Surprise Audits are Proven to Fight Fraud

Four antifraud controls are associated with at least a 50% reduction in both fraud loss and duration, according to “Occupational Fraud 2024: A Report to the Nations” published by the Association of Certified Fraud Examiners (ACFE). They are financial statement audits, reporting hotlines, surprise audits and proactive data analysis. However, the ACFE study also found that two of these — surprise audits and proactive data analysis — are among the least commonly implemented controls. Here’s how your organization might benefit from conducting periodic surprise audits.

Financial statement audits vs. surprise audits

Business owners and managers often dismiss the need for surprise audits, mistakenly assuming their annual financial statement audits provide sufficient coverage to detect and deter fraud among their employees. But financial statement audits shouldn’t be relied upon as an organization’s primary antifraud mechanism.

By comparison, a surprise audit more closely examines the company’s internal controls that are intended to prevent and detect fraud. Such audits aim to identify any weaknesses that could make assets vulnerable and determine whether anyone has already exploited those weaknesses to misappropriate assets.

Auditors usually focus on particularly high-risk areas, such as cash, inventory, receivables and sales. They show up unexpectedly, usually when the owners suspect foul play, or randomly as part of the company’s antifraud policies. In addition, an auditor might follow a different process or schedule than during an annual financial statement audit. For example, instead of beginning audit procedures with cash, the auditor might first scrutinize receivables or vendor invoices during a surprise audit.

The element of surprise is critical because most fraud perpetrators are constantly on guard. Announcing an upcoming audit or performing procedures in a predictable order gives wrongdoers time to cover their tracks by shredding (or creating false) documents, altering records or financial statements, or hiding evidence.

Big benefits

The 2024 ACFE study demonstrates the primary advantages of surprise audits: lower financial losses and reduced duration of schemes. The median loss for organizations that conduct surprise audits is $75,000, compared with a median loss of $200,000 for those organizations that don’t conduct them — a 63% difference. This discrepancy is no surprise in light of how much longer fraud schemes go undetected in organizations that fail to conduct surprise audits. The median duration in those organizations is 18 months, compared with only nine months for organizations that perform surprise audits.

Surprise audits can have a strong deterrent effect, too. Companies should state in their fraud policies that random tests will be conducted to ensure internal controls aren’t being circumvented. If this isn’t enough to deter would-be thieves or convince current perpetrators to abandon their schemes, simply seeing guilty co-workers get swept up in a surprise audit should help.

Despite these benefits, the 2024 ACFE study found that less than half (42%) of the victim-organizations reported performing surprise audits. Moreover, only 17% of companies with fewer than 100 employees have implemented this antifraud control (compared to 49% of those with 100 or more employees).

We can help

Your organization can’t afford to be lax in its antifraud controls. The ACFE estimates that occupational fraud costs the typical organization 5% of its revenue annually, and the median loss caused by fraud is a whopping $145,000. If your organization doesn’t already conduct surprise audits, contact us to discuss how they can be used to fortify its defenses against occupational theft and financial misstatement.

As artificial intelligence (AI) continues to integrate itself into many workplaces, the U.S. Department of Labor (DOL) has been busy addressing the technology’s many implications.

In fact, the agency recently issued two sets of guidance that employers should be aware of. One discusses the legal compliance impact of AI, and the other suggests best practices for protecting workers’ well-being as AI-powered systems and processes are rolled out.

FLSA, FMLA, etc.

On April 29, DOL administrator Jessica Looman distributed a Field Assistance Bulletin (No. 2024-1) to Wage and Hour Division staff that outlines how various federal labor laws apply to employers’ use of AI. The memo warns that “without responsible human oversight, the use of [AI] technologies may pose potential compliance challenges with respect to federal labor standards.”

Of particular interest are the specifics Looman provides regarding the Fair Labor Standards Act (FLSA) and the Family and Medical Leave Act (FMLA). Regarding the FLSA, for example, the memo warns that employers can’t dock employees’ pay based on activity or productivity metrics calculated by AI systems.

Nor can employers use AI (or other systems) to take adverse actions against employees who engage in protected activities. Looman gives an example of using “automated worker surveillance systems to detect, target, or monitor workers whom the employer suspects have filed a complaint” with the DOL.

When it comes to the FMLA, employers must be on guard for the possibility that AI-powered systems could:

Wrongfully deny employees’ qualified leave under the act,
Miscalculate rightfully earned paid time off, or
Demand too much information from employees requesting leave.

The memo also warns: “Systems used to track leave use may not be used to target FMLA leave users for retaliation or discourage the use of such leave.”

In addition, the guidance covers the Providing Urgent Maternal Protections for Nursing Mothers Act (commonly referred to as the PUMP Act) and the Employee Polygraph Protection Act. To read the full text of the bulletin, click here.

8 key principles

On May 23, the DOL published a document on its website entitled Artificial Intelligence and Worker Well-being: Principles for Developers and Employers. The guidance, which is based on “input from workers, unions, researchers, academics, employers, and developers, among others,” sets forth eight principles applicable to the development and deployment of AI in the workplace. The principles recommend that AI should be:

Centered on worker empowerment (that is, employees should be informed and involved in its development, training and use),
Ethically developed to protect workers,
Established under clear governance and human oversight,
Transparent in how it’s used for both job applicants and employees,
Compliant with laws regarding workers’ right to organize and other rights and protections,
Used to enable employees to improve job quality,
Introduced into the workplace with appropriate support and upskilling, and
Managed with the responsible use of employees’ sensitive data.

Per the guidance, “The Principles are applicable to all sectors and intended to be mutually reinforcing, though not all Principles will apply to the same extent in every industry or workplace.” To read the full text, click here.

More guidance ahead?

Both sets of guidance were prompted by an executive order issued by President Biden in October 2023 on the “safe, secure, and trustworthy” use of AI. Employers can likely expect further guidance to be issued on the federal and state levels as the impact of AI on various industries and workplaces in general becomes clearer.

Health Savings Accounts (HSAs) allow eligible individuals to lower their out-of-pocket health care costs and federal tax bills. Since most of us would like to take advantage of every available tax break, now might be a good time to consider an HSA, if you’re eligible.

Not only can an HSA be a powerful tool for financing health care expenses, it can also supplement your other retirement savings vehicles. Plus, it offers estate planning benefits to boot.

HSAs by the numbers

Similar to a traditional IRA or 401(k) plan, an HSA is a tax-advantaged savings account funded with pretax dollars. Funds can be withdrawn tax-free to pay for a wide range of qualified medical expenses. (Withdrawals for nonqualified expenses are taxable and, if you’re under 65, subject to a penalty.)

An HSA must be coupled with a high-deductible health plan (HDHP). For 2024, an HDHP is a plan with a minimum deductible of $1,600 ($3,200 for family coverage) and maximum out-of-pocket expenses of $8,050 ($16,100 for family coverage).

