Magazine of the
New Jersey Society of Certified Public Accountants
Fraud 2.0 Why Is Fraud Still an Issue? p. 6 Using Data in the Fight Against Fraud, p. 8 The Scourge of Elder Financial Abuse, p. 10 Interview with IRS Office of Criminal Investigation, p. 12
March • April 2016
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March • April 2016
Ralph Albert Thomas, CGMA Chief Executive Officer & Executive Director rthomas@njcpa.org
Ellen C. McSherry, CGMA Chief Operating Officer emcsherry@njcpa.org
Don Meyer
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Chief Marketing Officer dmeyer@njcpa.org
Rachael Bell Managing Editor rbell@njcpa.org
Editorial Advisory Board Daniel R. Arcuri, CPA Neil B. Becourtney, CPA Salvatore A. Collemi, CPA Rebecca B. Fitzhugh, CPA Catherine Z. Horn, CPA Barry S. Kleiman, CPA Victoria Kosuda, CPA Ryan J. Lapinski, CPA David A. Lopez, CPA Anthony F. Marone, CPA Marc D. Mintz, CPA Sean Stein Smith, CPA Michael R. Steiner, CPA Margaret Van Brunt, CPA
The New Jersey Society of Certified Public Accountants 425 Eagle Rock Avenue Roseland, NJ 07068-1723 973-226-4494 njcpa.org #njcpamag Read New Jersey CPA digital at njcpa.org/newjerseycpa.
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Why Is Fraud Still an Issue? Is fraud a bigger problem today, or do we just have better methods to report and measure it? The answer to that question has a lot to do with human nature. Using Data in the Fight 2 Close Up Against Fraud CPA Poll Finds Gridlock As organizations become Suffocating Economic increasingly more data dependent, Growth CPAs can play a role to help improve audit quality and 12 A&A Buzz deliver added value to their Lease Accounting Update organizations. 14 Best Practices Getting the Taste of Spam The Scourge of Elder Out of Your Mouth Financial Abuse As our population ages, the 15 Corporate Finance problem grows. See what CPAs The Dreaded Restatement can do to spot problems and the actions they can take to protect 16 Financial Planning senior clients. Countering the Robo-Advisor Threat Interview with IRS Office of 17 Forensic File Criminal Investigation Data Contamination in Fraud Cases Find out where the CI office is putting its energy and what you can do to help keep clients safe. 18 Small/Sole Practitioner Combating Fraud at Small Businesses
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19 Tax Talk Supreme Court Rules on Maryland Resident Income Tax Credit 20 Tech Center Internal Communications Safety Practices 26 Young Professionals When You’re Faced with an Unethical Situation 27 Legislative Views NJ Pension Crisis – Part 2 28 Member Profile A CPA and His H.O.G. Society Pages Get Involved, 22 Member Benefits, 23 Classifieds, 24
New Jersey CPA (ISSN 1534-6692) is published six times per year by the New Jersey Society of Certified Public Accountants, 425 Eagle Rock Avenue-Suite 100, Roseland, NJ 07068. Issue No. 56 Copyright© 2016 New Jersey Society of Certified Public Accountants. Annual membership dues includes $9 for a one-year subscription to New Jersey CPA magazine. Members may not deduct subscription price from dues. Periodicals postage paid at Roseland, NJ, and at additional mailing office. POSTMASTER: Send address changes to New Jersey CPA, 425 Eagle Rock Avenue, Suite 100, Roseland, NJ 07068-1723. The materials and information contained within New Jersey CPA are offered as information only and not as practice, financial, accounting, legal or other professional advice. The opinions expressed herein are those of the authors and not necessarily those of the New Jersey Society of CPAs. Publication of an advertisement in New Jersey CPA does not constitute an endorsement of the product or service by the New Jersey Society of CPAs.
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CPA Poll Finds Gridlock Suffocating Economic Growth B Y D ON MEYER, NJCPA C HI E F M ARK E TI NG O F F I C E R
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he fourth annual survey of CPAs commissioned by the New Jersey Society of CPAs (NJCPA) and the Pennsylvania Institute of CPAs finds that governmental overregulation and legislative gridlock stunt economic growth at both the federal and state levels. The poll surveyed more than 1,500 CPAs in public accounting in the two states about national and state business climates, economic conditions and other topics. Roughly half the CPAs polled indicated that economic conditions in the U.S. are about the same as one year ago (55 percent in PA, and 51 percent in NJ). CPAs in both states believe local economic growth is suffering from government gridlock (according to 89 percent of the CPAs polled in PA and 92 percent in NJ), and federal regulations (91 percent in PA, and 88 percent in NJ). However, respondents from both states expect business revenues and salaries for their clients to increase in the next 12 months. For the Pennsylvania CPAs polled, 51 percent expect revenues to increase for their clients, while 45 percent of New Jersey CPAs expect revenue increases at client businesses. Fifty-seven percent of Pennsylvania CPAs anticipated salary increases for their clients, compared to 44 percent of New Jersey CPAs. Fortyeight percent of Pennsylvania CPAs and 53 percent of New Jersey CPAs expect investments to remain flat, while 61 percent of Pennsylvania CPAs and 62 percent of the New Jersey CPAs polled expect workforces to remain flat. “While some of New Jersey’s key indicators are trending into more positive territory, it’s a trickle, not the surge our economy needs,” says NJCPA CEO and Executive Director Ralph Thomas. “Business leaders and
legislators really need to work together now to help reform onerous tax policy and legislative gridlock before it irrevocably impacts the state.” CPAs expressed little hope for a change in the coming year, with only 14 percent of both PA and NJ respondents predicting that things will be better next year. When assessing the state’s fiscal health, only 7 percent for PA and 4 percent for NJ describe their respective state as excellent or good.
Gridlock CPAs are clearly frustrated at the slow-moving wheels of government. A staggering 92 percent of NJ respondents feel government gridlock and 88 percent feel federal regulations have had a negative effect on the U.S. economy during the past 12 months. In New Jersey, 78 percent of CPAs believe the state’s business climate hinders economic growth. These same professionals say their largest internal (28 percent) and external (42 percent) obstacles are government regulation.
Employment Jobs—the driving engine of economic growth—fared prominently in this study. Over the next 12 months, 62 percent of NJ CPAs believe their clients’ workforce will not change (versus 55 percent last year). And 56 percent believe salaries at those clients will remain the same or decrease. Respondents feel the main factors that contribute to New Jersey’s high relative unemployment are companies leaving the state (52 percent) and the NJ tax climate (50 percent).
Taxes Nearly nine in 10 (89 percent) of NJ CPAs believe that the state’s tax structure is worse than most other NEW JERSEY CPA • MARCH • APRIL 2016
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states, and 74 percent have actually advised a client to consider relocating out of NJ due to its estate and inheritance taxes.
Other Assorted Trends In a technological, data-driven world, it’s no surprise that 83 percent of New Jersey CPAs have had a client impacted by identity theft. Interestingly, 58 percent of NJ respondents would favor additional IRS funding to improve taxpayer service. And while the Supreme Court recently upheld samesex marriage, 85 percent of NJ CPAs did not see this translate into growth opportunities at their firms. View the complete study at njcpa.org/cpapoll
2015/16 Board of Trustees EXECUTIVE COMMITTEE President – Frank R. Boutillette, CPA President-Elect – Walter J. Brasch, CPA Secretary – Edward I. Guttenplan, CPA Treasurer – Lynn L. Albala, CPA Immediate Past President – Brad E. Muniz, CPA CEO & Executive Director – Ralph Thomas, CGMA TRUSTEES Jean I. Abbott, CPA Sharon J. Bishop, CPA Leonard N. Brooks, CPA Joseph C. DiFalco, CPA Carol Donatiello Iocca, CPA Sarah Krom, CPA Roy H. Kvalo, CPA Edward G. O’Connell, CPA Stephen O. Richard, CPA William J. Ryan III, CPA Audrey J. Sherrick, CPA Lorenzo T. Vanore, CPA
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Why Is Fraud Still an Issue? Will fraud ever truly go away? Over the past 20 years, we have heard of several high-profile accounting frauds that turned heads, prompted new legislation and regulations, and made us think that something so heinous and outrageous could never happen again.
By Rebecca B. Fitzhugh, CPA Sobel & Company LLC, CPAs
We thought that business owners, executives, auditors and regulators have learned their lessons and would be better prepared the next time. A few years went by without any major headlines, but then a bevy of new frauds came to light. In addition to accounting frauds, we continually hear of instances whereby a trusted employee has stolen hundreds of thousands of dollars from their employer, and we wonder how this can happen. Over and over again, people continue to commit various manners of fraud, and we still don’t seem to have figured out how to stop this from happening.
Getting at the Problem There are many types of fraud these days: consumer fraud, occupational fraud, insurance fraud, corporate fraud, financial institution fraud, health care fraud, identity theft, Internet fraud, voter fraud, elder fraud, bankruptcy fraud and mortgage fraud. So is fraud a growing problem, or are we just measuring and reporting on it more frequently? It’s a tough question to answer, but the growing global economy, rapidly advancing technology, and increasing disparities between wealth and poverty seem to provide increased opportunities for those who NEW JERSEY CPA • MARCH • APRIL 2016
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perpetrate fraud. A fraudster can now reach multitudes of people through the Internet, utilizing technology to make it much easier to find victims than it used to be. However, technology also allows us to become more educated about frauds, and we can use the web to discover the latest fraud schemes and how to prevent victimization.
