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Making a
year-end
list and checking it twice

By: Melissa Magoon,

Josh is a Tax Specialist in the Firm’s Not-for-Profit Tax Group. He helps with the preparation of a variety of forms related to NFPs in the 990 series (Form 990, 990-T. 990-PF), and other tax projects and matters specific to non-profit organizations.

Joshua Maloney
01.17.23

Read this if your organization receives charitable donations.

As the holiday season has passed and tax season is now upon us, we have our own list of considerations that we would like to share—so that you don’t end up on the IRS’ naughty list!

Donor acknowledgment letters

It is important for organizations receiving gifts to consider the following guidelines, as doing some work now may save you time (and maybe a fine or two) later.

Charitable (i.e., 501(c)(3)) organizations are required to provide a contemporaneous (i.e., timely) donor acknowledgment letter to all donors who contribute $250 or more to the organization, whether it be cash or non-cash items (e.g., publicly traded securities, real estate, artwork, vehicles, etc.) received. The letter should include the following:

  • Name of the organization
  • Amount of cash contribution
  • Description of non-cash items (but not the value)
  • Statement that no goods and services were provided (assuming this is the case)
  • Description and good faith estimate of the value of goods and services provided by the organization in return for the contribution

Additionally, when a donor makes a payment greater than $75 to a charitable organization partly as a contribution and partly as a payment for goods and services, a disclosure statement is required to notify the donor of the value of the goods and services received in order for the donor to determine the charitable contribution component of their payment.

If a charitable organization receives noncash donations, it may be asked to sign Form 8283. This form is required to be filed by the donor and included with their personal income tax return. If a donor contributes noncash property (excluding publicly traded securities) valued at over $5,000, the organization will need to sign Form 8283, Section B, Part IV acknowledging receipt of the noncash item(s) received.

For noncash items such as cars, boats, and even airplanes that are donated there is a separate Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, which the donee organization must file. A copy of the Form 1098-C is provided to the donor and acts as acknowledgment of the gift. For more information, you can read our article on donor acknowledgments.

Gifts to employees

At the same time, many employers find themselves in a giving spirit, wishing to reward the employees for another year of hard work. While this generosity is well-intended, gifts to employees can be fraught with potential tax consequences organizations should be aware of. Here’s what you need to know about the rules on employee gifts.

First and foremost, the IRS is very clear that cash and cash equivalents (specifically gift cards) are always included as taxable income when provided by the employer, regardless of amount, with no exceptions. This means that if you plan to give your employees cash or a gift card this year, the value must be included in the employees’ wages and is subject to all payroll taxes.

There are, however, a few ways to make nontaxable gifts to employees. IRS Publication 15 offers a variety of examples of de minimis (minimal) benefits, defined as any property or service you provide to an employee that has a minimal value, making the accounting for it unreasonable and administratively impracticable. Examples include holiday or birthday gifts, like flowers, or a fruit basket, or occasional tickets for theater or sporting events.

Additionally, holiday gifts can also be nontaxable if they are in the form of a gift coupon and if given for a specific item (with no redeemable cash value). A common example would be issuing a coupon to your employee for a free ham or turkey redeemable at the local grocery store. For more information, please see our article on employee gifts.

Other year-end filing requirements

As the end of the calendar year approaches, it is also important to start thinking about Form 1099 filing requirements. There are various 1099 forms; 1099-INT to report interest income, 1099-DIV to report dividend income, 1099-NEC to report nonemployee compensation, and 1099-MISC to report other miscellaneous income, to name a few.

Form 1099-NEC reports non-employment income which is not included on a W-2. Organizations must issue 1099-NECs to payees (there are some exclusions) who receive at least $600 in non-employment income during the calendar year. A non-employee may be an independent contractor, or a person hired on a contract basis to complete work, such as a graphic designer. Payments to attorneys or CPAs for services rendered that exceed $600 for the tax year must be reported on a Form 1099-NEC. However, a 1099-MISC would be sent to an Attorney for payments of settlements. For additional questions on which 1099 form to use please contact your tax advisor.

While federal income tax is not always required to be withheld, there are some instances when it is. If a payee does not furnish their Tax Identification Number (TIN) to the organization, then the organization is required to withhold taxes on payments reported in box 1 of Form 1099-NEC. There are other instances, and the rates can differ so if you have questions, please reach out to your tax advisor. 1099 forms are due to the recipient and the IRS by January 31st.