Be aware that, to contribute to an HSA, you must not be enrolled in Medicare or covered by any non-HDHP insurance (a spouse’s plan, for example). For 2024, the annual contribution limit for HSAs is $4,150 for individuals with self-only coverage and $8,300 for individuals with family coverage.

If you’re 55 or older, you can add another $1,000 annually. Typically, contributions are made by individuals, but some employers contribute to employees’ accounts.

Cost-saving benefits

HSAs can lower health care costs in two ways: 1) by reducing your insurance expense (HDHP premiums are substantially lower than those of other plans) and 2) allowing you to pay qualified expenses with pretax dollars.

In addition, any funds remaining in an HSA may be carried over from year to year and invested, growing on a tax-deferred basis indefinitely. This is a huge advantage over health care Flexible Spending Accounts, where the funds must be spent or forfeited (although some employers permit employees to carry over up to $500 per year). When you turn 65, you can withdraw funds penalty-free for any purpose (although funds that aren’t used for qualified medical expenses are taxable).

To the extent that HSA funds aren’t used to pay for qualified medical expenses, they’re treated much like those in an IRA or a 401(k) plan.

Estate planning benefits

Unlike traditional IRA and 401(k) plan accounts, with HSAs you don’t need to take required minimum distributions once you reach age 73. Besides funds used to pay qualified medical expenses, the account balance continues to grow on a tax-deferred basis indefinitely, providing additional assets for your heirs. The tax implications of inheriting an HSA differ substantially depending on who receives it, so it’s important to consider your beneficiary designation.

If you name your spouse as beneficiary, the inherited HSA will be treated as his or her own HSA. That means your spouse can allow the account to continue growing and withdraw funds tax-free for his or her own qualified medical expenses.

If you name your child or someone else other than your spouse as beneficiary, the HSA terminates and your beneficiary is taxed on the account’s fair market value. It’s possible to designate your estate as beneficiary, but in most cases that’s not the best choice. A non-spouse beneficiary other than your estate can avoid taxes on any qualified medical expenses that you incurred prior to death, paid with HSA funds within one year after death.

This webinar has concluded. Additional resources are provided below.

Yeo & Yeo’s payroll specialists and a U.S. Department of Labor representative hosted a webinar on the latest Department of Labor (DOL) Wage and Hour Division developments. The DOL has finalized a rule impacting overtime exemptions for executive, administrative, and professional employees under the Fair Labor Standards Act (FLSA). This new rule raises the minimum salary needed for employees to qualify for exemption. The initial increase takes effect July 1, 2024, and will automatically adjust every three years based on a specific formula.

This webinar focused on the following key topics:

FLSA executive, administrative, and professional exemptions, including learned and creative professionals
Minimum salary levels and effective dates
The primary duties test
Highly compensated employees (HCE) test
Nondiscretionary payments to meet salary thresholds
Definition of “paid” on a salary
What actions should you take now to prepare?

Additional Resources:

Final Rule: Restoring and Extending Overtime Protections – DOL presentation that provides an overview of the new rule
Unlocking Compliance: Mastering DOL’s Final Overtime Rules Through Job Duties Analysis – Yeo & Yeo’s webinar slides
U.S. Department of Labor’s 2024 Final Rule webpage – Additional resources to help navigate the Final Rule
U.S. Department of Labor’s 2024 Final Rule
Wage and Hour Division Fact Sheets
Webinar Q&A

Webinar Presenters:

Christine Porras, CPP – Yeo & Yeo, Payroll Supervisor

Rose Sharman – Yeo & Yeo, Outsourced Business Operations Manager

Mildred Kress – U.S. Department of Labor, Community Outreach & Resource Planning

We are delighted to spotlight Kyle Richardson, CPA, one of the recipients of the Tomorrow’s 20 award from the Auburn Hills Chamber of Commerce. This award recognizes emerging leaders who exemplify outstanding leadership, innovation, and commitment to community service.

Kyle, can you tell us about your journey leading up to receiving the Tomorrow’s 20 Award?

My journey to receiving the Tomorrow’s 20 Award has been shaped by a strong sense of duty and a pursuit of excellence, cultivated during my time serving in the United States Army. Stationed in Afghanistan, I was privileged to earn commendations for heroism and meritorious service, experiences that instilled in me a deep commitment to leadership and helping others.

Your involvement with various organizations is impressive. Could you share some insights into your leadership roles?

I was fortunate to assume leadership roles in various organizations that have allowed me to use what I have learned to help others. As the former president of the Walsh College Student Veteran Organization and the Walsh College Accounting and Taxation Student Organization, I was privileged to guide and empower fellow students, leveraging my experiences to support their academic and professional growth. As the former president of the Yeo & Yeo Young Professionals group, I worked closely with my colleagues to organize events and activities to give back to the communities where we live, work, and play.

What drives your passion for giving back?

My passion for giving back is deeply rooted in the power of community and collective action. I am driven to make a difference in the lives of others, leveraging my skills and resources to uplift those in need and contribute to the greater good. Whether volunteering with the American Cancer Society to support cancer research and patient care, engaging in meaningful initiatives at Woodside Bible Church, or supporting The Bottomless Toy Chest, I am continually inspired by the profound impact that acts of service can have on individuals and communities.

Winning the Tomorrow’s 20 Award is a significant achievement. How do you feel about receiving this honor?

Winning the Tomorrow’s 20 Award is an incredibly humbling experience. It is inspiring to be recognized alongside other emerging leaders who share a commitment to service and excellence. This award is a testament to my passion for community service and professional growth. It reaffirms my belief in the power of leadership and collective action to effect positive change and motivates me to continue striving for excellence and making meaningful contributions to my community and beyond.

Kyle Richardson epitomizes the qualities of tomorrow’s leaders through his unwavering commitment to service, exemplary leadership, and forward-thinking mindset. His dedication and contributions have left a lasting mark on those around him, inspiring others to follow his example and actively shape a brighter future for all. We extend our congratulations to Kyle on this well-deserved achievement and eagerly anticipate the continued impact of his leadership and service in the years to come.

Businesses have long been advised to engage in active dialogues with their customers and prospects. The problem was, historically, these interactions tended to take a long time. Maybe you sent out a customer survey and waited weeks or months to gather the data. Or perhaps you launched a product or service and then waited anxiously for the online reviews to start popping up.

There’s now a much faster way of dialoguing with customers and prospects called “conversational marketing.” Although the approach isn’t something to undertake lightly, it could help you raise awareness of your brand and drive sales.

Concept and goal

The basic concept behind conversational marketing is to strike up real-time discussions with customers and prospects as soon as they contact you. You’re not looking to give them canned sales pitches. Instead, you want to establish authentic social connections — whether with individuals or with representatives of other organizations in a business-to-business context.

The overriding goal of conversational marketing is to accelerate and enhance engagement. Your aim is to interact with customers and prospects in a deeper, more meaningful way than, say, simply giving them a price list or rattling off the specifications of products or services.

