Fall 2017 issue of Horizons

Fall 2017 A publication by RubinBrown LLP

FEATURING u Furious Rush of Digital Disruption

u How Audit Methodologies Will Change in the Future

Featuring

A publication by RubinBrown LLP Fall 2017

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RubinBrown News

Furious Rush of Digital Disruption

Chairman & Managing Partner John F. Herber, Jr., CPA, CGMA

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How Audit Methodologies Will Change in the Future

Denver Managing Partner Michael T. Lewis, CFA, CGMA

Industry Updates

Denver Resident Manager Gregory P. Osborn, CPA, CGMA Kansas City Managing Partner Todd R. Pleimann, CPA, CGMA Las Vegas Managing Partner Glenn L. Goodnough, CPA, CFE St. Louis Managing Partner Frederick R. Kostecki, CPA, CGMA

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CONSTRUCTION

HEALTHCARE

PUBLIC SECTOR

REAL ESTATE 24 It’s a Record Period of Growth for the Multi-Family Industry Multi-family units saw record increases in new units entering the market in 2016. Cyber Security Remains a Significant Challenge for Manufacturers & Distributors Enhancements to current processes expose organizations to new risks. 20 MANUFACTURING & DISTRIBUTION Technology Advances in the Construction Industry Drones, 3-D modeling and smart clothing are just a few tools improving construction sites.

Healthcare’s Biggest Disruptor: Blockchain & EHR Interoperability Blockchain technologies are poised to manage and maintain holistic healthcare data.

How Technology has Changed Government

Governments are turning to social media and connected devices to address the public.

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NOT-FOR-PROFIT

Editor Dawn M. Martin

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TRANSPORTATION & DEALERSHIPS

Cyber Security Effects in Today’s Fundraising

Technology Advances in Transportation

Art Director Jen Chapman

Online donations are a growing trend; protecting organization and donor information is vital.

New innovations bring safety features to an industry heavily reliant on technology.

Designer Brendan Coleman

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GAMING

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LAW FIRMS

Placing Bets on Disruptive Technology Gaming customers’ changing expectations inspire innovation in the industry.

Cyber Security: What Law Firm Leaders Need to Know Cyber security is a top concern; understand and implement standards in your organization.

Horizons , a publication by 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. Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.

www.RubinBrown.com

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

Digital Disruption: The New Normal We hear it from our clients and our business partners, and we constantly discuss it internally here at RubinBrown. Without a doubt, technology is disrupting the way we all do business. Staying ahead of the changes and adapting our processes has become not just an intermittent business activity, but a constant strategy to re-engineer our businesses. Throughout this issue of Horizons , you will read about some specific ways business is evolving within the industries we serve the most. Change has always been a part of business, but the pace of change in recent years has accelerated to a frenzied pace. What we have learned is that the best strategy to remaining competitive in today’s disruptive marketplace comes down to one important concept….innovation. Today’s best business leaders are embracing innovation. When you think about what Amazon has done to retail, Uber to taxi services, and Airbnb to the hotel industries, it is astounding to contemplate. Each disruption can be attributed directly to innovation. At RubinBrown, we’re working hard to help our clients build and protect value. We are proud to be your trusted business advisors and work hard each and every day to help you innovate and lead the way to the next decade’s disruptions.

John F. Herber, Jr., CPA, CGMA Chairman & Managing Partner

Pleasant reading,

Staying ahead of the changes and adapting our processes has become not just an intermittent business activity, but a constant strategy to re-engineer our businesses.

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RUBINBROWN NEWS

RubinBrown Expands to Las Vegas

RubinBrown has combined with Stewart Archibald & Barney (SAB), Las Vegas’ third largest accounting firm, effective June 1, 2017. The Las Vegas market is desirable for RubinBrown not only for the thriving business climate, but also the strategic platform it provides for RubinBrown’s national gaming practice. Over the past decade, RubinBrown has become a leading provider of assurance and consulting services to gaming regulators and operators nationally. The firm now has ‘boots on the ground’ for its commercial gaming clientele in Las Vegas, as well as the tribal market in the Southwest.

SAB and RubinBrown share a common history and culture that is founded on client service. Glenn Goodnough , managing partner of SAB, continues his role as managing partner of the Las Vegas office. Bringing together more than 600 team members, RubinBrown is proud to welcome the following Las Vegas partners and managers.

RubinBrown Las Vegas Office 7881 W Charleston Blvd, Suite 250 Las Vegas, Nevada 89117 702.579.7000

Glenn Goodnough Las Vegas Managing Partner

RubinBrown News

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Jeff Breeden Tax Services Group Las Vegas

Leland Pace Tax Services Group Las Vegas

LAS VEGAS PARTNERS

Annette Carro Assurance Services Group Las Vegas

Michael Patchett Tax Services Group Las Vegas

Stephanie Sand Entrepreneurial Services Group Las Vegas

Eric Johnson Tax Services Group Las Vegas

Dave Mathews Tax Services Group Las Vegas

Brett Sellers Tax Services Group Las Vegas

Larry Piparo Tax Services Group Las Vegas

Jeff Albach Assurance Services Group Las Vegas

LAS VEGAS MANAGERS

James Chapman Assurance Services Group Las Vegas

Ji Yu Tax Services Group Las Vegas

Ethan Kent Assurance Services Group Las Vegas

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RubinBrown Retirements Two RubinBrown partners will retire this fall—both of whom have had a tremendous impact on the firm and its clients.