Whether organizations are receiving gifts, giving employee gifts, or thinking about acknowledgments and other reporting we hope that by making our list and checking it twice we can save you some time to spend with your loved ones this holiday season. We wish you all a very happy and healthy holiday season!

Related Professionals

Principals

BerryDunn experts and consultants

Read this if you are an NFP interested in being a fiscal sponsor. 

Charitable projects or startup charities awaiting their IRS determination may look for an established 501(c)(3) organization to lend their tax-exempt status and certain administrative benefits onto the project or startup so that it can receive grants and tax-deductible contributions that it would otherwise not be able to receive. That’s where you come in. Now that you have agreed to be a fiscal sponsor, what does that actually mean?

Fiscal sponsorship definition

Fiscal sponsorship is an arrangement between a 501(c)(3) public charity, the “Sponsor” and a “Project” (an organization or a group of individuals not recognized as a 501(c)(3)).

How does fiscal sponsorship work?

Fiscal sponsorship allows the Sponsor to accept funds restricted to the Project on the Project’s behalf. The Sponsor accepts the responsibility to make sure the funds are spent to achieve the Project’s goals. The Sponsor has full control and discretion of the donated funds. All revenue collected and expenses paid out are reported on the Statement of Operations of the Sponsor. The activity of the Project must be consistent and in furtherance of the Sponsor’s tax-exempt purpose. A Sponsor cannot have this type of arrangement with any Project—it must be consistent with the Sponsor’s exempt mission. 

Arrangement types

There are two common types of Fiscal Sponsorship arrangements, the Direct Model and the Grant Model

In the Direct Model the Project becomes an integrated part of the Sponsor. The Project does not have a legal identity separate from the Sponsor. Donations and grants for the Project are directly received by the Sponsor, and the use of the funds is reported on the Sponsor’s tax filings. An employer-employee relationship is formed between the Sponsor and the Project so that staff and volunteers of the Project become employees and volunteers of the Sponsor. Due to this relationship, the Sponsor is both fiscally and legally liable for all actions of the Project and thus must exercise significant control over the Project’s actions and funding to protect its tax-exempt status. 

In the Grant Model the Sponsor and the Project have a grantor-grantee relationship. The Project submits a grant request to the Sponsor detailing the project and its activities. The Sponsor approves the request and then receives funds on behalf of the Project and disperses them accordingly. The Sponsor may receive a one-time grant on behalf of the Project, or the relationship may be continual. In this model, the Sponsor is not legally liable for all actions of the Project, but is still fiscally liable for the Project’s actions. The Sponsor must still exercise enough control over the Project’s funds to ensure they are used in accordance with the grant agreement. Also, unlike the direct model, the Project is still required to comply with any tax reporting requirements required by the legal status of the Project. 

What are some advantages of Fiscal Sponsorship?

  • Projects are able to “test the waters” before deciding to be a separate independent entity.
  • Donors are able to make tax deductible charitable contributions now to a cause that is not yet recognized as a tax-exempt entity.
  • By working with an established 501(c)(3) entity the Project will have access to a larger network of donors and experience in fundraising.
  • The Project is not required to incorporate or file for their own tax-exempt status right away, saving start-up fees.
  • Fiscal Sponsors provide additional services to the Project such as administrative support, accounting, office space, grant writing and technical support which the Project may not be able to afford.

What are some disadvantages of fiscal sponsorship?

  • Depending on the model used, legal and fiscal control of the Project is held by the Sponsor creating a loss of control for the Project.
  • A Fiscal Sponsor may charge an administrative fee for use of their facilities, services, and staff.
  • Credit for the Project may fall onto the Sponsor as donations are received and controlled by the Sponsor.

Fiscal Sponsorship vs. Fiscal Agency

Fiscal Agency is an arrangement with an established charity to act as the legal Agent for a Project, but the Agent doesn’t retain discretion and control of the donated funds. The Agent is acting on behalf of the Project who ultimately has the right to control the Agent’s activities. Funds contributed to a Project with a fiscal Agent are not tax deductible to the donor. Typically the collections and disbursements made by the Sponsor are not reported on the Sponsor’s Statement of Operations, but instead are recorded through their balance sheet.