In accomplishing this goal, you’ll increase the likelihood of gaining loyal customers who will generate steady or, better yet, increasing revenue for your business.

Commonly used channels

The nuts and bolts of conversational marketing lies in technology. If you decide to implement it, you’ll need to choose tech-based channels where your customers and prospects most actively contact you. Generally, these tend to be:

Your website. The two basic options you might deploy here are chatbots and live chat. Chatbots are computer programs, driven by artificial intelligence (AI), that can simulate conversations with visitors. They can either appear immediately or pop up after someone has spent a certain amount of time on a webpage. Today’s chatbots can answer simple questions, gather information about customers and prospects, and even qualify leads.

With live chat, you set up an instant messaging system staffed by actual humans. These reps need to be thoroughly trained on the principles and best practices of conversational marketing. Their initial goal isn’t necessarily to sell. They should first focus on getting to know visitors, learning about their interests and needs, and recommending suitable products or services.

Social media. More and more businesses are actively engaging followers in comments and direct messages on popular platforms such as Facebook, Instagram and Tik Tok. This can be a tricky approach because you want responses to be as natural and appropriately casual as possible. You don’t want to sound like a robot or give anyone the “hard sell.” Authenticity is key. You’ll need to carefully choose the platforms on which to be active and train employees to monitor those accounts, respond quickly and behave properly.

Text and email. If you allow customers and prospects to opt-in to texts and emails from your company, current AI technology can auto-respond to these messages to answer simple questions and get the conversation rolling. From there, staff can follow up with more personalized interactions.

A wider audience

Like many businesses, yours may have already been engaging in conversational marketing for years simply by establishing and building customer relationships. It’s just that today’s technology enables you to formalize this approach and reach a much wider audience. For help determining whether conversational marketing would be cost-effective for your company, contact us.

Are you tired of juggling a multitude of passwords like a circus act? You’re not alone. According to a recent report, around 1 in 4 of us feel the same. But it’s not just the sheer number of passwords that’s causing headaches – it’s the security risks they pose.

Let’s face it, when it comes to setting passwords, most people aren’t cyber security professionals. From weak and easily guessable passwords to the cardinal sin of reusing passwords across multiple accounts, human error is everywhere.

Another study revealed that, on average, people use the same password for five different accounts. And don’t get us started on classics like ‘123456’… used on a mind-boggling 23 million breached accounts.

But here’s the thing: Cyber criminals don’t need any extra help. They’re already pros at cracking passwords, and our lax habits are like an open invitation to wreak havoc. And let’s not forget the staggering stats – a projected $434 billion loss to online payment fraud globally between 2024 and 2027, with 90% of data leaks attributed to stolen login details.

So, what’s the solution?

Password managers.

These are essential software tools that take the hassle out of password management by generating and storing complex, unique passwords for each account. No more ‘123456’ disasters. Just robust security.

And the best part? Password managers not only beef up your security defenses but they also streamline your digital life. With one-click logins and autofill features, you’ll wonder how you ever lived without one. And with the right password manager, you can rest easy knowing your sensitive data is under lock and key.

A password manager makes your life easier and business safer at the same time. Want to know which one we recommend? Get in touch.

Information used in this article was provided by our partners at MSP Marketing Edge.

After experiencing a downturn in 2023, merger and acquisition activity in several sectors is rebounding in 2024. If you’re buying a business, you want the best results possible after taxes. You can potentially structure the purchase in two ways:

Buy the assets of the business, or
Buy the seller’s entity ownership interest if the target business is operated as a corporation, partnership or LLC.

In this article, we’re going to focus on buying assets.

Asset purchase tax basics

You must allocate the total purchase price to the specific assets acquired. The amount allocated to each asset becomes the initial tax basis of that asset.

For depreciable and amortizable assets (such as furniture, fixtures, equipment, buildings, software and intangibles such as customer lists and goodwill), the initial tax basis determines the post-acquisition depreciation and amortization deductions.

When you eventually sell a purchased asset, you’ll have a taxable gain if the sale price exceeds the asset’s tax basis (initial purchase price allocation, plus any post-acquisition improvements, minus any post-acquisition depreciation or amortization).

Asset purchase results with a pass-through entity

Let’s say you operate the newly acquired business as a sole proprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a partnership, a multi-member LLC treated as a partnership for tax purposes or an S corporation. In those cases, post-acquisition gains, losses and income are passed through to you and reported on your personal tax return. Various federal income tax rates can apply to income and gains, depending on the type of asset and how long it’s held before being sold.

Asset purchase results with a C corporation

If you operate the newly acquired business as a C corporation, the corporation pays the tax bills from post-acquisition operations and asset sales. All types of taxable income and gains recognized by a C corporation are taxed at the same federal income tax rate, which is currently 21%.

A tax-smart purchase price allocation

With an asset purchase deal, the most important tax opportunity revolves around how you allocate the purchase price to the assets acquired.

To the extent allowed, you want to allocate more of the price to:

Assets that generate higher-taxed ordinary income when converted into cash (such as inventory and receivables),
Assets that can be depreciated relatively quickly (such as furniture and equipment), and
Intangible assets (such as customer lists and goodwill) that can be amortized over 15 years.

You want to allocate less to assets that must be depreciated over long periods (such as buildings) and to land, which can’t be depreciated.

You’ll probably want to get appraised fair market values for the purchased assets to allocate the total purchase price to specific assets. As stated above, you’ll generally want to allocate more of the price to certain assets and less to others to get the best tax results. Because the appraisal process is more of an art than a science, there can potentially be several legitimate appraisals for the same group of assets. The tax results from one appraisal may be better for you than the tax results from another.

Nothing in the tax rules prevents buyers and sellers from agreeing to use legitimate appraisals that result in acceptable tax outcomes for both parties. Settling on appraised values becomes part of the purchase/sale negotiation process. That said, the appraisal that’s finally agreed to must be reasonable.

Plan ahead

Remember, when buying the assets of a business, the total purchase price must be allocated to the acquired assets. The allocation process can lead to better or worse post-acquisition tax results. We can help you get the former instead of the latter. So get your advisor involved early, preferably during the negotiation phase.

Occupational fraud isn’t just a financial threat. It can potentially change a business’s reputation, culture and relationships. But before dealing with any larger ramifications of fraud, defrauded companies must first “clean up” the mess. This may include potentially terminating the perpetrator, taking civil action or referring the perpetrator to the police. Whatever a business chooses to do in the aftermath of a fraud incident, swift action is paramount and internal controls must be addressed.

How do victims react?

In its Occupational Fraud 2024: A Report to the Nations, the Association of Certified Fraud Examiners (ACFE) reveals that when organizations uncover fraud, 67% choose to terminate the individuals involved. In 57% of cases, companies refer fraud perpetrators to law enforcement. Of those, 45% result in the perpetrator pleading guilty or no contest, while 27% are convicted at trial. In 14% of referred cases, law enforcement declines to prosecute.

