The Cooperative Accountant - Summer 2020

Summer 2020 | The Cooperative Accountant

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CONTENTS

82 ––––––––––– EXECUTIVE COMMITTEE AND NATIONAL DIRECTORS –––––––––––––

FEATURES 3 From the Editor

By Frank M. Messina, DBA, CPA

4 Utility Cooperative Forum: Impacts of COVID-19 on Financial Reporting

By Peggy Maranan, Ph.D.

10 Ransomware is Now the Biggest Online Menace You Need to Worry About – Here’s Why 12 ACCTFAX Bulletin Board

By Phil Miller, CPA; Greg Taylor, CPA, CVA, MBA; Bill Erlenbush, CPA

20 TAXFAX

By George W. Benson; Kevin J. Feeley; Marlis Carson; Rebecca L. Smith, CPA

29 Small Business Forum: The Role of the Board in Internal Fraud Prevention

By Barbara A. Wech, Ph.D. Steve Dawson, CPA, CFE

34 Internal Controls to Prevent & Detect Fraud

By Bill Erlenbush, CPA

PRESIDENT: *William Miller, CPA Electric Co-op Chapter Bolinger, Segars, Gilbert & Moss, LLP 8215 Nashville Avenue Lubbock, TX 79423

EXECUTIVE COMMITTEE VICE PRESIDENT: *Nick Mueting (620) 227-3522 Mid-West Chapter nickm@.lvpf-cpa.com Lindburg, Vogel, Pierce, Faris, Chartered P.O. Box 1512 Dodge City, KS 67801

President Nick Mueting, CPA Lindburg, Vogel, Pierce, Faris, Chartered

SECRETARY-TREASURER: *Dave Antoni Capitol Chapter KPMG, LLP 1601 Market St. Philadelphia, PA 19103

Vice President David Antoni, CPA KPMG, LLP

(267) 256-1627 dantoni@kpmg.com

Secretary-Treasurer Eric Krienert CPA Moss Adams LLP

IMMEDIATE PAST PRESIDENT: *Jeff Brandenburg, CPA, CFE (608) 662-8600 Great Lakes Chapter jeff.brandenburg@cliftonlarson ClifftonLarsonAllen LLP 8215 Greenway Boulevard, Suite 600 82 ––––––––––– EXECUTIVE COMMITTEE AND NATIONAL DIRECTORS ––––––––––––– Middleton, WI 53562 PRESIDENT: *Indicates Executive Committee Member *William Miller, CPA (806) 747-3806 NATIONAL OFFICE Electric Co-op Chapter bmiller@bsgm.com Bolinger, Kim Fantaci, Executive DirectorSegars, Gilbert & Moss, LLP136 S. Keowee Street 8215Executive Nashville Avenue Jeff Roberts, Association Dayton, Ohio 45402 Lubbock, TX 79423 Tina Schneider, Chief Administrative Officer info@nsacoop.org

Immediate Past President William Miller, CPA Bolinger, Segars, Gilbert & Moss, LLP

Krista Saul, Client Accounting Manager Bill Erlenbush, Director of Education VICE PRESIDENT: *Nick Mueting (620) 227-3522 Phil Miller, Assistant Director of Education Mid-West Chapter nickm@.lvpf-cpa.com THE COOPERATIVE ACCOUNTANT Winter 2018 Lindburg, Vogel, Pierce, Faris, Chartered P.O. Box 1512 Dodge City, KS 67801

At Large Erik Gillam, CPA Aldrich CPAs +Advisors

NATIONAL DIRECTORS

At Large Kent Erhardt CoBank, ACB

SECRETARY-TREASURER: *Dave Antoni Kent Chapter Erhardt Capitol KPMG, LLP Director 1601 Market St. CoBank, ACB Philadelphia, PA 19103

(267) 256-1627 dantoni@kpmg.com

IMMEDIATE PAST PRESIDENT: *Jeff Brandenburg, CPA, CFE (608) 662-8600 Great Lakes Chapter jeff.brandenburg@cliftonlarson ClifftonLarsonAllen LLP 8215 Greenway Boulevard, Suite 600 Jo Ann WI Fuller Middleton, 53562

For a complete listing of NSAC’s National Board of Directors and Director Committees, visit Alabama Farmers *Indicates Executive Committee Member

Mark Feldm Director Crowe LLP

Jeff Krejdl Director Ag Valley

Cooperative, Inc.

www.nsacoop.org NATIONAL OFFICE

Kim Fantaci, Executive Director

136 S. Keowee Street

Jeff Roberts, Association Executive

Dayton, Ohio 45402

Tina Schneider, Chief Administrative Officer

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(806) 747-3806 bmiller@bsgm.com

info@nsacoop.org

Krista Saul, Client Accounting Manager Bill Erlenbush,Summer Director of Education 2020

| The Cooperative Accountant

Eric Krienert, CPA Director THE COOPERATIVE ACCOUNTANT

Phil Miller, Assistant Director of Education

Winter 2018

Tucker Lem Director

From the

Editor

Frank M. Messina, DBA, CPA Alumni & Friends Endowed Professor of Accounting UAB Department of Accounting & Finance Collat School of Business

We have all been affected by Covid 19 in so many ways. Our daily work lives have changed drastically for many. Who would have thought there were so many new ways to meet? Given much we have all learned and probably thought we would never have to – our new lives will be even more technologically driven. Goes to show you that we are all never too old to learn. Everyone should know that Cooperation is the key that will get us through this. We hope you and your family stay safe and well.

