The Most Important Steps That You Can Take to Combat Embezzlement in Youth Sports and Other Organizations

By:  Michele Renz

If you are a parent of a school-aged child in Western Pennsylvania, you are undoubtedly familiar with the seemingly endless amount of choices of teams, clubs, associations, and groups that are available for your child to join.  For example, take sports.  Not only are there school-related sports teams – there are regional, community, travel, elite, club, in-house, and other special team classifications I’m sure I’m missing and haven’t listed – for each sport – and it’s big business.  According to a 2016 article in the New York Times, there are approximately 14,000 youth sports organizations in the Unites States taking in annual revenue of about $9 billion.  Add to this the plethora of different non-sports related clubs, associations, and groups – band boosters, drama, dance, art, ski, history, mountain biking, chess, computer, choir – the billions in revenue being brought in is greater than some entire states!

Which begs the question:  who is keeping track of all those fees, dues, and expenses you are paying into organizations?  At the local and regional level, it’s likely a volunteer: a civic, volunteer-minded, honest parent of a kid in the organization that knows how to manage a checkbook and wants to manage the finances to benefit the overall well-being and purposes of the organization.  The majority of volunteer treasurers and boards are good people and have the best interest of the organization in mind.  These people – and the countless others that serve – run great organizations and make the experience worthwhile for all involved.

However, there is a definite dark side out there.  Take a moment and type “youth sports embezzlement” or “youth sports financial theft” into your search engine, and you will see what I mean: countless stories are documented and millions of dollars are being embezzled from youth organizations each year.  What’s even more scary?  For every case you hear about, there is one or possibly more, that haven’t been discovered yet or are not ever reported.  Reasons that cases aren’t reported include fear of bad publicity; protection of the reputation of the organization; social repercussions for the accuser, accused, and their children; upset of team dynamics; and legal and other professional costs associated with pursuing such an allegation.  Another main reason:  people are too busy to care or simply don’t want to spend the time it takes to pursue it.

Those of you reading this likely believe that this happens in other youth organizations, but it is certainly not happening in the organization where your child is involved.  After all, you know and perhaps are friends with the people in charge of the organization – they are good people.  This exact kind of thinking and rationalization has allowed the millions of dollars of frauds to occur in the first place.  According to the Association of Fraud Examiners 2016 Global Fraud Study (ACFE Study), 88.3% of fraudsters are first time offenders with no prior convictions and a majority had never been fired from a job for suspected fraud abuse.

When interviewed, most convicted fraudsters say that they did not go into their positions with the intent to defraud or steal from an organization.  Typically, there is a pressure upon them (e.g. financial problems, addiction, etc.) which causes them to rationalize (e.g. “I’ll just borrow the money and pay it back before anyone notices,” or “I do so much for this organization.  I deserve this.”).  When pressure and rationalization cross with the opportunity to steal – you have the perfect storm – the perfect fraud triangle and scenario for a fraud to occur.

How can fraud in youth sports and other extra-curricular organizations be prevented?  While every organization operates differently and processes need to be customized to the organization, following are two suggestions that are applicable to every organization: 

Recognize the Behavioral Red Flags Demonstrated by Fraud Perpetrators

According to the ACFE Study, the most common red flags identified by respondents as warning signs displayed by the perpetrator before a fraud was detected were as follows:

  • Living Beyond Means
  • Financial Difficulties
  • Unusually Close Association With a Vendor
  • “Wheeler-Dealer” Attitude
  • Control Issues; Unwillingness to Share Duties
  • Divorce/Family Problems
  • Irritability, Suspiciousness, or Defensiveness
  • Addiction Problems

A specific behavior that I have personally noticed and/or been made aware of in fraud and misappropriation investigations is the unwillingness to share bank statements and other financial documentation (receipts, etc.) with other organization leaders upon request.  Another indicator is that while the person is more than willing to share documentation, there “isn’t any” or “it’s missing”.  Good financial stewards will not only maintain good records, and even if they don’t, they will be eager to do whatever it takes to demonstrate their honesty and prove that they did not misappropriate funds. 