Redirecting Human Nature As I sit in a hotel room in Bangalore, India, writing this article, I look out the window and see an environment that is ripe for all sorts of fraud. This city is a rapidly growing tech hub in a huge country where economic disparities are rampant, corruption is widespread and accepted, cultural norms do not encourage whistleblowing, and an anti-fraud culture has yet to develop. Shouldn’t we in the United States, a more advanced and regulated economy, be less susceptible to fraud? In the U.S., high-profile frauds frequently prompt new legislation and regulation. Some of these measures may help encourage transparency and develop stronger processes and policies. But our biggest challenge when it comes to preventing and detecting fraud is overcoming human nature. One factor why fraud continues to be an issue in business is that we, as a society, are reluctant to spend money unless we can measure a return on investment. But how do you put a dollar figure on the success of a preventative effort when success means that something did not happen? It is difficult to persuade businesses to spend money on prevention if they have not yet encountered a fraud
issue. However, it will almost certainly cost a business more to respond to a fraud situation than it will to implement preventive measures, not to mention the immeasurable cost of reputational damage that may result. Most businesses seem to prefer to take the risk that they will not fall victim to fraud, rather than spend money to ensure that they will not. A second factor is that we inherently want to trust others, especially in a small business. Most frequently, fraud is committed by someone in a position of trust. This person normally would not do wrong, but he or she has an overriding need and takes advantage of the lack of oversight and controls in order to misappropriate an asset or manipulate financial statements. We make the excuse that because we trust someone implicitly—he/ she is a nice person—and we have known him/her for a long time, he/ she would never betray us. However, that is exactly the environment that allows fraud to happen. When we do not trust someone, we do not allow them the opportunity to commit fraud;
we, instead, leave the door open to those we trust. We must cultivate the understanding that implementing internal controls and a strong system of checks and balances protects everyone involved in an organization by creating an environment where temptations are not available and pressures do not create the motivation to commit fraud. A third factor is the willingness (or unwillingness) of individuals to speak out when they see something improper. Whether it is the accounting clerk who is instructed to book false journal entries or the employee who sees his coworker stealing cash from the register, all must feel empowered and be given the (non-retaliatory) opportunity to report wrongdoing when it is seen or suspected. Lastly, it is the reluctance to prosecute fraudsters for fear of embarrassment. Many fraudsters get away with their acts and are allowed to continue victimizing others because the first target does not wish to prosecute. This may be due to the desire to not prolong a painful episode or because they fear negative publicity. NEW JERSEY CPA • MARCH • APRIL 2016
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CPAs’ Role CPAs play an important role as clients’ trusted business advisors. If we want to influence the fight against fraud, we should encourage clients to invest in strengthening policies and implementing controls that will mitigate weaknesses that can otherwise be exploited by potential fraudsters. We must get clients to develop a mindset of professional skepticism, to realize that even a trusted employee can commit fraud. We should reinforce to clients that they are best served by providing a method for employees, vendors and customers to report fraudulent behavior and pursuing all possible remedies for punishing fraudsters. To overcome fraud is to overcome human nature. Rebecca B. Fitzhugh, CPA, is a member of the firm at Sobel & Company LLC, CPAs. She is a member of the New Jersey Society of CPAs Business Valuation Forensic Litigation Services Interest Group and the Editorial Advisory Board of New Jersey CPA magazine. Contact her at rebecca. fitzhugh@sobel-cpa.com.
Using Data in the Fight Against Fraud Fraud and its financial ramifications all-too-often impact organizations in virtually every industry. Along with the traditional type of fraud, epitomized by Enron and WorldCom, CPAs need to understand that, as business changes, fraud and other risks also change. As organizations become increasingly more data dependent and continue to report to an ever-expanding circle of stakeholders, managing data and reporting high-quality information become critical. CPAs can leverage these changes in order to improve audit quality and continue to deliver value to their organizations.
By Sean Stein Smith, CPA Hackensack University Medical Center
Auditing and Business Decisions As stakeholders, regulators and financial shareholders demand increased levels of information; building and maintaining proper auditing assurance standards is essential. Establishing key performance indicators and key performance questions will allow CPAs to improve the quality of auditing and assurance for both financial information and an increasing amount of non-financial information. A logical next step is to establish proper parameters and tests for such information. Select method(s) that leverage existing skills while expanding the scope of work to areas of growth. Examples include standardizing data NEW JERSEY CPA • MARCH • APRIL 2016
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inputs or uploads, establishing a systematic way to analyze information as it flows from the input source through the management information system and building templates to clearly and efficiently communicate the key information.
Data-Driven Decision Making Auditing and reporting have traditionally focused almost exclusively on financial statements issued on a quarterly and an annual basis. Auditing and other forensic functions have remained inextricably linked to this format, and audits that look backward and only occur a handful of times during the year have remained the industry standard. This is changing as organizations and consumers obtain more information regarding different aspects of operations. The increased availability of data, however, is not limited to financial information and performance metrics; almost every aspect of an organization’s performance can now be quantified and compared to other periods and peer groups. Due to the globalization of business, management teams need accurate information and control over data related to expansion efforts, both domestically and internationally. Thus, CPAs need to become data experts on an increasingly larger scale.
Stakeholder Reporting There also currently exists an increase in the frequency and types of data
that must be reported to end users. From the BP oil spill in 2008 to the Volkswagen emission scandal of 2015, clearly all data—and not just financial information alone—is of value and considered material. Organizations that are best able to collect, quantify and report on both financial and non-financial data appear best situated to succeed in the “new economy.” With the increasing frequency and scope of reporting, however, comes increasing organizational risk. This is epitomized by the hacking scandals that seem a weekly if not daily occurrence. Many organizations simply do not have good controls and procedures surrounding their data. This lack of control, standardization and reporting frameworks provides additional opportunities for CPAs to add value to their companies.
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CPAs Opportunities The future of the accounting profession is discussed at virtually every accounting conference and CPE session. Clearly, the audit and fraud presentation functions are on the brink of a disruptive transformation. CPAs working in both public accounting and corporate finance are already familiar with the operational and financial ramifications of decisions. From strategic planning and capital budgeting to daily product and service decisions, business leaders depend on the quality and speed with which information becomes available and can be leveraged to make informed decisions. Organizations face financial pressures, competitive forces and the demands of a multitude of external partners. Who better than the CPA to help manage that mountain of information? Maintaining control over data produced by the organization on all aspects of operations, from financial information to environmentally and compliance-focused information, is right in the CPA’s wheelhouse. Because CPAs are already tasked with verifying financial information on a periodic basis, it is a logical
step for them to leverage changes in technology to enhance this verification process so that it occurs on a more continuous basis. Linking together disparate financial systems, point-ofsale and inventory data, and customer information—gathered from both traditional surveying tools and social media—can help CPAs to gather and quantify information on a more continuous basis. Data related to environmental issues and corporate governance issues are of increasing importance. Google, eBay, Volkswagen, Toshiba, Valeant and Yahoo! are organizations that could have benefited from greater control over and quantification of the various streams of data produced by the organization. CPAs, traditionally grounded in and focused on the historical reporting and analysis of financial information constructed for a small subset of stakeholders, must evolve in order to stay relevant in the marketplace. CPAs can leverage existing strengths (e.g., knowledge of quantitative NEW JERSEY CPA • MARCH • APRIL 2016
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analysis and the ability to create reports, frameworks and dashboards) to improve the auditing and fraud prevention standard. Perhaps more importantly, taking advantage of financial systems will allow CPAs to develop the tools and reports necessary to report and disseminate information related to emerging areas of importance, such as environmental issues, corporate governance matters and risk management. Simply put: Organizations and decision makers rely on information to guide their organizations; CPAs have a real opportunity to improve the consistency and quality of the information that, in turn, drives the company forward. Sean Stein Smith, CPA, DBA, CPA, CMA, CGMA, CFE, is a financial analyst at Hackensack University Medical Center. He is a member of the New Jersey CPA magazine Editorial Advisory Board. Contact him at ssteinsmith@yahoo.com.
The Scourge of Elder Financial Abuse One hot topic that may have flown under your radar while processing a mountain of tax returns and meeting with a multitude of clients is elder financial abuse.
By Damien J. Paumi Nisivoccia Wealth Advisors LLC
While younger generations uploaded tax documents and e-filed returns, many Baby Boomer and Greatest Generation clients showed up, paperwork in hand, for their face-toface meetings with financial advisors. In those meetings, clients showcased their successes during the past year, but they often forgot to mention the challenges they faced. Some of those challenges perhaps included the injustice of elder financial abuse.