When fraud comes to light, the role of legal counsel is critical. If your organization discovers fraud, be sure to notify your attorney before launching any investigation. Attorneys can provide guidance on how to handle potential suspects, including whether to suspend or terminate them from work, how to notify them of your decision and what to communicate with other workers.

Also consider engaging a forensic accountant. This fraud expert can help analyze records and data, identify suspects, interview witnesses, recover financial losses and collect evidence that will hold up in court (if applicable). Keep in mind that you may want to let your attorney hire the forensic accountant.

Whether your company or a fraud expert conducts the investigation, it typically will involve several steps. These include gathering and reviewing relevant documents (including digital files), interviewing possible perpetrators and their coworkers, and preparing a comprehensive investigative report. Your business also must — with legal input — decide whether it plans to pursue criminal or civil charges against those involved.

How can you mitigate losses?

Note that recovering financial losses from fraud isn’t necessarily straightforward. The ACFE found that 57% of organizations recovered nothing, 30% made a partial recovery and only 13% recovered all losses related to fraud.

Such figures only highlight the need for robust internal controls to mitigate losses in the first place. For example, the ACFE reports that if surprise audits aren’t used by an organization, the median loss if fraud occurs is $200,000. But if surprise audits are used and a business suffers a fraud incident, its median loss is only $75,000 — a 63% reduction. Obviously, following this approach to risk reduction acknowledges that internal controls aren’t always foolproof. However, when controls are deployed — particularly if your company has several layers of protection — they can reduce median losses significantly and possibly prevent fraud altogether.

In addition to surprise audits, these controls are associated with faster detection of schemes and at least a 50% reduction in financial losses:

Management review,
Routine financial statement audits,
Availability of an anonymous fraud tipline,
Fraud training for managers,
A written antifraud policy, and
Proactive data monitoring.

In 32% of fraud incidents, the most common factor is a lack of internal controls. In an additional 19% of cases, managers and others override existing controls. So controls must not only exist, they also must be rigorously followed.

How should you address risk?

If an employee commits fraud, what your company decides to do will depend on the extent of the fraud, the available evidence and many other factors. So that you’ll hopefully never have to make such difficult decisions, take steps now to ensure your internal controls address your organization’s risks. Contact us for help.

Audit committees act as gatekeepers over the accounting and financial reporting processes, including the effectiveness of the company’s control environment. However, as the regulatory landscape becomes increasingly complex and organizations face evolving risks, the scope of an audit committee’s responsibilities may extend beyond traditional financial reporting.

Top-of-mind list

In March 2024, a survey entitled “Audit Committee Practices Report: Common Threads Across Audit Committees” was published by Deloitte and the Center for Audit Quality, an affiliate of the American Institute of Certified Public Accountants. The survey analyzed 266 responses, including many from people who served on audit committees of public companies.

Respondents identified the following five priorities over the next 12 months:

1. Cybersecurity. This was listed as a top-three concern by a majority (69%) of audit committee members surveyed. The focus on cybersecurity is, in part, caused by a new regulation from the U.S. Securities and Exchange Commission. It requires public companies to 1) report material cybersecurity incidents, 2) disclose cybersecurity risk management and strategy, and 3) explain their board and management oversight processes. Surprisingly, only 24% of respondents said their audit committees had sufficient levels of expertise in this area. So additional resources may be needed to hire external cybersecurity advisors or invest in educational programs to bridge the knowledge gap.

2. Enterprise risk management (ERM). Nearly half (48%) of respondents listed ERM as a top-three concern. This refers to the processes an organization uses to identify, monitor and assess enterprise-wide risks. Audit committees have been tasked with ERM for many years, but extra attention may be warranted as new threats emerge. Examples include pandemics, large natural and climate-related disasters, and global conflicts. It’s important for audit committees to evaluate whether their organizations’ ERM processes can handle new threats efficiently and effectively.

3. Finance and internal audit talent. More than one-third (37%) of respondents put this concern on their top-three list. Audit committees frequently work closely with in-house finance and internal audit teams. While most respondents (89%) agree or strongly agree that their internal auditors possess high-level understandings of the companies’ operations, there may be opportunities to upskill in-house staff and use artificial intelligence (AI) to streamline routine tasks, eliminate redundancies and identify opportunities to operate more efficiently. Audit committees should oversee succession planning for finance and internal audit teams, particularly if their companies’ CFOs are planning to soon retire.

4. Compliance with laws and regulations. More than one-third (36%) of respondents are focused on the heightened complexity of the regulatory environment. Compliance issues are especially prevalent in heavily regulated industries, such as banking, food services and aviation.

5. Finance transformation. Listed as a top-three concern by 33% of respondents, finance transformation refers to revamping the finance department to better align with the company’s overall strategy. It may entail changes to the department’s operating model, staffing, processes and accounting systems. The goals are to simplify, streamline and optimize the organization’s finance function. Audit committees can help finance teams implement transformation initiatives by understanding the human and technological resources needed. Many are considering possible AI solutions, for example, to expedite closing the books at the end of the reporting period, improve financial planning and detect impending risks.

Collaborative approach

External auditors communicate frequently with audit committees about top concerns, emerging risks, impending regulations and other matters, so they can help each other in performing their respective roles. Contact us. We design audit procedures, draft financial statement disclosures and provide guidance to help address the challenges audit committees face today.

Various survey results have been rolling in, and the message for employers is relatively clear: Employees want support in maintaining their wellness — particularly when it comes to mental health.

Employers seem to be responding in kind. Many are ramping up their “well-being” benefits to retain valued staff members and draw strong job candidates. This marks a change in the competitive landscape for talent that every organization, including yours, should consider.

Lots of data

Among the most telling reports is MetLife’s Employee Benefit Trends Study 2024. The insurance giant combined responses from two surveys — one of 2,595 employee benefits decision-makers and influencers and another of 2,809 full-time employees — and found that 92% of employees want more “consistent care” from their employers.

This very high percentage echoes the results of the 2023 Workplace Wellness Survey by the Employee Benefit Research Institute and Greenwald Research. It found that, of 1,505 full- and part-time employees surveyed, 78% agreed that employers are responsible for ensuring staff members are “mentally healthy and emotionally well.”

As mentioned, many employers are actively trying to address these concerns. At the beginning of this year, the Integrated Benefits Institute, a nonprofit benefits research organization, released the results of a survey that found 51% of responding employers said “employee satisfaction” was their top organizational goal — that’s 10% more than the second most important goal of cost mitigation / revenue generation.

In response to this goal or a similar one, many employers are enhancing their employee benefits. The CHRO Confidence Index, which is researched and published by The Conference Board, a global nonprofit think tank and business membership organization, regularly takes the pulse of its member Chief Human Resources Officers (CHROs). In the February 2024 edition, 42% of responding CHROs reported planning to offer new benefits this year. Of those, 20% identified well-being benefits that will involve mental health initiatives.