Another unusual behavior that I’ve come across is a volunteer staying involved with an organization after his or her child has left the organization and has moved on to other activities.  Yes, there are admirable good Samaritans out there, but I think we can all agree that this kind of “service after your kids leave” is rare as we are busy rushing and finding time to make it to our kids’ own events or serving where our own kids are involved. 

Reduce or Eliminate the Opportunity for a Fraud to Occur or Go Undetected

Earlier in this blog, I referred above to the fraud triangle:  it is where pressure, rationalization, and opportunity meet to allow a fraud to occur and potentially go undetected.  An organization ultimately doesn’t have control over one’s internal pressures and rationalizations.  However, the organization has significant control over eliminating the opportunity for fraud.  Sadly, as is evidenced by the millions of dollars stolen from our youth programs, many fall way short of eliminating opportunity; as a matter of fact, many actually unknowingly encourage it. 

The biggest way that your organization can significantly reduce – and potentially eliminate – the opportunity for fraud is to implement what we auditors collectively refer to as internal controls.  Internal controls are processes and methods put in place by an organization to ensure the integrity of financial and accounting information.  In other words, good internal controls is an executed system of checks and balances to ensure accuracy.

By far, the most important internal control in any organization – or business for that matter – is to ensure that there is segregation of duties throughout financial processes.  Segregation of duties means having more than one person be involved in a task.  The opposite of segregation of duties is allowing one person to control a process from beginning to end.  Let me stress it again:  SEGREGATION OF DUTIES IS THE MOST IMPORTANT INTERNAL CONTROL IN ANY ORGANIZATION!!! 

Yet, so often, as I’ve seen in person and as is the case in many of the examples that you can pull up in your search engine, organizations allow one person – typically a highly respected, trustworthy person with the title of president or treasurer – to control the organization’s bank account and cash processes.  They allow the same person to collect money, deposit money, write checks, receive and pay invoices, be the sole signatory on the bank account, and receive and balance the bank statements.  Then, somewhere in the course of life while that person has sole control over your organization’s finances, he or she experiences a personal financial pressure, rationalizes that he or she will borrow and pay it back, and you have no controls stopping that person from helping himself or herself to your funds.  Easy.  Just like that, a fraud has occurred.  And many times, because it was so easy and no one found out, he or she does it again.  And again.  Before you know it, your organization and its participants are out hundreds of dollars – often more. 

This type of fraud is so common and yet, it is so easy to prevent, or at least significantly minimize, with these practical tips:

  • All checks and payments made from the organization’s bank account by the treasurer must have supporting documentation such as a detailed invoice. All invoices should be approved by another person (e.g. president, vice-president, or person requiring the goods or services).
  • Registration fees and player/member payments should be tracked and totaled by someone other than the treasurer. The treasurer should be responsible for depositing the funds. 
  • Two people from different families should be involved in cash collection processes such as a gate or admission receipts. A written form should be provided and should be signed by both people involved verifying the total cash being submitted.  The cash should be placed along with the form in a sealed envelope.  The envelope should be opened, counted, and verified by the treasurer and another member of leadership who should sign-off that they verified the totals.
  • Always have two signors on an organization’s bank account. Both signors must have access to view the account activity, including check images, and statements, via online banking inquiry.  The treasurer should be responsible for writing the checks, making deposits, and recording the checkbook while the other is responsible for preparing bank reconciliations and verifying deposits, check payments, and cash withdrawals to supporting documentation.  If possible and practical, having a third person involved in performing the verifications to supporting documentation is even better.  At least two people with access to the bank account statements is a non-negotiable must.
  • The checkbook, bank statements, and reconciliations should be presented for review by the governing body (board of directors or equivalent) of the organization. All supporting documentation for any deposits or expenditures should be made available upon request of members of the governing body. 
  • A member of leadership not listed on the bank account should verify supporting documentation for all payments or reimbursements to the two signors on the organization’s bank account as well as registration fee payments for the signors’ children.
  • If you do not have volunteers willing to perform the documentation verifications or want the added assurance of the involvement of an independent third party in your verification processes, consider hiring a local CPA to assist you.
  • A best practice is to have organization by-laws or rules require periodic rotation of at least one signor on the bank account. If this is not a requirement, involvement of assistance of a local CPA is highly encouraged.