Glenn Henderson Retiring October 31

Glenn Henderson joined RubinBrown in 2005, when Henderson Warren Eckinger (HWE) combined with RubinBrown. Glenn started HWE with Ed Warren and Bill Eckinger in 1982. Glenn has provided tax consulting and investment advisory services to individuals and closely held businesses for over 30 years. He is licensed in all areas of general securities.

Ed Warren Retiring November 30

Ed Warren joined RubinBrown in 2005, when Henderson Warren Eckinger (HWE) combined with RubinBrown. Ed and fellow partners Glenn Henderson and Bill Eckinger formed HWE in 1982. As a tax specialist and investment advisor, Ed has focused his practice in taxation (individual and business), retirement planning and investment services.

RubinBrown CPA Kendrick Coleman Honored with 30 Under 30 Award

Kendrick Coleman , a staff accountant in the Entrepreneurial Services Group at RubinBrown, was honored as one of the St. Louis Business Journal’s 30 Under 30. The 2017 class of honorees was chosen by a panel of previous 30 Under 30 winners and the Business Journal editorial board out of more than 400 nominations. Kendrick is active in a number of community organizations including the St. Louis Business Diversity Initiative, Insight St. Louis and NABA (National Association of Black Accountants).

RubinBrown Team Member Devenie Ross Receives Elijah Watt Sells Award

Devenie Ross , a tax accountant at RubinBrown, achieved the 2016 Elijah Watt Sells Award from the American Institute of CPAs. The 2016 award was bestowed upon CPA candidates who have obtained a cumulative average score above 95.50 across all four sections of the Uniform CPA Examination, passed all four sections of the Examination on their first attempt, and completed testing in 2016. Devenie was one of only 58 candidates across the country who qualified for the award.

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Nathan Croll has worked at RubinBrown since 2003. He is responsible for leading engagement teams on internal audit, Sarbanes-Oxley and other consulting engagements that help clients manage business operations and assess control environment risks.

PROMOTIONS PARTNERS

Daniel Holmes has been promoted to partner and has relocated to RubinBrown’s Las Vegas office. He serves as co-practice leader for RubinBrown’s gaming practice, focusing on expansion in the Las Vegas market.

Matt Marino serves clients in assurance services, as well as provides consulting services to clients in numerous industries in areas such as; forecasting, budgeting, financial analysis and process improvement.

Justin Wenzelman provides financial and professional services, IRS examination matters, and tax consulting to clients in various industries with a focus on food and beverage, professional services, real estate and financial services.

Kirk Wonio specializes in international taxation and advises on international and federal tax matters providing high level and technical guidance. He works with clients in a variety of industries, including the manufacturing and distribution industry.

RUBINBROWN WEALTH ADVISORS The RubinBrown Wealth Advisors website features a convenient location to access service offerings, market and investment news updates, client resources and more. www. RubinBrownWealthAdvisors .com

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Rosie Adams-Grote Assurance Services Group Denver

Jessica Holmes Business Advisory Services Group Las Vegas

PROMOTIONS MANAGERS

Jonathan Davis Assurance Services Group Nashville

Samantha Huff-Schlueter Assurance Services Group St. Louis

Matt D’Souza Entrepreneurial Services Group St. Louis

Nathan Hutson Assurance Services Group St. Louis

Ashley Granger Tax Services Group Denver

Samantha Nelson Tax Services Group Denver

Fred Grossman Assurance Services Group St. Louis

Paul Rodriguez Assurance Services Group Kansas City

Dave Hendrickson Business Advisory Services Group Nashville

Melinda Weissman Assurance Services Group St. Louis

RubinBrown News

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Rich Clemons Tax Services Group Denver

Debbie Maret Wealth Advisory Services Group St. Louis

NEW TALENT MANAGERS

Jeri Ann Farley Tax Services Group Kansas City

Jim Peavey Wealth Advisory Services Group Kansas City

Melissa Green Assurance Services Group Denver

Greg Weaver Wealth Advisory Services Group St. Louis

Micah Wenz Business Advisory Services Group Denver

Emily Herr Tax Services Group Denver

Connect with us on Social Media We regularly post accounting and tax updates, as well as announce client seminars and other important and timely information.

Connect with RubinBrown Recruiting

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Fur ious Rush of Digi tal Disrupt ion by Russ Banham

Reprinted with permission from the Journal of Accountancy , American Institute of Certified Public Accountants

Audrey Katcher, a partner in RubinBrown’s Business Advisory Services Group, spoke at the AICPA ENGAGE conference in Las Vegas recently on the top six transformative changes in companies that are driven by technology.

Katcher, who has more than 25 years’ experience as a technology adviser, is a member of the AICPA Trust Information Integrity Task Force.