IRS criteria for a Fiscal Sponsorship

  • Grants/donations are given to a 501(c)(3) tax-exempt organization (the Sponsor) that acts as a guardian of the funds for a project that does not have 501(c)(3) status.
  • The Sponsor must use funds received for specific charitable projects that further the Sponsor’s own tax-exempt purpose.
  • The Sponsor must retain discretion and control as to the use of the funds.
  • The Sponsor must maintain records that substantiate the use of funds for appropriate 501(c)(3) purposes.
  • Typically, the Project will be short-term or the sponsored group is seeking tax-exempt status.

If criteria are not met, the IRS can deem donations as not tax-deductible.

Other items of note

  • There must be a written agreement in place.
  • The 501(c)(3) Sponsor should periodically review activities of the Project to ensure they remain consistent with their own tax-exempt mission (including internal audits of financial reports and any bank accounts of the Project).
  • The Sponsor must ensure the Project does not engage in prohibited activities (i.e. political campaign activities or conducting excessive amounts of unrelated business income activities).
  • The Sponsor must be able to clearly communicate to donors that funds earmarked for the Project are subject to their discretion and control, and cannot guarantee funds will be automatically advanced to the Project.
  • The Sponsor can also provide general and administrative support services to the Project and charge a fee (generally 5-15%) of donations made to the Project.

As you can see it is not as easy as just agreeing to be a Fiscal Sponsor. There are reporting requirements and decisions to be made to ensure that the arrangement qualifies as intended with the IRS so that neither the Project nor the Sponsor receive any unintended consequences.

Article
So you want to be a fiscal sponsor. Now what?

Read this if you are an employer that gives employee gifts.

The holiday season is officially in full swing! Unlike Ebenezer Scrooge, many employers are looking for ways to recognize the dedication and hard work of their employees. This gratitude often comes in the form of a holiday gift of some fashion. While this generosity is well-intended, gifts to employees can be fraught with potential tax consequences organizations should be aware of. This article will attempt to demystify the rules surrounding employee gifts to ensure organizations and their employees have a joyous holiday season.

Holiday gifts: Taxable or not?

So, are holiday gifts to employees taxable? The answer, as is so often the case with tax questions, is it depends. The IRS is very clear that cash and cash equivalents (specifically including gift cards) are always included as taxable income when they are provided by the employer, regardless of amount, with no exceptions. This means that if you plan to give your employees cash or a gift card this year, the value must be included in the employees’ wages and is subject to all payroll taxes. Bah humbug indeed!

Nontaxable gift options

There are however, a few ways to make nontaxable gifts to employees. In each instance the gift must be noncash (nor convertible to cash). IRS Publication 15 offers a variety of examples of de minimis (minimal) benefits, defined as any property or service you provide to an employee that has a minimal value, making the accounting for it unreasonable and administratively impracticable. Examples include holiday or birthday gifts with a low market value (a card and flowers, fruit baskets, a box of chocolates, etc.), or occasional tickets for theater or sporting events, among others. Again, cash and cash equivalents never qualify. The key is that the gift must be occasional or unusual in its frequency and must not be a form of disguised compensation. While de minimis benefits can be a gray area, the IRS has generally deemed items with a value exceeding $100 as too large to qualify as de minimis.

Holiday gifts can also be nontaxable if they are in the form of a gift coupon, if given for a specific item (with no redeemable cash value). A common example would be issuing a coupon to your employee for a free ham or turkey redeemable at the local grocery store. Nontaxable employee gifts can also come in the form of achievement awards, either for length of service or for safety achievements. The proverbial gold watch upon retirement is a classic example of such a gift. Here too, the award must always be tangible personal property—never cash or a cash equivalent. There are additional rules and value thresholds on any such gift. Please contact a member of your tax team to discuss these specific details further.

Whether employers are considering supplying gift cards, turkeys, or something in between, we hope all find this guidance helpful and still in the giving spirit! Coincidentally, at the end of A Christmas Carol, Ebenezer himself gives Bob Cratchit a turkey on Christmas day. Of course Mr. Scrooge would be aware of the potential tax consequences! We wish you all a very happy and healthy holiday season!

Not-for-profit resources

If you are a not-for-profit organization receiving charitable gifts, read Donor Acknowledgements: We have to file what?

