Have you started a business and are wondering what accounting method (cash or accrual) is best for you to use?  Do you find yourself with annual debate if you should switch accounting methods? Or do you have different accounting methods you use for financial reporting vs. tax reporting?

The two main methods of record keeping are either accounting for your income and expenses on a cash basis or on an accrual basis. Each method is uniquely different and each has its pros and cons.   You should understand each method in detail before deciding which to use.

The cash method is the most common used accounting method for tax purposes for small businesses with sales of less than $5 million a year.  Under this method you record income as your receive money and record expenses when you pay them.  The accrual method, on the other hand, accounts for income and expenses when the services are rendered, goods are received and actual sales occur.   This is typically the method that bankers, surety bonders and other regulatory agencies look for when requesting financial statements from you.

The cash method provides a better picture of how much actual cash your business has.  The accrual method shows the flow of business income and debts more accurately and therefore provides the most accurate picture of the financial state of your business. This method matches the revenue & expense in the same period that they occur.  As an example, you may have a stellar month/year of sales but your payment terms may not require payment until a later date.  In the cash method you would not show that income until it was actually received at that later date.  This would be beneficial for tax purposes to defer the income until you actually receive it, but it you are submitting financial statements to a financial lender it would not provide them useful information to provide you funding as they would see no sales during that period.

When determining which method is best for you, you should consider various factors with one of the most important being who is the intended user of the financial statements and financial data? Or who in the future could be an intended user?  When you start your business you may be just tracking items for tax purposes and not thinking of the larger picture of when your business grows.  Another important factor is what type of an accounting software package are you using?  Does it provide the flexibility to carry out your business and provide both accrual and cash basis reports?  A common small business software which provides the users this functionality is QuickBooks.

If you are considering implementing a method in your new business or switching to another method, you should consult your CPA and the intended users of your financial statements to understand what information they need and want.  If you are unable to meet with them and want a good starting point, you may want to start using software which will track it both ways for you.

Ever wonder how the seemingly perfect company with great employees ends up finding fraud occurring within their organization?  There are 3 key items when investigating fraud that are common to all frauds:

• Pressure/Incentive
• Opportunity
• Rationalization

These three items are known in professional literature as the “Fraud Triangle”

Pressure or incentive for fraud is really the motivation for the employee, management, vendor, etc. to commit fraud.  These motivations can range from things such as:

• Loss of a spouses job
• Sick parent or loved one
• Gambling losses & drug addictions
• Financial struggles
• Debt covenants
• Bonus structure

Opportunity is the vulnerable areas that the fraudster finds in a Company where they could easily get past the controls that are in place or the lack of controls to misstate financial information, embezzle money or other company assets.  Some examples of vulnerable areas in Companies are as follows:

• Lack of oversight/supervision
• Too much trust in one individual
• No segregation of duties within cash (i.e., same person that makes deposits & signs checks, also reconciles the bank account)

Rationalization is the last common item found and is how the fraudster rationalizes what they have done which helps them justify their actions. Common comments for rationalizing are:

• “I will pay it back”
• “They owe me this”
• “I have been treated unfairly”
• “We will only falsify our financial statements until we get over this temporary hump”

No matter the perpetrator of fraud (employee, management, or outside party) these three items always exist.   When doing a fraud risk analysis on the Company, ownership/management should look at the fraud triangle see if they can put steps in place or change procedures to mitigate pressures, incentives or opportunity in their Companies.

In the past few years there have been constant stories in the news of frauds occurring in businesses.  I am sure many that come to your mind immediately are Enron, WorldCom, Tom Petters, Denny Hecker and many more.  What you often don’t see in the media are the frauds that are occurring in small businesses the United States.  These frauds are often not publicized as business owners react immediately and try to avoid any damage to their business name and reputation.  There is often a misperception that fraud only affects large companies, but in reality it is occurring in companies of all sizes. In the 2010 survey of its members conducted by the Association of Certified Fraud Examiners (ACFE), 31% of all occupational frauds were committed against small businesses and the median loss in those schemes was $155,000. Are you aware that Brunberg Blatt and Company, Inc. provides both proactive and reactive forensic accounting services?

Our expertise lies in preventing and investigating embezzlements and financial statement fraud, evaluating financial statement disclosures in matrimonial and probate concerns, as well as, other types of forensic accounting matters.  Our team of experienced professionals assist with our forensic account services that range from preventative to investigative.

Preventative forensic services assist companies and individual organizations in evaluating their accounting records and results, with the goal of identifying any potential programs or issues within the transactions.  While not able to provide absolute assurance that no fraud exists, these engagements help companies and individual organizations before a problem materializes by providing an objective outside review by accountants specializing in the field of fraud.  The outside review also acts as a deterrent which strengthens the company’s internal controls.  Preventative forensic accounting services are broken down into two separate categories (Prevention and Detection & Monitoring), which we will go into additional detail on a future post.

Investigative forensic services deal the with the business reality of fraud that has occurred.  Extensive accounting, auditing and investigative skills are used to gather and present the financial evidence needed to resolve or refute a case.  These types of engagements, work to control reputation damage, resolve adversarial proceedings, minimize business interruption and limit economic loss to the company.