Remember, we too are always looking for you to share your knowledge since you may have some extra time on your hands (like others continue to do) with us through articles in The Cooperative Accountant. Feel free to contact me (fmessina@ uab.edu) if you have any ideas or thoughts on a potential article contribution.

Sharing knowledge is a wonderful thing for all!!! Knowledge can change our world!

That is why we must remember – “The Past is history; the Future is a mystery, but this Moment is a Gift – that’s why it’s called the Present.”

Positively Yours, Frank M. Messina, DBA, CPA

Articles and other information which appear in The Cooperative Accountant do not necessarily reflet the official postion of he NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES and the publication does not constitute an endorsement of views or information which may be expressed.

The Cooperative Accountant (ISSN 0010-83910) is published quarterly by the National Society of Accountants for Cooperatives at Dayton, Ohio 45402. Second-class postage paid at Dayton, Ohio and at additional mail offices. The Cooperative Accountant is published as a direct benefit/service to the members of the Society and is only available to those that are eligible for membership. Subscriptions are available at university libraries, government agencies and other libraries (where there is already a current member) at a rate of $90.00 a year. International subscriptions are $110 a year. Land Grant colleges may receive a complimentary copy. Single copies are avaiable at a rate of $25.00 an issue. Postmaster: send address changes to National Society of Accountants for Cooperatives, 136 South Keowee Street, Dayton, Ohio, 45402.

Summer 2020 | The Cooperative Accountant

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Editor & Guest Writer Peggy Maranan, Ph.D Manager, Financial Accounting LCEC (Lee County Electric Cooperative, Inc.) PO Box 3455 North Fort Myers, FL 33918-3455 Phone (239) 656-2117 peggy.maranan@lcec.net

Most companies are likely to be impacted by the COVID-19 coronavirus pandemic, either directly or indirectly, and to varying degrees. Companies will need to consider the impacts of the pandemic on financial reporting periods ending in 2020 and possibly beyond. More specifically, there are key financial reporting areas that entities need to consider when reporting financial positions and disclosures in financial statements. This article is geared towards impacts to private company financial reporting, the sector in which cooperatives operate. An overview of things to be considered will be provided, which is not meant to be an exhaustive list. Instead, a listing of helpful resources will additionally be provided where more detailed information can be found that may be specific to an individual cooperative’s situation. Finally, the areas discussed are not in particular order of importance, and instead are meant to trigger a more thorough discussion and analysis for those who prepare and publish financial reporting for the cooperative.

In evaluating impacts to financial reporting, key areas to address include accounting considerations, disclosures, and internal control over financial reporting. Finance and operational considerations also provide the backdrop from which financial reports are 4

developed. This article will include a discussion of these topics.

Accounting Considerations Due to the impact of COVID-19, a company may need to introduce new or modified estimates into the production of financial statements. U.S. GAAP (Generally Accepted Accounting Principles) requires accounting estimates that rely on reasonable and supportable judgement and assumptions.

GrantThornton (2020) notes that a solid process to support these underlying estimates includes: ● Identifying information relevant to the estimate that is reasonably known or knowable as of the measurement date. This may include identifying related information after the measurement date, but before the financial statements are either issued or made available to be issued. ● Interpreting identified relevant information to produce a reasonable and supportable forecast of future conditions. ● Utilizing the reasonable and supportable forecast of future conditions in the approach used to arrive at a quantitative estimate. ● Producing transparent and robust disclosures describing the key inputs and assumptions used in the entity’s estimation approach.

Summer 2020 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM Estimates play an important role in financial reporting, directly impacting financial results reported. Some of the areas where estimates may need to be reevaluated or newly established include: ● Subsequent events ● Goodwill and other indefinite-lived intangibles impairment ● Asset impairments (i.e. long-lived assets, inventory) ● Fair value measurement and impairment of financial assets ● Debt securities

consider the implications on disclosures in their financial reporting. Disclosures will depend on the nature, duration, and extent of COVID-19’s impact on a particular organization. Those that prepare financial reporting should continue to monitor COVID-19 related developments and evaluate the appropriateness of their disclosures as they become impacted by COVID-19 activities. Some of the disclosures that may be impacted could include, but are not limited to: ● Contingent losses ● Going concern ● Risks and uncertainties

● Equity securities without a readily determinable fair value

● Asset impairments

● Equity Method investments

● Revenue recognition

● Leases

● Debt modifications and loan covenants

● Inventory

● Hedge accounting

● Hedge accounting

● Tax matters

● Revenue recognition

● MD&A and risk factors

● Government assistance (federal, state, or local)

The purpose of financial statement disclosures is to provide additional information to readers of the financial report which provide context to published financial statements.

Disclosures, provided in financial reporting footnotes, are an integral part of any financial report. They provide essential context for understanding the financial statements, and stakeholders rely on this information in making decisions surrounding the financial performance of the company. Some disclosures are mandatory, required by US GAAP, and will be impacted by COVID-19 activities. Other disclosures, while not mandatory, should be considered where additional explanation of COVID-19 impacts to financial statements would better assist readers in understanding the full financial picture. Preparers of financial reports will need to consider incorporating meaningful and appropriate disclosure information for any financial reporting where COVID-19 impacts have been experienced. A company may opt to prepare one general footnote to incorporate all COVID-19 disclosure requirements, or may choose to report disclosures separately.

