CPAs Margin Call

So its turns out that besides reorganizing how we interact socially and start worldwide democratic revolutions, social media is also getting more students to study computer science.  The theory is that Facebook, or rather the movie about it’s founder, has made being a geek cool again.  Also, one has to believe in a world where college is expensive and jobs are scarce, studying in this area also makes economic sense.  Still, it’s worth noting that unless you are Mark Zuckerberg or Andrew Mason (GroupOn), according to this blog post from Forbes.com, you might actually be better off majoring in accounting.

 In a February post called “The Most Profitable Small Businesses “ , Forbes assembled a list of the 20 most profitable industries, and CPA’s topped the list!  Who knew?!  (Obviously not me.)  Chiropractors were number 2 followed by “Freestanding Ambulatory Surgical and Emergency Centers”.  Non-CPA accounting services held the number 4 spot and Dentists came in at number 5.  Lawyers were number 8, Portfolio Managers were number 10. Physicians’ offices (except mental health specialists) came in at 20.

I’m sorry, there’s no way I’m going to tell my son that he shouldn’t apply to medical school because he can make more money as an accountant.  I’ve done too many tax returns to have those words leave my mouth.  However, as an accountant, I do have an explanation.  The issue is margin.  Profitability is how many cents out of a dollar your business gets to keep.  People who make lots more gross dollars than any accountant I’ve had the pleasure to meet can work in low margin businesses.  For example current “activist investor” Ron Burkle was in the supermarket business before he had billions left over to invest.  Supermarket margins are known for being razor thin.   

Still, it’s nice to know when it comes to being thrifty accountants rank number one.  Who knows, one day it may even be cool to be “froogle”.

Signature Cheating Diagnostics

This nugget showed up on one of my favorite blogs, Tax Update, but it’s actually the result of a study done at Harvard.  The study authors’ conclusion is that tax fraud can be reduced by having taxpayers sign at the top of the form, rather in the current traditional spot at the end of 1040.  I am not making this up.  The theory behind this is that by signing at the top of the form you are indicating that you will tell the truth, going forward.  If you sign at the end in the same frame of mind -- well you can see where the thinking goes here.

I’ll admit I don’t find this logic very compelling.  Still I’m in a line of work that has a direct correlation between cheating on your taxes and unemployment, so I’m not the typical tax payer.  In the study, the researchers tested the two types of forms.  They found that “top-of-the-form signers” did better than the “bottom-of-the-form signers” in terms of honesty. The cheating rate for the top-form group was 37% and it was 79 %(!) on the regular form.  This makes me wonder where they found people willing to participate in the study.  Call me naive, but 79% of filers cheating seems high to me.  Maybe the participant population had a high overlap with the same people who filed for new home buyer tax credits from prison.

Joe Kristan, who writes the Tax Update blog, noted that the academics may have missed a key issue here in terms of cutting tax fraud.  With about 70% of people e-filing their federal taxes, there’s not a lot of signing of tax returns actually happening any more.  While one could think that makes the study irrelevant, looking at it this way actually makes the results look compelling.  The cheating rate among study participants who didn’t sign their form was 64%.  Oops.

TIP = Tax Identity Protection

I recently did a post on avoiding identity theft when e-filing your tax return, but apparently I underestimated the risks associated with taxes and identity theft.  The General Accounting Office has issued a new report on the topic of Taxes and Identity Theft, and it’s not fun reading.  (OK I’ll admit it’s not a high potential topic for fun – but this is even worse than it seems.)  The report says it happens frequently and the IRS is ill prepared to deal with it.  That means, unwinding the case of mistaken identity will be particularly difficult with the IRS.  Yikes!

Apparently based on constituent complaints, Senator Bill Nelson from Florida (a place with lots of credit card fraud, at least when I lived there) held hearings on what the IRS is doing about the problem.  According to the government’s Taxpayer Advocate, they are trying.  The IRS now has a system that marks the returns associated with identity theft.  The idea is to let customer service reps know this is a special case.  Unfortunately, based on the testimony of the victims at the hearing, the improvements haven’t begun to solve their issues. Even the person brought in to talk about the positive side of the IRS work in this area told Congress the agency is “struggling to effectively manage identity theft cases.”  If that’s the rose colored glasses view, I’m getting nervous.