The Problem Just how severe is the elder financial abuse problem? A 2010 Investor Protection Trust Elder Fraud Survey and a 2011 MetLife Mature Market Institute Study indicated that 20 percent of Americans over age 65 have been victimized by financial fraud, and the cost of that fraud is at least $2.9 billion annually. A New York State Elder Abuse Prevalence Study found that only 1 in 44 financial fraud cases is ever reported. So with 10,000 people turning 65 years old every day for the next 17 NEW JERSEY CPA • MARCH • APRIL 2016
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years, undoubtedly there is more of this problem to come. Furthermore, most elder financial abuse occurs with people in their 80s who live alone. Also, women are twice as likely as men to be victims, and there is a definite increase among elderly victims who use home health care or maintenance services.
Vulnerabilities The four most common reasons researchers cite for prevalence of senior financial abuse are highlighted by the 2012 Women’s Institute for Secure Retirement: (1) a high percentage of seniors live alone and may be more vulnerable to scams; (2) seniors may be more trusting, believing the “pitches” they hear, and may have trouble spotting fraud; (3) seniors have relatively high net worth; and (4) the population of seniors is increasing, providing a continuous source of wealth for financial abusers.
Signs of Abuse Patricia Lombreglia, partner at Pathways Care Solutions LLC, shared that the National Council on Aging has published this list of “Possible Signs of Financial Abuse.” • The elderly person’s living conditions are well below his or her financial resources.
• Unusual or inappropriate bank account activity is reported. • Frequent checks for cash are written to a caregiver or financial professional. • Bills go unpaid or are overdue when someone is supposed to be paying them. • The elderly person transfers title of his or her home or other assets for no apparent reason. • Large, frequent gifts are made to a caregiver. • The person is reluctant to talk about once-routine topics. • Personal belongings are missing. • Attempts are made by a caregiver, friend or relative to isolate the person from others. • Changes are made in a will when the person appears to be incapacitated. • The older person takes out large, unexplained loans. • A live-in caregiver refuses to leave or is evasive about financial arrangements. The aforementioned forms of abuse typically take the forms of identity theft, credit card scams, power of attorney abuse, reverse mortgage scams,
living trust and annuity scams, deed theft and foreclosure rescue scams, and health care scams.
NJ Initiatives What is the state of New Jersey doing about this scourge? The Office of the NJ Attorney General supported the June 15, 2015, World Elder Abuse Awareness Day. State legislators have passed bills in recent years to increase penalties for identity theft when victims are seniors or veterans (2012 A.B. 632 & S.B. 1543) and to prohibit financial advisors from using misleading information to make it appear they have special certifications for advising senior citizens (2010 Law A-369). But there definitely seems to be a disconnect between laws on the books and actually tackling financial abuse. Why?
Professional Initiatives I have seen numerous email scams where bad actors abroad have asked clients for money to help them come back to this country or for a family member claimed to have passed away but didn’t. I have seen investment professionals recommend 90-percent NEW JERSEY CPA • MARCH • APRIL 2016
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and over stock allocations to conservative clients who are looking for more income and dividends. I have seen insurance agents sell underfunded life insurance policies that would lapse in short timeframes to clients who thought they had guaranteed death benefits for years to come. How can we, as CPAs and trusted financial advisors, help spot and educate clients on this topic? We need to become more familiar with the most common forms of financial abuse and who the potential victims are. What if the abuser is a close family member? We need to be aware, be informed, be a resource, and be an advocate. We also need to examine our practices to see what risks lie ahead. For example, that may entail making our clients question the validity of a scam or helping stop a wire transfer to a fraudulent account. We can ask them about changes to their tax returns that impact their investments and find out if they understand the risks of the new allocations. By sharing stories of others and educating them on the current scams, we can proactively help reduce their risk.
A Case Study of Action Members of our practice attended two Financial Planning Association of New Jersey conferences focusing on elder financial abuse. From that, we felt it necessary to quantify the number of clients we have who are age 65 and older and age 80 and older. Keeping in mind that 1 in 7 Americans over the age of 65 is going to develop some form of dementia or diminished capacity, we educated our team on things to look for and common scams. Finally, we cultivated a dialog with clients. It is these conversations, education initiatives and dialogue with the client and loved ones that can help provide a good defense to this increasing problem. Damien J. Paumi, CFP, AIF, CRPC, is the director of wealth management and planning at Nisivoccia Wealth Advisors LLC. Contact him at dpaumi@ nisivocciawealth.com or 973-298-8511.
Interview with IRS Office of Criminal Investigation New Jersey CPA magazine recently sat down for a question-and-answer session with Jonathan D. Larsen, Special Agent in Charge of the Newark Field Office for the Department of the Treasury, Internal Revenue Service (IRS), Criminal Investigation.
What is the overall mission of the IRS Criminal Investigation Division?
By Margaret Van Brunt, CPA Rowan University
IRS Criminal Investigation’s highest priority is to enforce our country’s tax laws and support tax administration to ensure compliance with the law and combat fraud. It is the only federal agency that can investigate potential criminal violations of the Internal Revenue Code.
What are the division’s main investigative areas? Many fiscal 2015 investigative priorities remain so for 2016. They include (1) our core tax mission, such as legal and illegal source tax crimes; (2) other financial crimes, such as public corruption, currency violations and cybercrimes; and (3) narcotics-related financial crimes. NEW JERSEY CPA • MARCH • APRIL 2016
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The IRS Office of Criminal Investigation will continue to enhance its comprehensive international strategy to combat offshore tax crimes committed by individuals, corporations and promoters of abusive schemes: Fraud Referral Program – Collaborate with IRS civil divisions to promote fraud awareness and maximum use of the fraud referral program. Abusive Tax Schemes – Identify and investigate tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding or furthering abusive tax schemes. Identity Theft – Investigate significant identity theft, refund fraud schemes and collaborate with other federal agencies and civil IRS divisions. Identity theft is often found through the Questionable Refund Program where we detect false returns that may have used stolen identities to claim fraudulent tax refunds. Return Preparer Fraud – Investigate tax return preparers who promote schemes designed to obtain fraudulent refunds or to fraudulently reduce their clients’ tax liabilities. Questionable Refund Fraud – Develop and support high-quality investigations through our Scheme Development Centers (SDCs), while maximizing the use of advanced analytical systems to become more
What are the sources of criminal investigations, and what are the potential penalties for bad actors? Investigations can be initiated from information obtained from within the IRS when a revenue agent (auditor) or revenue officer (collection) detects possible fraud. Information is also routinely received from the public as well as ongoing investigations by other law enforcement agencies across the country. Penalties can include a statutory maximum penalty of five years in prison and a $250,000 fine.
Any prominent NJ cases you can discuss?
efficient and effective. The SDCs will focus on all refund fraud areas, but especially those involving false W-2s, stolen Electronic Filing Identification Numbers, fabricated business entities and fictitious refundable credits. Employment Tax – Place a high priority on employee leasing schemes and other attempts to evade or circumvent the duty to withhold, account for and pay employment taxes.
What is your most critical area of focus over the next two years? Identity theft is becoming a more sophisticated crime. IRS Criminal Investigation will focus on even more complex identity theft investigations involving organized criminal networks with cyber and global connections that victimize American citizens and businesses. The use of the darknet has created additional challenges. A new generation of organized criminals is able to steal the personal information of millions of victims from a computer halfway around the world. Virtual currency further disguises the flow of illegal funds.
One of the more prominent cases involved the owners of the popular Ocean City pizza chain Manco & Manco Pizza (formerly Mack & Manco). Charles Bangle pleaded guilty in July 2015 to evading taxes, and his wife admitted to knowingly making materially false statements to the IRS. They are currently awaiting sentencing. Another high-profile case involved an Atlantic County tax preparer who was convicted in December 2015 of tax fraud for including fraudulent credits and deductions on federal tax returns for his clients in order to gain repeat business. The tax return preparer was convicted of 10 counts of aiding and assisting in the preparation of false federal income tax returns. The returns attached schedules for fictitious educational credits, charitable contributions and job expenses the taxpayers were not entitled to take—all to generate fraudulently inflated refunds. Each false tax return count carries a potential maximum penalty of three years in prison and a $250,000 fine.
To what extent does IRS Criminal Investigation work with state taxing authorities? We have a memorandum of understanding with the New Jersey Department of the Treasury Office of Criminal Investigation. NEW JERSEY CPA • MARCH • APRIL 2016
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What are a couple of ways that IRS Criminal Investigation deters financial crime and enhances voluntary tax compliance? We cultivate relationships with the tax professional community, such as the New Jersey Society of CPAs. We also utilize media opportunities to publicize investigations.
What’s one piece of advice you would give to CPAs? With the rampant growth in cybercrimes (including both large and small data breaches) that have compromised consumers’ personal and financial information, information security should be a top priority for CPAs and their clients. Putting safeguards in place to protect taxpayer information helps prevent fraud and identity theft.
What should CPAs do if they suspect tax fraud? CPAs who suspect or know of an individual or a business that is not complying with the tax laws on issues like false exemptions or deductions, kickbacks, false/altered documents, failure to pay tax, unreported income, organized crime or failure to withhold should use Form 39-49-A, Information Referral. The CPA is not required to identify himself/herself.