Some examples of disclosures that may be

● Employee compensation and benefits (i.e. short-term employee benefits, postemployment benefits, postretirement benefits) ● Creditor accounting for loan restructurings ● Borrower accounting for loan restructurings ● Exit or disposal activities ● Insurance recoveries ● Income taxes These are areas where some companies may have possibly seen impacts due to COVID-19 activities. A company should identify specific COVID-19 impacts to their organization, and consider underlying estimates and assumptions used in financial reporting. Any estimates and assumptions used, and associated financial information reported, should be in compliance with specific and applicable US GAAP accounting standards requirements.

Disclosures Companies affected by COVID-19 should Summer 2020 | The Cooperative Accountant

● Inventory

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UTILITY COOPERATIVE FORUM impacted, and possible impacts, are provided below: ● FMV disclosure - volatility in markets used in underlying measurements could impact FMV calculation results. ● Hedge accounting – flush losses through Net Margins in the period when known to occur and don’t push into future periods. ● Credit losses – estimate potential losses based upon best information available (i.e. trade receivables, loans, etc.). Don’t wait until customers start not paying their bills and then book a provision. Instead, estimate and model for COVID-19 conditions, and record losses based upon best estimates. ● New lease standard deployed – accounting for leases could look different due to possible impairment, using leased assets differently in the business could change valuation assumptions, or changing of original lease contract negotiated (lease modifications). ● Government assistance - businesses accepting stimulus funds will need to provide documentation regarding assistance received, and explain any financial implications. Certifications, commitments, obligations, or funding requirements that the company agreed upon in order to accept the assistance should be explicitly described. ● Current borrowing facility covenants and conditions – any renegotiations of lenders’ requirements on existing loans or new loan facilities placed should be described.

In preparing disclosures, the purpose is to tell a story. Management should decide what they believe a financial statement reader would want to know about a financial element. Consider omitting disclosure information for items already included on the financial statements.

Avoid over disclosure as too much information dilutes what is most important to readers and may discourage reading. Also consider the materiality of the item, being prepared to justify any disclosure omissions that were deemed not to be material in nature. Where estimates are included, ranges of estimates may be appropriately provided and explained. Given the magnitude and uncertainty of COVID-19 6

pandemic activities, estimated ranges underlying financial reporting assumptions may be a more common occurrence in disclosure footnotes.

Internal Control Over Financial Reporting Companies also need to consider COVID-19’s impacts on their internal control over reporting (ICFR). Due to process changes that may have been implemented in response to the pandemic, new controls may have been put in place or existing controls modified. Some examples of these include: ● Absences of personnel that execute controls due to illness, office closings, or mandated work arrangements that prevent them from executing controls as designed. ● Inadequate information necessary to complete certain controls due to geographical limitations. ● Changes to existing controls that may create segregation of duties issues. ● New controls that may not operate for a sufficient period of time to allow management or the audit team to conclude on their operating effectiveness.

(GrantThornton, 2020, p. 27) Care should be taken to ensure that any modified or new ICFR is designed and operating effectively to avoid deficiencies in internal controls over financial reporting.

Internal control process disruptions could occur due to such things as disruptions to a company’s supply chain, customer activity, and operational process changes. Another important internal control to consider is any changes made in review-type internal controls and the ability of staff to perform their control duties in light of any shelter-in-place orders. Management should ensure that any changes in design of existing controls or new controls deployed address both the original risks of material misstatement as well as any new risks.

With many companies migrating to a remote telework arrangement, management should especially reconsider the impacts of cybersecurity controls and disclosure. The media has reported an uptick in business email compromise schemes, which has proved to be Summer 2020 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM an emerging risk growing in frequency over time. Having effective internal accounting control systems that account for these threats is critical to maintaining an appropriate accounting control environment and safeguarding company assets.

Delays in completing normal financial statement closing processes could introduce the risk of increased potential for errors in financial statements. Time delays in producing financial information could also impede management’s ability to obtain accurate and timely information on which to make important business and financial decisions. In some cases, management may decide to extend reporting deadlines. Caution should be taken in these instances because time delays could introduce an increased potential for error specifically related to the identification of subsequent events. An entity’s controls over financial reporting also need to include controls over disclosures in the financial statements, including the adequacy of disclosing the effects of COVID-19 and the selection and application of GAAP for accounting for and disclosing matters arising from COVID-19. Any changes in internal controls that have materially affected, or are reasonably likely to materially affect an entity’s ICFR, should be disclosed in the footnotes of the financial report.

Finance and Operational Considerations As a result of the pandemic, companies have had to reevaluate basic finance and operational functions and develop alternate business plans.

These include functions such as budgeting, cash flow planning, managing liquidity, and reporting on key performance indicators. Due to the uncertain nature of the path to recovery from the pandemic, companies are advised to plan for the worst case scenario, and hope for the best. Increased numbers of scenarios should be accommodated in any planning models. The worst case scenario should always be considered, with alternate best case scenarios and multiple plausible scenarios also considered. A higher number of scenarios should be considered than in normal, nonpandemic business operations.

Budgets previously approved will need to be reevaluated to model impact scenarios Summer 2020 | The Cooperative Accountant

due to COVID-19. Any updates should be cross-functional in nature, with input being incorporated from key areas of the business.

More frequent reporting and scrutiny of budget versus actual financial results may be called for as management is challenged with navigating unchartered territory in managing revenues and costs in an environment where so much is out of management’s control. Consideration should be given to normally reported key performance metrics in order to determine if the metrics are still valid, should be revised, or new metrics included in any reporting.

The company will also need to carefully manage cash flows, ensuring sufficient liquidity is available to weather the pandemic and avoid negative impacts as much as possible.