Article
What employers need to know before making gifts to employees

Editor’s note: read this if you work for, or are affiliated with, a charitable organization that receives donations. Even the most mature nonprofit organizations may miss one of these filings once in a while. Some items (e.g., the donor acknowledgment letter) may feel commonplace, but a refresher—especially at a particularly busy time of the year as it pertains to giving—can fend off fines.

As the holiday season is now in full swing, the season of giving is also upon us. Perhaps not surprisingly, the month of December is by far the most charitable month of the year, accounting for almost one-third of all charitable gifts made annually. And with all that giving comes the requirement of charitable organizations to provide donor acknowledgments, a formal “thank you” of the gift being received. Different gifts require differing levels of acknowledgment, and in some cases an additional IRS form (or two) may need to be filed. Doing some work now may save you time (and a fine or two) later. 

While children are currently busy making lists for Santa Claus, in the spirit of giving we present to you our list of donor acknowledgment requirements―and best practices―to help you gain control of this issue for the holiday season and beyond.

Donor acknowledgment letters

Charitable (i.e., 501(c)(3)) organizations are required to provide a donor acknowledgment letter to each donor contributing $250 or more to the organization, whether it be cash or non-cash items (i.e., publicly traded securities, real estate, artwork, vehicles, etc.) received. The letter should include the following: 

  1. Name of the organization
  2. Amount of cash contribution
  3. Description of non-cash items (but not the value) 
  4. Statement that no goods and services were provided (assuming this is the case)
  5. Description and good faith estimate of the value of goods and services provided by the organization in return for the contribution, if any
  6. Statement that goods or services provided by the organization in return for the contribution consisted entirely of intangible religious benefit, if any

It is not necessary to include either the donor’s social security number or tax identification number on the written acknowledgment and as a best practice should not be included in the letter.

In addition to including the elements above, the written acknowledgment is also required to be contemporaneous, that is, sent out in a timely fashion. According to the IRS, a donor must receive the acknowledgment by the earlier of:

  • The date on which the donor actually files his or her individual federal income tax return for the year of the contribution
  • The due date (including extensions) of the return in order to be considered contemporaneous

Quid pro quo disclosure statements

When a donor makes a payment greater than $75 to a charitable organization partly as a contribution and partly as a payment for goods and services, a disclosure statement is required to notify the donor of the value of the goods and services received in order for the donor to determine the charitable contribution component of their payment.

An example of this would be if the organization sold tickets to its annual fundraising dinner event. Assume the ticket costs $100 and at the event the ticketholder receives a dinner valued at $40. In this example, the donor’s tax deduction may not exceed $60. Because the donor’s payment (quid pro quo contribution) exceeds $75, the charitable organization must furnish a disclosure statement to the donor, even though the deductible amount doesn’t exceed $75.

It’s important to note that there are some exclusions to these requirements if the value received is considered to be de minimis (known as the Token Exception), but the value received needs to be relatively small (e.g., receiving a coffee mug with a picture of the organization’s logo on it). Please consult your tax advisor for more details.

If the organization does not issue disclosure statements, the IRS can issue penalties of $10 per contribution, not to exceed $5,000 per fundraising event or mailing. An organization may be able to avoid the penalty if reasonable cause can be demonstrated.

Receiving or selling donated noncash property? Forms 8283 & 8282 may be required.

If a charitable organization receives noncash donations, it may be asked to sign Form 8283. This form is required to be filed by the donor and included with their personal income tax return. If a donor contributes noncash property (excluding publicly traded securities) valued at over $5,000, the organization will need to sign Form 8283, Section B, Part IV acknowledging receipt of the noncash item(s) received.

By signing Form 8283, the donee organization is not only acknowledging receipt, but is also affirming that if the property being received is sold, exchanged, or otherwise disposed of within three years of the original donation date, the organization will be required to file Form 8282. A copy of this form is filed with the IRS and must also be provided to the original donor. Form 8282 is not required for sales of donated publicly traded securities. The penalty for failure to file Form 8282 when required is generally $50 per form.

Cars, boats, and yes, even airplanes? That would be Form 1098-C.

An airplane? Yes, even an airplane can be donated, and the donee organization must file a separate Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, with the IRS for each contribution of a qualified vehicle that has a claimed value of more than $500. Contemporaneous written acknowledgment requirements apply here too, and Form 1098-C can act as acknowledgment for this purpose. An acknowledgment is considered contemporaneous if it is furnished to the donor no later than 30 days after the date of the contribution if you plan to use the item for a mission-related purpose, or 30 days after the date of the sale of the item to an unrelated third party.

