Fall 2012 issue of Horizons

Strategies for Managing Organizational Risk horizons A publication by RubinBrown LLP Fall 2012

PLUS

Compilation, Review, or Audit? Learn Which One You Need and What To Expect

How specific industries can reduce risk and loss for their businesses

TABLE OF CONTENTS

horizons A publication by RubinBrown LLP FALL 2012

Features

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Welcome from the Managing Partner

RubinBrown News

Chairman’s Corner

Chairman James G. Castellano, CPA

RubinBrown Celebrates 60 Years! From Three-Man Firm to Three Cities

Managing Partner John F. Herber, Jr., CPA

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Compilation, Review, or Audit? Learn Which One You Need and What to Expect

Denver Office Managing Partner Gregory P. Osborn, CPA Kansas City Office Managing Partner Todd R. Pleimann, CPA

Timely Reminders

Industry-Specific Articles

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media & entertainment A Look at the Evolution of Publishing Because the industry has weathered many challenges over the past 60 years, there is optimism for future evolution.

construction Managing Construction Risks During Lean Times Identifying the most common risks to proactively plan for them.

life sciences

Editor Dawn M. Martin

Reflections on the BIO Conference, Healthcare Reform and M & A Activity Midwest leaders in attendance

Art Director Jen Chapman

with international representatives; tax implications of medical devices; and big ideas receive largest financial support.

Horizons, a publication of RubinBrown LLP, is designed to provide general information regarding the subject matters covered. Although prepared by professionals, its contents should not be construed as the rendering of advice regarding specific situations. If accounting, legal or other expert assistance is needed, consult with your professional business advisor. Please call RubinBrown with any questions (contact information is located on the back cover). Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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not - for - profit

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Not-For-Profit Consolidation Rules

public sector

Require Careful Analysis Understanding how the complexities of GAAP impact nonprofit entities. hospitality & gaming Internal Controls for Private Clubs What it means when the auditor says you lack segregation of duties in your accounting department.

Self-Insuring Can Help Manage Healthcare Costs

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manufacturing & distribution

Governments are trying innovative ways to keep costs down without sacrificing service to citizens and benefits for employees.

Expensed Versus Capitalized: Tangible Property Helping manufacturers determine how property expenditures should be categorized. real estate Multi-Family Market Continues to Surge Current uncertain economy makes renting an attractive option for much of the marketplace.

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transportation & dealerships

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Organizational Risk for Automotive Dealers Steps to minimize predictable risks and best practices for unpredictable weather- related disasters.

Readers should not act upon information presented without individual professional consultation.

WELCOME FROM THE MANAGING PARTNER

Key Components of RubinBrown Vision Remain Constant for 60 Years

This year, RubinBrown is proud to celebrate our 60th anniversary.

Our storied history is marked by challenges and opportunities, growth, and many transformations to effectively respond to the changing marketplace. Along the way, we’ve discovered a fascinating constant. While our firm’s vision has changed and evolved over the years, there are two components that have been dominant in every iteration—“totally satisfied clients” and “inspired team members.” While both have served as faithful elements of all of RubinBrown’s visions, we’ve come to appreciate how well they have served us over the past 60 years. The steadfast dedication of our clients, some of which have worked with us for our entire existence, is a key to our success. This devotion can be directly attributed to our commitment to “totally satisfied clients.” We differentiate our firm by redefining the full-service experience. We do this by combining top-notch technical and industry expertise with a commitment to personal and high-level relationships. RubinBrown’s commitment to “totally satisfied clients” is entrusted with each team member and is protected and enhanced without compromise. That said, the best way to ensure we can deliver “totally satisfied clients,” is by inspiring our team members. RubinBrown invests tremendous time and resources to find the best and the brightest individuals in the profession. In addition, we provide opportunities for development within our organization through a dynamic professional environment.

John F. Herber Jr., CPA Managing Partner

We also encourage our team members to give of themselves and use their leadership skills to help build and grow our communities.

I’d like to take a moment to thank you—our dedicated clients and trusted partners—for sixty fantastic years. As we move forward, I welcome your feedback on ways we can continue to deliver “totally satisfied clients.” Please email me directly at john.herber@rubinbrown.com.

Pleasant reading,

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RUBINBROWN NEWS

RubinBrown Supports Denver Metro Chamber Events

To support the business community in Denver, RubinBrown is proud to serve as a new sponsor for a number of Denver Metro Chamber of Commerce events. After sponsoring the State of the City event in August, the firm looks forward to supporting and participating in the Colorado Business Hall of Fame, the State of the State, and the Business Awards Luncheon.

RubinBrown Presents Kansas City Manufacturing Summit

One of the premier annual events for manufacturers in the Midwest is the Kansas City Chamber’s Manufacturing Summit. This year’s event, held on October 24, will bring together hundreds of manufacturers to learn and network. RubinBrown is proud to serve as presenting sponsor of this event, along with the chamber. For more information, go to our website at www.RubinBrown.com.