Police Chief Magazine has an article on protecting yourself from this problem. (After reading accounting journals one has to find some more exciting publications to peruse.)  Their advice is:

• Make sure you keep tax related documents in a safe place.  In particular they recommend guarding W-2s and 1099 forms.  Also, don’t leave these items in a brief case or car.
• Shred paperwork associated with your tax return that you don’t need. 
• Password protect tax related files on your computer. 
• Be careful when selecting someone to help you with tax preparation.  (Yes!)
• Use direct deposit for your refund checks. 

Last but not least, beware of IRS phsishing scams.  These tend to be successful because people get so anxious about being contacted by the IRS, they drop their guard.  The IRS does not initiate taxpayer communications through e-mail.  (It’s snail mail only. )  They also don’t conduct business via e-mail.

Last year alone the IRS identified 245,000 tax return related identity theft “incidents”.  It’s worth some hassle now, to avoid the problem.

Price = Value

I remember when being on LinkedIn meant you were tech savvy for a non-tech person.  I also saw the shift to “you are completely out of touch if you’re not on LinkedIn”.   Now I’m trying to get some lessons learned about business valuation from watching the IPO.  (I didn’t get any financial benefit directly, so this is an effort to make the glass half full.)  It helps that I’m fascinated by the question --  what is a business worth?  As we saw from the IPO, there were plenty of opinions, but those who voted with their pocketbooks put a much higher price in place than my calculator would have ever predicted.  (This is a digression, but I also do agree with the school of thought that says the MVP award goes to the bankers, who made money on this deal and set themselves up for future profits at LinkedIn’s expense.)

Opinion aside, let me be clear that the value of anything is the price someone will pay for it. A valuation is an idea of what something should cost.  A purchase or a round of funding involves a real price, and real value.  The goal is to position the business to capture maximum value so the price is as good as or better than the valuation.  Ironically, the key to good positioning is making sure you know the fundamentals behind the numbers and that they add up to the truth.  LinkedIn wasn’t overly modest about their prospects, but they also acknowledged challenges for growth.  Did their bankers leverage a perception of market scarcity by limiting the amount of stock and getting the offer out quickly?  The answer would be yes.  Putting your business in a flattering light is OK, just make sure it’s only the lighting and not the basic assumptions that are the subject of adjustment.

Another key point for building value comes from the June issue of the Journal of Accountancy.  I’m highlighting where this idea comes from to give it more credibility, as it may seem counter intuitive at first. 

CPAs can frequently spend too much time on numbers, and not enough time telling their company’s story. The company’s background, niche, management, strategy and other less quantitative matters, are colloquially known as the company’s “story.” The story is what investors will typically remember and is generally what will drive them to invest. The story generates excitement where numbers alone usually do not.

LinkedIn got a higher value because of the story.  You don’t need high priced investment bankers to have a compelling story.  I see small businesses almost every day that have a great story.  Good numbers are part of the price, but being clear on why the businesses succeeds and will keep succeeding ultimately is where you can unlock value that translates into a better price.

I’m going to stop now and go update my LinkedIn profile….. 

Avoiding the Fraud Triangle

The Treasury Department requires virtually all businesses that provide financial services to the public to file”Suspicious Activity Reports” when they see financial transactions that might indicate malfeasance.  This monitoring requirement used to be focused primarily on banks, but as part of the USA Patriot Act it was expanded to get a broader view of the financial system.   Apparently this expansion was worthwhile as the latest “SAR Review” released by the Financial Crimes Enforcement Network shows quite an uptick in this type of suspicious behavior.

Despite -- or maybe because of -- the focus on following the money to stop terrorism, questionable activities associated with terrorist financing were the topic of 30% more filings than last year.  Money laundering filings went up in 2010, after a decline the year before.  (Apparently even criminals had a tough time with the recession).  Interestingly depository institutions actually reported a year over year decline in suspicious activity.  The growth is in the “shadow banking” world that includes credit unions and money services businesses.  Of those, Gaming Establishments increased their filings by 16% and Card Clubs increased 180%.

All of this serves as a reminder that the technology allowing more transactions to happen more easily is also fertile ground for criminals.  This isn’t just a big business problem.  Ironically, according to the Association of Certified Fraud Examiners  per employee losses from fraud are 100 times greater for small businesses than those for larger companies.  The Association cites 3 areas where small businesses make themselves especially vulnerable:  inadequate screening of new employees, not using financial controls to contain fraud, and allowing employees to conduct transactions that make it easy to commit fraud.  The fraud triangle is built on a base of incentive and rationalization.  All it takes is opportunity to commit the crime.  If employers make it easy, it’s more likely to happen.