February 26, 2015

The MLB Strike Zone May Now Equal Money

Major League Baseball (MLB) is considering changing the strike zone – again.

We all know and understand the unofficial strike zone has fluctuations all the time depending on the umpire, player reputation and even the game situation. However, this would be the first official adjustment in almost two decades.

The concern is that the official strike zone has gotten too low. The low called strike, while possibly correct under the current definition, has resulted in a reduction in offense in MLB that has runs per game the lowest in almost 35 years. While the focus on Performance Enhancing Drugs (PEDs) may have a role to play in the reduced scoring, many experts agree that the lower strike zone is having a definitive affect.

If the bottom of the strike zone is adjusted upward, just a couple inches by the reference to the knee of the batter, it’s likely that we’ll see more offense in the coming years.

Changes aren’t common, but do happen. The rules are occasionally tweaked to keep a competitive balance between the pitchers and hitters – i.e. changing the pitcher’s mound height after 1968.

A not so indirect benefit may be that the overall appeal of the game will be enhanced for the ticket buying fans and the television viewing audience. Never a bad thing if you want your product sales to keep on growing.

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February 17, 2015

Understanding the Deductions for Business-Related Vehicle Expenses

If you drive a personal car for work you can deduct part of the vehicle expenses on your tax return, and in turn lower your taxes. There are two ways to deduct business related vehicle expenses, the Standard Mileage Method and the Actual Expense Method.

The Standard Mileage Method, simply uses a standard mileage rate for each year, for 2014 this rate is 56 cents per business mile. This method cannot be used if the vehicle is depreciated using Modified Accelerated Cost Recovery System or claiming Section 179 on the vehicle. The standard method also cannot be used on vehicles used for hire or for more than four vehicles used simultaneously.

The Actual Expense Method gives an allowance for depreciation of the vehicle as well as gas, oil, insurance, repairs, and maintenance. The vehicle expenses are taken based on the percentage of miles the car is used for business to arrive at the total deduction. This method generally ends up with a larger deduction than the Standard Mileage Method. To use this method, taxpayers must keep a log for time, place, mileage, business purpose, and total mileage for the year.

Due to the extra time and record keeping the Actual Expense Method takes compared to the Standard Mileage Method, the Standard Mileage Method is much simpler.

If you use the Standard Mileage Method in the first year you can switch to the actual expense method later. However, once you have elected to use the Actual Expense Method you cannot switch back to Standard Mileage Method for that specific car.

Driving from your home to your regular office does not count as business mileage and is not deductible. Travel to and from temporary job sites, visiting clients, and going to business meetings are deductible. Out of town business is also deductible as long as the purpose for the trip is business related and is reasonable.

If you are reimbursed for any of your driving expenses, they are not deductible on your tax return.

As always, please contact your Anders tax professional with any additional questions.

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February 4, 2015

A Framework To Analyze Industry Competition

In 1979, Professor Michael E. Porter published “How Competitive Forces Shape Strategy” in the Harvard Business Review. Thirty-five years later, the framework developed by Professor Porter is still being used by business valuators to assess the competitive position of an industry in which a business operates. The framework is based on the theory that there are five forces (as seen in the diagram below) that shape the competitive intensity and attractiveness of an industry.

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Rivalry Among Existing Competitors – Companies compete in a number of different ways, such as price, product innovation, and service. As competition within the industry increases, profitability tends to decrease as businesses are forced to spend money in order to maintain, or compete for, market share. The more rivalry there is among existing competitors, the less attractive the industry will be to an investor looking to purchase a business operating within the industry.

Threat of New Entrants – Industries that are profitable tend to attract new entrants. As the number of businesses competing within an industry increases, the profitability per business tends to decrease. The threat of new entrants is lowest for those industries that have significant barriers to entry, such as major capital requirements, burdensome government regulations, or significant intellectual property. Industries with high barriers to entry tend to be more profitable, and therefore more attractive in the eyes of an investor.

Threat of Substitute Products or Services – The threat of substitute products or services limits the price that a business can charge. Industry profitability will suffer when there are many substitute products available in the market. This is especially true when the customer’s cost of switching to the substitute product or service is low. Industries that produce products or provide services for which there is no substitute tend to be the more profitable, and therefore more attractive to investors.

Bargaining Power of Suppliers – When there are a limited number of suppliers supporting an industry, the bargaining power shifts away from the industry participants (i.e., the customers) and in favor of the suppliers. This shift in bargaining power allows the suppliers to increase their profitability through various means, including increasing prices, limiting the quality and service to be provided, and shifting costs from the supplier to the industry participants. Accordingly, industries in which the suppliers have the bargaining power tend to be less profitable, and therefore less attractive to investors.