The key takeaways from the tips above are a good system of checks and balances (internal controls) and transparency.  By implementing even one of the tips above, you reduce the risk of a fraud happening to your organization.  Implementing multiple tips exponentially reduces fraud risk. 

If you are an honest volunteer who is donating your time to a worthwhile organization for the benefit of youth in your community, thank you, and I hope that you find these suggestions helpful to your organization and share it with your leadership and the leadership of other organizations.  If you are a volunteer reading this who is currently defrauding an organization you are involved with, please understand the ramifications to you personally after you are caught are less now than they will be if you continue doing what you are doing.

In conclusion, preventing fraud from happening in any organization is not rocket science – it’s common sense and good business.

If our firm can be of any assistance to your organization, contact us. 

UPDATE: New Pennsylvania State Tax Withholding Obligation on Certain Leases

Pennsylvania Act 43 of 2017 created a withholding obligation for certain payors of PA-source income and lessees of PA real estate to non-residents.  Beginning January 1, 2018, anyone that makes payments to non-resident individuals or disregarded entities with a non-resident member that is subject to 1099-MISC reporting is required to withhold PA tax from the payments if the payments total $5,000 or more annually.  If the payor or lessee fails to withhold and pay the required withholding, the Department of Revenue can collect the tax from the payor or lessee.  Just recently, the state announced that periods prior to July 1, 2018 will not be subject to assessment for a failure to withhold; however, when tax is withheld, it must be filed and remitted as required by law. 

Contact us if you have any questions related to the new PA 1099-MISC withholding rules or other tax matters.

Individual Tax Provisions Included Within the Recent Budget Deal

On February 9, 2018, Congress passed and the President signed into law, the “Bipartisan Budget Act of 2018.”  Included in the act are several tax provisions, including “extenders” for individuals, which affect the 2017 tax year.  These “extenders” are:

        1. Exclusion for discharge of indebtedness on a principal residence:  Normally, a discharge of indebtedness is considered taxable income to the borrower.  This provision, which is now extended through agreements entered into before January 1, 2018, permits a taxpayer to exclude the discharge that pertains to qualified principal residence indebtedness.

       2. Treatment of mortgage insurance premiums as deductible qualified residence interest: This provision permits mortgage insurance premiums to be treated as mortgage interest on a qualified personal residence.  The deduction for mortgage insurance premiums begins to phase out for taxpayers with adjusted gross incomes (AGIs) exceeding $100,000 ($50,000 in the case of a married individual filing a separate return).

       3. Deduction for qualified tuition and related expenses: An “above-the-line” deduction is available to taxpayers with qualified higher education expenses.  The deduction is capped at $4,000 for taxpayers who have an AGI less than $65,000 ($130,000 for married taxpayers filing jointly) or $2,000 for individuals who have AGIs not exceeding $80,000 ($160,000 for joint filers).

      4. Tax credit for nonbusiness energy property:  A tax credit is available, up to $500, for homeowner’s who make certain energy-efficient improvements to their homes.  The credit is based on 10% of the project cost and includes such improvements as new windows and doors, heating and cooling units, and insulation materials, provided that the improvement meets specific energy rating requirements.  The $500 limitation applies to the lifetime of the taxpayer.

If you have any questions on this law change, or others, please contact us today to schedule an appointment.

Cottrill Arbutina Cares About… Supporting Our Clients’ Charitable Initiatives

By:  Michele Renz

“Cottrill Arbutina Cares About…” is a blog that highlights the employees and community service of Cottrill Arbutina.