“We’re in the early stages of the fourth industrial revolution, where the transformative impact of these many new technologies is just now beginning to be felt,” she said in a telephone interview before the conference. “The mobile internet, cloud, and big data are yesterday’s technology drivers, while the “Internet of Things” is today’s key technology innovation. Next up are cognitive computing breakthroughs in augmented intelligence, machine learning, natural language processing, and robotics, among other technologies still incubating.”

Here are Katcher’s top six transformative changes and their respective impact:

Governance Complexities In many organizations, cybersecurity is “owned” by the IT function, which is tasked to implement, supervise, and maintain new systems and applications. Today, cybersecurity must be owned by the entity itself, because the location, accuracy, and security of a company’s data, and the resiliency of its network to withstand cyberattacks, represent a business and compliance issue of import to senior executives and board members. Cybersecurity involves more than just technology networks and systems, given the people and processes that may inadvertently make an organization susceptible to a cyberattack. Cross-collaboration across the enterprise is essential. “Finance and IT used to be occasional collaborators on IT issues, but given increasing regulatory requirements and the need for enhanced transparency (into financial data), collaboration is not optional anymore,” Katcher said. “There has to be a ‘Switzerland’ looking out for both technology enablement and the entity’s cyber-risk protection. Someone has to define the governance strategies that are in the best interests of the company.” Cyber Everything Technology is embedded deeply across every company today, producing a fast-changing array of cybersecurity risks. “Cyber is in everything,” said Katcher. “Although technology itself is becoming more secure, the weakest link remains people, followed by inferior processes for attack detection, system recovery, and crisis management.” Substandard cybersecurity was evident in the recent “WannaCry” ransomware attacks that affected computers across the world. Many companies and government entities reportedly had not upgraded their Microsoft software with the patches provided to help prevent/mitigate the impact. “CPAs can help ensure, via attestations for companies, that the right people, processes, and controls are in place to help prevent such incidents,” Katcher said.

Here, There, And Everywhere Data Every company has what IT professionals call their “crown jewels”—highly sensitive customer data such as credit card numbers or proprietary business information.

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Unfortunately, many businesses have not identified their crown jewels, much less who is allowed to access this data and on which types of devices. “If you don’t know where the critical information is, how can you secure it?” Katcher said.

And boards of directors expect accurate reporting on the security of the organizations they serve. Without clear visibility into business and market data, these goals are thwarted. “To validate the client’s cybersecurity in today’s demanding real-time environment requires transparency into their data and overall cyber-risk management,” said Katcher. “Otherwise, CPA firms may not be able to accurately present the financial figures to regulators and external auditors.” Reporting On Steroids Reporting used to entail an analysis of the financials and the application of judgment. Today, accurate reporting depends upon how data is input, processed, and stored, and the security risks presented in each scenario. “Simply stating information and reporting that the data is accurate no longer is enough,” said Katcher. “CPA firms must provide evidence demonstrating that a client’s data is complete, accurate, valid, and secure. An example is SSAE 18, which provides additional guidance on how to validate ‘information produced by the entity.’” Skill Set Shortages With technology increasingly driving how business is conducted, the tasks traditionally performed in the work environment are rapidly changing. Augmented intelligence, machine learning, robotics, and other transformative technologies are combining in unique ways to replace some jobs, augment others, and demand the development of new skills. The challenge for many organizations is the dearth of talent to fill these roles. The war for such talent that has ensued separates companies into winners, losers, and those in between. For the last two categories, talent gaps can generate cyber risks that are underappreciated. “In advising our clients, we have to feel their pain,” said Katcher. “They’re grappling with having the right skill sets in place, yet may not realize that not having these people is increasing their susceptibility to cyber risks.”

A case in point is the vast number of employees that use cloud-based

applications to conduct their work more efficiently. However, the extent of this usage is unknown, the solutions are not managed by the organization, and when an employee leaves, their information leaves with them. “Engineering might use an app that puts the company’s intellectual property in the cloud, but since IT or someone charged with governance does not know this, the controls may not be there to protect the information,” said Katcher. “Ensuring a controlled vendor risk management program is in place to protect the most critical information is paramount.” Opaque Transparency The transparency of cybersecurity risk management is important for the good governance of all business entities. Corporate leadership seeks transparency into business and market data to increase the speed of operational decision-making.

CYBER SECURITY ADVISORY SERVICES GROUP

RubinBrown’s dedicated team specializing in cyber security services is designed to meet each client’s requirements, providing executive consulting, security risk assessments, vulnerability and penetration testing, vendor risk management and specialized security consulting. For more information, visit www.RubinBrown.com/Cyber-Security .

Audrey Katcher, CPA, CISA, CITP, CGMA Partner Business Advisory Services Group 314.290.3420 audrey.katcher@rubinbrown.com

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Mark Your Calendars 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.