October 24, 2012

RubinBrown Sponsors St. Louis RCGA Top 50 Awards

RubinBrown will serve as presenting sponsor for the fourth year of the St. Louis Regional Chamber and Growth Association’s Top 50 Businesses Awards. The awards program recognizes companies based on their significant contributions to the St. Louis region and how they have positively affected the future of the business community.

RubinBrown Chairman Named One of 125 People of Impact

RubinBrown Chairman Jim Castellano is named one of 125 people of impact in the accounting profession in the Journal of Accountancy. In celebration of its 125th anniversary,

Jim was recognized due largely to his work in representing over 360,000 accountants while he served as chairman of the board of directors of the AICPA in 2002. Jim committed his time as chairman to restoring public confidence during the accounting profession’s fallout from the Enron and related business scandals.

the AICPA set out to acknowledge those individuals who have made a significant impact on the accounting profession since its founding in 1887.

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RubinBrown Promotions New Partners RubinBrown has promoted Brian Amelung to partner in RubinBrown’s Assurance Services Group. He

Ben Barnes was promoted to partner in RubinBrown’s Assurance Services Group. In addition to leading the firm’s Private Equity Services Group, he provides audit and transaction due

specializes in employee benefit plan audits and business performance analysis for clients in a variety of industries.

diligence services to clients in a variety of industries, including manufacturing and distribution, professional services, retail and private equity.

Congratulations to Wayne Danneman, who was

promoted to partner in the firm’s State and Local Tax Services Group. He serves as the practice leader for the sales/use tax consulting and personal property tax compliance initiatives, multi-state nexus studies, tax incentives and credits, and asset classification for tax depreciation.

Bill Gawrych was recently promoted to partner in RubinBrown’s Assurance Services Group. Bill provides clients in the real estate industry with audit, consulting and tax services.

Sharon Latimer was promoted to partner in RubinBrown’s Assurance Services Group. Sharon, who works in the Kansas

City Office, primarily serves clients in the manufacturing and distribution, not-for-profit, and professional services industries.

New Managers

RubinBrown recently promoted Michael Fox to manager in the firm’s Kansas City assurance practice.

Tim Hall was promoted to manager in RubinBrown’s

Assurance Services Group. Tim works in the Kansas City Office and primarily serves assurance and auditing clients in the manufacturing and distribution, hospitality and public sector industries.

Michael specializes in a variety of areas including assurance services for clients in the automotive, contractor, manufacturing and distribution and public sector industries.

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RUBINBROWN NEWS

New Managers (continued)

Daniel Holmes was promoted to manager in the firm’s Business Advisory Services Group. In addition, Daniel serves as chair of the Gaming Segment in the Hospitality &

RubinBrown promoted Rachel Meyers to manager in the assurance practice in St. Louis. Rachel specializes in assurance services and tax return preparation for clients

Gaming Services Group. He specializes in gaming regulatory compliance consulting, gaming control audits, internal control assessments and process improvement.

in a variety of industries, including not-for- profit, hospitality, real estate and professional services. She also serves as the chair of the Social Services Segment of RubinBrown’s Not- for-Profit Group.

RubinBrown promoted Tim Kendrick to manager in RubinBrown’s Tax Services Group. Tim provides an array of services including tax return preparation, tax planning, IRS

RubinBrown has added Brad Scheiter as a manager in its Real Estate Services Group. Brad specializes in working with developers, owners, and investors to create value from real estate properties.

examination matters and tax consulting. He works in the architecture and engineering, construction, manufacturing and distribution and real estate industries.

Andrew Schmitt was recently promoted to manager in the

Becky Knezevich was recently promoted to assurance manager. She also serves as the co-chair of the Religious Segment of RubinBrown’s Not-for-Profit Group. Becky specializes in

Assurance Services Group. He provides audit services for clients in the real estate industry specializing in low-income housing and historic tax credits, real estate investment funds, HUD, and employee benefit plans.

internal controls and operations, audit, tax return preparation, and attest services.

Congratulations to Eric Stranghoener, who was promoted to manager in RubinBrown’s Strategic Client Development Group. Eric works with RubinBrown’s

RubinBrown promoted Kathy Maher to assurance manager in the Denver Office. Kathy provides assurance and auditing services, business performance analysis, and

industry and practice leaders to develop new relationships for the firm and to develop strategic growth plans. Ginny Ottenad was promoted to manager in the St. Louis Office’s Assurance Services Group. Ginny primarily serves clients in the real estate and not-for-profit industries with financial audit and reporting services.

due diligence engagements to clients in the homebuilding, non-profit, professional services and public sector industries.

Dan McCabe, who recently relocated to RubinBrown’s Denver Office, was promoted to assurance manager. Dan provides assurance services, plan audits, business

performance analysis, tax return preparation and SEC registrations and filings to clients in the hospitality and gaming, manufacturing and distribution and public sector industries.

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Ethics Seminar

MARK YOUR CALENDARS

Denver RubinBrown Center October 19, 2012 8-10 a.m.

Kansas City Doubletree Hotel November 6, 2012 8-10 a.m.