On Saturday, February 3, 2018, Cottrill Arbutina employees Vito Farelli, Katie Pagan and Shannon McVey, along with Katie’s boyfriend, Wayne Butler, represented our firm in supporting our credit union clients at the Beaver Valley Chapter of the Pennsylvania Credit Union Association Chapter Bowl-a-Thon benefiting the Pennsylvania Credit Union Foundation.  The purpose of the Pennsylvania Chapter Credit Union Foundation is to provide grants to offer educational scholarships, provide disaster relief, promote consumer education about credit unions, and assist small credit unions in the state.

Our team turned in a combined, three game score of 1,761 – not bad for a couple of auditors and an IT guy! 🙂 The IT guy took 2nd place with highest series in men’s division.

A New Year, A New Beginning – Implementing the HMDA Rule

By:  Michele Renz

January.  The month marking the start of new beginnings – a new year of good intentions and implementation of resolutions to better yourself personally.  While you undoubtedly started strong toward your goals and still have the best intentions, the reality, at least according to one study, is that 80% of resolutions fail by February.  If you are succeeding at your resolution – congratulations!  If you have failed, you are obviously not alone.  The good news is that you can always pick up where you left off and start fresh.  On the other hand, if you never got started, there is no better time to start than now.  Such is true with the implementation of the Consumer Financial Protection Bureau’s (CFPB) Home Mortgage Disclosure Act (HMDA) Rule. 

The HMDA Rule, published in 2015 and revised in 2017, redefined what is a covered, reportable loan and contains numerous new provisions that became effective on January 1, 2018.  Perhaps the most significant, enhanced of the HMDA Rule provisions that became effective on January 1st is that the number of data points on the loan application register (LAR) expanded from 29 to 48, and the number of data fields ballooned from 39 to 110. 

Some of the added data points – such as property address and credit score – are new fields required on the LAR that are undoubtedly collected as a part of your credit union’s loan application process.  However, there are multiple data points and fields that are entirely new, such as expanded ethnicity and race fields, for which you may not be collecting to the level of detail required by the newly enacted HMDA Rule provisions.  Furthermore, these additional data fields and/or points means that you will need to establish an efficient way to collect, record, and transfer the data collected to the LAR in a timely manner.  Depending on the volume of covered transactions that your credit union processes, you may want to track this information manually via an Excel spreadsheet, or it may be time and money well spent to invest in resources to include and auto-extract this information from your core systems. 

The good news is that the Consumer Financial Protection Board (CFPB) has some excellent resources on its website to get you on track with collecting the data necessary for 2018 HMDA reporting.  If you were not using it already, I highly recommend that you immediately begin using the Sample Data Collection Form – Demographic Information of Applicant and Co-Applicant to collect voluntary, self-identified ethnicity and race information from loan applicants and co-applicants.  Also, the Reportable HMDA Data:  A regulatory and reporting reference overview chart is an invaluable resource to guide and define required data point definitions and proper data field reporting.  In addition to these resources, the Home Mortgage Disclosure Act Rule Implementation web page contains a link to the 225-page published Rule as well numerous other invaluable resources including executive summaries, coverage charts, and free archived, educational webinars.  Regulators have also indicated that a guide similar to the Federal Financial Instiutions Examination Council’s (FFIEC) 2013 A Guide to HMDA Reporting – Getting It Right! for the CFPB’s HMDA Rule is coming soon; this is sure to be a welcome addition to your HMDA compliance resources. 

As you are likely aware, the NCUA has included HMDA compliance in its published Supervisory Priorities for 2018.  This letter indicates that examiner’s will “…evaluate federal credit unions’ good faith efforts to comply with (HMDA)” and that the “NCUA’s review of 2018 HMDA data will be diagnostic in nature…and will credit good faith compliance efforts”.  Familiarity with and use of the aforementioned resources, along with a documented HMDA compliance management system, will go a long way towards demonstrating your credit union’s good faith compliance efforts with the current HMDA Rule.

