The Office of Management and Budget (OMB) has proposed reforms that could have a significant impact on financial reporting and accountability requirements for non-profit organizations. These reforms would affect compliance audits performed under OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, commonly referred to as “Single Audits”.

The proposed changes primarily impact the Single Audit thresholds, major program determination process, Type A versus Type B factors, criteria for determining low- versus high-risk auditees and the various compliance requirements to be tested. All of the major proposed changes are projected to increase the efficiency and effectiveness of federal programs, which in turn could decrease related costs associated with a Single Audit.
Currently, non-profit organizations that expend over $500,000 in federal awards are required to undergo a Single Audit. With the proposed changes, this threshold would be increased to $750,000. However, entities under the new threshold would still have to make all records available for review or audit by appropriate agencies, including the awarding agency, pass-through entities, and the U.S. Government Accountability Office.

Thresholds and other defining characteristics that differentiate Type A and Type B programs are also expected to change. Most notably, there would be an increase in the Type A determination threshold from $300,000 to $500,000. The constraints around Type B programs would be relaxed as well.
The defining characteristics that make an auditee “high-risk” are also proposed to loosen. For example, for a Type A program to be considered high-risk, it must have received a modified opinion on the last report (opinion other than unqualified), a material weakness in its internal controls, or more than five percent of questioned costs compared to total expenditures. As well, only 40% coverage of federal expenditures will be required to be tested for high-risk auditees and 20% coverage for low-risk auditees. This is a reduction from 50% and 25%, respectively.

Lastly, the proposed changes would reduce the compliance attributes to be tested from fourteen attributes to six. The six remaining types of compliance would be Activities Allowed/Unallowed and Allowable Costs/Costs Principles, Cash Management, Eligibility, Reporting, Subrecipient Monitoring, and Special Tests and Provisions. Also, all eight OMB circulars would be combined into one document which would distinguish the primary differences for various types of reporting entities.

These proposed changes could take effect in the very near future, although effective dates have not yet been suggested. For more information and details on the proposed changes, visit the following link to see the full proposal: http://tinyurl.com/aw79k5o.

About the Author

Bo Garner, CPA, MBA is a Supervisor with PBMares’ Not-For-Profit Team. PBMares is a regional accounting and business consulting firm serving the Mid Atlantic, as well as specialty areas nationwide. Serving not-for-profit organization clients has been a primary specialty of PBMares for more than 45 years. To discuss the contents of this article and how it may affect your organization, please contact Mr. Garner at (757) 355-6013 or bgarner@pbmares.com.

Executive Summary
Gathering information each year to refresh our tutorial for Bank Director’s annual Bank Audit Committee Conference, certain high-performing characteristics always seem to work their way into the conversation. While current events and trends should always inform audit committees’ thinking, the best performing committees are those that are not distracted from their essential tasks. The audit committee’s synthesis of the events, risks, market forces, and the committee’s understanding of the bank’s operating processes and outcomes are key to the committee’s successful oversight. Thoughtful, independent analysis of these complex and interconnected factors are essential for sound risk management decisions. Here are five fundamental ideas vital to building and sustaining a high-performing committee in this complex environment.

Touch All the Bases
A key concern for every audit committee is that it is discharging all of the responsibilities assigned to it. Because the committee’s internal control monitoring role overarches all of the bank’s opera-tions—not just financial reporting—the list of tasks can seem daunting. How can you be sure the committee is doing all it should be doing, without using precious time and resources to do things the committee is not responsible for doing? The answer is to use your audit committee charter as your guide to schedule the recurring elements of the committee’s agenda. In one bank, recurring tasks as articulated in the audit committee charter are actually listed at the conclusion of the committee’s meeting minutes. This provides a check to the chairman (as well as the board and regulators who ultimately see the minutes) that all of the bases are being touched. Items can be delayed if needed, but the completion of all required activities is ensured if the listing is maintained and updated each year after the charter has been approved by the board for the upcoming year. Advance scheduling allows management to schedule production of their deliverables, and allows for management to pre¬pare the agenda, at the request of the chairman, to include the scheduled matters. The chairman is then free to add agenda items as needed, but this way he or she can be sure all the bases are being touched.

Protect the Committee’s Boundaries
There are two types of boundary violations to consider, scope creep and participant creep. Both are to be avoided, or at least carefully considered, if one or both are unavoidable.

“Can the audit committee handle this?” When asked that question, the chairman’s first reaction should be to consider whether or not the charter provides for the committee to address topics outside its charter. (Care should be taken when your charter includes “and other matters as delegated by the board,” because that does not leave the committee free to reject assignments it deems unsuitable.)

Scope creep can be dangerous for a committee that does not protect its boundaries. It can draw the committee into matters it is not qualified to adequately assess, and into new areas that take time, focus and resources away from tasks for which the committee will be held accountable (externally as well as internally). As the board and committee assess various risks from time to time, so too should the audit committee assess the risk of failing to achieve its charter-driven objectives if extraneous matters are tacked on to agendas that are already full. Audit committees are responsible for a lot of tasks. Be sure yours are being executed at a high level before taking on more.

Practical Tip: Take on additional tasks only after working through the impacts they will have on completing existing assignments.

