.

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The process: Value acceleration series part one (of five)

On November 8, 2022, Massachusetts voters approved a constitutional amendment to alter the state’s flat 5% income tax to add a 4% surtax on annual income exceeding $1 million. The so-called “millionaires tax,” also referred to as the “Fair Share Amendment,” is effective for tax years beginning on or after Jan. 1, 2023. The annual income level subject to the surtax would be adjusted yearly to reflect increases in the cost of living.

This measure is expected to bring in revenue of between $1.2 and $2 billion annually. The proceeds from the increased tax collections will support state budgets in the areas of education, roads, bridges, and public transportation. The measure passed with 52% voter support and is the sixth attempt to change the state’s flat income tax rate since 1962. This amendment is expected to affect about 0.6% of the state’s population, or about 20,000 taxpayers.

If you expect your income to exceed $1 million in 2023 and have questions regarding the recent legislation, please contact a member of our state and local tax team.

Article
Massachusetts voters pass "Millionaires tax"

Read this if you think your organization may have to prepare an HRSA audit.

Many healthcare providers who have never done an audit before may be required by the Health Resources and Services Administration (HRSA) agency to do so this year because they received Provider Relief Funding (PRF). We’re helping you prepare by answering some common queries about the PRF audit:

Will my organization have to complete a PRF audit?

The HRSA requires organizations to complete a federal single audit when they expend more than $750,000 of federal funding in one year, regardless of whether those federally sourced funds came directly from the federal government or were passed from a state or local government. Healthcare providers who received $10,000 or more from the PRF during a given period must report on usage.

For many providers, this is the first time they’ve received over $750,000 in federal funding. As a result, these providers will need to complete the single audit for the first time.

Other providers, especially physician practices, may not meet the single audit expense threshold, but that doesn’t mean they’re free from audit obligations. While they may not have to complete a single audit, if they received funding from the PRF, they may need to complete a HRSA-required audit—and the data requests for these audits are, in some cases, more involved than those for the single audit.

What will the HRSA’s PRF audit look like?

The audit will address the data used by the providers to report on their usage of PRF money. That means they will need to provide support for lost revenue and expenses that justify the use of the funds that they received.

The HRSA is going to drill down on the revenue numbers, specifically looking at the general ledger (GL) and other select revenue tests. On the expenses side, they’re going to look at the GL, invoice dates, payments and more.

To complete this audit, HRSA will require a significant amount of supporting documentation. Ideally, most of these documents should already have been copied and set aside as support in anticipation of financial reporting requirements. Below is a partial list of items that could be requested during the audit:

  • General Ledger details
  • Listing of expenses reimbursed with PRF payments grouped into specified categories
  • Listing of patient care revenue by payer
  • Listing of other sources of assistance
  • Listing of expenses reimbursed with the other assistance received
  • Detailed inventory listing of IT supplies
  • Budget attestation from CEO or CFO and board minutes showing ratification of the budget before March 27, 2020
  • Documentation of lost revenue methodologies
  • Audit financial statements
  • CMS cost reports for Medicare and Medicaid
  • Other supporting documentation

If certain documentation isn’t available, providers will need to request copies from their vendors. Missing documentation may make it difficult to justify the use of funds, in which case, providers may have to repay a portion or all of their provider relief funding.

It’s possible that certain expenses were not allowable under PRF. However, that doesn’t necessarily mean providers will have to repay their funds. Providers may have other lost revenue or expenses that would be allowed under PRF—but only if they have the documentation to prove it. That’s why it’s crucial that providers have all relevant documentation for expenses and lost revenue over the periods they received provider relief funding.

What challenges should I anticipate when it comes to completing the audit?

According to the 2022 BDO Healthcare CFO Outlook Survey, 35% of respondents identified CARES Act/PRF reporting as a regulatory concern.

Much of this concern likely stems from a lack of resources as well as audit inexperience. Many providers who will have to complete an HRSA audit don’t have the necessary resources to dedicate to navigating the process. In addition, they may not know the type, scope, or time frame of documentation they need to pull. They may also struggle to locate certain documentation, especially documentation that’s more than two years old.

Finding the right people to sift through the information to ensure its accuracy can be extremely difficult, especially if the documents are not filed electronically. This problem is even greater right now, given the professional services labor shortage that makes it difficult to hire the right people for the job if they aren’t already employed at your organization.

What should my next steps be?

To get ready for a potential HRSA audit, there are at least three immediate steps you should take:

  1. Select a responsible point person. One person should be responsible for coordinating the process to ensure that nothing falls through the cracks or is overlooked.
  2. Keep your PRF filing reports on hand. Pull any related supporting documentation and collate it into one place if it isn’t already.
  3. Identify what support is needed by doing a gap analysis. Determine where you need additional support or expertise and seek to close these gaps before the notification of any audit process.

Insufficient documentation may result in the recapture of provider relief funding by the HRSA. Fortunately, a lack of documentation is preventable with the right support and resources in place.

Article
HRSA audit preparation: All you need to know

Thanks to a little-known law, eligible Massachusetts taxpayers will receive a tax credit in the form of a refund this fall—just in time for holiday shopping. Chapter 62F of the Massachusetts General Laws, a voter passed initiative from 1986, states that if state tax revenue collections exceed a cap tied to wage and salary growth, the surplus must be returned to the taxpayers. This tax credit was only triggered once before – 35 years ago.

According to the Mass.gov website, in Fiscal Year 2022, state tax revenues exceeded the cap by $2.941 billion—the sum of which will be returned to taxpayers by check or direct deposit in the coming months.

Governor Baker stated that a preliminary estimate of the refunds will be approximately 13% of the taxpayer’s personal income tax liability in 2021, though they will update that estimate in late October, once all 2021 tax returns have been filed.

More details on the tax refund:

  • Taxpayers, both resident and non-resident, who have filed a 2021 state tax return on or before September 15, 2023, are eligible for the refund.
  • The expected time frame for the issuance of refunds is expected to begin November 2022.
  • Individual refunds may be reduced by refund intercepts, such as unpaid child support or unpaid tax liability.
  • Massachusetts taxpayers can use this online refund estimator to calculate their estimated refund using information from their 2021 tax returns.

If you have questions, please contact a member of our state and local tax team.

Article
Chapter 62F law to give Massachusetts taxpayers a bonus refund