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

Ethics DENVER NOVEMBER 14, 2017 Denver University KANSAS CITY NOVEMBER 15, 2017 The Gallery ST. LOUIS NOVEMBER 16, 2017 St. Louis Art Museum Year-End Update DENVER DECEMBER 5, 2017 RubinBrown Office KANSAS CITY DECEMBER 6, 2017 Overland Park Convention Center LAS VEGAS DECEMBER 12, 2017 Bali Hai ST. LOUIS DECEMBER 7, 2017 Donald Danforth Plant Science Center

SEC Update ST. LOUIS JANUARY 4, 2018 RubinBrown St. Louis Cortex Office

Public Sector Update DENVER JANUARY 19, 2018 RubinBrown Office ST. LOUIS JANUARY 31, 2018 RubinBrown Office

Not-For-Profit Update DENVER JANUARY 30, 2018 RubinBrown Office KANSAS CITY FEBRUARY 6, 2018 Overland Park Convention Center ST. LOUIS JANUARY 24, 2018 Donald Danforth Plant Science Center

How Audit Methodologies Will Change in the Future by By Liz Farr, CPA

Reprinted with permission from the Journal of Accountancy , American Institute of Certified Public Accountants

Name of Article Here

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Alan W. Anderson, founder of ACCOUNTability Plus LLC, believes the question to ask isn’t “What is the audit firm of the future?” but “What is going to be audited in the future?” Auditing today is frequently a mad dash against the clock from planning to fieldwork to wrap-up to the final set of financials. It can become such an exercise in filling out forms and checklists that “those that like to think and learn, leave,” Anderson, who presented a session on the audit firm of the future at the AICPA ENGAGE conference in Las Vegas, said during a preconference telephone interview. Anderson discussed new audit methodologies that will help firms transition from the current state of audit to the audit firms of the future. The basic methodology for auditing hasn’t changed significantly in decades. Today’s auditors essentially create paperless versions of what they have done with paper and pen since auditing began. In the future, there will be more opportunities for practitioners to provide insights that will help clients build better businesses. “When the firm is not using any of that knowledge to provide insight about the business, it is no wonder the audit is seen as a commodity. Because how valuable is a December 31, 2016, financial statement that is issued on May 24, 2017?” Anderson said. In Anderson’s vision of the future of audit, “we’re making time and room for insight. And insight, by the way, not only adds value to the client, it actually results in a better audit.” The Virtual Audit A virtual audit turns the practice on its head: The work that’s usually done in the field is done virtually in the office, and the wrap-up phase, which is normally done in the office, is done in the field. Rather than traveling to a client’s offices, the auditors perform the routine work of examining the client’s documents in the auditors’ office using information uploaded to a secure portal. Once the routine tasks are completed, engagement leaders visit the client for the wrap-up phase. Questions raised during the in-office portion of the audit are answered, and issues that require judgment are resolved. Anderson described two models for performing in-office fieldwork. One model is the team approach, where staff members are assigned to one audit at a time and work together as a team in an office with multiple desks. Another model is the service-center model. Staff members are assigned a particular task to be completed for several clients. For example, one person’s job may be to audit cash for multiple clients. These employees need not be degreed accountants; people with experience as billing clerks might be a perfect fit for this repetitive and detailed work. Hiring dedicated employees for a service center locks in efficiencies lost when experienced accountants move up the ladder into more challenging tasks. Continuous Auditing Continuous auditing involves frequent monitoring throughout the year to ensure that transactions are captured properly and are flowing correctly to the income statement. The balance sheet serves as an anchor at the end of the period. A few firms are implementing this by performing quarterly mini-audits. Frequent, smaller audits level the firm’s workload and reduce the busy season time crunch.

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These firms don’t need as many employees, and those employees may not need to work as many hours. Virtual audit techniques can be combined with this. Errors and anomalies can be addressed promptly rather than months after year end. Clients have better recall of events when discussed soon after they occur. The constant interaction between the audit team and the client means that team members acquire a deeper understanding of the business. According to Anderson, “it’s really understanding the client’s business where you can provide value to the client, where you can help them improve and make things better and make more money and cut costs. That’s really what we should be doing.” Data Analytics Anderson believes that data analytics will be the foundation of the audit of the future. Using existing technology, auditors examine a client’s transactions to spot trends.

For example, a customer whose previous on- time payment suddenly slows to 10 days late may signal a risk of default. Data analytics should not be confused with analytical review. Analytical review procedures examine a client’s data in aggregate to examine trends for the client as a whole, such as changes in inventory turnover. Data analytics looks at the details of transactions to determine inventory turnover for each of the client’s customers. “Using big data and data analytics will be absolutely the springboard for the accountant as the auditor to provide more insight to the client,” said Anderson. Moving To The Audit Firm Of The Future According to Anderson, a key is learning to communicate and work virtually with your clients. Being familiar with this technology “positions you for the audit of the future. Because [in] the audit of the future, with artificial intelligence and analytics, a lot of that ticking and tying will be done internally.” Leveraging technology to provide greater insights provides more value to the businesses being audited. But it will also require time and commitment from firm leaders to change workflow habits and firm culture. The potential payoff is huge. Audit clients will be happier with deeper insights that help them achieve business goals. Employees will be happier in a culture where innovation is valued and thinking is rewarded. The audit will transform from a commodified necessity to a valuable opportunity for business improvement.

ASSURANCE SERVICES GROUP

RubinBrown utilizes a unique, value-added approach to our audit services. The ViewPoints report focuses on understanding all aspects of your organization and enables us to evaluate the overall effectiveness of your organization. For more information, visit www.RubinBrown.com/Assurance .