The committee’s independence and objectivity can be constrained, if not impaired, when non-financial executive officers are regular participants in commit¬tee meetings. While it is not an uncommon or necessarily “wrong” practice, the danger is that the audit committee meetings become an extension of board meetings, or, worse, that the meetings wind up act¬ing to further perpetuate management’s view of the context and environment in which the bank operates. While we should always carefully consider management’s view of the world, the audit committee is the place to compare and contrast the committee’s independently developed views and concerns with management’s. A significant aspect of why audit committees work is diminished if executive management exerts constant or high level influence over the committee. By their constant presence, even if not voting, it is impossible to avoid management’s natural tendency to try to shape what should optimally be the committee members’ independently considered judgments.

Practical Tip: Other directors, if interested in the committee’s work, are welcome as visitors. The chairman, CEO and other non-financial officers are also always welcome to come to meetings, but only if they have a specific matter of concern to discuss with the committee. Otherwise they (and other employees) are to be present only when invited. An invitation to attend an audit committee should be perceived as something slightly less pleasant than a tax audit. This also has the unintended benefit of freeing executive management to perform other tasks.

Protect the Bank’s Borders
This is an emerging topic, different than protecting the committee’s boundaries. In a smaller bank, the audit committee needs to be keenly aware of how the bank protects its own boundaries from intrusion by being knowledgeable about technology-operational and security issues. These matters are tested in the outsourced or internal IT (information technology) audits the committee oversees as part of its overall control monitoring functions, and as part of the committee’s charge to oversee the bank’s execution of its internal control function (whether resourced internally or externally). Frankly, it is frightening how smart the bad guys are and how clever they can be. It is imperative that your bank be out in front of these issues, and in many banks, this responsibility falls to the audit committee. Larger banks may handle this aspect of risk management oversight from a separate IT committee, but in smaller banks, rarely a meeting goes by without an update on the hundreds of daily attempts to attack the banks’ firewalls and intrusion protection software, or of newly developed IT and non-technology-based frauds attempted.

Obviously, the multiple and expanding regulatory requirements surrounding the privacy and confidentiality of data must be paramount in any high-level consideration of compliance with regulations. These concerns must be weighed independently against management’s dual and competing assignments: to operate safely, but to maximize shareholder returns through earnings. Here is where the committee’s unique perspective on the bank’s risk appetite must be brought to bear. The direct costs associated with preventing data breaches have to be measured at some point against the indirect but equally real regulatory and reputational costs, not to mention the direct potential legal liability, of such a breach. In this increasingly expensive, sophisticated and regulated technology environment, high-performing audit committees must take these threats seriously and address them constantly.

Practical Tip: Move IT to its own committee as soon as practicable. People with good governance, risk management and financial skills do not always possess good IT skills or strategic IT insights. If the committee cannot move IT to a separate commit¬tee, be sure your committee has adequate technology resources (internal or external) available to it to help understand the nature and extent of the multiple operational and malicious threats that exist.

Champion of the Tone at the Top
Every piece of corporate governance literature ever written stresses the importance of tone at the top. While the tone at the top extends to all directors as well as executive management, never underestimate the power that you and the audit committee have to influence ethical behaviors in the organization. Never forget that executives, staff, customers, vendors, regulators and shareholders are closely watching what you do and how you respond to ethical questions. This means you’re expected to strenuously repudiate illegal activities within the bank, reject regulatory deficiencies or overt failures to comply and unequivocally condemn unethical practices and integrity-related policy violations (false expense reports, etc.). While misdeeds may be measured against markers of severity to determine the sanctions or remediation, no violation of law or regulation, and no conscious policy violations can be toler¬ated. The sooner the board and committee make that clear to everyone involved, the sooner the bank will be freed of this counterproductive and potentially devastating threat from within. Few are better positioned to deliver this message than the audit commit¬tee; none are better positioned when the culprit is an executive officer.

Practical Tip: Do not attempt to solve problems with the same level of thinking that created the problem (paraphrased from Albert Einstein).

The Intersection of Support, Collaboration and Fiercely Independent Thinking
This is the hard part. How do you maintain the fierce independence required to do your job well, yet still maintain the confidence and trust of management necessary for a collaborative effort? There is no easy recipe for this, no glib practical pointer. If your audit committee can think critically and independently, if you are all on the same page strategically, if you all recognize and advocate for the ultimate, long-term benefit of the bank, the brand, and thus the shareholders, you’re half way there. If you treat each other and everyone involved in the bank with respect, if you collaborate with management (new business opportunities, referrals, scanning for strategic opportunities and threats) and you can support management (read your board package ahead of meetings, mark it up with your own impressions and comments, and point out those typos so the 10-K is absolutely perfect), then you’re nearly the rest of the way there. Think independently about what you are seeing and hearing from your own con¬textual perch, through your own ethical, experiential and operational prism. Only then are you ready to consider management’s point of view.©