How can practitioners best contact the NJ Department of the Treasury, IRS Criminal Investigation? They can contact Robert Glantz, Special Agent and Public Information Officer, at 732-761-3381 or at robert.glantz@ ci.irs.gov. Margaret Van Brunt, CPA, is the assistant dean at the Rohrer College of Business at Rowan University. She is a member of the NJCPA and is on the Editorial Advisory Board of New Jersey CPA magazine. Contact her at vanbrunt@rowan.edu.
A&A
buzz
Lease Accounting Update B Y JAMES H . RUITENB E R G, C PA, B E D E R SON LLP
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he Financial Accounting Standards Board (FASB) and the International Accounting Standards Board have been working on a joint project to improve accounting for lease transactions. This project began as a result of criticism of the existing standards by financial statement users, preparers and the Securities and Exchange Commission. A common criticism was that leases could be written in such a way to attain a desired accounting result. In November 2015, the FASB issued an Accounting Standard that will require a change to lease accounting
that has been employed since the adoption of FAS 13 (FASB Topic 840) in 1977. It is expected that the new standard will be published in the first quarter of 2016, with implementation expected to be effective for public companies with fiscal years beginning after December 15, 2018. Private companies will have an additional year to implement the new standard, yet early adoption is permitted. Under existing Generally Accepted Accounting Principles (GAAP), which have been in effect for 35-plus years, leases are classified as either operating NEW JERSEY CPA • MARCH • APRIL 2016
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or capital/financing leases. If one of four criteria is met, it is recorded as capital/financing on the balance sheet. If none of the four criteria are satisfied, the lease is classified as an operating lease and disclosed in the notes on the financial statements. The operating lease is considered an off-balancesheet obligation with disclosure of the commitment.
Accounting Changes The new standard significantly changes the way accountants have been accounting for leases for most of
their professional careers. These new proposed standards will impact the lessee more than the lessor. The proposal, for the most part, will require the creation of an asset and liability to be recorded on the balance sheet based on the right to use the leased asset. Most operating leases that are currently reporting as rent expense for the annual rental payments will be subject to the proposed change. Leases currently classified as capital/ financing will continue to be treated as a purchase transaction. Operating leases will now be accounted for as a transaction in which the lessee records the liability and the right-to-use asset. Most short-term leases under one year and certain variable lease payments may not be included in the liability. Off-balance-sheet commitments used to finance equipment (even buildings) by entering into leasing transactions will be eliminated. This gives financial statement users even greater transparency.
The newly created liability will be recorded at the present value of the remaining future lease payments. The corresponding asset will be a right-touse intangible asset. Future monthly rental payments will reduce the liability, while straight-line amortization of the intangible asset and interest will reflect as a right-to-use expense on the company’s income statement. The computations appear to be simple; however, contingent rentals will cause complications because the liability and related asset must be recomputed as lease terms and rentals change.
Financial Impact
current and long-term. Companies with outstanding debt that is subject to compliance with debt covenants may be compromised. Many loan documents require the computation of financial ratios under financial statements prepared under GAAP. These lease changes could result in a company unintentionally failing to meet the financial covenants as defined by its creditor, creating a technical default. That aside, the new lease standard is intended to improve financial reporting and will align U.S. GAAP with the international accounting standards framework, both with similar effective dates.
In addition to the potential reporting complications, the financial impact of these changes may be significant. U.S. companies will now be including new debt. Some reports of up to $2 trillion will hit the liability side of the balance sheets of U.S. companies—both
James H. Ruitenberg, CPA, CFP, PSA, is a partner at Bederson LLP. He is a member of the New Jersey Society of CPAs Peer Review Executive Committee. Contact him at jruitenberg@bederson. com or 973-530-9129.
NEW JERSEY CPA • MARCH • APRIL 2016
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BEST
practices
Getting the Taste of Spam Out of Your Mouth B Y ANTHONY MONG E LUZO, PC S
U
ntil about 20 years ago, spam was only thought of as some sort of canned ham. Today, it’s a common daily occurrence of unwanted and unsolicited (or so we thought) emails that clog our inbox. Spam not only steals valuable time from your day, it actually presents a potential security threat.
You Just Made the List We first have to understand why we get spam or, more precisely, how spammers get our email addresses. While numerous methods exist, here are the common ones: Mailing Lists – People can buy email lists through list brokers, just as they have bought mailing lists for decades. Any time you buy something or sign up, you wind up on a list. Web Pages – Spammers send “spiders” to crawl through web pages looking for email addresses. Domain Names – All domains must offer three contact points: administration, technical and billing. The contact point or person must have an email address. Spammers grab it via the “who is” command. The Checkbox – When we sign up or buy anything, the site may ask if it’s okay to send you stuff. Many people automatically click yes.
Filters Stopping spam is easy; don’t use email. Presuming that’s not an option, the other tack is to have some type of filter to control, reduce or even eliminate spam. Virtually every email program has some kind of filter that guides the spam to a junk folder or destroys it before it gets into your mailbox. If you feel that the default or built-in program is insufficient, then you can go to thirdparty filters that work well. The ones indicated below are free: Outlook – There is a built-in spam filter, and its default is low. To change, go
to mail, then the Home tab. In the delete group, click junk and then click on email options indicating the level you want. Apple Mail – Filtering is simple with Smart Mailboxes. Create a new smart mailbox and enter the conditions that catch unwanted junk mail. Windows Live Mail/Hotmail – Go to prevent junk email and you will see two options that allow you to adjust the degree of protection you’re seeking. Yahoo! Mail – Go to the gear icon in the upper right corner and click on help then type “email filters” and watch the instructional video. Gmail – Gmail spam filters are excellent. Gmail claims that less than 0.1 percent of emails “in the average Gmail inbox is spam . . . and the amount of wanted mail landing in the spam folder is even lower, at 0.05 percent.” BoxBE – Compatible with Yahoo!, Gmail, Google, AOL and Outlook, it offers a guest list of sorts. Someone sending an email will be asked to verify that they’re a human and that they know you. SpamBayes – Compatible with Thunderbird, Outlook/Express and Windows Live mail, it segments emails into spam, ham (good mail, not spam) and unsure. NEW JERSEY CPA • MARCH • APRIL 2016
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A Few Words of Caution First, everyone’s tolerance for spam is different. You might get inundated and it doesn’t bother you. Others consider five spam emails a day too much. This plays a vital role in determining the degree of filtering for your email account. Second, this tolerance matters because the more aggressive your filter is, the more likely you are to capture emails that are not spam and could be legitimately from a client asking for important information. The client starts wondering why you, the accountant, haven’t responded. (You didn’t because it’s in the junk folder.) If you doubt this, simply check your junk folder. You might be surprised. I asked a friend who owns a PR agency and serves as the editor of a national trade publication to check his junk mail during a two-day period. He received 20 emails that went to his junk folder. A total of 12 of those were actually relevant to his magazine. So, in addition to checking your email regularly, also check your junk folder periodically. Anthony Mongeluzo is the CEO and president of PCS. Contact him at anthony@helpmepcs.com or follow him on Twitter at @PCS_AnthonyM.
CORPORATE
finance
The Dreaded Restatement B Y LAURA M. CROW LE Y, C PA, W I LK I N & GU T T E NPLA N , P C
M
ore than a decade after Section 404 of the Sarbanes-Oxley Act—which requires the management of public companies to assess the effectiveness of the internal controls of financial report issuers—first became effective, financial statement restatements are still a common occurrence. A financial statement restatement is generally viewed by management with dread. It is often perceived by those who use these financial statements as an indication that the company’s finance function made a mistake or, worse yet, fraud was committed. Beyond potential damage to a company’s reputation, restatement of the financial results can also impact a company’s stock price and is often a tedious and expensive process requiring consultation with accountants and legal counsel. Restatements by both public and non-public companies can affect management’s relationships with bankers, customers and other stakeholders. If the restatement is related to a complex area of accounting, such as income taxes or hedging activities, it may be outside the realm of in-house accounting expertise. The restatement of previously issued financial statements requires that (1) the cumulative effect on periods prior to those presented be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented; (2) an offsetting adjustment, as necessary, be made to the opening balance of retained earnings or other appropriate equity category; and (3) financial statements for each prior period presented be adjusted to reflect the required corrections. Restatements of previously issued financial statements generally relate to one of these:
Correcting an Error An error could be the result of a mathematical mistake, using an
accounting principle not in conformity with the reporting framework, misapplication of an applicable accounting principle, the disregarding or misusing of facts that existed as of the date the financial statements were prepared, or intentional fraud. Correcting an error in the financial statements requires restatement of the prior period results in order to accurately reflect net income for all periods presented in the financial statements.
Changes in Accounting Principles Except in the event of transition guidance to the contrary, a change in accounting principle is to be reported through retroactive application of the newly adopted principle to all prior periods being presented. A change in accounting principle by a reporting entity is only permitted if the change is required by a newly issued standard or the entity can justify the use of an allowable alternative on the basis that it is preferable. Therefore, a restatement may be required, for example, where a new accounting alternative is made available that the company elects to adopt.