Deloitte (2020) notes that the use of forwardlooking cash flow estimates will be important also in assessing any possible “impairment of nonfinancial assets (including goodwill), the realizability of deferred tax assets, and the entity’s ability to continue as a going concern”.

The COVID-19 pandemic is presenting some particularly unique challenges in preparing forward-looking estimates. Deloitte (2020) notes that these include the following: ● There is an extremely wide range of possible outcomes. A recent headline expresses this dilemma well — “Infectious Disease Experts Don’t Know How Bad the Coronavirus Is Going to Get, Either.” There is a particularly high degree of uncertainty about the ultimate trajectory of the pandemic and the path and time needed for a return to a “steady state.” ● The associated economic impact of the pandemic is highly dependent on variables that are difficult to predict. Examples include the degree to which governments restrict business and personal activities, the associated level of compliance by citizens, the degree to which “flattening the curve” is successful, and the nature and effectiveness of government assistance. ● Each entity must then translate the effect of those macro conditions into estimates of its own future cash flows. (para. 5) Despite these challenges, companies will continue to need to make good-faith estimates and prepare comprehensive documentation 7

UTILITY COOPERATIVE FORUM to be included in financial reporting that tells the story of the pandemic impacts upon the financial information.

Just as further examples of what to consider during this pandemic, KPMG (2020) offers a quick guide on COVID-19 that identifies reporting areas to be evaluated and considered when preparing financial reporting.

These areas are identified below, along with the questions that should be addressed.

Are Assets Being Carried at Appropriate Amounts?

Have non-financial assets become impaired – e.g. PPE, intangible assets and goodwill? ● Are fair values appropriately determined? ● Will taxable profits be available to recover deferred tax assets? ● Have lease assets become impaired? ● Are revenue-cycle assets recoverable? ● How might capitalization of borrowing costs be affected?

What Are the Key Financial Instruments Impacts? ● How have economic forecasts used to measure expected credit losses been updated? ● How has the credit risk of borrowers and other debtors been reassessed? ● Are fair values appropriately determined? ● How is hedge accounting impacted? ● Does a contract still meet the own use exemption? ● Have borrowers considered changes to the terms of their liabilities? ● How are expected credit losses on trade receivables impacted?

What Are the Relevant Going Concern Considerations? ● Do events or conditions cast significant doubt on the company’s ability to continue as a going concern?

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How Should Government Assistance Be Accounted For? ● Are government grants recognized in the right period and appropriately measured? ● How should companies account for different forms of government assistance?

Are All Liabilities Fully Recorded and Properly Presented? ● Has COVID-19 resulted in an unavoidable liability or a loss-making contract? ● When is the right time to recognize a restructuring provision? ● How does COVID-19 impact current and non-current classification of debt?

What is the Impact on Employee Benefits? ● Have there been changes to employee benefits and employer obligations?

What is the Impact on Revenue-Cycle Accounting? ● Are customer contracts still enforceable? ● Are revenue estimates up to date – e.g. variable consideration, measure of progress? ● How should companies account for insurance proceeds? ● How are expected credit losses on trade receivables impacted?

Have Changes Been Made to Lease Contracts? ● How should companies account for rent concessions? ● Have expectations around lease renewal, termination or purchase options changed?

What is the Impact For Insurers? ● What are the specific accounting implications for insurers?

What are the Interim Reporting Considerations? ● What is the impact of COVID-19 on interim financial statements?

Summer 2020 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM Is COVID-19 an Adjusting or a NonAdjusting Event? â—? How should companies assess COVID-19 events after the reporting date? (para. 4) Conclusion In many cases, companies are encountering situations and activities that they might have never needed to report on in the past. Or, they need to report on items differently due to COVID-19 impacts. Because of this, identifying these items as early as possible, researching and determining appropriate

accounting and reporting treatments, and devising a plan on how to incorporate these into financial reporting is advised. It is also recommended that those preparing financial reporting for the company reach out to their external auditor and industry professionals for guidance and suggestions on reporting COVID-19 impacts in financial reporting as they will be a useful resource to assist in identifying and reporting on items specific to their clients.

References Deloitte. (April 24, 2020). COVID-19: Accounting and financial reporting considerations.

Retrieved May 1, 2020 from the following website: https://www2.deloitte.com/us/en/pages/ audit/articles/financial-reporting-considerations-related-to-covid-19-and-an-economic-downturn. html GrantThornton. (April 23, 2020). New Developments Summary: COVID-19 Accounting and financial reporting considerations. NDS 2020-04. Retrieved May 1, 2020 from the following website: https://www.grantthornton.com/-/media/ content-page-files/audit/pdfs/New-Developments-Summaries-2020/NDS-202004-COVID-19-pandemic-Accounting-and-financial-reporting-considerations-1. ashx?la=en&hash=5A0C5945F2E69EBE0C1E7BD85836A9CEC3A2F40E KPMG. (March, 2020). Insights publication: COVID-19 | Financial reporting Resource centre on the financial reporting impacts of coronavirus. Retrieved May 1, 2020 from the following website: https://home.kpmg/xx/en/home/insights/2020/03/covid-19-financial-reporting-resource-centre. html Additional COVID-19 Resources AICPA. (March 18, 2020). Consequences of COVID-19 Financial Reporting Considerations.