St. Louis RubinBrown Center October 9 & 10, 2012 8-10 a.m. TWO CONVENIENT DATES!

Year-End Accounting & Tax Update

Denver RubinBrown Center December 18, 2012 8-10 a.m.

Kansas City Doubletree Hotel December 19, 2012 8-10 a.m.

St. Louis Knight Center,

Washington University December 20, 2012 8-10 a.m.

SEC Update

Glean insight into the latest tax legislation. Learn more about how new accounting rules will affect your business. Find out how your organization can benefit from business strategies and innovative ideas. Throughout the year, RubinBrown is an excellent source for learning and insight. For Upcoming RubinBrown Seminars

St. Louis RubinBrown Center January 3, 2013 8-10 a.m.

Not-For-Profit Update

Denver RubinBrown Center January 24, 2013 8-10 a.m.

Kansas City Doubletree Hotel January 22, 2013 8-10 a.m.

St. Louis Knight Center, Washington University January 30, 2013 8-10 a.m.

Public Sector Seminar

Registration will be available 5 weeks prior to each event at www.RubinBrown.com.

Denver RubinBrown Center February 1, 2013 8 a.m.-5 p.m.

Kansas City Doubletree Hotel February 7, 2013 8 a.m.-12 p.m.

St. Louis RubinBrown Center January 23, 2013 8 a.m.-12 p.m.

CHAIRMAN'S CORNER

Managing Organizational Risk Over 60 Years by Jim Castellano, CPA

R ubinBrown is proud to celebrate our 60th anniversary in 2012. Anniversaries are common times to reflect on the past and look forward to the future. So I am taking this opportunity to do just that. Looking back, I feel very privileged to have spent the past 39 years, my entire professional career, as a member of our firm. Of course there have been remarkable changes in our profession, our marketplace, our local, national and global economies and in our firm over that time.

Reflecting on these changes and where RubinBrown is today raises the question, “How has RubinBrown managed to grow and prosper through periods of such dramatic change?” The answer is simply, managing risk by being true to a set of core values. One of the most dramatic and traumatic periods affecting our profession and the capital markets over the past 60 years was the crisis commonly referred to as the “Enron Crisis” of 2001-2002.

During that period, I had the distinction of serving as Chairman of the Board of the American Institute of CPAs. As chairman, I experienced the crisis first hand and participated in creating solutions to restore confidence in our profession and capital markets.

RubinBrown Chairman Jim Castellano testified before Congress in 2002 during his time as chairman of the American Institute of CPAs.

What I learned during that crisis is that Enron and other well-known companies failed to appropriately manage risk. In fact, the tone at

RubinBrown Core Values

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Superior Quality & Service

Devotion to the People of RubinBrown

Teamwork Objectivity & Integrity

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the top of some companies was such that taking extraordinary risk was encouraged because of the immense short-term rewards they received. The tone at the top, described as simply greed and arrogance, was supported by failures of some boards and audit committees to press management about the risks being taken and processes to manage them. Of course, some auditors also failed to understand the risks associated with the companies they audited. Call it a significant breakdown in the systems supporting our capital markets which evolved over time and culminated in a series of extraordinary business failures. While the solutions implemented at the time to restore confidence in the accounting profession and capital markets were severe, the most important result was improvement in the tone at the top of certain organizations and the management of risk. This crisis was a very expensive and painful lesson learned for some. My experience with this crisis certainly caused me to be grateful that RubinBrown has been true to its core values for our entire

60-year history. While they were not written nor painted on the walls when I joined the firm in 1973, they were nonetheless quite evident in the behavior that our firm leaders exhibited. Since then, we have institutionalized these values, and they serve as the guiding light in our decision making.

There is no doubt that managing risks while taking risks is a key success factor for any organization. Once again looking back, I believe managing risks by being true to our core values significantly

increased our probability of success.

Be assured as we look to the future, we will continue to be guided by the core values that have defined the RubinBrown culture for 60 years.

Thanks for your confidence in us.

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Competence

Devotion to our

Innovation & Continuous Improvement

Vision

Having Fun

Community & Profession

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FEATURE

RubinBrown Celebrates

When three young accountants formed Rubin, Brown, Gornstein & Co. in St. Louis in the early 1950s, they only dreamed that their enterprise would evolve into a national leader in the accounting and business consulting profession. Today, RubinBrown LLP, with more than 400 team members working out of offices in Denver, Kansas City and St. Louis, is ranked 46th in the nation by Inside Public Accounting. Jim Castellano, chairman, cites RubinBrown’s founders’ high professional standards, a dedication to client satisfaction and an exceptional team for the firm’s growth and success. “We wouldn’t be where we are today without the support of our clients and the exceptional work of our partners, managers and other team members,” observed Castellano. “Mahlon Rubin, Harvey Brown, and Sidney Gornstein set very high values for all of us. We feel privileged to follow in their footsteps.” John Herber, managing partner, who helped oversee the firm’s expansion to Kansas City in 2005 and growth to Denver in 2010, also credits the strategic vision of the firm’s board and partners, an aggressive recruitment program and rigorous training program designed to attract and retain the best and the brightest in the profession. From Three-Man Firm to

RubinBrown Mission Statement RubinBrown helps its clients build and protect value, while at all times honoring the responsibility to serve the public interest.