Felicia Malter, CPA, CGMA Partner-In-Charge Assurance Services Group 314.290.3249 felicia.malter@rubinbrown.com

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“Devotion to our Community & Profession” has been a core value of RubinBrown since its inception. RubinBrown encourages each team member to be active in his or her local community, through charitable giving and volunteer service. In the past year, more than 300 RubinBrown team members served 200+ organizations by volunteering their time and talents. In addition to team members volunteering outside of the workplace, each year the firm reserves a day on which team members in each office are encouraged to be their best for their communities by volunteering for service projects. RubinBrown’s Outreach Day is an opportunity for team members to work together side-by-side at not-for-profit organizations throughout our local communities. RubinBrown also contributes $6,000 annually to nonprofits in honor of the Community Service Award recipients. Recipients are selected based on dedication and service to making a difference in our communities.

11,680 TOTAL HOURS VOLUNTEERED BY TEAM MEMBERS IN 2016 46% OF RESPONDING TEAM MEMBERS VOLUNTEERED 50+ HOURS IN 2016 72% OF TEAM MEMBERS REPORT PARTICIPATING IN A RECYCLING OR ECO-FRIENDLY PROGRAM 46% OF TEAM MEMBERS REPORT SERVING IN A LEADERSHIP POSITION WITHIN A NONPROFIT 305 TEAM MEMBERS PARTICIPATED IN RUBINBROWN’S 2016 OUTREACH DAY

INDUSTRY UPDATE CONSTRUCTION

Technology Advances in the Construction Industry by Pat Miller, CPA

W hen considering the impact of technology on the modern workplace, construction services is not typically the first industry that comes to mind as being at the forefront of technological advancement. Many of the tools used on a typical job site have remained unchanged for years, if not decades. However, technological advances have allowed construction companies to improve not only the efficiency of their work and the quality of their end product, but also the safety of the work environment for their employees. In addition, technological breakthroughs are on the horizon that will help construction

companies complete tasks and achieve results previously thought to be impossible.

On-Site Communication One such advance is evident in the area of on-site communication. Considering the importance of constant communication on a job, more and more companies are starting to provide their own WiFi at job sites. In very rural locations, where cell phone and LTE service may be ineffective or almost nonexistent, WiFi allows workers on a job site to stay connected not just to each other in the field, but also with management back at headquarters. Consequently, safety issues or disputes that arise on the job can also be addressed more quickly.

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3-D Modeling Another recent innovation that some

Change orders can be generated by the team onsite, then reviewed and approved by management more efficiently. With this enhanced wireless capability, project managers and superintendents are able to utilize tablet devices to their full potential, submitting data such as receipts for small purchases and information about progress on the job, in real-time. For outdoor jobs, project managers and foremen are able to track weather forecasts to ensure that crews do not have potentially unsafe situations due to incoming storms. Certain applications will allow project managers to track employee timecards, which provides the dual benefits of maintaining timecards in the same place (for data storage purposes) and being able to submit timecards electronically (permitting transfer to payroll). Regardless of the specific tasks it’s used for, WiFi on job sites has helped construction companies communicate more easily and efficiently. Drones In addition to WiFi capabilities, another more popular innovation to recently take flight at construction sites is the unmanned aerial vehicle, or drone. It’s not difficult to imagine why they have become frequent sights on construction jobs. Drones allow the operator to traverse large job sites quickly to survey the status of the job, saving time previously spent walking from end to end. Drones can provide a new aerial perspective on the job site, permitting the user to identify potential hazards or design flaws that may not be evident from the ground level. Drones can also assist in performing tasks, such as inspections at high elevations or in tight quarters, that would have otherwise presented a safety risk. Lastly, drones grant the user a means of surveillance to both watch for uninvited guests to the job site and to monitor workers, if necessary. Drones have aided companies by making job sites safer and more accessible for employees.

companies utilize is 3-D modeling. In the near future, physical blueprints of building designs may become obsolete, as 3-D modeling software becomes more sophisticated and cost effective. Used in conjunction with tablet devices, 3-D modeling software allows companies to make changes more efficiently to project designs. When taking other available data into consideration (such as financial information about the project or local ordinances), the software will also allow the user to quickly determine whether or not a projected design change would fit within the budget or would even be permitted under local code, further saving the company valuable time and resources. Smart Clothing While these existing technological advances have already helped construction companies in numerous ways, the future of technology promises even further gains in efficiency and employee safety. Some of these advances, such as smart clothing, are already in their infancy stage and being used in other industries. Professional (and even some amateur) athletes are already wearing smart clothing on a daily basis. Small sensors located within shirts, shoes, or other active wear are able to track the sensory data of the athlete and compile the data for an interested coach or for the athletes themselves. This data helps to detect and notify the user when the athlete is experiencing excess fatigue or other unsafe health conditions, such as an elevated heart rate or blood pressure. Construction companies making use of this technology would therefore be able to tell if an employee is unable to safely continue work tasks. One company within the industry is even designing a smart safety vest with built-in lights that will activate when the site gets too dark and an ‘airbag collar’ that will deploy if the wearer falls from an excessive height.