Benefits to consider

So, what are well-being benefits? They’re generally considered those that augment an employer-sponsored health care plan and help support mental health as well as physical and financial wellness. Here are just a few to consider:

An Employee Assistance Program (EAP). This is a voluntary and confidential work-based intervention program designed to help employees and their dependent family members deal with issues that may be affecting their mental health and job performance. EAPs can help participants deal with issues such as workplace stress, grief, depression, marriage/family problems, psychological disorders, financial troubles, and alcohol and drug dependency.

Revised paid time off (PTO) policies. Many employers are finding that the old “X number of vacation days and X number of sick days” approach lacks the flexibility employees need to care for themselves. Your staff may appreciate a bank of PTO that can be used for any purpose, without question. Some employers are also adding “mental health days” to their lists of organizational holidays.

Trainings related to mental health or financial literacy. Employers are often well-positioned to teach groups of people to lessen behaviors that hurt mental health and emphasize behaviors that improve it.

For example, stress management programs can train workers to recognize strenuous situations and better cope with them. Meanwhile, financial literacy programs may help employees better understand topics such as debt management and investing. In turn, this can lower their stress levels.

A diverse menu

For many employers, particularly midsize and larger ones, the days of offering up some paid time off, health insurance and a retirement plan are over. Employees increasingly expect a wide and diverse menu of fringe benefits that address multiple facets of their lives. Contact us for help analyzing your benefits costs and choosing cost-effective offerings.

Interim financial reporting is essential to running a successful business. When reviewing midyear financial reports, however, you should recognize their potential shortcomings. These reports might not be as reliable as year-end financials, unless a CPA prepares them or performs agreed-upon procedures on specific accounts.

Realize the diagnostic benefits

Monthly, quarterly and midyear financial reports can provide insight into trends and possible weaknesses. Reviewing interim results is particularly important if your business fell short of its financial objectives in 2023.

For example, you might compare year-to-date revenue for 2024 against 1) the same time period for 2023, or 2) your annual budget for 2024. If your business isn’t growing or achieving its goals, find out why. Perhaps you need to provide additional sales incentives, implement a new marketing campaign or adjust your pricing.

You can also review your gross margin [(revenue – cost of goods sold) ÷ revenue]. If your margin is slipping compared to 2023 or industry benchmarks, find out what’s going wrong and take corrective actions.

Don’t forget the balance sheet. Reviewing major categories of assets and liabilities can help detect working capital problems before they spiral out of control. For instance, a buildup of accounts receivable may signal collection problems. Or, if your company is drawing heavily on its line of credit, operations might not be generating sufficient cash flow.

Proceed with caution

If your company’s interim financials seem out of whack, don’t panic. Some anomalies may not necessarily be related to problems in your daily business operations. Instead, they might be caused by informal accounting practices that are common midyear (but are corrected by your CPA at year end). Remember that unlike year-end reports, interim reports for private companies are seldom subject to external audit or rigorous internal accounting scrutiny.

For example, some controllers might loosely interpret period “cutoffs” or use subjective estimates for certain account balances and expenses. In addition, interim financial statements typically exclude major year-end expenses, such as profit sharing and shareholder bonuses. As a result, interim financial statements tend to paint a rosier picture of a company’s performance than its year-end report may.

Furthermore, many companies perform time-consuming physical inventory counts exclusively at year end. Therefore, the inventory amount shown on the interim balance sheet might be based solely on computer inventory schedules or, in some instances, the controller’s estimate using historic gross margins. Similarly, accounts receivable may be overstated, because overworked controllers may lack time or personnel to evaluate whether the interim balance contains any bad debts adequately.

Finish the year strong

It’s hard to believe that 2024 is almost half over! Once your staff generates your business’s midyear financial reports, contact us for help interpreting them. We can help you detect and correct potential problems. We also can help remedy any shortcomings by performing additional testing procedures on your interim financials — or preparing audited or reviewed midyear statements that conform to U.S. Generally Accepted Accounting Principles.

Michigan’s cannabis industry has been on an unprecedented trajectory, marked by remarkable milestones, significant challenges, and abundant opportunities. As we dive into the trends, challenges, and opportunities shaping this dynamic landscape, it becomes evident that while the industry is flourishing, it also grapples with complexities that demand innovative solutions and strategic foresight.

Trends

Michigan’s cannabis industry soared to new heights in 2023, surpassing a staggering $3 billion in total sales. This milestone, equivalent to approximately $300 per person in the state, signifies a remarkable 30% growth from the $2.3 billion recorded in 2022 (MJBizDaily, 2023). Such exponential growth emphasizes the robust demand and evolving consumer preferences within the market.
A driver of this growth has been the surge in adult-use cannabis sales, evidenced by a compelling 15.7% year-over-year increase in March 2024. However, medical cannabis sales faced a significant decline of 79.1% (MJBizDaily, 2023). This shift illustrates a fundamental transformation in consumer behavior, with recreational cannabis gaining prominence over its medicinal counterpart.
The increase in the number of retail stores further exemplifies the industry’s expansion, with an additional 120 stores opening their doors in 2023, bringing the statewide total to 750 (MLive, 2024). Nonetheless, amidst this increase lies a nuanced challenge, as some communities have opposed the establishment of recreational cannabis sales, reflecting ongoing societal attitudes toward legalization (Freep, 2024).
Moreover, pricing dynamics have proven volatile, with adult-use flower prices experiencing a 1.3% sequential decline alongside a 4.4% year-over-year increase (MJBizDaily, 2023). This fluctuation underscores the imperative for cannabis businesses to maintain a keen vigilance over pricing strategies to navigate the evolving market landscape effectively.

Challenges

While Michigan’s cannabis industry experiences success, it faces many challenges that threaten its stability and viability. Foremost among these challenges is the issue of oversupply, leading to a downward price spiral and putting pressure on retailers’ margins. The resulting business failures and industry consolidation highlight the urgent need for strategic interventions to address supply and demand imbalances (Freep, 2024).
Compounding this challenge is the Cannabis Regulatory Agency’s (CRA) heightened enforcement efforts, which have intensified its scrutiny of businesses failing to adhere to regulatory frameworks. Infractions related to financial reporting and the infiltration of illicit markets are mainly targeted, underscoring the imperative for stringent compliance measures within the industry (MLive, 2024).
Access to capital emerges as another challenge confronting cannabis businesses, fueled by the industry’s legal intricacies and the lack of banking services. The inherent risk associated with cannabis ventures discourages traditional financial institutions from providing support, further worsening the capital crunch within the industry (Freep, 2024).
Additionally, the conflict of interest in the private lab testing system presents a pressing challenge, with allegations of altered results undermining the integrity of quality assurance processes. The need for the CRA to establish its reference lab underscores the importance of restoring trust and transparency within the testing ecosystem (MLive, 2024).

Opportunities

The sustained growth in adult-use cannabis sales, evidenced by a 33.3% increase in 2023, unveils a fertile ground for businesses to expand their footprint and seize market share (MJBizDaily, 2023).