Penalties for failure to provide contemporaneous written acknowledgment for qualified vehicles can be pretty stiff, generally calculated as a percentage of the sale price if sold, or a percentage of the claimed value if not sold. Should you have any questions or receive a request regarding any of the forms noted above, please consult your tax advisor.

As you can see, the rules around donor acknowledgments can seem a lot like Grandma’s fruitcake―complex and perhaps a bit on the nutty side. When issuing donor acknowledgments this holiday season and beyond, be sure to review the list above and check it twice. Doing so may end up keeping you off of the IRS’s naughty list!

Article
Donor acknowledgments: We have to file what?

Read this if you work for a healthcare organization that serves uninsured or self-pay patients.

The No Surprises Act was passed in 2020 as part of a COVID relief package, with the goal of reducing surprise bills for patients who received medical or surgical services. One part of the act requires healthcare facilities and providers to give Good Faith Estimates (GFEs) to uninsured and self-pay patients starting on January 1, 2022. Read on for frequently asked questions about this topic, an update for 2023, and resources where you can find more information.

Frequently asked questions about good faith estimates for healthcare

What is a good faith estimate?

A Good Faith Estimate (GFE) is a document provided to a patient that details the expected charges for healthcare services provided. It is not a bill.

Who needs to provide GFEs, and to whom?

At this time, GFEs need to be provided to uninsured and self-pay patients. 

The following healthcare facilities must comply:

  • Federally Qualified Health Centers (FQHCs)
  • FQHC Look-Alikes
  • Tribal/Urban Indian Health Centers
  • Rural Health Clinics (RHCs)
  • Hospitals
  • Hospital outpatient departments
  • Critical access hospitals
  • Title X Family Planning Clinics
  • Health care providers who serve uninsured and self-pay patients

How should information about the GFE process be communicated to uninsured and self-pay individuals?

Information about the availability of GFEs for uninsured or self-pay individuals must be:

  • Written in a clear and understandable manner and prominently displayed:
  • On the facility’s website and easily searchable from a public search engine
  • In the office (such as in the patient waiting room), and
  • Onsite where scheduling or questions about the cost of items or services occur, such as at the registration or check-out areas
  • Explained verbally when scheduling an item or service or when questions about the cost of items or services occur
  • Made available in accessible formats, and in the languages spoken by individuals considering or scheduling items or services

How does the US Department of Health and Human Services (HHS) define uninsured and self-pay individuals?

HHS has a two-fold definition:

  • Individuals who have no health insurance coverage
  • Individuals who do have health insurance coverage, but do not want to have a claim submitted to their insurer

Both of these groups of individuals must receive a GFE.

What content is required in a GFE?

A GFE must include the following:

Patient information

  • The patient’s name and date of birth

Services estimated

  • A description of the primary item or service in clear and understandable language and, if applicable, the date the primary item or service is scheduled
  • A list of items or services reasonably expected to be furnished for the primary item or service

Information about services, providers, and estimated charges

  • Applicable diagnosis codes, expected service codes, and expected charges associated with each listed item or service
  • The name, National Provider Identifier, and Tax Identification Number of each provider or facility represented in the GFE, and the State and office of the facility’s location where the items are services are expected to be provided
  • Lists of items or services that the provider or facility anticipates will require separate scheduling and that are expected to occur before or following the expected period of care for the primary item or service. (A disclaimer should state that separate GFEs will be issued upon scheduling or upon request of the listed items or services.)

Disclaimers

  • A disclaimer that there may be additional items or services that the provider or facility recommends as part of the course of care that must be scheduled or requested separately and are not included in the GFE
  • A disclaimer that the information provided in the GFE is only an estimate and that actual items, services, or charges may differ from the GFE
  • A disclaimer that the individual has a right to initiate the patient-provider dispute resolution process if the actual billed charges are substantially in excess of the expected charges included in the GFE.
  • “Substantially in excess” is defined as at least $400 more than the total amount of expected charges.
  • This disclaimer must include instructions about where an uninsured or self-pay individual can find information about how to initiate the patient-provider dispute resolution process and state that the initiation of the patient-provider dispute resolution process will not adversely affect the quality of health care services that are furnished.
  • HHS strongly encourages providers and facilities to include an email address and telephone number for someone within the provider’s or facility’s office that has the authority to represent the provider or facility in a billing dispute.
  • A disclaimer that a GFE is not a contract and does not require the uninsured or self-pay individual to obtain the items or services identified in the GFE.