When the hair on the back of your neck stands up, trust yourself. In our seminar we often talk about the potential harm in “drinking the Kool-Aid.” I know the committee is doing its job when a really skilled and experienced bank executive at a meeting says, “Hmm, I hadn’t thought of this in that way.” Your non-bank, non-board experiences have taught you to look for reinforcing markers, ratios and relationships. Bring that talent, experience and point of view to bear on the bank’s challenges. Dive more deeply into topics you know more about. Those who are financial experts know to ask: Is management saying one thing when results indicate another? Why is X down when Y is up? How does a percent go down when the dollar amount goes up? Do the rate-volume analyses make sense to you? Do changes in markets, the economy, new strategies or risk exposures result in appropriately additional or diminished risk management? If new or additional risks are being identified, if new products are being introduced, if longtime employees are turning their positions over to the next generation, are controls and processes being installed to address the changing environment or context? As a preliminary matter, in things financial, you are the judge. Thinking that way may keep you from discussing the bank in front of a real judge at some future date.

Finally, tell truth to power, respectfully but firmly. Experienced bankers did not become experienced bankers because they lacked confidence in their beliefs. But the best executives appreciate constructive criticisms and challenges to the status quo. They seek out opposing points of view to formulate their own views, and they prefer their bad news sooner rather than later. Your independent mindset and critical thinking skills are fundamental to the audit committee’s effectiveness, and thus your bank’s entire risk-management infrastructure. Your willingness to bring those skills to the table each meeting are what make the corporate governance model work.

Lawrence W. Schwartz is the partner-in-charge of the Northern Virginia (Washington, D.C.) office of PBMares, LLP, a 200-person regional accounting firm. He has been a partner in CPA and business advisory firms since 1984. He is a member and past chairman of the audit committee of BankAnnapolis and Annapolis Bancorp, Inc., the parent company for the bank. He also is a director and member of the loan and audit committees of First Virginia Community Bank.

By Sean R. O’Connell, CPA/PFS, CGMA, Partner

1. Establish an Operating Budget
In 1984, the average cost of a medical practice to provide services was just under 42% of their gross revenues. By 1996, the tables were almost completely turned. Preparing a monthly operating budget is essential for a health care practice-and is not that difficult. The challenge is to utilize an accounting system that compares actual results to those projected accurately and timely. With this reporting mechanism in place, the practice has the information it needs to make ongoing decisions regarding personnel, staff salary adjustments, equipment purchases, and so on.

2. Maintain Strong Internal Controls
A reliable system of internal controls helps ensure that transactions are authorized, processed, and recorded timely and accurately. Checks and balances are employed in order to minimize the risk of intentional or unintentional losses. “First, Stop the Bleeding” is an outline that we discuss with practices to help them control costs. Perhaps, most important is that the practice fosters a culture within all staff to operate with fiscal responsibility.

3. Periodically Analyze Practice Revenues
This type of analysis may include recommendations to raise certain fees for specific procedures in order to maximize revenue, or to reduce those that may be too high. When the practice’s fees are adjusted to hover at between 10% to 20% over the carrier allowances, periodic allowance increases are automatically captured in reimbursements. Many times, problematic billing patterns can be identified before certain flags are raised with government or third party payers. Manual carrier reviews or insurance audits may be avoided. Unprofitable utilization patterns can also determined – correcting these tendencies can make a big difference in the success of a practice.

4. Have Performance-Based Compensation Measures
Most successful practices structure some portion of physician compensation based on objective production measures, such as net adjusted charges or the number of patients seen. In addition, others within the practice also have performance-based bonuses. Incentives and rewards for good performance are good business.

5. Stay Current on Procedure Codes
Improper coding is the number one reason for denied and/or delayed payments to physicians’ offices. Almost every medical practice encounters some financial loss due to coding problems. This can be remedied through proper training and education of the medical staff. In addition, A Procedure Code Analysis (PCA) should be performed on regular intervals or every time that there are changes made to the coding process. When a PCA is conducted, practices can identify:

• Use of invalid or deleted procedure codes
• Violation of Correct Coding Policy Edits
• Inappropriate codes for level of service
• Inaccurate code for service description
• Improper billing for surgical services
• Improper or no use of Site of Service Payment Differential
• Improper or no use of Modifiers

6. Be Selective in Contracting for Managed Care
Ever since the introduction of Managed Care concepts, physicians have been outgunned by the insurance carriers’ ability to dance around the issues of cost with relation to fixed fee schedules. Now, with Cost Accounting Models, comprehensive sets of reports can identify, for each procedure code, the following information:

• Billing, Collection, and Cost per RVU
• Revenue and Cost Allocation
• Profit/Loss per RVU and per year
• Break-even fees for Fixed and Fee-For-Service Plans

Successful practices use this information to determine whether each existing or proposed managed care contract is of value and benefit to them.

7. Implement a Qualified Retirement Plan
Until 1997, 80% of businesses with fewer than 100 employees did not offer retirement plans. Then, Congress provided for SIMPLE retirement plans, intended for practices that don’t maintain any other retirement plans and have less than 100 employees. Whether it’s the new SIMPLE or a 401(K) plan, these are vehicles that allow funds to be set aside now with pre-tax dollars. Along with building wealth and funding retirements, these plans complement compensation packages, helping to attract and retain employees.