RubinBrown Vision Statement RubinBrown...

One firm, Highly respected

Nationally prominent

With a solid foundation of core values, inspired team members and totally satisfied clients.

RubinBrown Core Values Superior Quality & Service

Devotion to the People of RubinBrown

Teamwork

Objectivity & Integrity

Competence

Number of Team Members

Devotion to our Community & Profession

Innovation & Continuous Improvement

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3

9

38

149

Vision

Having Fun

1950

1960

1970

1980

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The RubinBrown Timeline

“Our accounting professionals hold key national positions within the accounting profession and have not only helped our firm broaden its services, but also have contributed to the development of accounting practices and standards within various industry segments on a national level,” said Herber. “It’s a proud legacy that we are privileged to continue today.” RubinBrown is also a member of Baker Tilly International, the world’s eighth largest network of independent accounting firms in 125 countries. Castellano serves as chairman of Baker Tilly International in addition to his role as chairman of RubinBrown. “RubinBrown was blessed with strong roots planted by our founders,” said Herber. “And it’s the hard work and dedication of our team that has allowed us to branch out geographically and in the services we provide. As our profession has evolved, so, too, has RubinBrown. We are impressed by the caliber of new accountants and business professionals who have chosen to join our team and we look forward to many decades of success ahead.” 60 Years! Three Cities

1950

Mahlon Rubin & Sidney Gornstein begin original association, sharing offices in downtown St. Louis (706 Chestnut) Rubin & Brown form partnership; move office to Clayton (7730 Carondelet) RBG moves to larger building in Clayton to accommodate growth (230 S. Bemiston)

Harvey Brown joins Rubin & Gornstein

Gornstein merges with Rubin & Brown, forming Rubin, Brown, Gornstein & Co.

1960

1970

1980

Industry specialization launches

Firm becomes independent member of Baker Tilly International

1990

RBG Staffing established

2000

RBG moves to One North Brentwood in Clayton

RBG becomes RubinBrown and merges with Henderson, Warren, Eckinger in Kansas City

ABACUS Recruiting and RBG Staffing combine

RubinBrown merges with Saltzman Hamma Nelson Massaro in Denver

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290

2010

RubinBrown merges with BONDI & Co. in Denver

RubinBrown turns 60!

1990

2000

2010

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FEATURE

LEARN WHICH ONE YOU NEED AND WHAT TO EXPECT

In the world of assurance services, many believe that any assurance work that is performed by an accountant is an “audit.” We often hear “the auditors are here.” The reality is that in addition to an audit, there are other assurance reporting options that may be available to you and your organization.

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By understanding the different levels of assurance services offered and what they entail, it will allow you to select the service that is best for your organization as well as understand what is required by your financial statement users. The type of report needed is determined based on many factors, including the size, complexity and needs of the organization, as well as the requirements or needs of the organization’s creditors or investors. Securities laws require all publicly held enterprises to provide annual audited financial statements, while privately held companies may be able to opt for reviewed or compiled statements. Credit agreements with lenders may also dictate the level of assurance required. Compilation A compilation represents the most basic level of service provided with respect to financial statements. A report on the financial statements is issued that states a compilation was performed in accordance with the American Institute of Certified Public Accountants (AICPA) professional standards, but no assurance is expressed that the statements are in conformity with generally accepted accounting principles. This is known as the expression of “no assurance.” Compiled financial statements are often prepared for privately held entities that do not need a higher level of assurance expressed by the accountant. Review A review is more in-depth and requires the accountant to perform inquiries and analytical procedures. A report is issued stating that a review has been performed in accordance with AICPA professional standards, but provides “limited assurance.”

Reviewed financial statements are often prepared for entities that have bank loans, outside investors, or trade creditors, but those third parties do not require audited statements. Audit Audited financial statements are the product of a CPA’s highest level of assurance service. In an audit, the CPA performs verification and substantiation procedures. These verification and substantiation procedures may include direct correspondence with creditors or debtors to verify details of amounts owed, physical inspection of inventories or investment securities, inspection of minutes and contracts and other similar steps. Also, the CPA gains knowledge and understanding of the entity’s system of internal control. When the audit is completed, the CPA’s standard audit report states that an audit was performed in accordance with generally accepted auditing standards and expresses an opinion that the financial statements present fairly the entity’s financial position and results of operations. This is known as the expression of “positive assurance.”

RubinBrown Business Performance Analysis (BPA) Report Rebranded One of the most valuable resources provided to RubinBrown clients is our renowned Business Performance Analysis (BPA) report. This report, which has been renamed ViewPoints, provides a unique, value-added approach to our audit services. The new ViewPoints report focuses on understanding all aspects of your organization and enables us to evaluate the overall effectiveness of your organization. ViewPoints also provides a summary of your strengths and opportunities for improvement, as well as analyses to provide financial knowledge to assist you in managing your business. Let us know what you think about our ViewPoints report!

