Fraud is costly for all victimized companies, but it’s even worse in the construction sector. According to the Association of Certified Fraud Examiners’ Report to the Nations: 2020 Global Study on Occupational Fraud and Abuse, construction companies affected by fraud lose a median $200,000 per fraud incident, compared with $125,000 per incident for all organizations.
Some types of fraud are more prevalent in the construction industry, particularly payroll and billing fraud. These can lead to legal liability and fines. For example, paying under-the-table cash wages to avoid paying payroll taxes could result in criminal charges and significant penalties. To prevent your managers and workers from acting illegally or unethically, tighten your internal controls.
Certain internal controls are essential — including segregation of duties. This means that multiple employees should handle multiple financial or accounting tasks. For example, the person who processes cash transactions shouldn’t also prepare your company’s bank deposits. If you don’t have enough accounting employees to segregate duties, consider outsourcing some or all accounting functions. Also, have monthly bank statements sent directly to you or a manager independent of your accounting department.
You can reduce purchasing fraud threats by naming someone other than your purchasing agent — you or an estimator, for instance — to review vendor invoices, purchase orders and other documents. Also use prenumbered purchase orders and regularly check materials and supplies to ensure they correspond to what was ordered.
Kickbacks and bid-rigging can be kept to a minimum with scrutiny. If your company is suddenly winning bids that you haven’t in the past and that seem like a stretch, verify that your bid processes have been followed. Sometimes employees disguise illegal activities as change orders, so be sure to scrutinize each change order.
To minimize the risk of payroll fraud in your company, ask someone independent of your accounting department to verify the names and pay rates on your payroll. And if you don’t already, pay employees using direct deposit, rather than with checks or cash. You may also want to make surprise jobsite visits to compare employee headcounts to time reports and wage payments.
Don’t forget to enlist the help of fraud experts. We can review your accounting records and inventory and visit jobsites to help assess risk and suggest additional internal controls.
© 2021 Covenant CPA
No company can afford to operate without the right accounting software. When considering whether to buy a new product or upgrade their current solutions, however, business owners often fall prey to some common mistakes. Here are five gaffes to avoid:
1. Relying on a generic solution. Some companies rush into buying an accounting system without stopping to consider all their options. Perhaps most important, they may be missing out on specific versions for their industries.
For instance, construction companies can choose from many applications with built-in features specific to how their businesses work. Nonprofit organizations also have industry-specific accounting software. If you haven’t already, check into whether a product addresses your company’s area of focus.
2. Spending too much or too little. When buying or upgrading something as important as an accounting system, it’s easy to overspend. Those bells and whistles can be enticing. Then again, frugal-minded business owners may underspend, picking up a low-end product and letting staff deal with the headaches.
The ideal approach generally lies somewhere in the middle. Perform a thorough review of your accounting needs, transaction volume and required reports, as well as your employees’ proficiency and the availability of tech support. Then calculate a reasonable budgeted amount to spend.
3. Getting stuck in a rut. Assuming you already have an accounting system, one of the keys to managing it is knowing precisely when to upgrade. You don’t want to spend money unnecessarily, but you also shouldn’t risk errors or outdated functionality by waiting too long.
There’s no one-size-fits-all answer. Your financial statements are a potentially helpful source of information. A general rule of thumb says that, when revenues hit certain benchmarks (perhaps $5 million, $10 million or $15 million), a business may want to start thinking “upgrade.” The right tipping point depends on various factors, however.
4. Neglecting the importance of integration and mobile access. Once upon a time, a company’s accounting software was a standalone application, and data from across the company had to be manually entered into the system. But integration is the name of the game these days. You should be able to integrate your accounting system with all (or most) of your other software so that data can be shared seamlessly and securely.
Also consider the availability and functionality of mobile access to your accounting system. Many solutions now include apps that users can use on their smartphones or tablets.
5. Going it alone. Which accounting package you choose may seem an entirely internal decision. After all, you and your staff will be the ones using it, right? But you may be forgetting one rather obvious person who could help: your accountant.
We can help you assess and determine your accounting needs, set a feasible budget, choose the right solution (or upgrade) and implement it properly. Going forward, we can even periodically test your system to ensure it’s providing accurate data and generating the proper reports.