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As safety is often on the forefront of management’s mind, smart clothing will help ensure that employees are able to work more safely than ever before. Self-Operating Vehicles Like ‘smart’ clothing, self-operating vehicles already exist in limited use. In dangerous situations and on hazardous job sites, self-operating heavy equipment can be controlled remotely from a distance to prevent workers from having to put themselves in potentially hazardous situations. Also, because one worker could theoretically control multiple self-operating vehicles or pieces of heavy equipment, the company would be able to utilize its human capital more efficiently. Those workers would still require specialized training to be able to operate multiple machines at once, but that could be a small price to pay in order to be able to deploy multiple workers on another job. Virtual Reality One way workers would be able to obtain specialized training is through the use of virtual reality, which presents numerous potential uses. Experienced workers could utilize virtual reality to show newer employees how to operate heavy machinery or perform skilled techniques in a safe environment. Simulations have been developed to help workers become comfortable working underground, in tight spaces and at extreme heights before even stepping foot on a job site.

Similar to 3-D modeling, developers and project managers will be able to see and modify jobs before the work is physically completed, potentially saving money and time from having to complete costly re-work. This would also allow companies to determine the exact placement of building materials such as piping and wiring, allowing some facets of the construction to be completed off-site and ahead of time, helping to avoid potential delays. 3-D Printing Another technology already in existence but with potentially major ramifications in the future is 3-D printing. Printing a needed part on location will be much easier than having to purchase and transport the part from off site. 3-D printing could allow companies to create building materials and even whole sections of the building itself (such as walls or flooring) much more quickly than currently possible. A company in China has already begun to print small concrete houses for low-income families. A Dutch engineering and design firm has released plans for a full steel bridge to be printed for use in Amsterdam and hopes to have the project underway within the next year. Domestically, small office buildings have been printed for use in California in their entirety. The biggest concerns with 3-D printing are related to safety and quality control. Because the technology is so new, there isn’t enough data yet to compile long-term track records for safety and quality control, making the process and materials difficult to regulate.

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Yet, as 3-D printing becomes more prevalent in the industry, construction companies and regulators will get more comfortable with utilizing the changing technology. Exoskeletons Lastly, another advancement already being used on some job sites are exoskeletons or power assist suits. Worn over clothing, these suits help workers operate heavy machinery and tools for a long period of time while minimizing the stress put on the body. Not only does this help protect a worker’s physical well-being, but it also improves the quality of the work by helping the worker stay focused over longer periods. Exoskeletons can also help workers lift heavy objects by redistributing the load of an object to stronger muscles within the body, reducing strain on a worker’s back. There are some risks to current versions of the suits, namely that they limit a worker’s mobility and that the weight of the devices

themselves could inadvertently increase the pressure on unforeseen areas of the body. As with 3-D printing, there is currently insufficient data to generate proper safety standards or to determine any possible long- term health effects, but the potential for increased work quality and employee health is tremendous. As is the case when any new technology is unveiled, those in the construction industry will have to approach the innovations on the horizon with skepticism and caution. However, when considering the potential gains in workplace efficiency, job safety and financial results that technological innovation has to offer, it’s easy to get excited about what the future might have in store for contractors and how they build our world.

CONSTRUCTION SERVICES GROUP

RubinBrown provides services to general contractors, specialty subcontractors and related companies in the construction industry. For more information, visit www.RubinBrown.com/Construction .

Ken Van Bree, CPA, CGMA Partner-In-Charge Construction Services Group 314.290.3429 ken.van.bree@rubinbrown.com

Mark Jansen, CPA, CGMA Partner & Vice Chair Construction Services Group 314.290.3208 mark.jansen@rubinbrown.com

Matt Beerbower, CPA Partner & Vice Chair Construction Services Group 303.952.1252 matt.beerbower@rubinbrown.com

Zach Fritz, CPA Manager Construction Services Group 816.859.7916 zach.fritz@rubinbrown.com

Pat Miller, CPA Manager Construction Services Group 314.290.3217 pat.miller@rubinbrown.com

Chris Coleman, CPA, CCIFP Partner & Vice Chair Construction Services Group 314.290.3263 chris.coleman@rubinbrown.com

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INDUSTRY UPDATE MANUFACTURING & DISTRIBUTION

Cyber Security Remains a Significant Challenge for Manufacturers & Distributors by Rob Rudloff, CISSP-ISSMP

M odern manufacturing continues to evolve providing incredible enhancements to current processes, in turn exposing the underlying technology and the organization to additional risks. Disruptive improvements in technology, such as the Industrial Internet of Things (IIoT), continue to link manufacturing technologies together – not just in a single shop or building, but across geographic areas and organizations. The connectivity between the computers and industrial control systems controlling the manufacturing are sending and collecting data, making modifications based on the

data and feeding the information back into business information systems for analysis. Unfortunately, the networks, computers and control systems were not designed with cyber security in mind – in fact, some of the underlying technology was designed to be isolated from all other computer communications and does not handle “internet” style communications well. Using web-enabled and advanced communications techniques with these systems to link them together directly – virtually and through the cloud – exposes the data, the manufacturing systems and your proprietary information to additional risks.

