Preparing for a financial statement audit can be an overwhelming task. But there are several simple things you can do to get through your audit this year with minimal frustration: 

 10. Begin working on your schedules well in advance of the audit. And remember, if you have questions, your auditor is just a phone call or email away. 

 9. Keep track of issues you struggled with during the year and communicate those to your auditor. It will help the auditor key in on important areas at the beginning of the audit and prevent surprises down the road. 

 8. Get the confirmations back to the auditors quickly! The more time there is to send these out the better chance we have of getting them back. Every confirmation that’s not returned creates more work for everyone. 

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Anyone…at least that is how one should think when analyzing fraud risks.

Fraud is a hot topic. If you don’t think so ask someone who used to work for Enron or invested in Madoff’s investment company - they might change your mind. Because of instances like these, people often think of fraud in large terms, and the mention of the word carries a lot of weight. But fraud can occur in all sizes and forms.

Who is likely to commit fraud? Most people use what is commonly known as the fraud triangle to identify areas where one can commit fraud. The three criteria are Pressure/Incentive, Opportunity, and Rationalization.

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There have definitely been tougher economic times in our country’s history, but the recession we are in now calls for effective leadership. A very important characteristic of managing in hard times is true leadership. A leader’s role changes drastically when business is not booming and there is more down time than usual. Leaders have to make tough, maybe even controversial, decisions. A leader has to be assertive and lead more directly than in good times where delegating responsibilities might be more effective. Mark Cook wrote in the Fort Worth Business Press that leaders have to assert different skills in tough times.

Honesty and Authenticity- communications with employees should show your understanding of the current events and seek input from talented people. Being honest about your concerns and opening communications will help employees see the reality and help them take ownership of the solutions.

Day-to-day Operational Presence- this is not to be confused with micromanagement. This process is more about understanding the impact of the current times at a lower level in order to dissect problems and continue high-level strategy. Top employees will respond to this involvement if it is seen as high-level investigation to make their processes easier and more efficient. These hard times require leadership focus in all facets of the organization.

Optimistic Realism- being either too optimistic or too pessimistic create doubt in employees. Focus on the solutions to the problems and do not dwell in the problems as they appear. Be realistic about performance measures and reward smart solutions and outcomes. Do not give employees a false sense of security or a false sense of insecurity due to business slow downs. You can lose talented employees if they feel uncertainty.

Smart People Decisions- leaders have to make tough personnel decisions in hard times. Be certain changes are made based upon performance and contribution to the company. Develop or better implement performance guidelines to grade your employee group. Hard times are not forgiving to decisions made based on loyalty or politics. Your company cannot afford to keep or hire a liability in this market. You may be able to replace low performers with talented individuals who are currently in an uncertain job or have been laid off due to the current economic climate.

Future Watch- build with the future in mind knowing that the economy will turn around at some point. Can you make key acquisitions now and exploit these when the economy recovers? Use this time to innovate processes, learn new techniques for operations, and look for gaps in your current processes. You can come out on the other side of this economic chasm in much stronger position operationally.

Being a strong leader includes being willing to change current practices. The skills Mark Cook focuses on could help you improve your company for the long term.

Assistance on this post provided by Emily Strong.

A tax partnership is a tool used in certain drilling arrangements to ensure that the working interest owner who bears the cost of drilling a well also gets the tax benefits related to those costs.

Consider the following example.  A working interest owner who doesn’t have the cash to drill and develop his property strikes a deal with a third party operator to fund all of the drilling costs in exchange for a working interest in the property.  Even though the operator will incur all of the costs to drill that well, he can only deduct IDC in proportion to his ultimate working interest percentage.  The remaining IDC is treated as additional leasehold cost and is depleted (deducted) over time.  As a result, tax deductions for IDC paid in one year are not realized for tax purposes until later years. 

Here’s where a tax partnership  can be a huge benefit to the operator.  By establishing a tax partnership and contributing all of the property and the costs of drilling and development to that partnership, all of the costs incurred (and resulting tax benefits) can be allocated to the operator regardless of the ultimate working interest percentages.

Using a tax partnership is not without its hassles.  The biggest headache is the administrative burden of accounting for the activity of the partnership and the requirement to file a federal partnership tax return each year.  Therefore, you should carefully consider the tax implications before deciding to use a tax partnership.

If you have questions about whether you might benefit from using a tax partnership, we can help.

One of the common issues encountered in the setup of a drilling company is the handling of the economic deal of the partners in the drafting of the partnership agreement.

Many deals, especially those financed by investment funds, have a tiered or waterfall structure for allocating income and distributions.  It is normal for the partners who are putting the deal together and who will run the day-to-day operations to have a relatively small ownership percentage on the front end since most of the capital will come from an investment fund.

Over time, based on the entity’s performance and the increase in value of the enterprise, these “operations partners” may increase their ownership percentage in the income and profits of the partnership.  This will usually occur once certain return hurdles are met for the “investment partners.”  Unless provided for in the partnership agreement, this switch in sharing percentages will result in the “investment partners” being allocated more income and therefore more distributions over time that the parties intend.

Although there are several options, the best way to make sure all partners end up being allocated the income and distributions everyone intends each party to receive over time, is to handle income allocation and distribution provisions independently in the partnership agreement.

The 2008 Report to the Nation is a report issued by the Association of Certified Fraud Examiners that discusses who commits fraud and the most common ways that they do it. Some of the more common schemes are corruption, billing, skimming, and expense reimbursements. 

Corruption is when someone manipulates a business transaction for their personal gain. Kickbacks are a perfect example of corruption.

Billing is the category in this report that describes instances when the billing system is manipulated for personal gain. For example, submitting invoices from a fictitious vendor for payment or submitting invoices for personal expenses for payment.

Skimming is more common in companies with a lot of cash transactions. When a convenience store clerk accepts the cash payment but does not record the sale, the clerk is skimming.

Expense reimbursements refer to the practice of submitting fictitious or inflated business expenses for reimbursement.

You have probably heard of most of these schemes, however the challenge is developing controls to prevent and detect them. Need an assessment of your operational controls? Contact me.

The 2008 Report to the Nation is a report issued by the Association of Certified Fraud Examiners that discusses who commits fraud and the most common ways that they do it. Fraudsters are generally 40 to 60 year old executives or accountants. The study showed that as incomes and education levels increased the instances of fraud decreased, but the dollar value increased. Additionally, in a majority of the fraud cases there was only one person involved in the scheme and it was their first offense.

Common indicators of fraud are employees living beyond their means or experiencing financial difficulties.

Take a look around your office, do you see anybody that fit this description? Keep your ears and eyes open and establish a whistleblower policy providing procedures of investigation and protection.