The legalization of cannabis has changed the real estate market, with more demand for properties dedicated to cultivation, processing, and retail. This demand presents a lucrative opportunity for property owners and investors to capitalize on the cannabis industry (AlphaRoot, 2022).

Moreover, cannabis tourism has emerged as a trend, attracting visitors from neighboring states and beyond. This influx of tourists improves the state’s economy and presents an opportunity for businesses to cater to the unique needs and preferences of cannabis enthusiasts, thereby diversifying revenue streams (AlphaRoot, 2022).

The commitment of the CRA to foster transparency, communication, and industry support is good for both regulators and businesses. Working together helps cannabis businesses follow the rules and navigate the regulation maze in a supportive environment. (MLive, 2024).

In summary, Michigan’s cannabis industry is at a crucial point, balancing between substantial growth and significant challenges. Stakeholders need to understand current trends, address challenges with creativity, and capitalize on available opportunities. With focused efforts and careful planning, Michigan’s cannabis industry has the potential to achieve sustained growth and success in the future.

References

AlphaRoot. (2022). The economic impact of cannabis in Michigan. Retrieved from https://alpharoot.com/insights/the-economic-impact-of-cannabis-in-michigan/

Freep. (2024, February 9). Michigan recreational cannabis outlook: Sales up, business failures possible. Retrieved from https://www.freep.com/story/news/marijuana/2024/02/09/michigan-recreational-cannabis-outlook-sales-business-failures-2024/72354109007/

MJBizDaily. (2023). Michigan total marijuana sales reach $3 billion in 2023. Retrieved from https://mjbizdaily.com/michigan-total-marijuana-sales-reach-3-billion-in-2023/

MLive. (2024, January 15). Michigan marijuana sales surpass $3 billion in 2023 but face possible slowdown. Retrieved from https://www.mlive.com/cannabis/2024/01/michigan-marijuana-sales-surpass-3-billion-in-2023-but-face-possible-slowdown.html

Let’s say you plan to use a C corporation to operate a newly acquired business or you have an existing C corporation that needs more capital. You should know that the federal tax code treats corporate debt more favorably than corporate equity. So for shareholders of closely held C corporations, it can be a tax-smart move to include in the corporation’s capital structure:

Some third-party debt (owed to outside lenders), and/or
Some owner debt.

Tax rate considerations

Let’s review some basics. The top individual federal income tax rate is currently 37%. The top individual federal rate on net long-term capital gains and qualified dividends is currently 20%. On top of this, higher-income individuals may also owe the 3.8% net investment income tax on all or part of their investment income, which includes capital gains, dividends and interest.

On the corporate side, the Tax Cuts and Jobs Act (TCJA) established a flat 21% federal income tax rate on taxable income recognized by C corporations.

Third-party debt

The non-tax advantage of using third-party debt financing for a C corporation acquisition or to supply additional capital is that shareholders don’t need to commit as much of their own money.

Even when shareholders can afford to cover the entire cost with their own money, tax considerations may make doing so inadvisable. That’s because a shareholder generally can’t withdraw all or part of a corporate equity investment without worrying about the threat of double taxation. This occurs when the corporation pays tax on its profits and the shareholders pay tax again when the profits are distributed as dividends.

When third-party debt is used in a corporation’s capital structure, it becomes less likely that shareholders will need to be paid taxable dividends because they’ll have less money tied up in the business. The corporate cash flow can be used to pay off the corporate debt, at which point the shareholders will own 100% of the corporation with a smaller investment on their part.

Owner debt

If your entire interest in a successful C corporation is in the form of equity, double taxation can arise if you want to withdraw some of your investment. But if you include owner debt (money you loan to the corporation) in the capital structure, you have a built-in mechanism for withdrawing that part of your investment tax-free. That’s because the loan principal repayments made to you are tax-free. Of course, you must include the interest payments in your taxable income. But the corporation will get an offsetting interest expense deduction — unless an interest expense limitation rule applies, which is unlikely for a small to medium-sized company.

An unfavorable TCJA change imposed a limit on interest deductions for affected businesses. However, for 2024, a corporation with average annual gross receipts of $30 million or less for the three previous tax years is exempt from the limit.

An example to illustrate

Let’s say you plan to use your solely owned C corporation to buy the assets of an existing business. You plan to fund the entire $5 million cost with your own money — in a $2 million contribution to the corporation’s capital (a stock investment), plus a $3 million loan to the corporation.

This capital structure allows you to recover $3 million of your investment as tax-free repayments of corporate debt principal. The interest payments allow you to receive additional cash from the corporation. The interest is taxable to you but can be deducted by the corporation, as long as the limitation explained earlier doesn’t apply.

This illustrates the potential federal income tax advantages of including debt in the capital structure of a C corporation. Contact us to explain the relevant details and project the tax savings.

Welcome to Everyday Business, Yeo & Yeo’s podcast. On episode 32, host Michael Rolka, CPA, CGFM, Principal in Yeo & Yeo’s Auburn Hills office, is joined by Daniel Beard, CPA, Manager in Ann Arbor.

Listen in as Mike and Dan discuss GASB Statement No. 101, Compensated Absences, breaking down its complex aspects into digestible insights. They discuss its purpose, its impact on governmental accounting, and why it’s essential for financial reporting. In this podcast, you will learn more about:

Components of GASB Statement No. 101
Critical aspects essential for implementation
Effective implementation strategies
Critical auditor considerations
Impact on financial statements and disclosures
Examples to better understand the standard’s intricacies

Whether you’re new to GASB 101 or seeking more insight, this podcast takes a deeper dive into the challenges, changes and considerations to help you navigate its complexities.

Thank you for tuning in to Yeo & Yeo’s Everyday Business podcast. Yeo & Yeo’s podcast can be heard on Apple Podcasts, Spotify, PodBean and, of course, our website.

For more business insights, visit our Resource Center and subscribe to our eNewsletters.

As technology has rapidly evolved, and the value of intellectual property has skyrocketed, so has employers’ use of noncompete agreements. Many different types of organizations have deployed these agreements to prevent employees from taking valuable information and key customers with them to competitors if they decide to leave their jobs.

But, on April 23, the Federal Trade Commission (FTC) said no more. Citing a violation of Section 5 of the FTC act, the agency announced a final rule that will ban the use of most noncompetes when and if it takes effect later this summer.

Rationale for the rule

In the FTC’s view, use of noncompetes has become so widespread that it’s unfairly suppressing wages, inhibiting innovation and negatively affecting workers’ ability to earn a living. According to the agency, 18% of U.S. workers are currently covered by such agreements. That amounts to one in five workers — or 30 million people. By banning the use of noncompetes, the FTC estimates that annually:

Typical workers will earn $524 more,
More than 8,500 new start-ups will be launched, and
An average of 17,000 to 29,000 more patents will be issued over the next 10 years.