Center for Plain English Accounting, AICPA’s National A&A Resource Center. Retrieved May 1, 2020 from the following website: file:///F:/NSAC/cpea-covid-alert-20200318.pdf AICPA. (n.d.). Coronavirus (COVID-19) Resource Center. Website: https://www.aicpa.org/news/ aicpa-coronavirus-resource-center.html Deloitte. (n.d.). COVID-19 Resources. Website: https://dart.deloitte.com/USDART/home/ publications/deloitte/covid-19 FASB. (n.d.). FASB Response to COVID-19. Website: https://www.fasb.org/COVID19 GrantThornton. (April 1, 2020). New Developments Summary: COVID-19 Accounting and financial reporting considerations. Website: https://www.grantthornton.global/globalassets/1.-member-firms/global/insights/insight-contentblocks-and-media/covid19-financial-reporting-and-disclosures/covid-19-financial-reporting-anddisclosures.pdf Marcum LLP. (n.d.) Marcum Coronavirus Resource Center. Website: https://www.marcumllp.com/ coronavirus Summer 2020 | The Cooperative Accountant

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UTILITY COOPERATIVE FORUM

Ransomware attacks have overtaken credit card theft as the top form of cybercrime according to new data.

Ransomware attacks have become more commonplace than payment card theft incidents for the first time, as cyber criminals alter how they go about their malicious operations in an effort to gain the biggest financial reward for the least amount of effort.

Analysis of more than a trillion security events over the past year and hundreds of breach investigations by researchers at cybersecurity company Trustwave found that ransomware attacks have become the most common security incident.

Almost one in five – 18% – of incidents throughout 2019 involved ransomware attacks, where organizations found part or all of their environment compromised by network encrypting malware – and then faced a financial demand from hackers to regain access to the data.

The number of ransomware incidents quadrupled when compared with the previous year and it now means that ransomware attacks are more common that payment card and financial data breaches for the first 10

time. Incidents involving stolen bank account details and credit card information accounted for 17% of incidents during 2019.

One of the reasons why ransomware attacks have risen so much is because cyber criminals are increasingly viewing it as the simplest and quickest means of making money from compromised networks.

With ransomware, attackers can lockdown an organization’s entire network and demand a bitcoin payment in exchange for the decryption key.

Ransomware attacks are often successful because organizations opt to pay the ransom demand, viewing it as the quickest and easiest way to restore functionality to the network, despite authorities warning never to give into the demand of extortionists.

These ransomware demands commonly reach six-figure sums and, because the transfer is made in bitcoin, it’s relatively simple for the criminals to launder it without it being traced back to them.

“The ‘beauty’ of the ransomware model is you only need to write the ransomware once and its potential to infect is only limited by its reach, which with the internet is unlimited,” Summer 2020 | The Cooperative Accountant

RANSOMWARE Ed Williams, EMEA director of SpiderLabs, the research division at Trustwave, told ZDNet. Stealing financial data is also a potentially lucrative path for cyber criminals, but it arguably involves more work than installing ransomware and demanding a ransom.

The attackers need to make their way into a network, maintain persistence on the network without being uncovered – potentially for a sustained period of time – and then exfiltrate the information without being detected.

All of this takes time, then the criminals need to take additional time and effort to make money from the stolen data. That could either be by using the stolen bank details to commit fraud themselves, or it could be selling the stolen information on to other users on underground forums.

However, such is the proliferation of stolen credit card information on the dark web, it can be difficult to make large sums of money from selling stolen details, so a lot of work could go into what might not be a major reward.

So when ransomware can net attackers hundreds of thousands of dollars in one go, it’s easy to see why it has become such an appealing prospect for cyber criminals.

Another factor: many malware attacks rely on the user clicking on a phishing link or downloading a malicious file. However, ransomware is able to exploit the likes of internet-facing ports and Remote Desktop Protocol to infiltrate and spread around the Summer 2020 | The Cooperative Accountant

network without the involvement of the user.

WannaCry ransomware is probably the most notorious example of this and, in the years since, cyber criminals have exploited vulnerabilities to crawl around the network and infect everything necessary before pulling the trigger on the ransomware demand – all without the victim needing to be involved.

However, despite the potential damage that can be done by ransomware, it’s very much possible to defend against it.

Organizations should ensure that networks are patched and up to date, so that ransomware and other malware can’t take advantage of known vulnerabilities to take hold.

“The basics are always key; patching, passwords and policy. Making sure all software is running the latest secure version,” said Williams.

Organizations should also make sure that any ports that don’t have to be facing the outside world aren’t doing so as that’ll help prevent attackers breaching the network in the first place. Multifactor authentication should also be applied across the network, so if attacks do attempt to brute force logins to get around the network, there’s an additional barrier to stop them.

Finally, organizations should regularly backup the entire network – and store the backup offline – so that if the worst happens, and a ransomware attack is successful, the network can be restored without having to consider the idea of giving into extortion (Source: AICPA – CPA Letter Daily - ZDNetApril 24, 2020) 11

GENERAL EDITOR Philip W. Miller, CPA Assistant Education Director NSAC 18 Tow Path Lane South Richmond, VA 23221 (804) 339-9577 pwm01@comcast.net

ACCTFAX

ASSISTANT EDITORS Greg Taylor, CPA, CVA, MBA Shareholder Williams & Company (806) 785-5982 gregt@dwilliams.net

By Phil Miller, NSAC Assistant Education Director

Bill Erlenbush, CPA NSAC Education Director (309) 530-7500 nsacdired@gmail.com

EDITOR’S NOTE: Covid-19 is impacting all aspects of our lives. Accounting standards setting did not get a pass! In this issue of ACCTFAX, I will highlight (IN RED) communications from the major standard-setting bodies related to their responses to the pandemic.