By Sean R. O’Connell, CPA/PFS, CGMA, Partner

Recently, some of our firm’s health care clients have entered into transactions that they had never previously had to account for on their books. “Donation Agreements” with hospitals are providing funds toward the cost of practices’ Electronic Health Record (EHR) systems. Denise Short and I have discussed the accounting and tax treatment of these payments.

Accounting Treatment
Here’s the journal entry for the books of the medical practice:

*Contributions to a corporation by unrelated third parties to induce a particular course of action may be treated as contributions to capital if the benefit to the contributing nonshareholder is sufficiently indirect and intangible.

Government or civic group subsidies are considered contributions to capital by nonshareholders if the following criteria are met:

• The contribution becomes a permanent part of the transferee’s working capital structure;
• The contribution is not compensation for goods or services provided to the transferor;
• The contribution is bargained for;
• The contribution foreseeably results in benefit in an amount commensurate with its value; and
• The asset contributed ordinarily, if not always, is employed or contributed to the production of additional income.

Income Tax Treatment
The donation is excluded from income under Internal Revenue Code Section 118. Reg. 1.118-1 provides that the gross income of a corporation does not include contributions to capital that are made by persons who are not shareholders, including governmental units. The basis of the software is to be reduced by the payments of the non-owner.

If IRS were to challenge the treatment of donated software as capital contribution and required inclusion in income, the taxpayer could make and election to expense the software on an amended return under Section 179 (up to $500,000) on its 2011 tax return, if filed within the three-year statute of limitations. Beginning in 2012, however, this election is scheduled to be reduced to $125,000. And, beginning in 2012, such an election would need to be made either:

• On the original return, or
• On an amended return filed by the due date of the original return (including extensions)

Medicare and Medicaid Incentive Payments
As most of you are aware, once a practice has been able to implement a certified EHR system and successfully demonstrate “meaningful use”, they are eligible to receive incentive payments of up to $44,000 per eligible professional (EP) over a 5 year period through Medicare, and up to $63,750 per EP through Medicaid over 6 years.

Legislative requirements with regards to benefit plans seem to change on a regular basis. Couple this with the fact that the regulations are extensive, to say the least, and quite complicated. As a result, many plan sponsors may feel overwhelmed, particularly if they are a small business trying to make ends meet by doing more with less since the economic downturn four years ago.
Interestingly, small businesses – which are classified as a privately held company with less than 500 employees – employ half of all U.S. workers and pay 44 percent of the U.S. private payroll. Clearly, ensuring these businesses fully understand their fiduciary responsibility as a plan sponsor is extremely important.

As the plan sponsor, the employer is faced with specific responsibilities and subject to standards of conduct set forth by the federal laws, including the Employee Retirement Income Security Act (ERISA). There are many negative consequences a plan sponsor will face from both the Department of Labor (DOL) and/or the Internal Revenue Service (IRS) if the company is not in compliance.

With the increased attention being placed on the role of plan sponsors, many are now beginning to take a closer look at understanding fiduciary responsibilities, compliance, and maintaining proper documentation.

Who Qualifies As A Fiduciary?
ERISA defines a fiduciary as anyone who uses discretion in administering and managing a plan or in controlling the plan’s assets. A plan must have at least one named fiduciary that has control over the operations of the plan, which could include a single individual, a plan administrative committee, or a Board of Directors. A fiduciary who no longer wants to serve in that capacity can terminate its fiduciary duties. However, the fiduciary is responsible for making sure there is a plan in place for another person to carry out these responsibilities so that the plan continues to operate per the plan provisions.

Acting prudently under ERISA is an important responsibility and requires that the fiduciary have expertise in many areas, such as knowledge of investments. The numerous responsibilities can be complex and demanding and generally the fiduciary will need to hire third party experts to help with managing the different areas of responsibilities.

Hiring and Monitoring a Service Provider
A service provider can make or break an organization when it comes to benefit plans, so it is extremely important to look for reputable, proactive service providers. While a plan sponsor may use a Third Party Advisor (TPA) or broker, the plan sponsor is still responsible for ensuring plan compliance, according to the government. For that reason alone, the employer needs to be on top of applicable regulations and cannot rely solely on the plan service providers.

That said, it’s a daunting job and highly recommended that the plan sponsor work with a qualified TPA. When searching for a third party expert, start by asking an auditor or others in related industries for recommendations. Make sure to find out what services are offered and how much that expert will charge – and then compare against other quotes. While ERISA requires plan fees to be reasonable, it is smart for plan sponsors to keep in mind that the most qualified isn’t always the lowest bidder. Look for an expert who has a track record for providing accurate and quality services.

Once a service provider has been selected, the fiduciary should make sure they are monitoring the service providers by reviewing information they provide, understanding the fees charged, and regularly comparing these to other providers for reasonableness. In addition, the fiduciary should be aware of any complaints from participants that could be due to the service provider’s actions and performance.

What If Mistakes Occur?
With all the vast and complex requirements that plan sponsors are subject to, it is inevitable that something will eventually go wrong. Fiduciary responsibilities include making sure there is a process in place to correct any problems in the administration of the plan.
By using an advisor – and having an annual check-up established – a plan sponsor would be able to stay on top of new and pending legislation. Many TPAs will provide a cumulative list of changes, which will help in keeping the plan current with regards to regulations. Contribution limits, elective deferrals, and withdrawal rules are subject to changes and, therefore, should be checked regularly.