HHS encourages sliding fee discount providers and facilities to include information about the provider’s or facility’s sliding fee schedule and any other financial protections that it offers. Sliding fee discount providers and facilities have flexibility to determine how best to demonstrate the expected charges associated with each listed item or service, and to determine what additional information to include, if any.

What are the required methods for providing a GFE?

A GFE must be provided in written form either on paper or electronically, based on the individual’s requested method of delivery and within the required time frames. GFEs that are provided electronically must be provided in a manner that the individual can both save and print. A GFE must be written using clear and understandable language that can be understood by the average uninsured or self-pay individual.

If the individual requests a GFE in a method other than on paper or electronically (such as by telephone or verbally in person), the provider or facility may verbally inform the individual of the information contained in the GFE. However, the provider or facility must also issue the GFE in written form.

What is the timeline for providing a GFE?

When providing a GFE to an uninsured or self-pay patient, the following time frames must be followed.

When the service is scheduled: When the GFE must be provided:
If scheduled at least 3 business days prior to the date that the item or service will be furnished Not later than 1 business day after the date of scheduling
If scheduled at least 10 business days prior to the date that the item or service will be furnished Not later than 3 business days after the date of scheduling

Please note, when a GFE is requested by an uninsured or self-pay patient, a GFE must be provided not later than 3 business days after the date of the request.

How long should a provider or facility retain a copy of GFEs?

A GFE is considered part of the patient’s medical record and must be maintained in the same manner. At the request of an uninsured or self-pay individual, the provider or facility must provide a copy of any previously issued GFE within the last six years.

Update for 2023

  • As of the start of 2023, all of the preceding requirements remain in place.
  • As of January 1, 2023, HHS has paused enforcement on the next phase of GFE implementation

The next phase of GFE implementation, which began on January 1, 2023, requires that GFEs for uninsured and self-pay patients include expected charges from co-providers or co-facilities that are part of an episode of care for a patient coordinated by a provider or facility. However, on December 2, 2022, HHS paused its enforcement of this requirement based on comments it received during the rulemaking process indicating that compliance with this provision was likely not possible by January 1, 2023.

HHS is extending enforcement discretion, pending future rulemaking, for situations where GFEs for uninsured or self-pay individuals do not include expected charges from co-providers or co-facilities. We will provide an update when HHS issues any communication about changes to GFE-related enforcement.

Helpful resources for FQHC, RHCs, and other healthcare facilities

If you have questions about the information provided in this article or are interested in an external review of your healthcare facility’s compliance with current GFE requirements, please contact Robyn Hoffmann or Mary Dowes.

Article
Healthcare Good Faith Estimates (GFEs): Updates for 2023

Read this if you are at a financial institution and concerned about fraud.

Financial fraud by the numbers

Back in 2021, BerryDunn’s David Stone wrote about occupational fraud at financial institutions. This article mainly cited information from a 2020 Report to the Nations: Banking and Financial Services Edition (2020 Report) published by the Association of Certified Fraud Examiners (ACFE). Fast forward to 2023, and the ACFE’s 2022 Report to the Nations (2022 Report) displays that occupational fraud continues to be a concern.

Financial institutions account for 22.3% of all occupational fraud worldwide, up from 19% in the 2020 Report. These fraud causes have a median loss of $100,000 per case—which was the same as the 2020 Report. Cases had decreased from the 2020 Report from 368 to 351; however, financial institutions remain the most susceptible industry to occupational fraud.

What does a fraudster look like, and how do they commit their crimes? How do you prevent fraud from happening at your organization? And how can you strengthen an already robust anti-fraud program? These questions, raised in David’s 2021 article, remain relevant today. 

Profile of a fraudster

One of the most difficult tasks any organization faces is identifying and preventing potential cases of fraud. This is especially challenging because most employees who commit fraud are first-time offenders with no record of criminal activity, or even termination at a previous employer.