FASB ISSUES NARROW-SCOPE IMPROVEMENTS TO FINANCIAL INSTRUMENTS GUIDANCE On March 9, 2020, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that makes narrowscope improvements to various aspects of the financial instruments guidance, including the current expected credit losses (CECL) standard issued in 2016.

The ASU is part of the FASB’s ongoing Codification improvement project aimed at clarifying specific areas of accounting guidance to help avoid unintended application. The items addressed in that project generally are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities.

The FASB decided to issue this financial instruments ASU separate from other Codification improvements to increase stakeholder awareness of the changes and to expedite the improvement process. It addresses areas brought to FASB’s attention 12

by stakeholders, and it represents the Board’s ongoing commitment to support a successful transition to FASB standards.

Among its improvements, the ASU clarifies that all nonpublic companies and organizations are required to provide certain fair value option disclosures.

The ASU is available at www.fasb.org.

FASB ISSUES GUIDANCE TO ASSIST IN TRANSITION AWAY FROM INTERBANK OFFERED RATES TO NEW REFERENCE RATES On March 12, 2020, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that provides temporary optional guidance to ease the potential burden in accounting for reference rate reform.

This new ASU provides stakeholders with the guidance they need to ease the process of migrating away from LIBOR and other interbank offered rates to new reference rates. It addresses operational challenges Summer 2020 | The Cooperative Accountant

ACCTFAX stakeholders raised with the Board and will help simplify matters going forward. At the same time, the new guidance will also help reduce transition-related costs.

LIBOR and other interbank offered rates are widely used benchmark or reference rates in the United States and globally. Trillions of dollars in loans, derivatives, and other financial contracts reference LIBOR, the benchmark interest rate banks use to make short-term loans to each other.

With global capital markets expected to move away from LIBOR and other interbank offered rates toward rates that are more observable or transaction based and less susceptible to manipulation, the FASB launched a broad project in late 2018 to address potential accounting challenges expected to arise from the transition.

The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022.

The ASU, along with a “FASB in Focus” overview, is available at www.fasb.org.

FASB SETS PLANS TO ADDRESS STANDARD-SETTING ISSUES DURING THE CORONAVIRUS (COVID-19) PANDEMIC On April 1, 2020, the Financial Accounting Standards Board (FASB) issued a statement on its plans on addressing standard-setting issues during the pandemic. FASB shares global concerns about the stakeholder impact of the coronavirus (COVID-19) pandemic in the United States and abroad. The FASB is monitoring and responding to the situation and is committed to supporting and assisting Summer 2020 | The Cooperative Accountant

stakeholders during this difficult time.

At its meeting on April 8, 2020, the FASB discussed plans to support stakeholders as they navigate the impact of the pandemic.

Discussion included:

The FASB is monitoring and responding to the situation and is committed to supporting and assisting stakeholders during this difficult time.

Responses to pervasive questions on urgent accounting issues The FASB will help its stakeholders interpret guidance related to priority issues, including troubled debt restructurings and lease modifications. The FASB continues to work in close collaboration with the Securities and Exchange Commission staff, the AICPA, banking regulators, and other stakeholders.

Agenda requests for deferral of standards The FASB will discuss effective date deferral requests for significant standards not yet effective. The FASB will also discuss the sunset date for reference rate reform.

Impact on other standard-setting activities The FASB will discuss the potential impact to current project deliberations and standard setting as a result of the COVID-19 pandemic.

Stakeholder resources The FASB encourages stakeholders to connect with them through their web resources: ● Technical inquiry service: submit questions directly to FASB staff about standard implementation or other issues ● Implementation web portal: a “one-stop shop” of educational resources on major standards, including leases, credit losses, insurance, and reference rate reform 13

ACCTFAX Find out where to submit other comments, questions and inquiries at https://fasb.org/ contact.

STATEMENT OF FASB CHAIRMAN RUSSELL G. GOLDEN ON FASB MEETING ON ACCOUNTING RELIEF DURING COVID-19 PANDEMIC On April 8, 2020, Financial Accounting Standards Board (FASB) Chairman Russell G. Golden issued the following statement: “Earlier today, the FASB held a public meeting to approve measures intended to provide stakeholders with accounting relief and clarity during the COVID-19 crisis.

In the coming days, the FASB will issue a proposal to provide certain private companies and not-for-profit organizations with an optional, one-year effective date delay of the leases standard. Stakeholders will have a 15-day comment period from the time of issuance to review and provide comments on the proposal. The FASB will also add

14

a project to its research agenda to see if there are opportunities to provide revenue recognition implementation expedients to franchisors. While that project is ongoing, the private company franchisors will also be given a one-year deferral for the revenue recognition standard.

Additionally, the FASB staff soon will issue a leases question-and-answer document to help stakeholders account for the rapid, unprecedented lease concessions lessors are seeking to provide tenants during the pandemic. The staff also addressed implementation questions about other crisisrelated issues, including interest income and loan payment holidays, hedging, and fair value accounting. The staff also noted that they have received questions related to accounting for loans from the Small Business Administration and that they will work with stakeholders to provide accounting clarity in that area as well. This information will be memorialized in FASB’s upcoming summary

Summer 2020 | The Cooperative Accountant

ACCTFAX of tentative Board decisions (TBDs) and meeting minutes to be posted to the FASB website.