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FEATURE

Adapted from materials prepared by American Institute of CPAs. Copyright 2012. All rights reserved. Used and adapted with permission.

An important item to note is that audits provide a high level of assurance, but not absolute assurance about whether the financial statements are free from material misstatement.

The AICPA developed a helpful table to further illustrate the differences in the three reports (see above). RubinBrown’s Assurance Services Group is happy to help you determine which choice is best for your business.

RubinBrown’s Assurance Services Group Your company will benefit from our highly trained professionals with experience in many industries. We utilize our renowned ViewPoints Report to bring value-added ideas and feedback while performing attest services.

Fred Kostecki, CPA – St. Louis Partner-In-Charge Assurance Services Group 314.290.3398 fred.kostecki@rubinbrown.com

Bert Bondi, CPA – Denver Partner Assurance Services Group 303.952.1213 bert.bondi@rubinbrown.com

Todd Pleimann, CPA – Kansas City Managing Partner, Kansas City Office 913.499.4411 todd.pleimann@rubinbrown.com

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R ubin B rown I nvestment A dvisors C elebrates its 10 th A nniversary

RubinBrown Advisors may only transact business in any state if we are first registered, excluded or exempt from applicable registration requirements. Follow-up, individual responses or rendering of personalized investment advice for compensation will not be made absent compliance with applicable state registration requirements or applicable exemption or exclusion.

*Rankings are provided by Meridian-IQ and are based on total assets under management of investment advisers that meet the following criteria: (a) they offer financial and retirement planning and portfolio management for individuals; (b) they have at least some clients for which they do planning; (c) individuals account for at least 10% of their clientele; and (d) they do not operate a broker- dealer, although some may receive revenue from commissions.

CONSTRUCTION

Managing Construction Risks During Lean Times by Frank Hogg, CPA

T he construction industry is inherently subject to higher levels of risk. The economic slowdown of the past several years has changed the construction landscape and increased the importance of managing risk. Proactively identifying and planning for these risks is the key to effectively managing and controlling the effect they have on your company.

because of poor cash flow than from a lack of work or fading profits.

Effective cash flow management begins with maintaining 12-month cash flow projections. These projections help identify potential problems that can be addressed before they become critical issues. In addition, maximizing cash flow through managing receipts and payments (while staying within payment terms) remains very important. For example, ensure that remote checks are scanned and deposited on a daily basis.

Liquidity Risk Cash is the lifeblood of every contractor. Maintaining a strong cash flow is critical. More contractors will go out of business

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Collections Risk With margins reduced due to the economic slowdown, delays in receiving payments or failure to collect for all work performed could be disastrous to a company’s cash flow. Collections must be a daily mindset and not an end of the month activity. This mindset begins with the fact that collecting your accounts receivable is a right and not a privilege. The rights of the company must always be protected, although it may involve offending a customer. It may help delivering large invoices in person or personally collecting checks to help reduce excuses and delays. It is also important that contractors focus on being great “closers” in order to speed up recovery of the retention as soon as possible. Owner And Contractor Risk During challenging economic times, it is critical to carefully evaluate doing work with others that may be on shaky ground. Regarding owners, it is important for contractors to diligently research potential customers. This includes examining work previously performed, character, credit, payment history and ethics. For general contractors, it is important to pre-qualify subcontractors and vice versa. All parties need to closely analyze the financial stability of those with which you will be working. There is no doubt that your success and profitability on the project is entwined with theirs. Operational Risk It is a natural tendency for contractors during lean times to take on work—any work—in order to utilize existing company resources. This often results in bidding on work outside of their “sweet” spot or areas of expertise. Contractors should be especially careful bidding this type of work.

Challenges include not having the technical expertise to properly execute the project in a quality manner, not being familiar with certain contract provisions and specifications, or leaving important elements out of their bid. In addition, operating in a new geographic region to gain work can be risky for contractors that are not familiar with local labor and state/local regulatory approvals. Safety Risk Safety programs are the heart of many construction risk management plans. With already low margins during the slowdown, proactive safety programs can generate significant cost savings for the contractor. These include lower insurance premiums and legal fees and reductions in lost time from accidents and injuries. While insurance can mitigate some of the economic risks, it is critical to focus on risk avoidance and on loss control. The most successful safety programs are ingrained into the very culture of the company to ensure that every worker returns home safely each night.

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CONSTRUCTION CONSTRUCTION

valuation provisions in buy/sell agreements still reasonable in light of recent financial performance? In addition, reductions in profitability and capital from the slowdown can result in risks to existing relationships with bankers and sureties. Communication is the key to maintaining and strengthening these relationships. Open, honest and timely dialogue is critical – avoid surprises at all times. By its very nature, the construction industry is prone to increased levels of risk. The recession within the industry has dramatically altered the construction landscape. Unfortunately, the recovery for the construction industry continues to move along much slower than any of us would like. The slowdown has intensified certain financial risks while controlling other risks such as safety remains critical. Contractors that understand and manage their risk exposure can most effectively capitalize on opportunities within the marketplace.