Changes in the Reporting Entity Such changes only result in a restatement of prior period financial statements if they are the result of activity other than a transaction. For example, the decision to prepare combined or consolidated financial statements—when previous reporting included only a single entity or a change to the specific entities included in consolidated or combined financial statements—would require restatement to ensure the comparability of the financial statement information. However, the purchase or sale of a division or subsidiary would be NEW JERSEY CPA • MARCH • APRIL 2016
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recorded in the appropriate period based on the nature of the transaction being recognized. A restatement is not required for a change in an accounting estimate, which instead is reflected on a go-forward basis. In addition to the accounting requirements, restated financial statements must include disclosure of the nature of the error and the effect on net income (in total and per share) and retained earnings for each period presented, plus the cumulative effect of the change in retained earnings in the balance sheet as of the earliest period presented. The impact of a financial statement restatement can be felt well beyond the finance department. The company will have to incur additional costs to evaluate and correct any errors, and it will need to work closely with lenders and other key stakeholders to manage expectations and provide clarification of the accounting and internal control issues uncovered throughout the restatement process. Laura M. Crowley, CPA, M.B.A., is a manager at Wilkin & Guttenplan, PC. She is a member of the New Jersey Society of CPAs Accounting & Auditing Standards Interest Group. Contact her at lcrowley@wgcpas.com or 732-846-3000 x147.
FINANCIAL
planning
Countering the Robo-Advisor Threat B Y GUY MCPHAIL , C PA, THE GM GROU P
O
ne of the most talked about topics among my financial planning colleagues is that of robo-advisors. The big question is what kind of threat are they to CPAs who also are involved in wealth management?
The Robo-Advisor To answer the aforementioned question, we first need to determine exactly what a robo-advisor is. A roboadvisor is basically an online service where someone can invest money and where those funds are automatically rebalanced. Investors simply sign up for the service, fill out a profiling and risk-tolerance questionnaire, and invest in an appropriate assetallocation model. This is all done for a low fee compared to a broker or most registered investment advisors. Roboadvisors typically charge 0.25 percent compared to a broker who may charge 1 percent or more to manage a welldiversified portfolio. The funds used by the robo-advisor are usually lowcost mutual funds or exchange traded funds that have a low expense ratio compared to funds used by many fullcost investment managers.
Who and How Much? The first major players in the roboadvisor game were Betterment and Wealthfront, each having approximately $3 billion under management. Wellknown custodians Schwab and Fidelity have entered the market with their own versions, and every week it seems a new player is entering the market. MyPrivateBanking.com research estimates that robo-advisors will collectively control around $255 billion in end-client assets in four years.
Your Best Defense As a CPA and fee-only wealth manager, I have always tried to differentiate myself from traditional brokers by offering
clients value in ways other than being just an investment manager. In prospect meetings I also cover tax strategies and other aspects of financial planning that traditional investment managers don’t have the skills for or simply choose not to do. I recently spent time doing year-end tax planning for my clients—a year in which tax-loss harvesting came in to play. We sold some positions to get capital losses because I knew these clients’ overall tax situations. This was value added to the client way beyond the scope of a robo-advisor. How clients take their money out of their various “buckets” of money during retirement years can make a huge difference in the amount of money they have over the rest of their lives. There aren’t many advisors that do this kind of work. There is also a big need to help clients secure and manage the various types of insurance offerings possible. Clients know I am not selling insurance, but that I am their watchdog to make sure an agent charges them the least amount of commission possible and doesn’t oversell them. I once showed a new client that he had been overcharged by about $20,000 in a commission on a life insurance policy by an agent who could have just taken $5,000. Whether or not to take a lump sum or pension is often encountered in my NEW JERSEY CPA • MARCH • APRIL 2016
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practice, and I can help guide clients to the correct answer. Maximizing Social Security, funding college, buying a home, and performing estate planning and gifting are all areas where I can differentiate and provide that extra value to my clients. Robo-advisors simply can’t guide clients through those significant and complex areas.
Will You Be Impacted? It is those advisors who have built a practice on charging high fees for investment management that should be worried. Similar to the trend for tax and audit services, investment management is being commoditized. As such, these investment managers and their offerings could be replaced by robo-advisor technology. But, you have no reason to worry about the robo-advisor invasion if you are providing value-added service to clients. My practice can’t be duplicated by technology, so I sleep very well at night. My clients appreciate that I partner with them in reaching their goals, something a robot can’t provide—at least not yet. Guy McPhail CPA, PFS, CFP, is the president of The GM Group. He is a member of the New Jersey Society of CPAs. Contact him at gmcphail@ njbizcpa.com or 609-737-6600.
FORENSIC
file
Data Contamination in Fraud Cases B Y HENRY RINDER, C PA, SM O LI N LUPI N
A
ccording to the Association of Certified Fraud Examiners, occupational frauds are generally classified into three categories: asset misappropriation, corruption and financial statement fraud. Its studies indicate that employee embezzlement, which has been on the rise, represents “the most commonly cited category of fraud.” Moreover, these studies contend that new technologies and the increasing globalization of business create additional opportunities for the commission and concealment of fraud. In a recent fraud investigation, my firm came across a situation in which the fraudster stole a substantial number of the employer’s business records and circulated them back into the accounting system for fraudulent reimbursements—after copying the documents and alternating amounts, dates and approvals. Many of the records remained missing and were never recovered. This type of data corruption is quite common in occupational fraud. Cash, computers, inventories, trade secrets and other valuable company assets are good targets for embezzlement by fraudsters. Since occupational fraudsters are often accounting employees, they are in positions that give them unique access to alter accounting records in order to commit fraud and cover up their illicit activities.
Insurance Coverage Quality multi-peril business policies will have certain crime coverages to recover losses from occupational fraud; pay for accounting expenses in reconstructing accounting books, records and amended tax returns after the fraud has been detected; cover the cost of the fraud investigation; and reimburse for cybercrimes and forgeries involving nonemployees.
When a claim is made for a loss resulting from employee dishonesty, proving loss rests with the employer. There needs to be a credible finding of loss for criminal prosecution, restitution agreement or order, and/ or insurance claim. It is more difficult to prove the loss in a situation when the fraudster contaminates the accounting data by destroying or altering books and records. Moreover, the insurance adjuster will likely review the employer’s antifraud policies, procedures and controls for signs of contributory negligence. In those cases, there is a clear need for a forensic professional with adequate skills and experience to overcome the data contamination problem. Such a professional can assist the company in recovering the lost funds, establishing future controls and securing insurance coverage to mitigate and minimize future losses.
Occupational Fraud Types The following is a partial list of accounting irregularities that surround occupational fraud: 1. Intentional alteration of contemporaneous business records (e.g., invoices, petty cash receipts, books of original entry, cancelled checks). 2. Intentional destruction of emails, correspondence and other contemporaneous business records in order to eliminate incriminating evidence. 3. Fraudulent and unsubstantiated adjusting entries. 4. Unrecorded transfers of assets to other parties. 5. Unrecorded loans and other obligations. 6. Forged signatures on checks and submission of fraudulent checks. NEW JERSEY CPA • MARCH • APRIL 2016
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7. Fraudulent payroll entries. 8. Transactions netted and deleted in the general ledger systems, in some systems without a trace of an audit trail. 9. Cash receipts stolen and other nonrecurring receipts posted as accounts receivable payments to conceal the theft of cash. 10. Fraudulent sales credits, AR credits and discounts. 11. Entries to recognize fraudulent assets and revenues. 12. Personal transactions and withdrawals recognized as business expenditures. 13. Self-serving transactions without any economic credence. A major task for forensic professionals is getting the discovered evidence to be admitted by the court. The applicable rules of evidence and chain of custody procedures should be strictly followed in all criminal and civil cases. The written record of chain of custody connects the fraudster to the crime and should be appropriately maintained. The contamination of the data, while the evidence is in possession of the financial investigator, could result in the evidence being thrown out of court. As such, the evidence must be handled carefully by the investigators to prevent any altering or contamination. Henry Rinder, CPA, ABV, CFF, CFE, DABFA, FACFEI, CGMA, is a member of Smolin Lupin. He is a member of the New Jersey Society of CPAs Accounting & Auditing Standards Interest Group. Contact him at hrinder@smolin.com or 973-439-7200.
SMALL/SOLE
practitioner
Combating Fraud at Small Businesses B Y PATRICIA B . CIAR D ULLO, C PA, O’ C O NNO R DAVI E S , L L P
M
any small businesses share the same profile: a small accounting staff with one or two people doing everything. Unfortunately, fraud risk (both at your firm and at client firms) can’t be completely eliminated, but there are tools you can use and steps you can take to mitigate it. Let’s start with the fraud triangle. Two out of the following three elements need to exist for an actual fraud to occur: (1) perceived opportunity; (2) pressure, motive; and/or (3) rationalization. Opportunity – Financial fraud entails having the ability to carry out a plan to defraud another. This means that proper controls are not in place to prevent or detect fraud, an employee can override internal controls, there is access to cash or other valuable assets, or there is poor security in place. Rationalization – This is the justification of the criminal activity. Here, an employee may have a sense of revenge or disloyalty to an employer because he or she feels
Fraudulent Activity Scheme
overworked, underpaid or passed over for a promotion. Perhaps an employee rationalizes by initially intending to repay any funds taken— but fails to do so later. Pressure – This is the motivation or incentive to commit fraud. An employee may have financial difficulty, live beyond his/her means or have some sort of addiction. The chart below outlines some things to watch for, along with some recommended actions steps.
maker scheme may be the reason. • When comparing the monthly bank statement details with the check register, be alert for unusual or nonbusiness payees on the cancelled checks. If a forged checks scheme has taken place, the endorsement may reveal the possible perpetrator. • Vendor inquiry and review of cancelled checks would also allow for detection of an altered checks scheme. • Careful review of invoices and supporting documents for any indication of alteration or falsification could reveal billing schemes. By reviewing the fraud triangle, watching for early warning signs and putting preventative measures in place, you can help shield your practice and your clients’ practices from fraud.