The 2022 Report reveals a few commonalities between fraudsters. The amounts from the 2020 Report are shown in parentheses for comparison purposes:

  • 6% of fraudsters had a prior criminal background (3%)
  • Men committed 73% of fraud and women committed 27% (71%, 29%)
  • 37% of fraudsters were an employee, 39% worked as a manager, and 23% operated at the executive/owner level (56%, 27%, 14%)
  • The median loss for fraudsters who had been with their organizations for more than five years was $193,500 compared to $75,000 for fraudsters who had been with their organizations for five years or less ($150,000, $86,000)

Employees who committed fraud displayed certain behaviors during their schemes. The ACFE reported these top red flags in its 2022 Report:

  • Living beyond means—39% (42%)
  • Financial difficulties—25% (33%)
  • Unusually close association with vendor/customer—20% (15%)
  • Divorce/family problems—11% (14%)

These figures give us a general sense of who commits fraud and why. But in all cases, the most pressing question remains: how do you prevent the fraud from happening?

Preventing fraud: A two-pronged approach

As a proactive plan for preventing fraud, we recommend focusing time and energy on two distinct facets of your operations: leadership tone and internal controls.

Leadership tone

The Board of Directors and senior management are in a powerful position to prevent fraud. By fostering a top-down culture of zero tolerance for fraud, you can diminish opportunity for employees to consider, and attempt, fraud.

It is crucial to start at the top. Not only does this send a message to the rest of the company, but frauds committed at the executive level had a median loss of $337,000 per case, compared to a median loss of $50,000 when an employee perpetrated the fraud. This is compared to a median loss of $1,265,000 and $77,000 per case, respectively, in the 2020 Report.

Internal controls

Every financial institution uses internal controls in its daily operations. Override of existing internal controls, lack of internal controls, and lack of management review were cited in the 2022 Report as the most common internal control weaknesses that contribute to occupational fraud.

The importance of internal controls cannot be overstated. Every organization should closely examine its internal controls and determine where they can be strengthened—even financial institutions with strong anti-fraud measures in place.

The experts at BerryDunn have created a checklist of the top 10 controls for financial institutions, available in our whitepaper on preventing fraud. This is a list we encourage every financial leader to read. By strengthening your foundation, your company will be in a powerful place to prevent fraud. 

Read more to prevent fraud

Employees are your greatest strength and number one resource. Taking a proactive, positive approach to fraud prevention maintains the value employees bring to a financial institution, while focusing on realistic measures to discourage fraud.

In our free white paper on preventing financial institution fraud, we take a deeper look at how to successfully implement a strong anti-fraud plan. Download the white paper here.

Commit to strengthening fraud prevention and you will instill confidence in your Board of Directors, employees, customers, and the general public. It’s a good investment for any financial institution. If you have questions about your specific situation, please visit our Ask the Advisor page to submit them, or contact a member of the Financial Institutions team. We’re here to help.

Article
Preventing fraud at financial institutions 2023 update: An anti-fraud plan is the best investment you can make

Read this if you are a not-for-profit executive, CFO, or audit professional.

You may have heard—or tried not to—a lot about the new Current Expected Credit Loss (CECL) accounting standard1 that has consumed much of the banking industry for the past few years. While the impact to banks has snagged most of the headlines, webinars, and conference sessions, the new accounting standard applies to a broad range of financial instruments, meaning it affects a lot of companies and organizations outside the banking industry. Assessing your readiness is critical, as the standard goes into effect for all remaining organizations in 2023. 

Does CECL affect your organization? 

The first step is determining if you have any in-scope financial instruments; ASU 326-20-15-2 is the section of the new standard that identifies these assets. Please do consult the standard directly but, to briefly explain, it applies to financial assets measured at amortized cost basis, including financing receivables, held-to-maturity debt securities, trade and other receivables, net investments in leases recognized by lessors, and off-balance-sheet credit exposures for loans, letters of credit, and financial guarantees not accounted for as insurance. If your organization has any of these financial assets – receivables and leases are likely the major categories for non-banks – then you will need to ensure you comply with the requirements of the new standard. 

What’s different?

In addition to applying to many more types of financial instruments, CECL meaningfully changes the way in which reserves are calculated. First, all in-scope assets must be segmented—or grouped—by common risk-based characteristics, determined and documented by each organization. ASC 326-20-55-5 provides examples of risk characteristics that individually, or in combination, may define a segment—a few examples include financial asset type, credit score or rating, geographical location, or term.