Other Risks One of the side effects of the economic slowdown in the construction industry is that planning for other important risks may be put aside.

Have you updated business continuity and disaster recovery plans? Are the

RubinBrown’s Construction Services Group We provide services to general contractors, specialty subcontractors and related companies in the construction industry.

Frank Hogg, CPA – St. Louis Partner-In-Charge Construction Services Group 314.290.3413 frank.hogg@rubinbrown.com

Glenn Henderson, CPA, CFP – Kansas City Partner Construction Services Group 913.499.4429 glenn.henderson@rubinbrown.com

Mark A. Jansen, CPA – St. Louis Vice Chair Construction Services Group 314.290.3208 mark.jansen@rubinbrown.com

Jim Massaro, CPA – Denver Partner Construction Services Group 303.952.1211 jim.massaro@rubinbrown.com

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NOT-FOR-PROFIT

Not-For-Profit Consolidation Rules Require Careful Analysis by David Duckwitz, CPA

A s the operation of nonprofit entities becomes increasingly complex, such entities will sometimes acquire an ownership interest in a for-profit entity or become related to other nonprofit organizations. In situations such as these, a determination should bemade as towhether the nonprofit entity should consolidate the activities of the acquired or related entity in its financial statements. Fortunately, U. S. generally accepted accounting principles (GAAP) contains a framework which stipulates how this determination is made. However, this

framework is complex and the rules differ depending on whether the related entity is a for-profit entity or a nonprofit entity.

For-Profits For-profit entities should be consolidated when the nonprofit organization has a controlling financial interest in the for-profit entity. That controlling financial interest generally consists of the direct or indirect ownership of a majority voting interest although a general partner in a limited partnership can also have a controlling financial interest regardless of its percentage ownership.

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NOT-FOR-PROFIT

A majority voting interest in the board of the separate nonprofit is possessed if the nonprofit organization has the ability to appoint members of the board that comprise a majority of the votes of the full board. In scenarios where a nonprofit organization with an economic interest in a separate nonprofit has control of that separate nonprofit through means other than majority ownership or a majority voting interest in the board, such as through a contractual arrangement, consolidation of the separate nonprofit is permitted but not required. If the decision is made not to present consolidated financial statements, additional disclosures including summarized financial data of the separate nonprofit are required. Consolidation is prohibited in situations in which the nonprofit organization does not possess both an economic interest and control of the separate nonprofit. In circumstances such as this, an entirely different analysis must be performed to determine if the nonprofit organization should consolidate the SPE lessor. Consolidation of the SPE lessor is required if all of the following conditions are met: ∙ Substantially all of the SPE lessor’s activities involve assets that are leased to a single lessee. ∙ The risks and rewards of the leased asset and the obligation related to the underlying debt of the SPE lessor reside with the lessee. ∙ The owner of the SPE lessor has not made a substantive capital investment. This condition is considered met if the owner of the SPE lessor is not an independent third party regardless of the amount of the capital investment. Special Purpose Entity Lessors For various reasons, nonprofit organizations sometimes engage in leasing transactions with a special-purpose entity (SPE) lessor.

Other Nonprofits A nonprofit organization’s relationship with another nonprofit can take various legal forms. The form of the relationship ultimately determines whether consolidation is appropriate. A nonprofit organization that directly or indirectly owns a majority voting interest in another nonprofit entity should consolidate that entity unless control does not rest with the majority owner in which case consolidation is prohibited. In situations where there is not direct or indirect ownership, but there is control or an economic interest in the other nonprofit, further analysis is required. If the nonprofit organization controls a related but separate nonprofit entity, in which it does not have an ownership interest, through a majority voting interest in the board of the separate nonprofit and has an economic interest in the separate nonprofit, consolidation is required.

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In situations where consolidated financial statements are not permitted, it may still be desirable to present the activities of the related organization. In such a scenario, it may be possible to present combined financial statements. Combined Statements GAAP contains rules that stipulate when combined financial statements may be utilized. Those rules stipulate that combined financial statements can be utilized when the entities to be combined are under common control or common management and combined financial statements are more meaningful than separate financial statements. The preparation of combined financial statements is similar to the preparation of consolidated financial statements so combined financial statements may be useful in situations where consolidation is not appropriate.

The consolidation and combination rules related to not-for-profit financial statements are complex. Further details, including numerous examples, are available in FASB’s Accounting Standards Codification which should be consulted whenever questions arise. Additionally, communicating with your accounting advisors can help avoid surprises when it comes time to prepare your organization’s financial statements. While FASB’s Not-for-Profit Advisory Committee (NAC) is studying improvements to financial reporting, including such topics as net asset classification and the statement of cash flows, as part of its agenda, re- examination of the consolidation rules for nonprofits is not currently part of NAC’s plan. As a result, no FASB action resulting in a change to these consolidation rules is expected in the near future.