Knowledge Is Power—Be Aware of Early Warning Signs Armed with this knowledge, business owners can identify where their processes and procedures are lacking and begin to implement preventative measures and controls. Be aware of the early warning signs, for example: • When a vendor inquires about payment of an invoice, but the accounting records reflect that the invoice was paid, an authorized check-
Patricia B. Ciardullo, CPA, is a partner at PKF O’Connor Davies, LLP. She is a member of the New Jersey Society of CPAs. Contact her at pbc@fgpcpa.com.
Recommended Steps and Controls for Prevention
Scenario
Authorized Check-Maker Scheme
When someone other than the owner has check-signing authority and access to the Limit the allowable signatories on the bank accounting records, checks can be written accounts; open and review the contents of the to the perpetrator (or a payee) for personal monthly bank statements. expenses, while the accounting records reflect a legitimate vendor for that check number.
Forged Checks Scheme
If the stock of blank checks is not properly secured, an unauthorized signatory can write a check to any payee he/she chooses and forge the signature.
Altered Checks Scheme
When legitimate signed checks are not Control the mailing of checks once they are safeguarded, the opportunity exists for a fraudster to modify the payee or check amount signed; review the contents of the monthly for his/her own personal gain by using a check- bank statements. washing solution or other means.
Billing Scheme
Billing Scheme Submission of authentic appearing invoices with false supporting documentation where the vendor is actually connected to the wrongdoer.
Keep the stock of blank checks in a locked cabinet; compare cancelled checks to the check register in the accounting system; periodically review vendor listings and check payee listings for anything unusual.
Carefully review invoices and supporting documentation before approving for payment; implement a vendor approval process before any new vendors can be created.
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TAX
talk
Supreme Court Rules on Maryland Resident Income Tax Credit B Y R ICH ARD J. BL OO M , C PA, W E I SE RM AZAR S LLP
I
n a 5-4 decision, the U.S. Supreme Court ruled that Maryland’s failure to allow a credit against its county income tax for taxes paid to other jurisdictions violated the Commerce Clause of the U.S. Constitution. In Comptroller of the Treasury v. Wynne, the majority held that failure to allow a credit incentivized taxpayers to conduct intrastate, rather than interstate, business, violating the judicially created dormant Commerce Clause. Maryland residents pay both state and county income tax. Residents who pay tax in another jurisdiction for income earned in that jurisdiction were previously allowed a credit against their Maryland state income tax, but not their county income tax. Nonresidents who earn income from sources within Maryland must pay the Maryland state income tax and a special nonresident tax in lieu of the county income tax. Maryland residents Brian and Karen Wynne owned stock in an S corporation that filed composite tax returns in other states and paid taxes on behalf of the Wynnes in these states. The Wynnes claimed these taxes as a credit on their 2006 Maryland personal income tax return against their state and county income taxes. The Maryland State Comptroller of the Treasury allowed a credit against their state income tax, but not against county income tax. The Hearings and Appeals section of the Comptroller’s Office upheld this decision and the Maryland Tax Court concurred. Eventually, the case came before the U.S. Supreme Court.
Court Rationale Justice Alito began the majority’s analysis, noting that the Commerce Clause grants Congress the power to “regulate commerce … among the
several states” and that the court has “consistently held this language to contain a further, negative command known as the dormant Commerce Clause, prohibiting certain state taxation even when Congress has failed to legislate on the subject.” Under prior cases, the dormant Commerce Clause precluded states from “discriminating between transactions on the basis of some interstate element.” The internal consistency test, which “looks to the structure of the tax at issue to see whether the identical application by every state in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate,” led the court to conclude that the Maryland taxing scheme violated the dormant Commerce Clause, which the court highlighted in this example: Assume that every state imposed the following taxes, which are similar to Maryland’s county tax and special nonresident taxes: (1) a 1.25-percent tax on income that residents earn in state; (2) a 1.25-percent tax on income that residents earn in other jurisdictions; and (3) a 1.25-percent tax on income that nonresidents earn in state. Two taxpayers, April and Bob, both live in state A, but April earns her income in state A, whereas Bob earns his income in state B. Bob will pay more income tax (1.25 percent to state A and state B) than April (1.25 percent only to state A) solely because he earns income intrastate.
Impact Maryland residents who paid income tax to another jurisdiction on income earned in that other jurisdiction might be eligible for a refund. Maryland has issued a new Form 502LC and provided taxpayer FAQs on the subject. What if a state grants a credit for taxes paid to other jurisdictions only NEW JERSEY CPA • MARCH • APRIL 2016
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when the income is earned from activities performed in the other jurisdiction? For example, New York allows a credit for taxes paid to other jurisdictions on income derived from those jurisdictions. Consequently, a credit is generally not allowed on intangible income, such as interest and dividends. This was upheld in John Tamagni v. Tax Appeals Tribunal of the State of New York. Since Tamagni was based on dicta in another federal case that was rejected in the Wynne decision, it may be challenged in the future. Other states have issued guidance regarding how the Wynne decision impacts their credits for taxes paid to other jurisdictions. As such, use careful analysis to determine how it impacts your clients. Richard J. Bloom, CPA, PFS, MST, is a partner at WeiserMazars LLP. He is a member of the New Jersey Society of CPAs. Contact him at richard.bloom@ weisermazars.com.
TECH
center
Internal Communications Safety Practices B Y JAIME C AMPBEL L , C PA, AND DAVI D C AM PB E LL, T I E R O N E S E RV I C E S , L L C
B
est practices in internal communications should focus on reducing opportunities for fraud, which comes down to security. A leading internal communications tool is a company intranet. An intranet is a restricted, internal resource for communication and data access. It’s often isolated from external access and can be used for hosting internal wikis, interactive sites, information sites, data, active forms, documents, shared communication spaces and internal social media portals.
Secure Messaging Best practices include monitoring, encryption and secure hosting. Secure messaging should not only be encrypted, but hosted on SSAE 16 audited servers. Many popular
tools—including Skype, Google Chat, Facebook and Snapchat—are not as secure as one might think and should not be mistaken for secure internal communication channels. Read the documentation and learn what happens if your key is lost or compromised. Are prior messages still secure? What is the app’s method of verifying that the person you think you’re messaging with is the person you think it is? This question has a corollary for users with related education and policies. Have you ever thought about whether the person you’re chatting with is actually the person you think it is? How do you know, and do you know who to contact if something seems a little off? When people communicate digitally, there is always a third-party host NEW JERSEY CPA • MARCH • APRIL 2016
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involved. Popular chat apps (Google Hangouts, Whatsapp, Skype and Facebook chat) do encrypt what they’re sending out, but of these, only Skype protects your data against being viewed by the provider’s employees. None provide any guarantee or means of verifying the identity of your contact. Only Facebook, Google and Whatsapp have had their code audited. Messaging apps include Facetime (Apple), iMessage (Apple), Yammer (Microsoft), Lync (Microsoft) and Signal. Signal was actually designed by hackers and is an open-source private messaging system that also makes private calling possible. For security, Signal stands out.
Hosting Hosting can be internal or external. The
challenge of an on-premises server is to protect it from physical theft, which requires access controls such as locks, cameras, visitation logs; access control lists limiting the personnel that can get in to access the hardware; software security and hardware firewalls; and isolation of the intranet from external internet access. Externally hosted intranets must be located in redundant sites so that there is no single point of failure. You’ll want an SSAE 16 audited facility. The provider must not be able to access your data and it must not be co-located with other clients who are also hosting their intranets with the provider.
career . As th e to worki ng prof p choice for ession New Je als thro rsey an compe ughout titive d the Valley, Delaw marke the Rut which tplace are can be gers P delive , all of MAc rs a re instan in the le tly ap workp vant cu taught plied la rricul by ex ce. The pr ovides um ceptio an acce PMA pa na rticipan c l facu lerate broad lt ts y d ba w in cohort The pr ith a ckgrou ogram format and bu nd in provid . accoun siness opport es a un , and ting unity career develo ique to deve s in pu critical ps thei lop kn blic, co thinki govern r owledg rporat ng, de ment, skills, e, an e, cision non-pr and te d educ -makin ofit ac amw groups ation. g th counti of dive ork savvy The pr ng e 15 , w 0 cred rse pr ogram ithin from ofessi it hour a vari meets of the onals ety of s requ state of and in organi iremen dustri New Je the Cer zation t es thro rs region s ti ey to fied P ughout . The sit for ublic (CPA the y co Accou ) exam this 16 nting inatio -month llaborate du n. ring progra stimul m to ate th ei r intell their po ect, he tentia ighten l, and perspe broade ctives n thei while profes r expand sional ing th networ thrive eir k. wit Partici pants convey h a curricul um th s anal at ytical busine tools, ss tech the la niques skills test , an needed to succ d enhanced eed in today’ s
FAQs Is it safe to email attachments with sensitive information to someone in my company? If your company uses private key encryption, then the likelihood of compromise is reduced. However, unless you have a system designed to encrypt attachments, you’re taking a chance as to whether internally transmitted data is secure. Can I talk about sensitive information to a colleague over the phone? There are secure calling apps and secure telephone lines, and you can use encrypted VOIP telephones. What about voicemail services that email me a recording of my voicemail or a transcription of the voicemail? These services are only as secure as your internal messaging system. As long as the perceived upside outweighs the perceived downside, there is always going to be a risk of fraud. Reduce the number of opportunities for bad actors and you’ll protect a variety of stakeholders from harm.
