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THE CONSTRUCTION $IGHT - Brown, Edwards & Company L.L.P

THE CONSTRUCTION $IGHTDuring the past few years,the number of financial accountingstandards issued or modified hasbeen tremendous. The cost ofcompliance with these standards hascontinued to increase. The last timethe FASB (Financial AccountingStandards Board) researched thefinancial reporting needs of privatecompanies was in 1983. In responseto increased criticism from companies,CPAs, and stakeholders, the FAF(Financial Accounting Foundation)that oversees FASB, along withthe AICPA (American Institute ofCertified Public Accountants) and theNational Association of State Boards ofAccountancy established a Blue RibbonPanel made up of a cross-section ofexperts and users of private companyfinancial reporting. The stated purposeof the panel was to address howaccounting standards can best meetprivate company financial statementusers’ needs and to determine thefuture standard-setting process forprivate companies. The panel issuedits report in January 2011.The two most importantrecommendations of the Blue RibbonPanel include establishing a newstandard-setting board under theoversight of the FAF separate fromFASB, and recommended changes toexisting and future GAAP (generallyaccepted accounting principles) thatrecognize the unique needs of users ofprivate company financial statements.A Financial Newsletter Designed for the Construction Industrypresented byBrown Edwards Construction Services GroupA number of recent changes to GAAPhave arisen out of the complexitiesof publicly traded companies andthe role they play in the economy.The problem with these changesis that they are often not useful toprivate company owners, lenders,and investors. Private companiesand their financial statement usershave informational needs differentthan public companies. Manybelieve the new reporting has notbeen cost-beneficial and can causepoor business decision-making bycomplicating the financial statementswith unnecessary information. Inthe panel’s report, they express a needfor a new standard-setting authoritybecause FASB has demonstratedit cannot effectively balance thecompeting needs of both public andprivate companies and their users.The current recommendations forchanging the standards focus onmaking exceptions and modificationsto GAAP that are responsive to theneeds of private company financialstatement users. This model affordsAugust 2011Common Sense Changes to Financial ReportingMay Be on the HorizonBilly R. Robinson, CPABrown Edwardsthe opportunity to implement changequickly. The recommended approachincludes a cost-benefit analysis forcompliance with accounting standards.The panel recommends companiesgenerally retain the option to follow“FASB GAAP,” or to use the proposed“private company GAAP.” Manyfeel the decision on which modelto use will be market/user drivenrather than being determined bystandard-setters. A number of areasspecifically addressed by the panelinclude accounting for variable interestentities, uncertain tax positions, fairvalue measurements, and goodwillimpairment. The complexity and costof compliance with these standardshave led to more users being willingto accept opinion modifications.However, many loan covenants requireGAAP financial statements, and thesecompanies often do not have theoption of taking a modified opinion.Currently the FAF is studying therecommendations of the panel witha Trustee Working Group and isin the process of gathering publicinput through roundtable meetings,surveys, and meetings with advisoryand constituent groups and others. Itis anticipated that the Trustees willshare their findings and conclusions inthe fall of 2011. If you are interestedin expressing your views to the FAF,you may write to them at P.O. Box5116, Nowalk, CT 06856 or e-mailpresidentsdesk@f-a-f.org.

Financial & Occupational Fraud within the Construction IndustrySonny W. Morris, CPA, CFEBrown EdwardsMost of us are intrigued toread in the paper or to watch the mediareport on the particular facts of a currentfinancial fraud. We are curious to findout how good people choose to crossthe line and commit a fraudulent act,whether it’s material or not. Even withadvancements made within sophisticatedcomputer systems and a strengthening ofaccounting standards and managementoversight, there continues to be anincrease in “white collar crime.” Thesefraudsters seem to exploit the very toolsand safeguards which have been designedto prevent and detect fraud!Over the past two decades, therehave been a few unforgettable fraudsperpetrated that have affected globaleconomies:• In the early 1990s, the LincolnSavings and Loan Associationperpetuated what was thought tobe the largest fraud that would everbe pulled off, at $3 billion. Overall,747 of 3,234 savings and loans wentbankrupt due to the successfulexploitation of the banking rules andthe related mortgage industry duringa time of deregulation at both thestate and federal level.• A second flurry followed during2002 with the successive financialstatement scandals of Enron, Tyco,World Com, and others. Thiswas caused during a time whenprofessional investment and advisoryservice standards were loosened,resulting in a conflict of interestwith the independence principles ofboth the audit firm that performedadvisory services and for entities thatit also audited.• Then, just when we thoughtthat major frauds could only beperpetrated by the “Goliaths ofthe SEC Registrants,” in 2009 Mr.Bernard Madoff surfaced andsuccessfully bilked over $65 billionfrom his clients, hospital trustfunds, and other institutional fundmanagers using a legendary Ponzischeme. The point of discovery camewhen Madoff’s investment fundscontinually produced returns of 7%during the same time as the crash inthe R/E market.Financial and occupational fraudcontinues to be pervasive among alltypes of businesses and in all industries,especially during periods of extendedfinancial distress such as businessesare currently experiencing. Theintense pressures to meet the financialexpectations of banks and investors (andsureties, in the cases of large constructioncontractors) have made businesses evermore susceptible to fraud.No business is immune to fraud, so it’simportant to keep educated about thecurrent fraud research so as to deter thisthreat. Every two years, the Associationof Certified Fraud Examiners (ACFE)makes public its statistical findings in aReport to the Nations on OccupationalFraud and Abuse. In its 2010 report,data from over 1,800 actual fraudexaminations were summarized andstatistically tested to determine theprofile and demographics of those whoare perpetrating financial fraud. Thisstudy also measures the magnitudeand duration of various fraud schemes.These cases are classified among one ofthree different categories of occupationalfraud and abuse: Corruption, Asset2Misappropriation, and FraudulentFinancial Statement Presentation.Frauds in the construction industryclassification made up 4.2% of thetotal cases. For tests of median fraudlosses, the construction industry ranked9th among the 23 separate industriesrepresented in the ACFE study. These77 cases had a median loss of $200,000per fraud. (The greatest percent of caseswithin the 2010 report occurred withinbanking and financial services — 16.6%,or 298 cases. The largest median loss was$1,000,000 and occurred within the 12cases of the mining industry niche.)Overall, the data suggests thosecommitting occupational fraud aremiddle aged (38.6% are between the agesof 36 and 45), primarily male (66.7%),within the employee and managerialranks of their company (77.8%), andhave attended or graduated fromcollege (55.1%). The average tenureof one who commits fraud is under 5years (45.7%). But though there maybe fewer perpetrators who have tenuregreater than 10 years, the median lossfrom employees who have spent greaterthan 10 years with their company is$289,000, or 253% more than those whohave worked less than 5 years within thecompany. WOW! Of the 1,117 casesthat involved single perpetrators, 514worked in the managerial ranks (whichreflected a 15% increase from the 2008Report to the Nation).Of the 77 cases within constructionindustry reviewed, the followingrepresents the distributions of variousfraud schemes officially classified bythe ACFE, (some cases are classified inmultiple categories):Corruption – 45.5% - (35 Cases)Billing Practices – 29.9% - (23 Cases)Check Tampering – 18.2% - (14 Cases)Skimming Cash – 15.6% - (12 Cases)Non-Cash Frauds – 15.6% - (12 Cases)Expense Reimbursement – 13.0% - (10 Cases)Payroll Schemes – 9.1% - (7 Cases)

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