Bargaining Power of Buyers – Just like with suppliers, when there are a limited number of buyers, the bargaining power tends to shift to the buyers. Industries in which there are a limited number of buyers tend to be less profitable as the buyer can force prices down and demand better quality and service, which drives costs up.

The competitive position of the industry in which a business operates can have a significant impact on the value of the business and the attractiveness of the business to an investor. If you would like some assistance in assessing the competitive position of your industry, please contact a member of the Forensic and Valuation Services Group at Anders.

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February 3, 2015

Occupational Fraud Continues to Plague Businesses

The Association of Certified Fraud Examiners (ACFE) recently released the 2014 Report to the Nations on Occupational Fraud and Abuse, and I noticed one overarching theme as I read through it: fraud has been and continues to be a costly problem for businesses of all sizes and across all industries. Managers and business owners tend to fall into the mindset that their employees would never attempt such a thing, which is not necessarily an inappropriate thought process (you should be able to trust your employees, after all), but managers and business owners should also heed the advice of a well-known maxim: trust but verify.

The ACFE defines occupational fraud, or employee fraud, as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” The 2014 Report to the Nations indicates that the median loss to businesses due to fraud increased slightly from $140,000 in 2012 to $145,000 in 2014. More than 20% of the cases involved in both studies had losses over $1,000,000. Of the three main categories of employee fraud (asset misappropriation, financial statement fraud, and corruption), asset misappropriation is the most frequently occurring type of fraud but has the lowest median losses. Financial statement fraud occurs the least often but has the highest level of median losses. There is also correlation between the length of a fraud scheme and the median amount of losses. According to the 2014 study, frauds that lasted less than 7 months had median losses of around $50,000, while frauds that lasted more than 5 years had median losses closer to $1,000,000. This illustrates that early detection of fraud should be of utmost importance to business owners and managers.

Fraud can be detected in many ways. At an Anders’ speaker series at which I co-presented last year, most of the attendees thought external audits were the most common means of fraud detection, but this is not true. While external audits can uncover a fraud scheme, tips are actually the most common way frauds are detected with most of these tips coming from other employees in the organization. Other common forms of detection include management review, internal audit (more common in large organizations), and detection by accident. We have worked on two fraud investigations this year where the scheme was uncovered by different forms of management review.

One form of detection not specifically covered in the 2014 report is the use of forensic data analytics, which is the analysis of large volumes of a company’s electronic financial data to detect fraud. According to Ernst & Young’s 2014 Global Forensic Data Analytics Survey, 72% of the Survey’s participants believe forensic data analytics can play a role in fraud detection and prevention, but only 2% of the participants actually incorporate forensic data analytics into their companies’ anti-fraud programs. This type of analysis allows business owners and managers to see patterns, trends, and/or relationships in the company’s financial data that may allow them to more quickly identify suspect transactions. The 2014 ACFE report notes  frauds reported by victim organizations that did employ some type of data monitoring and analysis as a detection tool were 60% less costly and 50% shorter in duration than victim organizations that did not utilize such techniques to detect fraud. Strong detection tools, such as forensic data analytics, also play a significant role in fraud prevention as the perceived threat of getting caught may deter an employee from attempting any of malfeasance.

Preventing fraud from occurring in the first place is just as important as quickly detecting fraud that is already occurring. Of the three elements commonly present to an employee when fraud occurs (pressure, opportunity, and rationalization), opportunity is the only element where the company has any control. Fraud prevention techniques aim to limit those opportunities within a system that allow fraud to occur. Creating an honest and ethical workplace while setting an appropriate zero-tolerance policy for fraud is paramount to preventing fraud. Some of those more common ways of achieving this are making employees aware of the background checks conducted when they are hired (leading the company to hire more trustworthy employees in the first place), having all employees read and sign a code of conduct outlining the company’s policy, continuous anti-fraud training for all employees, and actually following through with the policy when fraud is detected.  Management is also charged with creating and maintaining a system of internal controls aimed at preventing fraud, which could include such controls as proper segregation of duties and mandatory vacations for all employees.

Occupational fraud is and will always be a problem for businesses of all sizes and across all industries. There are measures a company can take to limit its risk of and exposure to fraud, with some of those measures becoming more high-tech and able to provide more precise information than previously available to management. Business owners and managers should be able to trust their employees with company assets, but with occupational fraud as prevalent as it is, it is also the duty of business owners and management to do what is necessary to verify that fraud is or is not occurring in their business.

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