20 Cyber Security Remains a Significant Challenge for Manufacturers & Distributors

The data being transmitted, created and collected from modern manufacturing is susceptible to disruption and corruption, including replacement with fake data as well as theft of the information. Recent events have demonstrated improperly secured Internet of Things devices can be hijacked and used to cause problems across the world. The IIoT is subject to the same kind of hijacking and misuse if left exposed to the internet without proper precautions. Some of the challenges are basic, for example changing default passwords, but keeping hundreds or thousands of devices up-to-date with configuration changes and patches can become cumbersome very quickly. The devices themselves can also be disrupted by overloading them with too much data, causing mini-outages that can cause cascading problems in the manufacturing flow. Isolating from the internet if possible and consciously addressing security configurations as devices are deployed The traffic between devices can also be affected by corrupting, intercepting, replacing or even stealing data. Encrypting traffic between devices requires additional hardware or software, management and configuration work, so most industrial devices forego encryption. The downside to foregoing encryption is that it can be used to check the integrity of the data transmission, validate if the sender is legitimate and make it very difficult to sniff the data as it transits a network connection. Ideally the devices should be isolated onto an industrial control systems network, limiting the amount of data traffic in the area and isolating the data communications from outsiders. Strong consideration should be given to encrypting the traffic both to protect the confidentiality of the data and to add a layer of integrity checking to the underlying data transmission. are important to protecting the manufacturing environment.

the Industrial Internet of Things, continues to link manufacturing technologies together – not just in a single shop or building, but across geographic areas and organizations

Disruptive technologies may fundamentally change the supply chain, customization capabilities or the manufacturing processes, but they will still use your data and your private business information to effectively operate and deliver value to your clients. Every solution needs to consider what level of confidentiality (authentication and encryption), integrity (encryption and error checking) and availability (both up-time and recoverability) are needed for the type of manufacturing. You must also consider the exposure to external networks, key interfaces and communications points with other solutions as well as the people allowed to access the solution and information. Consider the following recommendations from the National Center for Manufacturing Sciences and the U.S. Federal Bureau of Investigations: ∙ Implement application whitelisting – Can detect and help prevent attempted execution of malware uploaded by adversaries ∙ Ensure proper configuration/patch management – Safe importation and implementation of trusted patches can help keep systems secure ∙ Reduce your attack surface area – Isolate systems from untrusted networks and disable unused ports and services ∙ Build a defendable environment – Segment networks into logical enclaves and restrict machine-to-machine communication paths

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Amazon.com: The Biggest Disruptor of All by Jeff Sparks, CPA, CGMA

Over the last decade, regardless of the products you are selling, the internet has certainly revolutionized how you do business and Amazon is a large part of that. As clients assess how their business models will evolve to incorporate doing business with Amazon, it is certainly clear that there are many items to consider. No doubt this change will be costly, however the loss in sales could be devastating. The first question for many is how will this impact taxes, however, there are a few questions to consider beforehand. How will you sell on Amazon? ∙ Sell to Amazon and let the retailer take it from there; therefore, your customer is Amazon. ∙ List your product on Amazon and you ship the product once sold. ∙ Ship to Amazon and have it fulfill sales for you, in which case your customer is the end user. Some items to consider ∙ Will the product be listed as Prime eligible?

Don’t forget to inquire about increased rates during the holiday season. How much will sales volume increase as a result of these investments? How much of the sales increase is being redirected from your current distribution channel? However, the most significant question might be how much sales volume will you continue to lose if you don’t sell on Amazon? As you work through these questions, you will need to consider the tax impact. If the product is Prime eligible and Amazon is fulfilling sales for you, then your product will likely be re-distributed between warehouses based on sales data analytics. This means your inventory could be in 30 different states within a couple of months. This could trigger you to have sales or income tax nexus in each state. With certain states requiring the filing of monthly sales tax returns, you could quickly have a significant administration compliance burden. This burden is compounded by the fact that each state has different rules and rates. Owners of a flow-through entity (S Corp or Partnership) may now be required to file a personal tax return in multiple states. The information and data a company can learn from working with Amazon is tremendous. Imagine knowing who your end customer is and getting real time product reviews from them. How will you react to this new data? No doubt, potential customers will be reading the reviews! While a changing environment can be intimidating, diligent planning can lead to tremendous opportunity for your company.

∙ What is the anticipated quantity requirements with Amazon?

∙ What additional fees will Amazon charge?

Significant modeling is needed to determine the payback of selling via Amazon and being listed as Prime eligible. Amazon’s web site lists the cost to sell as “$39.99 a month + additional selling fees.” These selling fees can range from storage to fulfillment cost and can be considerable, especially if you want to be Prime eligible.

22 Cyber Security Remains a Significant Challenge for Manufacturers & Distributors

∙ Manage authentication – Implement multi-factor authentication where possible and follow least-privilege principles ∙ Implement secure remote access – Limit remote accesses, consider monitor only access and eliminate persistent remote connections ∙ Monitor and respond – Perform system baselines and monitor for changes, develop detailed response and restoration plans

Disruptive technologies should disrupt your processes, the status quo and your perceptions. It will take conscious effort and a systematic approach to secure your technologies so that you can avoid a literal disruption to your disruptive technologies.