Rutgers Professional Masters of Accounting (PMAc) • Designed for accounting professionals • Earn a degree without disrupting your full-time career • Develops critical thinking, communication, and analytical skills • Satisfies the 150-hour requirement for the CPA examination Classes Begin September 2016 at the Princeton Crowne Plaza
Attend one of the following information sessions to learn more Cherry Hill, NJ
Plainsboro, NJ
Philadelphia, PA
Sat. March 12th Wed. April 6th Thurs. May 5th
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Tues. May 10th Wed. July 20th
To register for an information session: Visit pmac.rutgers.edu/infosessions or call 856-225-2700
Jaime Campbell, CPA, M.B.A., CGMA, CTT, MCT, is the chief financial officer and David Campbell is the CEO at Tier One Services, LLC. Jaime is a member of the New Jersey Society of CPAs Technology Interest Group. Contact the authors at 704-837-0185.
More Than a Degree, A Difference.
NEW JERSEY CPA • MARCH • APRIL 2016
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SOCIETY
pages
Get Involved One-on-One with Exposure Draft Task Force Chair
NJCPA Members Respond to CPA Exam Exposure Draft
NJCPA member and educator Jean Abbott, CPA, Ed.D., chaired the task force that authored the comment letter.
Members of the New Jersey Society of CPAs Accounting Educators Community responded to the request for comments from the American Institute of CPAs on its Exposure Draft, Maintaining the Relevance of the Uniform CPA Examination, on behalf of the NJCPA. The exposure draft summarizes changes between the current and next version of the Uniform CPA Exam. You can read the comment letter at njcpa.org/cpaexamchanges, which supports the AICPA and Board of Examiners efforts to ensure that the CPA Exam continues to test the minimum competencies needed to become a licensed Certified Public Accountant. The comment letter responds to specific questions regarding the design and content of the exam as well as future considerations for implementation of the changes. Comments reflect the following positions: • Support for increased focus on testing of higher-order skills with concern that recent graduates and entry-level staff will not have enough practical experience to understand and solve an increased number of task-based simulations. This concern extends especially to students who have not had internship or co-op experiences, including under-represented minorities. • Concern for insufficient or reduced coverage of Ethical Considerations (REG, Area 1); Conflict Resolution (REG, Area II); Bonus Depreciation (REG, Area III B); and Financial Management (BEC); and other content in FAR and AUD. • Concern that the extent of the changes has the effect of providing less guidance to CPA Exam candidates and to educators. Educators found this change to be unhelpful in the development of relevant curriculum and the preparation of accounting students. It was recommended that adequate time be considered for the future. • Strong recommendation that these changes to the test administration model be implemented as quickly as possible: (1) blackout months should be eliminated; (2) retesting of a failed section should be available to a candidate immediately after the candidate has learned that he or she did not pass the section; and (3) extend the time that a candidate must pass all four sections of the CPA Exam from 18 to 36 months. • Strong recommendation to control fee increases. Additional comments and details can be found in the comment letter. The comments represent those of some of the individuals of the NJCPA Accounting Educators Community only and do not necessarily reflect the views of all NJCPA members. The AICPA and the Board of Examiners will review all comments received. Feedback to the Exposure Draft will help finalize the development of the next CPA Exam’s content, structure and design. Changes for the next version of the CPA Exam will be announced in 2016 and included on the 2017 exam.
As a member, CPA and educator, why did you find it important to participate on the task force? I think that it’s important for the NJCPA to comment on this important matter. I wanted to learn more about the proposal for the new exam and to find out what other educators thought.
Have you discussed changes to the exam with your students? Yes. Generally they are a bit apprehensive about changes based on what they see and read. But, as they haven’t taken the exam at all, as is or revised, I don’t think the changes are a really big concern.
Why is it important for the exam to change every few years? It’s important to keep up with changes in the business environment, regulations and the profession. But I’m not sure that the exam needs to change every few years for that reason. There is much basic knowledge that is tested, and that does not change every few years. I do think that changes in technology that improve the administration of the exam and improved convenience for candidates should be rapidly incorporated.
In light of recent AICPA statistics that only one-third of accounting graduates become CPAs, how do you think the recommendations you outlined will help? It’s vital that the exam be administered in the most convenient and user-friendly fashion. There’s no need to maintain obstacles to completion. I think our comments address this.
Some CPAs may think, “Oh, I’m already a CPA. I don’t need to be aware of or concerned about what’s happening with the CPA Exam.” What would you say to them? We all need to be aware of what it takes to become a CPA. Newly minted CPAs will be our employees and colleagues. The path to becoming a CPA influences who decides to follow it and who decides to veer away from getting the certification. The quality of all CPAs impacts the value of our credential.
Any final comments? A big thanks to the rest of the task force and the other members who provided feedback to us and/or submitted their own comment letters. Our team included: Ann Marie Callahan, CPA; Elizabeth C. Ekmekjian, CPA, J.D.; Evelyn, A. McDowell, CPA, Ph,D.; and C. Daniel Stubbs, CPA.
NEW JERSEY CPA • MARCH • APRIL 2016
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CLASSIFIEDS Mergers/Acquisitions Seize a merger/acquisition opportunity with benefits for you. Tired of dealing with issues of running a firm? We are looking for firms ranging from $300,000 to $5,000,000 eager to combine forces as we continue to grow across northern NJ, Westchester and the Hudson Valley region. Goldstein Lieberman & Company is ideally situated to service all types of industries. Visit glcpas.com; email me, Phillip Goldstein, CPA, managing partner, philg@glcpas.com; or call 800-839-5767 to have a confidential conversation. Essex County CPA looking toward retirement; gross $300K. Looking for CPA to take over practice. Having a small existing client base and a strong tax background are desirable. File No. 1248 Traphagen & Traphagen CPAs, a well-established firm in Bergen County with diverse client base and credentialed support staff is seeking small firms and sole practitioners for acquisition or merger. We are looking for firms ranging in size from $300K to $700K. This is an opportunity to align with a quality firm, while continuing to provide your clients with exceptional service. To confidentially discuss this opportunity, please email us at carolynn@tfgllc.com.
New Jersey practices for sale: Multi-location tax franchise, gross $242K; Elmwood Park tax practice, gross $77K; Ewing tax and bookkeeping, gross $150K (available April 15, 2016). For more information, call Bradley Holmes, 800-397-0249, or visit accountingpracticesales.com to view all listings and register for free email updates. North NJ CPA practice for sale. Grossing over $400K. Owner is looking toward retirement. Tax and write-up practice; no audits, reviews, compilations. Higher-end clients. Long-term staff willing to stay. Owner wants to work part-time for at least four years. It is important to maintain the office in the local area. Please email me at njcpa2016@aol.com.
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YOUNG
professionals
When You’re Faced with an Unethical Situation B Y DANIEL R. ARCURI , C PA, L’ OR E AL USA
Y
ou hope it never happens to you; but, for some, it may be a question of “when” and not “if.” If you are confronted with an unethical workplace situation, it is invaluable to know just how to react. First, analyze the issue. What exactly is taking place? What do you think makes it unethical? What are the potential consequences to all concerned? What is the fallout from not doing the right thing? You can gain some perspective by asking yourself how you would feel if this became public information—splattered across the newspapers and TV news. Is this something you would be proud of or ashamed of telling your mother or your kids of your involvement? While an ethical standard may be somewhat subjective, generally, if it smells bad it is bad. Just because something is technically legal, or you may not get caught, does not mean it is ethical. And what if the actions are illegal? You then have much more to lose than your personal and professional reputation. There are many examples where employees are accused of misstating expenses. You may first think about understating expenses on the income statement in order to overstate income, but this is not always the case. However, these are usually the ones you will see in the news, because the amounts are often material. Misstating expenses is also an issue when it comes to expense reimbursements for travel and entertainment (T&E). Employees may try to submit personal expenses for reimbursement or try to receive reimbursement for a higher amount than what they actually spent. This is also considered fraud. There is opportunity, intent and motive to misstate the amounts actually spent.
