Friday, April 29, 2011

How do your clients protect themselves from fraud?

An example: The executive director of a service fulfillment company insists on using high quality paper for surveys, and demands control of the ordering process. This allows the executive to set up a false vendor, pay exorbitant prices for inferior paper, and then receive "loans" back from the vendor. If this was your client, would they be able to identify the fraud and properly gather evidence against the perpetrator?

Studies show that, on average, organizations lose 5% of their gross revenue to fraud. Our forensic specialists, through seminars and consultation, teach how to understand fraud and how to implement internal controls to avoid it. We also offer the expertise to uncover fraud and gather evidence.

Fighting fraud requires a clear comprehension of fraud theory. This includes understanding the Fraud Triangle: Pressure, Opportunity, and Rationalization-elements that fraud theory asserts must exist for an employee to commit fraud. It also requires proficiency in gathering evidence: seeking accounting irregularities and analytical anomalies, and compiling notes from properly conducted interviews, properly prepared and signed statements, and forensically acceptable electronic media images.

In our November 2010 Forensic Accounting Seminar, our team of specialists explored this case, teasing out the factors that allowed the fraud to take place, the investigation that revealed the extent of the fraud, and the evidence that was gathered.

In this case, another employee discovered the fraud by questioning the executive's insistence on high-quality paper and noticing a suspicious address for the vendor. The company took the correct steps to investigate: putting the executive on paid leave, interviewing employees and vendors, and creating legally acceptable disk images. After accounting for most of the fraud, they interviewed the executive, obtained a statement, notified law enforcement, and began civil proceedings. Building the case from the ground up facilitated both the civil and criminal cases.

With appropriate controls in place, organizations can minimize their risk for this kind of fraud and lessen the damage if it occurs. We look forward to opportunities to work with you in the future to explore ways to best protect your clients.

Tuesday, April 19, 2011

Deductibility of Skybox Rentals

I would like to review briefly the tax rules for deducting the expenses of renting a skybox or other private luxury box at a sporting event. Skybox rentals are subject to the general business-related entertainment expense rules as well as rules specific to skybox rentals.

In general, entertainment expenses are deductible if they are either “directly related to” or “associated with” the active conduct of your trade or business or investment activities. The direct relationship test is the harder of the two to meet. It requires an active business discussion during the entertainment event aimed at getting immediate revenue (as opposed to generalized good relations).

Accordingly, the “associated with” test is more likely to apply in the case of a skybox rental. To qualify under this test, you only need to have engaged in a substantial and bona fide business discussion before or after the entertainment event. If the discussion and entertainment event occur on the same day, the test is passed. If they are on different days, it may be more difficult to link the two, and the particular facts and circumstances involved will have to be looked at, e.g., whether a business client is from out of town, the length of the business meetings, etc.

In general, qualifying entertainment expenses are only 50% deductible. That is, if you spend $300 to entertain a client, the deduction is limited to 50% of your cost, or $150.

Special rules also apply for meals: they aren't deductible to the extent their cost is “lavish or extravagant” under the circumstances, and either you (or an employee of yours) must be present at the meal for the expense to qualify.

In addition, another limitation applies to the rental of a skybox or other private luxury box if the box is leased for more than one event. In that case, the deduction can only be based on the value of nonluxury box seats for the same event. For example, say you rent a 10-seat skybox at a stadium for $3,000 for three ballgames, where a nonluxury box seat costs $20. Ten seats times $20 for three events totals $600. Then, applying the general 50% limitation, the deduction would be $300, if the skybox was used for each event for entertainment “directly related to” or “associated with” the active conduct of your trade or business.

In determining whether the skybox rental is for more than one event, each game or other performance is counted as one event. Thus, a single lease for three or four World Series games is a lease for more than one event. On the other hand, two or more separate leases for the same event would be treated as one. That is, if three skyboxes are rented for a single game, the three leases would be treated as one, so the lease wouldn't be for more than one event. Additionally, if separate charges are incurred for food and beverages consumed in the skybox, these are deductible separately under the regular rules for such expenses rather than under the skybox limits.