RubinBrown’s Not-For-Profit Services Group As a recognized leader in the not-for-profit sector, we have the resources essential to serve arts and cultural organizations, foundations, private schools, religious organizations, social service agencies and trade and membership associations.

Judy Murphy, CPA – St. Louis Partner-In-Charge Not-For-Profit Services Group 314.290.3496 judy.murphy@rubinbrown.com

Evelyn Law, CPA – Denver Partner Not-For-Profit Services Group 303.952.1245 evelyn.law@rubinbrown.com

Sharon Latimer, CPA – Kansas City Partner Not-For-Profit Services Group 913.499.4407 sharon.latimer@rubinbrown.com

David Duckwitz, CPA – Kansas City Director Not-For-Profit Services Group 913.499.4433 david.duckwitz@rubinbrown.com

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HOSPITALITY & GAMING

Internal Controls for Private Clubs by Jeff Sackman, CPA

“ There is a lack of segregation of duties within your accounting department.” It can be a frequent occurrence for a private club to receive the above statement in its audit firm’s management letter. While the implied hiring of more employees could alleviate the problem, there are also other solutions that can address this concern effectively. First, it’s important to understand why your accounting firm issues such a statement and what it means.

Auditors’ Responsibilities Contrary to popular belief, it is not an auditor’s responsibility to find fraud. In fact, an external audit detected fraud less than 5% of the time. Auditors must consider and obtain an understanding of the club’s internal control over financial reporting (internal control) as a basis for designing their audit procedures, but not for the purpose of expressing an opinion on the effectiveness of the club’s internal control.

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Cash Disbursements and Accounts Payable

In addition, the auditors’ consideration of the club’s internal control is not designed to identify all deficiencies in internal control. If the auditor identifies deficiencies, they are required to determine the level of the deficiencies and communicate them to management. Thus, if your club lacks an adequate segregation of duties, it is considered a deficiency and is communicated in a management letter as a deficiency, significant deficiency, or a material weakness. What Does It Mean? There are two types of control activities which ensure management’s directives regarding operation and financial reporting of the club are followed—preventative controls and compensating or detective controls. Just as the term implies, preventative controls are designed to “prevent” an event from occurring. If adequate staffing levels exist, preventative controls are more desirable because of their potential ability to catch a problem before it starts. Segregation of duties is considered a preventive control because it prevents an event from occurring rather than discovering the error after-the-fact. Ideally, there should be at least two individuals involved with every financial transaction before it occurs to ensure adequate review for accuracy and reduce the risk of impropriety. Absent an adequate segregation of duties, the control environment is compromised and compensating controls must be incorporated to ensure transactions are being monitored for accuracy and propriety. Compensating controls are less desirable then segregation of duties because they generally occur after the transaction is complete; however, in the club industry, compensating controls are many times the reality.

In many club accounting environments, the same employee is maintaining the vendor master file, processing invoices, printing checks and mailing the checks after they are signed. In some cases, the same employee even has check-signing authority. There are a multitude of things that can go wrong in this scenario, including creation of fictitious vendors which is one of the top five common frauds committed in business. Some compensating controls that help mitigate risks in the areas of cash disbursements and accounts payable include:

∙ Independent approval of new vendor entries

∙ Dual signature policy

∙ Independent receipt and review of the bank statement (or online activity)

∙ Independent review of bank reconciliations

∙ Independent review of vendor edit reports

∙ Password and/or call-back verification for wire transfers and line-of-credit draws

∙ Independent spot checks of petty cash and the related supporting documentation and reconciliation

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HOSPITALITY & GAMING

Payroll (In-house) Many clubs process payroll in-house as opposed to outsourcing the process. In these cases, one employee may maintain the employee master file, process payroll and print the checks or submit the direct deposit. In some cases, the same employee even has check-signing authority or utilizes a signature stamp. Among the many risks here is another of the top five common frauds committed in business which is the creation of fictitious employees. Other risks include adjustment of payroll rates, altering seasonal employee information and issuing bonuses that weren’t authorized. Some compensating controls that help mitigate the risks in the area of payroll include:

∙ Independent authorization and approval of hours and pay rates

Cash Receipts Cash receipts are just as susceptible to fraud as disbursements if the same employee processes member billings, receives and processes member payments and issues member credits. If one employee performs these duties, that individual is in a position to divert cash for his/her personal benefit. Some compensating controls that help mitigate the risks in the area of cash receipts include:

∙ Independent approval of vacation and sick leave

∙ Independent review and approval of payroll

∙ Periodic, independent distribution of employee checks/direct deposit stubs

∙ Independent review of employee edit reports

∙ Utilization of a lockbox

Inventory If one individual is in charge of purchasing, receiving and performing the physical count of inventory, that individual could be having five-star meals at home every night or playing with the newest golf equipment every week. Here are some compensating controls to help mitigate the risks in the area of inventory:

∙ Restrictive endorsements on checks received

∙ Independent reconciliation of checks received to checks deposited

∙ Independent review of all member credits issued

∙ Reconciliation of cash bar revenues with consumption

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∙ Periodic, independent spot checks of inventory items being received during the delivery process