One thing an organization should never do is try to modify a plan originally designed for another company – each organization needs a plan designed specifically tailored to individual needs. Another major pitfall is to have a document drafted and then fail to update it regularly. This could potentially be putting an organization’s Qualified Status in jeopardy.

Another aspect of plan operations that has been a source of confusion for plan sponsors – and in some cases, could create issues with the DOL – centers around depositing employee contributions in a timely manner. Employee contributions must be deposited in the plan on the earliest date possible, but no later than the 15th business day of the month following withholding or receipt by the employer. While this has come to be known as the “15-day rule” for large plans (7 days for small plans), the reality is this rule does not exist. The DOL’s position is that “timely” is as soon as it is reasonably possible to segregate participant contributions from the company’s assets. For some companies, this could be within a day or two.

A plan sponsor and their service providers should also determine if the plan has satisfied the nondiscrimination tests, known as the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests. In addition, a plan sponsor should ensure Form 5500 is filed timely through the EFAST system, which simply means it needs to be completed and filed electronically. And, if the plan is required to have an audit, the plan audit must be uploaded with the electronic filing for the Form 5500. There is a Delinquent Filer Voluntary Compliance Program, which can assist late or non-filers of the Form 5500 so that they can correct these filings.

Over the past few years, hardship loans have increased, particularly at the start of the recession. While hardship loans may be permitted, it is important to show financial burden, or hardship, such as significant medical or hospital bills. It is necessary that the plan sponsor reviews and accurately fills out the proper documentation and then retains these documents in the event of a federal government audit. As long as the correct steps have been taken, the plan should still be in compliance.

If plan sponsors find that their plans aren’t compliant, it is essential to become compliant, which may lead to a plan amendment. The IRS website provides a user-friendly Fix-It Guide for those that need to become compliant and the DOL has established a Voluntary Fiduciary Correction Program (VFCP) as an avenue for Plan sponsors to voluntarily self-correct certain kinds of ERISA violations.

The majority of the time, the reason for non-compliance isn’t necessarily because of any flaws with the plan document itself. It simply comes down to a lack of awareness on the part of the plan sponsor.

Other compliance remedies are more severe and will most likely involve an increased cost to the plan sponsor. These remedies include a Voluntary Correction Program, which requires the plan sponsor to correct the problem and then pay a penalty to receive IRS approval. If a plan sponsor does not come forward to the IRS with plan issues that are discoveredas a result of an audit, the plan could potentially face an Audit Closing Agreement Plan. Under the Audit Closing Agreement Plan, the plan sponsor enters into a Closing Agreement with the IRS; corrects errors prior to entering into the Closing Agreement; or pays a hefty penalty to the IRS.

In Conclusion
No doubt there are many rules and regulations to keep in mind as the plan sponsor – too much for any one person to successfully manage. It is wise to use a qualified TPA, however, it is just as important to make sure that a TPA is properly vetted and has the right experience to help an organization meet its fiduciary responsibilities as a plan sponsor.

Neena Shukla, CPA, CFE, is in the Audit and Assurance Practice at PBMares, LLP, a regional accounting and consulting firm serving clients throughout the Mid-Atlantic. For more information, please contact the author at nshukla@pbmares.com or visit: www.pbmares.com.

It’s time we reduced the federal budget and left the family budget alone. – Ronald Reagan

We didn’t actually overspend our budget. The allocation simply fell short of our expenditures. – Keith Davis

The budget evolved from a management tool into an obstacle for management. – Anonymous

A budget tells us what we can’t afford, but it doesn’t keep us from buying it. – William Feather

It has been a couple of years since we have discussed the budget and how it can be used to assist planning. At the time of writing the article, Congress was dealing with the fiscal cliff and the federal budget. It is amazing that Congress has operated without a budget for so many years. Maybe that is one of the issues. While the economy in general has begun to improve, the club industry has been slower to make the turnaround in many areas of the country. However, members do have some pent up demand and competition for a limited number of members continues.

The members want a new swimming pool, the grill needs some new furniture, the golf course needs a new irrigation system, and the tennis courts need to be resurfaced. In addition, utility and food costs are rising, real estate taxes have increased because localities need more money, and while wages may be under control, other employee costs (i.e. Obamacare) continue to skyrocket. Needed repairs and maintenance have been deferred for several years under a “fix only if broken” policy and by the way – the members do not want a dues increase!

Where does the money come from to address the short and long-term, as well as the capital and operational needs of a club? Too often, members will forget that a club has a business as well as a social side to its operations. The members want improvements and the club spends the money. The economy over the last few years has caused management to focus on the business side and often the members are not happy. Clubs must learn to manage the members’ expectations. Unfortunately, the days of assessing a member for any shortfall at the end of the year is a distant memory. What many members may forget is that ultimately, no matter how it is funded, they end up paying for the club and its operations. While the federal government may, a club does not have the option of spending more than it takes in, at least over the long haul.