This is more common in cases where receipts are not required for T&E reimbursement if the amount spent is below a certain threshold. Although the amount may be considered immaterial, this is still considered unethical. So, if you have determined that a situation is unethical, report it immediately to your supervisor. If you believe that your supervisor is also involved, then go to the next level above him or her. Perhaps your manager is already aware of the issue and has already gone through the proper channels. The issue may be larger than you think. But if you see no resolution or action being taken, one option is to report the issue to an internal ethics hotline, which many companies have. Generally, callers remain anonymous and the appropriate internal committee must take action to resolve the issue. Smaller companies may not have an ethics hotline; however, you should still report the issue to your supervisor or management team. While you may feel there’s a sense of urgency, the appropriate person, team or committee needs to gather the facts and investigate the issue. Regardless of the reporting method, you need to let the process play out properly. Change does not take place immediately, and NEW JERSEY CPA • MARCH • APRIL 2016
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coming to a premature or incorrect determination is not a solution. It’s not uncommon for someone to feel uneasy about reporting what is happening. But better to speak up than do nothing. It often takes a certain amount of courage to do the right thing. Regardless if others are or are not aware of the issue, someone should take the initiative to start the resolution process. This is the mark of a leader. If you feel that the management team is involved in the situation, you may decide resignation is the least-worse course of action. Thankfully, this “nuclear” option is the exception and not the norm. It can be quite easy for an unresolved unethical situation to spiral out of control. Employees and/or customers may be compromised, and the ensuing media coverage could put the company out of business. The result could be significant job loss. Enron resulted in 4,500 lost jobs, while WorldCom led to 17,000 lost jobs. Therein lies the cost of doing nothing. aniel R. Arcuri, CPA, is a senior D accountant at L’Oreal USA. He is a member of the Editorial Advisory Board of New Jersey CPA magazine. Contact him at daniel.arcuri1@gmail.com.
LEGISLATIVE
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NJ Pension Crisis – Part 2 B Y JE FFREY T. KAS ZERM AN, NJ C PA GOVE R NM E NT R E L AT I O N S D I R E C TO R
I
n the May/June 2015 issue of New Jersey CPA magazine, we reported on a slew of dramatic developments regarding the state’s unfunded pension liability, which ranges from $37 billion to $83 billion based on investment assumptions. Since then, the issue has continued to develop in dramatic ways and now appears it may be headed to a constitutional amendment ballot question. The huge pension liability was caused by a failure of the past six governors—both Democrats and Republicans—to contribute adequate funding to the state’s pension system. In 2011, bipartisan legislation suspended cost-of-living increases for retirees and increased worker contributions in exchange for a state promise to make increasingly large, multibillion-dollar payments over the next seven years. At the time, lawmakers claimed that they had finally “fixed” the pension problem. The pension reform law started to unravel in 2014 when Governor Chris Christie, citing budgetary constraints, made a significant cut in the required payment for fiscal year 2014 and put $1.57 billion less than what was required in the 2015 budget. The unions brought suit saying the governor was contractually obligated to make the full payments. The issue bounced back and forth in the courts during 2015. That February, a state superior court judge ruled that the governor had illegally cut the payment into the pension plans required under the 2011 law. In June, however, the NJ State Supreme Court reversed that ruling, stating that the 2011 law did not create a “legally binding, enforceable obligation” for New Jersey to make the payments. With the 2011 law essentially invalidated, Republican lawmakers called on the unions and the
Democrats to return to the bargaining table to craft a new agreement based on the changes recommended by the NJ Pension and Health Benefit Study Commission in February 2015. Those changes would essentially require deep cuts in worker benefits in exchange for a constitutional amendment that would require the state to pay off the pension debt over a 40-year period. Pension experts have described it as a trade-off of reduced benefits, more in line with private sector benefits, to guarantee fund solvency. The unions and Democrats rejected that proposal. Another dramatic development occurred in December 2015 when the Senate President and Assembly Speaker, both Democrats, introduced identical resolutions proposing a constitutional amendment to require quarterly pension payments by NJ, thus removing pension payments from the annual budget appropriations process. They claimed that the quarterly payments called for in the resolution, which are calculated on an assumed 3-percent growth in tax revenue, would cost the state approximately $3 billion in 2018 and another $600 million a year until the state is contributing the full amount recommended by actuaries in 2022. The governor and Republican lawmakers condemned the resolution and called it an inappropriate use of the state’s constitution. They said the amendment would require severe NEW JERSEY CPA • MARCH • APRIL 2016
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spending cuts or tax hikes if the state economy does not hit the 3-percent growth target. Particularly troubling to the Republicans is that the constitutional amendment process in New Jersey allows the resolutions to go directly to the public as ballot questions if the legislature passes the resolutions in two consecutive legislative sessions. The resolutions do not need approval from the governor. That means that despite the governor’s opposition, the public could vote on the proposals as soon as November 2016. A similar constitutional amendment move by the Democrats to raise the minimum wage was successful in doing an end run around the Governor and was passed by voters in 2013. In addition to stiff resistance from Republican lawmakers, business groups in New Jersey are also adamantly opposed to the resolution. They, too, argue that amending the constitution is an inappropriate method for dealing with what should be an annual legislative appropriation process. They believe that the state needs the flexibility to deal with economic emergencies, and that if the state economy doesn’t perform at the 3-percent growth rate called for in the resolution, funding for the pension payments will have to come from tax hikes as well as cuts to critical areas of state spending, such as education and municipal assistance.
MEMBER
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A CPA and His H.O.G. B Y DAVID PL AS KOW
P
erhaps many of us who work in offices all day have a heightened appreciation of the outdoors. Such is the case for James A. Kruper, CPA. First, the office part … Kruper knew during his days at Linden High School that he would major in accounting at college. “I have a natural ability with numbers,” says Kruper. “In high school, I tested very well in math and cognitive thinking. So I decided to pursue a career that played to my strengths.” After graduating from Seton Hall in 1984 with a B.S. in accounting, Kruper worked for a few medium-sized public accounting firms. In 1996, he joined what is today Levine Jacobs & Company LLC. “I started as a senior accountant and made partner in 2004,” notes Kruper. “My focus is on certified audits and technical reviewing of financial statements.” Kruper reflects on his decision to make public accounting his path: “I like the variety and flexibility it offers. It’s never boring and you never know what’ll happen tomorrow. In public, our advice is always needed.” In 1989, Kruper made another careeraltering decision—to obtain the CPA designation. “I wanted to earn as much as I could, for a better quality of life for my family and me,” he comments. “It’s a necessary credential for advancement, that’s even more true today.” Within months of passing the CPA Exam, Kruper joined the New Jersey Society of CPAs. “Aside from the privilege and prestige of joining the Society,” says Kruper, “there’s the benefit of having others in the profession with whom to
discuss issues as well as the CPE and networking opportunities.” Kruper lives in Garwood with his wife Frances. His three kids (Alexa, Tarra and James) are grown and out on their own. James isn’t too far away, since he also works at Levine Jacobs. For relaxation, Kruper likes golfing, fixing things around the house, and he recently got into clay shooting. He’s also an active member of the Garwood Volunteer Fire Department. “Garwood’s a pretty quiet town,” notes Kruper. “Thankfully, fires are rather infrequent.” … And now for the outdoors part. In 1999, a friend of Kruper’s had gotten a motorcycle. “I had always wanted one and it seemed like the right time,” says Kruper. He first took a NJ safety course and got the required motorcycle endorsement on his license. “In October, I went to Liberty Harley-Davidson in Rahway and purchased a 2000 HarleyDavidson Sportster 1200 Standard.” While at Liberty Harley-Davidson, Kruper noticed a flyer for the Liberty Chapter of the Harley Owners Group (H.O.G.). “I thought joining would be a good way to meet like-minded people, plus I thought it would be more fun to ride with others,” comments Kruper. The H.O.G. chapter takes mostly daytrips on the weekends to places throughout New Jersey and eastern NEW JERSEY CPA • MARCH • APRIL 2016
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Pennsylvania. Kruper has ridden with the club to Niagara Falls, and goes annually to Wildwood for the “Roar to the Shore” rally. Kruper has also gone on some interesting road trips outside of the group. “A couple of friends and I took the scenic route down to Florida,” he recalls. And in 2005, Kruper and a Levine Jacobs partner, Robert Blackwell, CPA, flew to Dallas to purchase a couple of barely used Police Road King Harleys and then drove them back to New Jersey. “I’m a ‘buy American’ kind of guy,” says Kruper. “All of the cars in my family are American made.” In 2003, Kruper was asked to become the membership officer for the Liberty Chapter of H.O.G. One aspect of the job is helping at the group’s annual holiday toy run. “Each November, about 600 of us ride from Rahway to Robert Wood Johnson Children’s Hospital in New Brunswick,” says Kruper. The group rides along Route 27, complete with police escort and a bevy of spectators. “We bring toys for the kids and spend some time with them, which RWJ really appreciates. The cookies and hot chocolate they provide us are a nice touch. Afterward, we have a celebratory dinner at the American Legion in Rahway. The charity ride has gotten a lot of press coverage, and it’s really great to be a part of that event.”
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