MANUFACTURING & DISTRIBUTION SERVICES GROUP

RubinBrown’s Manufacturing & Distribution Services Group is nationally recognized for superior assurance, tax and consulting expertise coupled with solid international business knowledge, exceptional inventory management and process improvement services. For more information, visit www.RubinBrown.com/M-and-D

Henry Rzonca, CPA Partner & Vice Chair Manufacturing & Distribution Services Group 314.290.3350 henry.rzonca@rubinbrown.com

Jim Mather, CPA, CGMA Partner-In-Charge Manufacturing & Distribution Services Group 314.290.3470 jim.mather@rubinbrown.com

Rick Feldt, CPA, CGMA Partner & Vice Chair Manufacturing & Distribution Services Group 314.290.3220 rick.feldt@rubinbrown.com

Russ White, CPA Partner & Vice Chair Manufacturing & Distribution Services Group 303.952.1247 russ.white@rubinbrown.com

Mike Lewis, CPA Partner & Vice Chair Manufacturing & Distribution Services Group 314.290.3391 mike.lewis@rubinbrown.com

Rob Rudloff, CISSP-ISSMP Partner Cyber Security Services Group 303.952.1220 rob.rudloff@rubinbrown.com

Kaleb Lilly, CPA Partner & Vice Chair Manufacturing & Distribution Services Group 816.859.7917 kaleb.lilly@rubinbrown.com

Jeff Sparks, CPA, CGMA Partner Manufacturing & Distribution Services Group 314.290.3360 jeff.sparks@rubinbrown.com

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INDUSTRY UPDATE REAL ESTATE

It’s a Record Period of Growth for the Multi-Family Industry by Bill Gawrych, CPA, CGMA

E ach year, RubinBrown publishes an Apartment Statistical Analysis. This data is collected from clients, as well as other contacts and referrals within the industry, to compile averages in a variety of markets within the United States. The most recent publication of statistical information includes operational data for 2016 and represents approximately 600 apartment projects in roughly 40 states. While these averages are representative of a smaller pool of projects, the trends are usually consistent with those experienced at the national level.

Multi-Family Industry The multi-family industry continued to experience above-average performance in 2016. There were 321,000 multi-family units completed in 2016, up 5% from the averages seen in the 2000s and slightly higher than the 306,000 units completed in 2015. The new multi-family units added in 2016 are the greatest annual increase in new units entering the market in a single year since 1989. Over 90% of the units were intended to be rentals and over 80% were in properties consisting of more than 20 units.

It’s a Record Period of Growth for the Multi-Family Industry

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According to the Joint Center for Housing Studies of Harvard University, even though the construction of new multi-family units is at the highest level in 20 years, the additions to the rental supply have not been able to keep up with the huge demand. increase. According to data from the Survey of Market Absorption, the recent additions to the rental supply have been focused on the upper end of the market. With the addition of new units at the upper end, there is potential for some existing units to filter down to lower rent levels. According to the Housing Vacancy Survey , the number of households that are renting has increased by 600,000 from 2015 to 2016. This was the twelfth consecutive year of growth to nearly 10 million households. Although this is an impressive figure, the growth rate in the rental sector in 2016 reflects a deceleration from 2014 and 2015. Even with the increase in multi-family construction, according to MPF Research, the national rental vacancy rate was at a 30-year low in 2016 at 6.9%. The rental markets throughout the country remain tight. As expected when demand exceeds supply, rents were up in 2016 and continued to increase in the first half of 2017. However, there was a slowdown in the percentage increase in rent in 58 of the 100 markets that MPF Research tracks. Low vacancy rates along with increasing rents, mean that multi-family rental properties continue to perform well. According to data from the National Council of Real Estate Investment Fiduciaries, the net operating income for investment grade properties rose in 2016 for the seventh consecutive year. As a direct result of the supply versus demand, rent rates continued to Capital spending per unit has increased 13% annually from 2010 to 2015 in real terms, according to the National Apartment Association. Improvements have focused in the following areas: fitness and business centers, clubhouses and common areas,

Low vacancy rates along with increasing rents, mean that multi-family rental properties continue to perform well.

installation of in-unit washers and dryers and improved kitchen appliances.

Market Trends Demand for housing is primarily driven by an increase in household growth, which is expected to remain strong based on aging millennials and the overall population, as well as immigration. The Housing Vacancy Survey shows on a three-year rolling average basis that household growth has gone from under 600,000 per year in 2009 to 2011 to more than 1 million in 2015 to 2016. Although millennials currently have a limited impact on housing demand, this is expected to change. According to the State of the Nation’s Housing 2016 , published by the Joint Center for Housing Studies of Harvard University, millennials headed only 16 million of the nation’s 124.5 million households in 2015. By 2035, millennials are estimated to head 49.8 million households which will have a huge impact on housing demand. While the number of young adults impacting the housing demand will be growing very rapidly, the older population is growing even faster. According to projections by the Census Bureau, the total U.S. population age 65 and over will be 79 million in 2035. This is an increase of 31 million over the same statistic in 2015. The largest increase in the housing demand of older adults is expected to come from single-person households. The share of adults age 75 and over that are living in nursing homes was 4.9% in 2015 compared to 10.2% in 1990.

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