The financial health of the club cannot be ensured without a detailed knowledge of the costs and revenues involved. The financial software that is prevalent in the industry can provide more detailed information than ever before (and maybe more than we want). Information overload is a real possibility but in today’s environment, it is critical to have and use the tools available. One tool to assist management is through the establishment and use of a budget. An effective budget process is critical to projecting and monitoring operations. It is as necessary to a club as it is to a Fortune 500 company. For many, it can mean the difference between financial stability and failure.

No one budget process is right for every club. The process should be structured to meet the needs of the club; however, some general rules apply. Effective planning requires both a long and a short-term outlook. Finding cash for the next payroll is as critical as financing the next renovation. Long term planning entails setting club objectives and is part of an overall strategic plan. Short term planning involves cash flow and ensuring revenue is sufficient to operate the club on a daily basis at a level the members want and for which they are willing to pay. This is not always the same thing.

Most, if not all clubs, have a budgeting process. However, it is important to review the established procedures to ensure that the needs of the club are still being met. A process established even last year, never mind ten years ago, may need to be changed. While it is important to compare budgets from year to year, it is more important to realize that the budget is only a tool to more efficiently operate the club. As more tools become available, the process may be able to be streamlined. In developing the budget, the Board of Directors must set the long and short-term goals and it must sign off on any final budget.

A club frequently will have many more people involved in the budget process than will a regular business. To be effective, the group must be as small as possible. The Board of Directors, Finance Committee, (Budget Subcommittee), the department heads, and the general manager should be involved. The budget is a reflection of the business and operational plan. As such, while the members (through the Board) should give the direction of the budget, the operational input should come from professional management. The controller and the club manager, who are ultimately responsible for coordinating the process, assist the budget committee.

Teamwork is essential. Department heads must take ownership and estimate income and expenses by carefully weighing past performance and recognizing current trends. A “guesstimate” is not acceptable. No quicker way exists for the management team to lose credibility than not being able to justify the numbers in the budget with hard data. The next step is to determine the expense estimates for all non-revenue departments under management’s control and responsibility. While the historical cost from prior years is usually the base point, a fresh eye should be given each year to determine if any of the expenses can be reduced or eliminated entirely, or whether certain expenses incurred are for the benefit of only a few members.

Once the preliminary departmental budgets are complete and approved by the manager, the controller should combine all the information for use by the budget committee. This must be a realistic plan containing a monthly estimate of revenue by department, planned cost and expense ratios, and an expected profit or loss realization from each department. Once the operating budget is approved, the capital improvement projects needed for the period must be included. Although many clubs have a separate long-term budget for capital improvements, the cost expected to be incurred in the short-term should be rolled into the master budget.

As a final step, management should recommend projects that can reduce cost and expenses or improve efficiency. The budget committee forecasts the anticipated dues revenue for the year and, if appropriate, recommends an increase in dues to balance the budget. Without a detailed budget, dues increases often are difficult to justify. The master budget is submitted to the Board for approval or revision. If the budget process is followed and all excess costs and revenue are considered, the Board must realize that if it cuts the budget, the level of service the members can expect will be impacted. Once approved, the whole team must buy into the budget. The Board must give its support, management must do its best to implement, and the club cannot allow members or committees to by-pass the process and commit the club to expenses that have not been approved.

As with any business, the effectiveness of the budget process depends on the people involved. Variances, either positive or negative, should be reviewed and an explanation sought. A failure to follow-up and to hold people accountable makes it a useless exercise. The budget should act as a measuring stick for month-to-month operations. It is an aid to enable the Board and management to evaluate the financial direction of the club and the effectiveness of the club in meeting the needs and desires of its members and to make adjustments as necessary.

Kevin F. Reilly, an attorney and a CPA, has been involved in the hospitality area, and clubs in particular, for more than 25 years. He is a partner with PBMares, LLP. Mr. Reilly is located in the Fairfax, Virginia office. He may be reached at (703) 385-8809 or by email at kreilly@pbmares.com.

Mount Vernon-Lee Chamber of Commerce Honors Fairfax Office

FAIRFAX, VA (2/15/2013) – PBMares, LLP, a Virginia-based accounting and business consulting firm providing clients a broad range of business services, has been recognized as the Large Business of the Year by the Mount Vernon-Lee Chamber as part of the annual Holiday Business Awards Celebration.

The award identifies the businesses that not only follow the best practices, but also take the extra step and give back to the community.

“Giving back to the local community is an integral part of our business,” said Sean R. O’Connell, CPA/PFS, CGMA, Partner, PBMares. “We are honored to be recognized for those efforts by our peers in the community which we live and work.”

Sean R. O’Connell, CPA/PFS, CGMA accepted the award on behalf of PBMares (formerly PBGH) at an award ceremony held at the Mount Vernon Country Club on December 20, 2012. Winners also received a congratulatory letter signed by Senator Mark Warner.

Other winners include McEnearney Associates, recognized as the Mid-Sized Business of the Year; Fort Belvoir Swim Team, recognized as the Small Business of the Year; Top It Off Outlet, recognized as the New Business of the Year; and Barbara Doyle with Inova Mount Vernon Hospital, who was recognized as the Chamber Citizen.