Said FTC Chair Lina M. Khan, “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

Key details

The final rule requires employers to notify affected employees that existing noncompetes will no longer be enforced as of the rule’s effective date — that is, 120 days after publication in the Federal Register. On its website, the FTC states the expected effective date is September 4, 2024. At that time, employers will also be prohibited from entering into new noncompetes.

There’s a notable exception, however. Existing noncompetes for “senior executives” can remain in force. The final rule defines these as employees who earn more than $151,164 a year and are in “policy-making positions.” This generally includes a business entity’s president; chief executive officer or the equivalent; any other officer with policy-making authority; or any other “natural person” with policy-making authority who’s similar to an officer.

The earnings threshold includes base salary and nondiscretionary bonuses but excludes discretionary bonuses and fringe benefits. Also, there can be varying definitions of the term “year.” So, some employers may want to seek guidance from professional advisors on whether senior executives or officers fall above or below the threshold.

What employers can do

The FTC contends that its ban on noncompetes doesn’t leave employers helpless. According to the agency’s press release, “Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information.”

It’s important to note, however, that the final rule also prohibits overly broad NDAs, nonsolicitation clauses and training repayment agreement provisions. Thus, concerned employers should begin exploring with their attorneys how to craft carefully worded NDAs that protect specific proprietary information without violating the ban.

Beyond that, the FTC believes its final rule should drive employers to “compete on the merits for the worker’s labor services by improving wages and working conditions.” In other words, employee retention efforts are more important than ever.

Legal and compliance challenges

As is often the case with major employment policy developments, the ban was met with legal challenges — and more are expected. In fact, as of this writing, the U.S. Chamber of Commerce has already filed suit in the U.S. District Court for the Eastern District of Texas to block the FTC’s ban. Its argument is, essentially, that the agency lacks the legal authority to impose such a sweeping change.

Employers that use noncompetes would be well-advised to consult their attorneys and begin devising appropriate strategies. We can help you assess all your employment costs.

For many years, conservation easements have been a powerful estate planning tool that enable taxpayers to receive income and estate tax benefits while continuing to own and enjoy the properties. So it’s no surprise that the IRS has been scrutinizing easements to ensure they meet tax code requirements. The tax agency has even issued a warning that some of the transactions are “bogus tax avoidance strategies.”

Curbing abusive arrangements

A conservation easement is a restriction on the use of real property. It involves an arrangement to permanently restrict some or all of the development rights associated with a property. The easement is granted to a conservation organization — usually a government agency or qualified charity — by executing a deed and recording it in the appropriate public records office. The organization is responsible for monitoring the property’s use and enforcing the easement.

In a legitimate transaction, a taxpayer can claim a charitable contribution deduction for the fair market value of a conservation easement transferred to a charity if the transfer meets tax code requirements. The IRS explains that “in abusive arrangements, promoters are syndicating conservation easement transactions that purport to give an investor the opportunity to claim charitable contribution deductions and corresponding tax savings that significantly exceed the amount the investor invested.” The tax agency added “these abusive arrangements, which generate high fees for promoters, attempt to game the tax system with grossly inflated tax deductions.”

As part of recent legislation, an easement-related provision changed the tax code to curb certain abusive conservation easement transactions. The IRS announced it “is committed to ensuring compliance with the conservation easement deduction law as amended and will continue to keep an eye on transactions that are ‘too good to be true.’”

A guide for auditors

To assist auditors examining tax returns, the IRS has a Conservation Easement Audit Technique Guide (ATG). The fact that the ATG is more than 100 pages demonstrates how complex the transactions are and how serious the IRS is about uncovering abusive arrangements.

The ATG explains that to qualify for tax benefits, an easement must be granted exclusively for one of the following purposes:

To preserve land for public recreation or education,
To protect a relatively natural habitat of fish, wildlife or plants,
To preserve open spaces, either for the public’s “scenic enjoyment” or according to a governmental conservation policy that yields a “significant public benefit,” or
To preserve a historically important land area or a certified historic structure.

It’s critical for an easement to be carefully drafted so there’s no confusion about which land uses are given up and which are retained.

Tax benefits

For estate tax purposes, a percentage of the land’s value (up to certain limits) can be excluded from a gross estate (in addition to any reduction in value resulting from the easement). Certain other limitations apply.

For income tax purposes, a qualified transaction entitles a taxpayer to deduct the easement’s value (defined as the difference between the property’s fair market value before and after the easement is granted) as a charitable gift. The deduction is subject to the same limitations that apply to other charitable donations. Conservation easements valued over $5,000 must be supported by a qualified appraisal.

Common errors

The ATG identifies common mistakes when making donations. They include:

Use of improper appraisal methodologies and overvalued easements,
Failure to comply with substantiation requirements, and
Failure to restrict development of the land in perpetuity, allowing the easement to be abandoned or terminated.

If you’re contemplating a conservation easement, know that the IRS is scrutinizing them. Work with tax, legal and valuation professionals to stay out of IRS trouble and avoid losing valuable tax benefits.

No matter how carefully and congenially you run your business, customer disputes will likely happen from time to time.

Some of the complaints may be people looking to negotiate a discount, “game the system” or even outright defraud you. But others could be legitimate complaints arising from mistakes on your company’s part, technological glitches or, perhaps worst of all, fraudulent actions by a third party.

Whatever the case may be, you can protect your business’s reputation and even strengthen its brand by creating and maintaining an effective customer dispute resolution process that includes eight key features:

1. Easily accessible channels of communication. Post easy-to-find and clearly written directions on your website, social media accounts and other channels detailing how customers can report problems, suspected errors and fraud on their accounts. The directions should include up-to-date contact info for your company and identify any forms or documentation required. Also provide a succinct description of your dispute resolution process, so customers know what to expect.

2. An efficient timeline. Naturally, it’s imperative to respond as quickly as possible to customer concerns or complaints. Today’s technology allows businesses to immediately send automated replies confirming receipt of the customer’s message and assuring the sender that you’re investigating. If the matter appears legitimate, you can follow up with a resolution timeline stating the next steps in the process.

3. Empathy and understanding. Train employees to listen patiently and acknowledge to customers the inconvenience of potential errors or fraud on their accounts. Remind customer-facing staff to keep open minds and not automatically assume any customer is making a false report.

4. Rigorous investigatory techniques. Thoroughly investigate disputes to ascertain root causes. Precisely how you should do so will depend on the nature of your industry and operations, as well as the specifics of the complaint.

To ensure consistency and build a robust document trail, however, require employees performing investigations to first gather all available account information and transaction records. Investigators should also carefully preserve emails and other electronic messages, as well as record or transcribe phone conversations with complaining customers and, if applicable, other involved parties.

5. Strong data protection. Your business should already have up-to-date cybersecurity safeguards in place to prevent data breaches and identity theft. But your customer dispute resolution process should include additional layers of protection. For example, apply “the principle of least privilege,” which means, in this case, only authorized employees directly involved in investigations have access to pertinent data.