Once you have determined your segments, there are at least seven new methods for calculating the segment-level reserve. While the methods are mentioned in the standard, we’ve compiled a brief overview of the various methods for reference.

Another key change is that all in-scope assets must be considered for reserve—even those for which the likelihood of loss is small. Regardless of which allowable method(s) you choose for your calculation, the method is based on a life-of-asset time frame, meaning that you need to estimate risk of loss over the remaining time you believe the financial asset will be on your books.

Additionally, the standard requires you consider how this risk might change given a reasonable and supportable forecast of economic conditions over that remaining life. As a result of these key new elements, any in-scope financial asset(s) for which you compute and carry a $0 reserve must be very well-documented and explained.

New required financial statement disclosures

One final note: There are some new financial statement disclosures required with CECL adoption. Beyond those, there may be other CECL-related information either you want to share, or your audit/tax firm recommends be disclosed. Consulting with your auditor at least one quarter prior to financial statement preparation will help make sure you aren’t scrambling last minute to draft new language or tables. 

No matter what stage of CECL readiness you are in, our team of experts are here to help you navigate the requirements as efficiently and effectively as possible.
 

1Accounting Standards Codification (ASC) 326

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CECL isn't just for banks: Are you ready?

Read this if your company is considering financing through a sale leaseback.

In today’s economic climate, some companies are looking for financing alternatives to traditional senior or mezzanine debt with financial institutions. As such, more companies are considering entering into sale leaseback arrangements. Depending on your company’s situation and goals, a sale leaseback may be a good option. Before you decide, here are some advantages and disadvantages that you should consider.

What is a sale leaseback?

A sale leaseback is when a company sells an asset and simultaneously enters into a lease contract with the buyer for the same asset. This transaction can be used as a method of financing, as the company is able to retrieve cash from the sale of the asset while still being able to use the asset through the lease term. Sale leaseback arrangements can be a viable alternative to traditional financing for a company that owns significant “hard assets” and has a need for liquidity with limited borrowing capacity from traditional financial institutions, or when the company is looking to supplement its financing mix.

Below are notable advantages, disadvantages, and other considerations for companies to consider when contemplating a sale leaseback transaction:

Advantages of using a sale leaseback

Sale leasebacks may be able to help your company: 

  • Increase working capital to deploy at a greater rate of return, if opportunities exist
  • Maintain control of the asset during the lease term
  • Avoid restrictive covenants associated with traditional financing
  • Capitalize on market conditions, if the fair value of an asset has increased dramatically
  • Reduce financing fees
  • Receive sale proceeds equal to or greater than the fair value of the asset, which generally is contingent on the company’s ability to fund future lease commitments

Disadvantages of using a sale leaseback

On the other hand, a sale leaseback may:

  • Create a current tax obligation for capital gains; however, the company will be able to deduct future lease payments.
  • Cause loss of right to receive any future appreciation in the fair value of the asset
  • Cause a lack of control of the asset at the end of the lease term
  • Require long-term financial commitments with fixed payments
  • Create loss of operational flexibility (e.g., ability to move from a leased facility in the future)
  • Create a lost opportunity to diversify risk by owning the asset

Other considerations in assessing if a sale leaseback is right for you

Here are some questions you should ask before deciding if a sale leaseback is the right course of action for your company: 

  • What are the length and terms of the lease?
  • Are the owners considering a sale of the company in the near future?
  • Is the asset core to the company’s operations?
  • Is entering into the transaction fulfilling your fiduciary duty to shareholders and investors?
  • What is the volatility in the fair value of the asset?
  • Does the transaction create any other tax opportunities, obligations, or exposures?

The Financial Accounting Standards Board’s new standard on leases, Accounting Standards Codification (ASC) Topic 842, is now effective for both public and private companies. Accounting for sale leaseback transactions under ASC Topic 842 can be very complex with varying outcomes depending on the structure of the transaction. It is important to determine if a sale has occurred, based on guidance provided by ASC Topic 842, as it will determine the initial and subsequent accounting treatment.

The structure of a sale leaseback transactions can also significantly impact a company’s tax position and tax attributes. If you’re contemplating a sale leaseback transaction, reach out to our team of experts to discuss whether this is the right path for you.

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Is a sale leaseback transaction right for you?