We also announced that we will temporarily suspend issuance of other public exposure documents and will defer work that requires public outreach on other technical agenda projects to focus on supporting stakeholders as they navigate the impact of the crisis. Consequently, we have also decided to postpone our May 18, 2020 public leases roundtable meeting until a future date.

Finally, it’s important to note that we recognize that there are other standards with effective dates of 2022 and beyond – and that companies implementing them are also suffering from a dislocation of accounting staff and a reallocation of resources. I want to assure them that the FASB is committed to understanding how the COVID-19 crisis is impacting their transition plans, and we will continue to address issues at a future Board meeting, including addressing the need for more time related to adoption.

I would like to thank my fellow FASB members and the entire FASB technical staff for their diligent work in recent weeks to support our stakeholders. We will continue to closely monitor questions and concerns from our stakeholders, and we encourage them to continue to share them with us so we can help them during this difficult time.

Questions can be submitted through the FASB’s Technical Inquiry Service.”

FASB ISSUES STAFF Q&A DOCUMENT ON ACCOUNTING FOR LEASES DURING COVID-19 PANDEMIC On April 10, 2020, the Financial Accounting Standards Board (FASB) staff issued a question-and-answer document to address stakeholder questions on the application of the lease accounting guidance for lease concessions related to the effects of the COVID-19 pandemic.

Summer 2020 | The Cooperative Accountant

Many lessors are, or will be, providing lease concessions to tenants impacted by the economic disruptions caused by the pandemic. As part of the Board’s continuing commitment to educate stakeholders and to provide interpretive guidance on accounting for lease concessions, the FASB staff has developed this Q&A to respond to some frequently asked questions and to help stakeholders navigate the guidance in this area. Consequently, for concessions related to the effects of the COVID-19 pandemic, an entity will not have to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the contract and can elect to apply or not apply the lease modification guidance in Topic 842 Leases (or Topic 840 Leases) to those contracts.

The FASB staff will continue to monitor this area to determine whether to provide additional clarification in the future.

In addition to the above, the FASB announced that its May 18 leases roundtable will be postponed to a future date to be determined. The delay will allow the Board and staff to focus their resources on supporting stakeholders during the pandemic.

The staff question-and-answer document is available at www.fasb.org.

FASB SEEKS PUBLIC COMMENT ON PROPOSAL TO OFFER LIMITED EFFECTIVE DATE DELAYS ON TIMESENSITIVE STANDARDS Would Affect Certain Private Companies and Organizations Applying Leases, Revenue Recognition Guidance On April 21, 2020, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that would grant a one-year effective date delay for certain stakeholders applying leases and revenue recognition guidance. Stakeholders are encouraged to review and provide 15

ACCTFAX

The FASB’s proposal to delay timesensitive standards would provide a measure of relief to certain companies and organizations focused on the COVID-19 crisis.

comment on the proposed ASU by May 6, 2020.

The FASB’s proposal to delay time-sensitive standards would provide a measure of relief to certain companies and organizations focused on the COVID-19 crisis.

It’s the first in a series of steps the Board is taking to ensure stakeholders can successfully implement GAAP guidance during this time.

The leases effective date deferral would be limited to private companies, private notfor-profit organizations, and public not-for-profit organizations that have not yet issued their financial statements. It would provide near-term relief for certain entities for whom the leases standard is currently effective who have rapidly approaching year-end dates and for entities for whom the leases effective date is imminent.

Under the proposed ASU, private companies and private not-for-profit organizations would have the option to apply the new leases standard for fiscal years beginning after December 15, 2021, and to interim periods within fiscal years beginning after December 15, 2022. Public not-forprofit organizations that have not yet issued financial statements would have the option to apply the standard for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The proposed effective date deferral for revenue recognition would be limited to private company franchisors. Those stakeholders would have the option to apply the new standard for annual reporting 16

periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020.

The proposed ASU is available at www. fasb.org.

FASB ISSUES STAFF Q&A DOCUMENT ON HEDGE ACCOUNTING DURING COVID-19 PANDEMIC On April 28, 2020, the Financial Accounting Standards Board (FASB) staff issued a question-and-answer document (Q&A) that responds to frequently asked questions about the disruptive effects of COVID-19 on cash flow hedge accounting.

FASB Accounting Standards Codification® Topic 815, Derivatives and Hedging, provides guidance on when to discontinue cash flow hedge accounting and when and how to reclassify amounts deferred in accumulated other comprehensive income (AOCI) to earnings.

In recent weeks, stakeholders have asked how the postponement or cancellation of forecasted transactions related to the effects of the COVID-19 pandemic should be considered when applying cash flow hedge accounting under Topic 815. The FASB staff developed this Q&A to provide guidance on this unique and evolving situation, based on the information and feedback they’ve received to date.

The FASB staff will continue to monitor questions and communicate with stakeholders through additional statements, technical inquiries, and other means, as appropriate.

The Q&A is available at www.fasb.org.

PRIVATE COMPANY COUNCIL APRIL 17, 2020 MEETING RECAP The Private Company Council (PCC) met on Friday, April 17, 2020. Following is a brief summary of issues addressed by the PCC at that meeting: Summer 2020 | The Cooperative Accountant

ACCTFAX PCC Issue No. 2018-01, “Practical Expedient to Measure Grant-Date Fair Value of Equity-Classified Share-Based Awards”: PCC and Board members discussed the progress on a potential practical expedient that would allow a nonpublic entity to determine the current price input of equityclassified share-option awards using a valuation method performed in accordance with the presumption of reasonableness requirements of Section 409A of the U.S. Internal Revenue Code. In February 2020, the Board endorsed the PCC’s decision to issue a proposed Accounting Standards Update on that practical expedient. Because many private company stakeholders currently are experiencing resource constraints and may be unable to provide feedback at this time, the PCC unanimously agreed to delay issuance of the Exposure Draft until later in the second quarter of 2020.