The club should also consider utilizing a starter to aid in verifying greens fees and cart usage. Not only would a starter help the accounting department track proper billings, but he/she would also help to regulate the pace of play and greet members and their guests at the first tee. Loaning equipment to members is also a common practice in the pro shop. Loaned equipment promotes potential sales of merchandise and creates goodwill with members and their guests; however, the items are often “lost” and not returned. One practice to consider is billing the member’s account (or credit card) upon loaning the equipment and crediting the account upon return of the equipment. The pro shop should also verify the equipment returned is the same as was issued. Summary There is no question that lack of adequate segregation of duties is an issue for most clubs. Hopefully, your club decides to address the issue by implementing some of the compensating controls outlined above to mitigate club risk.

∙ Independent review and spot checks of the physical inventory count

∙ Independent approval of all modifications to perpetual inventory records

∙ Quantify and investigate all discrepancies (ie, demo clubs, write-offs, missing inventory, etc.)

Pro Shop Considerations The pro shop can play a major role in ensuring your club is accounting for (and collecting on) all of its golf activities. Requiring members to check in at the pro shop gives the club the opportunity to verify the greens fee and cart rental. It also improves traffic and merchandise sales. The electronic tee sheet could then be sent to accounting daily to be reconciled with the actual greens fees and cart rentals billed to the members.

RubinBrown’s Hospitality & Gaming Services Group Many hotels, country clubs, retailers and gaming operations seek out RubinBrown’s accounting, consulting, and tax services.

Jeff Sackman, CPA – St. Louis Manager & Private Clubs Segment Chair Hospitality & Gaming Services Group 314.290.3406 jeff.sackman@rubinbrown.com

Greg Osborn, CPA – Denver Managing Partner, Denver Office 303.952.1250 greg.osborn@rubinbrown.com

Todd Pleimann, CPA – Kansas City Managing Partner, Kansas City Office 913.499.4411 todd.pleimann@rubinbrown.com

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LIFE SCIENCES LIFE SCIENCES

Reflections on the BIO Conference, Healthcare Reform and M & A Activity by Steve Hays, CPA

M ore than 16,000 attendees from 65 countries gathered recently in Boston for the BIO International Conference, hosted by the Biotechnology Industry Organization (BIO). RubinBrown leaders were among the attendees, many of whom traveled from Canada, United Kingdom, and France. The states of Missouri and Kansas both had large delegations attend with leaders from each promoting their life sciences interest and capabilities. Six governors were present

along with more than 100 high-level public officials from around the world.

According to officials from BIO, a “positive outlook for the future of the life sciences was shared by many.” More than 25,000 partnering meetings were held to promote and drive the global biotechnology community and economic growth in continued “efforts to develop cures, breakthrough medicines, and other technologies that will make our world a cleaner, safer, and healthier place.”

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Health Care Reform Medical Devise Excise Tax

countries that export to the United States to register and annually update the devices they manufacture, prepare, propagate, compound, assemble, process, repackage or relabel for human use, the IRS expects most businesses to know whether or not their products are subject to the excise tax. Retail Exemption The legislation exempted sales of medical devices (determined by the IRS) that are of a type generally purchased by the general public at retail for individual use. Specifically exempted are:

As a reminder, the Patient Protection and Affordable Care Act and the Health Care and Educational Reconciliation Act of 2010 will impose a new tax on medical devices. The new tax goes into effect January 1, 2013. For sales made after December 31, 2012, manufacturers, producers and importers of medical devices must pay a 2.3% tax on the sales price of a taxable medical device. The tax is imposed at the legal entity level and is not reported on a consolidated basis. The applicable sales and tax must be reported quarterly on Form 720 Quarterly Excise Tax. The first Form 720 that will include the new tax is due April 30, 2013. Taxable Medical Devices Medical devices are defined under Section 201(h) of the Federal Food, Drug and Cosmetic Act (FFDCA) and include a broad range of devices for human use includes those: ∙ Intended for use in the diagnosis of disease or other conditions or in the cure, mitigation, treatment or prevention of disease ∙ Recognized by the official National Formulary or the United States Pharmacopoeia ∙ Intended to affect the structure or any function of the body and that don’t achieve their primary purposes through chemical action within or on the body and aren’t dependent upon being metabolized for the achievement of their primary intended purpose More specifically, a device includes an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent or similar or related article and any component part or accessory. Since the FDA generally requires owners and operators of places of business that are located in the United States or in foreign

∙ Eyeglasses

∙ Contact Lenses

∙ Hearing Aids

Other exempt items include bandages, applicators, pregnancy test kits, diabetes testing supplies, denture adhesives and snake bite kits. Taxable Event Sales and leases of taxable medical devices are taxable events. If a manufacturer uses the article for any use other than in the manufacture of another taxable article, for example as a demonstration product, the tax attaches to that use. If the product is given away free of charge as a promotional item, the excise tax is still due.

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