6. Transparency and proactive follow-ups. Keep customers informed throughout the entire process. Don’t “leave them hanging” and wait for them to follow up with you. Provide them with regular updates on investigations and inform them of outcomes as soon as they’re available.

7. Timely resolution. If a dispute is found to be in the customer’s favor, quickly make the necessary corrections — such as refunds or account adjustments. Also consider providing a temporary discount, free replacement items or complementary services. Many companies also issue an apology, though you may want to consult your attorney on the language.

If you deny a claim, provide a detailed explanation of the evidence and your reasoning. Consider allowing some customers to appeal decisions not in their favor by submitting supplemental information.

8. Documentation and analysis with an eye on continuous improvement. Last, be sure to continually learn from incidents. Retain records of all customer disputes and fraud claims to identify patterns and trends. Use this data to improve your internal controls and investigatory processes, make decisions on technology upgrades, and train customer-facing teams. By doing so, you may be able to prevent disputes in the future or at least lessen their frequency.

As an employer sponsoring a retirement plan, it’s essential to maintain accurate records to comply with legal requirements and ensure smooth plan administration. Let’s dive into the key aspects of maintaining and retaining retirement plan records.

Why Maintain Retirement Plan Records?

Maintaining accurate and up-to-date retirement plan records is essential for several reasons:

Compliance with Legal Requirements: The Internal Revenue Service (IRS) and Department of Labor (DOL) have specific requirements for record retention related to retirement plans. Failure to comply can result in penalties and fines.
Financial Planning: These records provide a clear picture of your retirement savings progress, helping you make informed decisions about your financial future.
Dispute Resolution: In case of any discrepancies or disputes with the plan provider, detailed records can provide necessary evidence.
Audit Ready: This is the main reason for retaining plan documents. Audits require a ton of documentation to prove the plan has been responsibly managed and kept in compliance. Most of the documents you are required to retain are those you’ll need to supply for an audit.

ERISA Guidelines and Requirements

The Employee Retirement Income Security Act (ERISA) sets minimum standards for retirement plans in private industry. Here are some key ERISA guidelines for record maintenance:

Plan Documents: ERISA requires plan administrators to maintain and provide participants with Summary Plan Descriptions (SPDs) and plan documents upon request.
Fiduciary Responsibilities: Plan fiduciaries must act prudently and solely in the interest of the plan’s participants and beneficiaries. All decisions and actions taken by fiduciaries should be documented and retained.
Reporting and Disclosure: ERISA requires the filing of annual reports (Form 5500) with the federal government. It provides transparency about the plan’s financial conditions and operations to the government and plan participants.
Record Retention: Section 107 of ERISA states that plan administrators must keep plan records for at least six years after filing ERISA returns or reports. However, some records should be kept indefinitely.
Accessibility: Whether in paper or electronic format, records must be readily retrievable. If using electronic media, the recordkeeping system must meet certain standards:

Ensure the integrity, accuracy, authenticity, and reliability of electronic records.
Maintain records in reasonable order and in a safe, accessible place.
Must be able to convert electronic records into legible paper copies when needed for reporting and disclosure requirements.

What Records Should You Keep and for How Long?

ERISA Section 107 requires that for fiduciary plan documents, contracts and agreements, participant notices, and compliance documents, you are required to keep records for “at least six years from the date the report was filed.”

Participant-level benefit determinations are slightly different. These should be kept “until the plan has paid all benefits and enough time has passed that the plan won’t be audited.”

Here are some of the key documents to retain:

Plan Documents: No legal documents related to the plan should ever be destroyed. This includes the original signed and dated plan adoption agreement, annuity contracts, plan amendments, and restatements. For example, if you have a 401(k) plan, keep the original signed and dated 401(k) adoption agreement.
Plan Benefit Records: ERISA requires every employer to maintain records necessary to determine benefits due or that may become due to each employee for as long as the possibility exists that they might be relevant to determining the benefit entitlements of a participant or beneficiary. These records include eligibility records, time cards and any records related to distributions and should be retained indefinitely.
Financial Statements: Keep all annual financial statements and auditor’s reports if the plan is subject to an audit.
Participant Records: Preservation of plan records is important not only from the standpoint of complying with ERISA record retention rules, but also because the IRS has been known to request records from employers that go back 10 years or more in the case of a plan termination. Deferral election forms, investment forms, beneficiary forms, and any Qualified Domestic Relations Orders (QDROs) should be kept indefinitely in the participant’s personnel files as well as records of each participant’s account balance and their vesting status. It is also recommended that a file be kept that contains copies of any notices that were given to employees.
Fiduciary Records: Plan fiduciary records should be retained indefinitely. Retain all records of decisions made by plan fiduciaries, including investment decisions, selection of service providers, and plan committee meeting notes. For instance, if you change the plan’s investment options, you should document the decision-making process and retain those records.
Form 5500 and Supporting Information: Form 5500 and records that verify or explain information on the Form 5500 should be kept for at least six years after the filing date of the Form. These include worksheets, receipts, checks, invoices, bank statements, ledgers, contracts, and evidence of the plan’s fidelity bond.

Best Practices for Record Maintenance

Organize Your Records: Keep the records in a systematic manner, making it easier to locate specific documents when needed.
Secure Storage: Protect the records from physical damage and unauthorized access. Consider using secure digital storage solutions.
Regular Updates: Update the records regularly to reflect any changes in the retirement plan or personal circumstances.
Professional Guidance: Consider seeking help from financial advisors or retirement plan consultants to ensure you are meeting all legal requirements.

Maintaining and retaining retirement plan records might seem like a daunting task, but it’s a vital part of ensuring smooth plan administration and complying with requirements.

Yeo & Yeo CPAs & Advisors, a leading Michigan-based accounting and advisory firm, has been named one of West Michigan’s Best and Brightest Companies to Work For for the twentieth consecutive year.

West Michigan Best and Brightest The Best and Brightest program identifies and honors organizations that excel in their human resource practices and employee enrichment. An independent research firm assesses organizations in categories such as communication, work-life balance, employee education, recognition, retention and more.

Yeo & Yeo takes pride in creating an environment that challenges, supports and rewards its people. The firm’s culture is one of learning, growth and purpose. The firm offers an award-winning CPA certification bonus program, an award-winning wellness program, gold-standard benefits, and hybrid and remote work capabilities.

“With today’s intense competition for top talent, fostering a thriving work environment is more important than ever. Job seekers and existing employees are no longer solely motivated by salary and benefits; they’re looking for a workplace that offers purpose, growth opportunities, and a sense of belonging and camaraderie,” said David Jewell, managing principal of Yeo & Yeo’s Kalamazoo office. “Receiving this award for 20 consecutive years is remarkable and confirms that Yeo & Yeo offers an outstanding work culture and environment that attracts and retains superior employees.”

The select companies were honored on May 9, 2024, at The Pinnacle Center in Hudsonville, Mich., and the winning companies will also compete for 14 elite awards.