If you did not make changes to your information collection process for HMDA-related loan applications, the time to make the changes is NOW.  The time required now to become familiar with the resources and implement these changes is minor compared to the time – and huge amount of rework and headache – you will incur if you do not do this until later in the year.  Also, I’m sure avoiding making your examiner unhappy and not giving them reason for a comment in this area is pretty good motivation to get moving on this as well!

If you have any questions regarding the HMDA Rule and/or its implementation, we can help.  Please do not hesitate to contact us today.

You Can Still Contribute to IRAs for the 2017 Tax Year

As we begin a new year, keep in mind that you generally have until April 17, 2018 to contribute to your traditional IRA and Roth IRA for the 2017 tax year.  If you get a filing extension, you have until October 15, 2018 to contribute to Keogh or SEP plans for 2017.  The maximum IRA contribution for 2017 is $5,500 ($6,500 if 50 or older) and the maximum for SEPs and Keoghs is 25% of self-employment earnings up to $54,000.  Additionally, you can take advantage of tax-deferred compounding by beginning to make your 2018 plan year contributions now.  Each situation is unique; taxpayers should consult with their tax advisor to assess his or her personal situation.

Contact us to help answer your questions about retirement contributions and other tax matters.

Why You Should Consider Direct Deposit For Your Tax Refund

The IRS is slated to begin accepting 2017 tax returns on January 29, 2018.  According to the IRS, 80 percent of taxpayers choose direct deposit as the method to receive their refund.  Here are a few reasons why you should consider the same:

  1. It is the quickest way for taxpayers to receive their refund.
  2. It is considered the most secure method to receive the refund. Since refunds go right into a bank account, there is no risk of having a paper check lost or stolen.
  3. It is easy! You will simply need to provide your tax preparer with your bank account information.
  4. You have options to split your refund into several financial accounts, that can include checking, savings, health, education, and certain retirement accounts.

For questions or assistance in preparing your 2017 taxes or questions regarding the 2018 Tax Reform, please contact us

2018 Tax Reform Law – Business Tax Provisions Summary

By:  Lucas Rihely

The recently enacted Tax Cuts and Jobs Act (“TCJA”) is perhaps the most sweeping change to the federal tax code in three decades with many of its changes affecting businesses.  The purpose of this blog article is to provide an overview of some of the changes that will be affecting a vast number of businesses.  Unless otherwise noted, these changes are effective for tax years beginning after December 31, 2017.