About PBMares, LLP
PBMares, LLP, a Virginia-based accounting and business consulting firm, provides clients a broad range of business services in the areas of audit and accounting, tax planning and preparation, pension plan design/administration, merger and acquisition consulting and investment management. With offices in Fairfax, Fredericksburg, Harrisonburg, Newport News, Norfolk, Richmond, Warrenton and Williamsburg, the firm provides additional services through its two affiliates, Artifice Forensic Financial Services, LLC, a financial consulting division specializing in fraud investigations and forensic accounting, and PBMares Wealth Management, LLC, a registered investment advisor. More information is available online at http://www.pbmares.com.

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]]> http://www.pbmares.com/2013/02/15/pbmares-recognized-as-large-business-of-the-year/feed/ 0 http://www.pbmares.com/2013/01/21/american-taxpayer-relief-act/ http://www.pbmares.com/2013/01/21/american-taxpayer-relief-act/#comments Mon, 21 Jan 2013 21:31:48 +0000 smiller http://www.wittmares.com/?p=4664 Continue reading →]]> By Joseph S. Mastaler, Jr., CPA, CGMA and Sean R. O’Connell, CPA/PFS, CGMA

Early in the afternoon on January 1, 2013, the Senate, by an 89 – 8 margin, approved and sent to the House of Representatives, the “American Taxpayer Relief Act”. Over the remainder of that New Year’s Day, it was not clear that the House would approve the measure. But, late in the evening, by a 257-167 margin, the House passed the bill and sent it to the President who signed it on January 2, 2013.

This act prevents many of the tax increases that were scheduled to go into effect in 2013. It retained many favorable tax breaks that were scheduled to expire on January 1, 2013, and reinstated many tax breaks retroactively to January 1, 2012. But the Act did allow some tax increases to go into place, principally for certain high-income individuals, and it significantly reduced the federal Estate and Gift tax increases that were scheduled to be effective on January 1, 2013.

What follows is a list of what we consider to be some of the major tax provisions added to the law by the Act:

• As of 2013, the top income tax rate increases to 39.6% (up from 35%) for individuals with taxable incomes of over $400,000 ($450,000 for joint filers; $425,000 for heads of household).
• The Alternative Minimum Tax (AMT) was retroactively “patched” for 2012, and the “patch” was made permanent by indexing it for inflation. Retroactively to 2012, the exemption was set at $78,750 for joint filers and $50,600 for single filers. Inflation indexed amounts for 2013 are not yet available.
• For years beginning after 2012, the dividend and capital gain tax rate permanently increases to 20% (up from 15%) for individuals with at least $400,000 ($450,000 for joint returns) of taxable income.
• “PEP” and “PEASE” limitations apply to high-earners beginning after 2012. The personal exemption phase-out (PEP) and itemized deduction phase-outs (named after Congressman Pease) were reinstated for taxpayers with adjusted gross incomes in excess of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 for married taxpayers filing separately.
• The estate and gift tax exclusion amount was set to $5 million for 2013, and is indexed for inflation for future years, the top estate and gift tax rate was set to 40% for years beginning after 2012 and portability between spouses of the unused exemption amount was made permanent. Prior to the Act, the exclusion was set to be $1 million for 2013 and thereafter, with no inflation adjustments, the top tax rate was set to be 55%, and portability was to expire.
• Tax-free distributions from individual retirement plans to qualified charities were reinstated for 2012 and 2013, with a special provision allowing for certain January 2013 transfers to charity to count as being contributed in 2012.
• Certain business tax credits, including the research credit and the work opportunity tax credit, and the Section 199 domestic production activities deduction, were generally extended through the end of 2013, retroactively from the beginning of 2012.
• The $500,000 increased expensing business tangible personal property amounts under Section 179 was extended retroactively to 2012 through 2013. Fifty percent first year bonus depreciation was also extended through 2013.
• The fifteen-year straight line cost recovery for qualified leasehold improvements (Section 1250 property), qualified restaurant buildings and improvements and qualified retail improvements (improvements made to the interior portion and used by the general public) were extended through 2013.
• The American Opportunity Tax Credit, a modified earned income tax credit (EITC), and the refundable child tax credit were extended, retroactively, to 2012 through 2017.
• Various energy credits, including the credit for energy-efficient new homes (Section 45L), were retroactively extended to the end of 2013.

Not extended by the Act, and having the effect of a 2% tax increase on wages and self-employment income up to $113,700, is the 2012 payroll tax “holiday” that had reduced the employee share of the OASDI portion of Social Security taxes from 6.2% to 4.2%. Also not addressed by the Act were taxes scheduled to take effect on January 1, 2013, under the Patient Protection and Affordable Care Act (ObamaCare). ObamaCare imposes a 3.8% surtax on net investment income for certain higher income taxpayers. Additionally, ObamaCare imposes a .9% surtax on wages or self-employment income where compensation and self-employment income reported on a joint return exceeds $250,000.

The Act contains many more provisions; we have only highlighted those provisions that we considered to be most important. Our tax consultants are available to discuss how the changes in the tax law will affect your tax and financial future. Please contact your PBMares tax consultant for additional information.