© 2020 Covenant CPA
One thing in plentiful supply in today’s business world is help. Orbiting every industry are providers, consultancies and independent contractors offering a wide array of support services. Simply put, it’s never been easier to outsource certain business functions so you can better focus on fulfilling your company’s mission and growing its bottom line. Here are four such functions to consider:
1. Information technology. This is the most obvious and time-tested choice. Bringing in an outside firm or consultant to handle your IT systems can provide the benefits we’ve mentioned — particularly in the sense of enabling you to stay on task and not get diverted by technology’s constant changes. A competent provider will stay on top of the latest, optimal hardware and software for your business, as well as help you better access, store and protect your data.
2. Payroll and other HR functions. These areas are subject to many complex regulations and laws that change frequently — as does the software needed to track and respond to the revisions. A worthy vendor will be able to not only adjust to these changes, but also give you and your staff online access to payroll and HR data that allows employees to get immediate answers to their questions.
3. Customer service. This may seem an unlikely candidate because you might believe that, for someone to represent your company, he or she must work for it. But this isn’t necessarily so — internal customer service departments often have a high turnover rate, which drives up the costs of maintaining them and drives down customer satisfaction. Outsourcing to a provider with a more stable, loyal staff can make everyone happier.
4. Accounting. You could bring in an outside expert to handle your accounting and financial reporting. A reputable provider can manage your books, collect payments, pay invoices and keep your accounting technology up to date. The right provider can also help generate financial statements that will meet the desired standards of management, investors and lenders.
Naturally, there are potential downsides to outsourcing these or other functions. You’ll incur a substantial and regular cost in engaging a provider. It will be critical to get an acceptable return on that investment. You’ll also have to place considerable trust in any vendor — there’s always a chance that trust could be misplaced. Last, even a good outsourcing arrangement will entail some time and energy on your part to maintain the relationship.
Is this the year your business dips its toe in the vast waters of outsourced services? Maybe. Our firm can help you answer this question, choose the right function to outsource (if the answer is yes) and identify a provider likely to offer the best value. Call us at 205-345-9898.
© 2019 Covenant CPA
Under the Tax Cuts and Jobs Act (TCJA), many more businesses are now eligible to use the cash method of accounting for federal tax purposes. The cash method offers greater tax-planning flexibility, allowing some businesses to defer taxable income. Newly eligible businesses should determine whether the cash method would be advantageous and, if so, consider switching methods.
Previously, the cash method was unavailable to certain businesses, including:
- C corporations — as well as partnerships (or limited liability companies taxed as partnerships) with C corporation partners — whose average annual gross receipts for the previous three tax years exceeded $5 million, and
- Businesses required to account for inventories, whose average annual gross receipts for the previous three tax years exceeded $1 million ($10 million for certain industries).
In addition, construction companies whose average annual gross receipts for the previous three tax years exceeded $10 million were required to use the percentage-of-completion method (PCM) to account for taxable income from long-term contracts (except for certain home construction contracts). Generally, the PCM method is less favorable, from a tax perspective, than the completed-contract method.
The TCJA raised all of these thresholds to $25 million, beginning with the 2018 tax year. In other words, if your business’s average gross receipts for the previous three tax years is $25 million or less, you generally now will be eligible for the cash method, regardless of how your business is structured, your industry or whether you have inventories. And construction firms under the threshold need not use PCM for jobs expected to be completed within two years.
You’re also eligible for streamlined inventory accounting rules. And you’re exempt from the complex uniform capitalization rules, which require certain expenses to be capitalized as inventory costs.
Should you switch?
If you’re eligible to switch to the cash method, you need to determine whether it’s the right method for you. Usually, if a business’s receivables exceed its payables, the cash method will allow more income to be deferred than will the accrual method. (Note, however, that the TCJA has a provision that limits the cash method’s advantages for businesses that prepare audited financial statements or file their financial statements with certain government entities.) It’s also important to consider the costs of switching, which may include maintaining two sets of books.
The IRS has established procedures for obtaining automatic consent to such a change, beginning with the 2018 tax year, by filing Form 3115 with your tax return. Contact us to learn more at 205-345-9898.
© 2018 Covenant CPA