  • Corporate tax rates reduced – The tax rate for corporations (C Corporations, in this case, to differentiate from S Corporations) has been reduced to a flat 21%. Prior to the TCJA, the rates were graduated with the highest marginal rate being 35%.  This change in rate to the flat 21% also applies to professional service corporations that were previously taxed at a flat 35% rather than under the gradual rate tax brackets.
  • Qualified Business Income Deduction for Pass-Through Entities: Newly created by the TCJA, the Qualified Business Income Deduction (“QBI Deduction” or “QBID”) is a deduction generally equal to 20% of a taxpayer’s qualified business income from a partnership, S corporation, or sole proprietorship.  Certain limitations, such as factors on wages paid or property owned, are placed into effect when taxpayers exceed income thresholds of $157,500 ($315,000 for married filing jointly).  For taxpayers in certain professional services, such as health care, law, and accounting, the deduction begins phasing out at the aforementioned income thresholds and may ultimately become completely phased out.  This deduction is perhaps the most significant change in the tax law.
  • Net Operating Loss (NOL) deduction modified – Generally, NOLs arising in tax years ending after 2017 can only be carried forward, not back, and these losses are able to be carried forward indefinitely. Under pre-TCJA law, the NOLs were subject to a 2-year carryback, 20-year carryforward provision in which any unused NOL after 20 years expires.  Also under the TJCA, for losses arising in tax years beginning after 2017, the NOL deduction is limited to 80% of taxable income, calculated without regard to the deduction.
  • Expanded use of the cash method of accounting – The TCJA has widened the availability of the cash method of accounting, increasing the gross receipts threshold to include taxpayers whose annual gross receipts are not in excess of $25 million using the average of the previous three years. Taxpayers permitted to make use of this increased threshold include taxpayers to whom inventory is a material income-producing factor.  Further, changes have been made to inventory accounting and cost capitalization requirements in light of these new rules.
  • Limit on business interest deduction – This new limitation applies to taxpayers with average annual gross receipts in excess of $25 million. This average is calculated over the three-year period ending with the prior tax year.  Those taxpayers not exempt from the limitation will see its deduction for business interest limited to 30% of its adjusted taxable income.  The limitation is calculated at the entity-level.  Any business interest disallowed under this rule is carried into the following year and may generally be carried forward indefinitely.
  • Increased Code Sec. 179 expensing – The maximum amount that may be expensed under Sec. 179 is increased to $1 million. If more than $2.5 million of property is placed in service during the year, the $1 million limitation is reduced by the excess over $2.5 million.  The expense election has been expanded to cover certain property placed into service in connection with furnishing lodging.  Additionally, certain types of improvements to nonresidential real property now qualify, such as: roofing, HVAC, and certain improvements that do not enlarge the building and are not structural in nature.
  • Bonus depreciation – Under the new law, a 100% first-year deduction is allowed for qualified property acquired and placed into service after September 27, 2017 and before 2023. The pre-TCJA law provided for a 50% allowance on new  Under the new law, the type of property has been expanded as well to include used property.
  • Luxury auto depreciation limits – Under the new law, for a passenger automobile which falls under the luxury auto definition and bonus depreciation is not claimed, the maximum depreciation allowance is increased to $10,000 for the year it’s placed in service, $16,000 for the second year, $9,000 for the third year, and $5,760 for the fourth and later years. The maximum first year bonus depreciation allowance remains at $8,000.
  • Like-kind exchange treatment limited – Under TJCA, the use of like-kind exchanges, a technique used to defer a gain on the sale of property, is limited to cover only like-kind exchanges of real property not primarily held for sale. The previous law permitted this technique to be used for like-kind exchanges of personal property as well.
  • Alternative minimum tax – The corporate alternative minimum tax (“AMT”) has been repealed by the new law.
  • Domestic production activities deduction (“DPAD”) repealed – The TJCA repeals the DPAD which allowed a 9% deduction for certain domestic activities of, generally, manufacturers, producers, growers, and extractors.

Please check back regularly for additional content related to this sweeping change in tax law.  If you have questions on how this information affects your business specifically, or how you can best position your business in light of the new tax law, please contact us today to schedule an appointment

Expanded Use of Tax-Advantaged 529 Accounts

Internal Revenue Code (IRC) Section 529 defines qualified tuition programs, known colloquially as 529 programs, or 529 accounts.  These accounts have historically provided for a tax-advantaged way of saving and paying for post-secondary tuition and other “qualified higher education expenses.”  Under the new federal tax law, the definition of “qualified higher education expenses” has been expanded to include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year.  This expansion applies for account distributions after December 31, 2017.

If you have questions on the tax advantages of 529 accounts or other areas of the tax code that address education costs, please contact us today to schedule an appointment.

2018 Standard Deduction Changes May Mean Less Recordkeeping for You

Beginning for the tax year ending December 31, 2018, the standard deduction is increasing to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in the 2019-2025 tax years.  Additional deductions are available for the elderly and the blind.  This increase in the standard deduction will likely simplify the annual tax compliance for individual taxpayers, especially those that are not business or income-property owners. 

If you have historically elected to itemize your deductions, but your total itemized deductions have typically been less than the new, higher standard deduction limits taking effect in 2018, it may not be necessary to continue to track your expenses for tax purposes going forward unless, of course, something unusual occurs during the year.

If you have questions on how this increased limit applies to you, please contact us today to schedule an appointment.