Richmond, VA (1/15/13) – PBGH, LLP and Witt Mares, PLC, two of Virginia’s leading CPA firms merged on January 1, 2013 and announced the new company name: PBMares, LLP.

As a merger of equals, the two firms chose to select a combination of the firm names for the new entity primarily because of the brand awareness established in each of their respective markets.

“As we discussed the name of the new firm, we could not discount the legacy of each organization. The firm names of PBGH and Witt Mares were synonymous with providing financial insight to clients while providing the highest levels of independence, integrity and technical expertise,” said Alan Witt, CEO of PBMares. “It was apparent that as a combined organization, we should incorporate portions of both firm names to propel us forward as a new enterprise, building upon the foundation each firm left behind.”

Senior management will operate from of a variety of offices. Alan Witt, CEO, and Mary Aldrich, COO will be located in Newport News; Keith Wampler, Chairman of the Board of Directors, will be based in Fredericksburg; and service line leaders and operational department heads will be located through the firm’s eight offices.

“The merger between Witt Mares and PBGH will provide clients with a comprehensive and enhanced menu of services,” said Keith Wampler. “It will also allow for further expansion throughout the Mid-Atlantic by leveraging service offerings, and combining experience and industry knowledge.”

Combined, the new company will be comprised of nearly 200 professionals in eight locations throughout the state, including Fairfax, Fredericksburg, Harrisonburg, Newport News, Norfolk, Richmond, Warrenton and Williamsburg. With the exception of a combination of the firms’ offices in Fairfax, no offices will close and staff will remain in place.

About PBMares, LLP

PBMares, LLP, a Virginia-based accounting and business consulting firm, provides clients a broad range of business services in the areas of audit and accounting, tax planning and preparation, pension plan design/administration, merger and acquisition consulting and investment management. With offices in Fairfax, Fredericksburg, Harrisonburg, Newport News, Norfolk, Richmond, Warrenton and Williamsburg, the firm provides additional services through its two affiliates, Artifice Forensic Financial Services, LLC, a financial consulting division specializing in fraud investigations and forensic accounting, and PBMares Wealth Management, LLC, a registered investment advisor. More information is available online at http://www.wittmares.com or http://www.pbgh.com.

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]]> http://www.pbmares.com/2013/01/15/witt-mares-and-pbgh-announce-new-name-pbmares-llp/feed/ 0 http://www.pbmares.com/2012/12/05/witt-mares-and-pbgh-announce-plans-to-merge-to-create-states-largest-group-of-cpas-in-virginia/ http://www.pbmares.com/2012/12/05/witt-mares-and-pbgh-announce-plans-to-merge-to-create-states-largest-group-of-cpas-in-virginia/#comments Wed, 05 Dec 2012 18:45:34 +0000 smiller http://www.wittmares.com/?p=4541 Continue reading →]]>  

For Immediate Release
Contact: Jessica Trzyna or Ray Weiss
443-451-7144 or jtrzyna@weissprassociates.com

Richmond, VA (December 5, 2012) – PBGH, LLP and Witt Mares, PLC, two of the state’s leading CPA firms have announced plans to merge, providing a comprehensive and enhanced menu of services for their clients. The expected merger will be effective January 1, 2013.

Combined, the new company will be comprised of nearly 200 professionals in eight locations throughout the state, including Fairfax, Fredericksburg, Harrisonburg, Newport News, Norfolk, Richmond, Warrenton and Williamsburg. With the exception of a combination of the firms’ offices in Fairfax, no offices will close and staff will remain in place. Alan Witt will be named as CEO, and will sit in Newport News, VA. Keith Wampler will be named Chairman of the Board and will sit in Fredericksburg, VA.

“We are very excited about this merger. Both firms are known for the value and quality they bring to clients. Together we realized we can bring a new energy and heightened strategic approach to those we serve, by capitalizing on synergies and combined depth of expertise,” said Alan S. Witt, CPA, CEO of Witt Mares, PLC.

“To expand our footprint across the state with this strategic merger will provide both firms with momentum to expand further throughout the Mid-Atlantic,” said Keith Wampler, CPA, CVA, Managing Partner of PBGH. “Our shared niche markets will allow us to leverage our service offerings, combined experience and industry knowledge.”

About PBGH, LLP
Established in 1963, PBGH, LLP, an audit, tax and advisory firm, serves clients through its four Virginia offices in Fairfax, Fredericksburg, Harrisonburg and Warrenton. The firm provides additional services to clients through its two affiliates, Artifice Forensic Financial Services, LLC, a financial consulting firm specializing in fraud investigations and forensic accounting, and PBGH Financial Advisors, Inc., a registered investment advisor. More information is available online at http://www.pbgh.com.

About Witt Mares, PLC
With a long history dating back to 1979, Witt Mares, PLC is a regional accounting and business consulting firm headquartered in Newport News, VA. The firm also has offices in Fairfax, Richmond, Norfolk and Williamsburg. Witt Mares provides its clients a broad range of business services in the areas of audit and accounting, tax planning and preparation, pension plan design/administration, merger and acquisition consulting and investment management. More information is available online at http://www.wittmares.com.

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