Revenue Recognition (Topic 606): FASB staff updated the PCC on current implementation progress with the revenue recognition standard and highlighted several FASB educational and implementation resources.

Conceptual Framework: Elements, Measurement, and Presentation: FASB staff provided the PCC with an overview of the Conceptual Framework projects. In the second half of 2020, the FASB expects to release an Exposure Draft related to Elements and an Invitation to Comment related to Measurement. PCC and Board members discussed the purpose and use of the Conceptual Framework and the proposed revised definitions of various elements.

Current Issues in Financial Reporting: PCC and Board members discussed practice issues as a result of the current business environment under the COVID-19 pandemic.

FASB staff provided an update on several emerging issues affecting private companies including: ● Leases: The Board decided to amend the Summer 2020 | The Cooperative Accountant

effective date of Topic 842 for private companies and private not-for-profit entities to annual reporting periods beginning after December 15, 2021, and to interim periods within the fiscal years beginning after December 15, 2022. An Exposure Draft will be issued soon for public comment. ● Fair

Value Measurement: An agenda request was received to suspend mark-tomarket accounting. FASB staff provided a reminder of the orderly transaction guidance in Topic 820, Fair Value Measurement, specifically paragraphs 820-10-35-54C through 35-54J. FASB staff encouraged PCC members to reach out if they have questions or encounter interpretation issues with the existing guidance.

● Interest

Income Recognition: The Board recently discussed a technical inquiry received by the FASB staff regarding the recognition of interest income. For illustrative purposes that inquiry included a fact pattern whereby an institution was providing assistance to borrowers impacted by COVID-19. FASB staff acknowledged two appropriate views for accounting for interest income.

Small Business Administration Loans: FASB staff noted that questions are arising related to lender accounting for fees received and borrower accounting for loan forgiveness.

FASB staff noted that entities scoped out of Update No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, are not precluded from applying the guidance by analogy when appropriate. Additionally, FASB staff has had ongoing dialogue with both the AICPA and practitioner groups preparing to publish papers discussing those issues.

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ACCTFAX The next PCC meeting will be held on Wednesday, June 24, 2020, and Thursday, June 25, 2020.

SEC CORONAVIRUS (COVID-19) RESPONSE “The U.S. Securities and Exchange Commission’s efforts are centered, first and foremost, on the health and safety of our employees and all Americans. We also are focused on, among other things: ● Maintaining the continuity of Commission operations; ● Monitoring

market functions and system

risks; ● Providing

prompt, targeted regulatory relief and guidance to issuers, investment advisers and other registrants impacted

by COVID-19 to facilitate continuing operations, including in connection with the execution of their business continuity plans (BCPs); and

● Maintaining

our enforcement and investor protection efforts, particularly with regard to the protection of our critical market systems and our most vulnerable investors.

We continue to work in close coordination with other financial regulators and governmental authorities in the United States and globally.

Below is a summary of operational initiatives, market-focused actions, guidance and targeted assistance and relief, investor protection efforts and other work of the agency in response to the effects of COVID-19. It is not an exhaustive list. Rather, it provides background and more specific context as to how the SEC is continuing to work with investors and other market participants as it executes its mission during this period of collective, national challenge. ● Agency Operations: Transition to Telework and Continuity of Operations ● Market Monitoring and Engagement with 18

Market Participants ● Guidance

and Targeted Regulatory Assistance and Relief

● Enforcement,

Examinations and Investor

Education ● Effect

on Comment Periods for Certain Pending Actions

Expanded discussions of the above five topics are available at www.sec.gov.

IASB TO CONSIDER IMPACT OF COVID-19 On April 14, 2020, the IASB published the following statement. “The International Accounting Standards Board (Board) recognises that the covid–19 pandemic is creating difficulties for many of our stakeholders. A supplementary meeting will be held on 17 April to discuss: ● Whether to propose a deferral by one year to 1 January 2023 of the effective date of an amendment to IFRS Standards issued in January – Classification of Liabilities as Current or Non-Current; ● Whether

to extend the consultation period for some major ongoing consultations;

● Delaying

the publication of forthcoming major consultation documents originally planned for 2020; and

● IFRS

16 and rent concessions granted as a result of covid-19.

Find further information at https://ifrs.org about how the IFRS Foundation is supporting its stakeholders during the pandemic.

This includes educational materials on the application of IFRS 9 Financial Instruments and IFRS 16 Leases to support consistent and robust application of the Standards.”

IASB ADDRESSES COVID-19-RELATED RENT CONCESSIONS On April 22, 2020, the International Accounting Standards Board (Board) Summer 2020 | The Cooperative Accountant

ACCTFAX

The objective of the amendment is to give timely relief to lessees when applying IFRS 16 to covid-19related rent concessions while still enabling them to provide useful information about their leases to investors.

proposed to amend IFRS 16 Leases to make it easier for lessees to account for covid-19-related rent concessions such as rent holidays and temporary rent reductions.

Exposure Draft Covid-19-Related Rent Concessions, which proposes an amendment to IFRS 16, was open for public comment until May 8, 2020.

The objective of the amendment is to give timely relief to lessees when applying IFRS 16 to covid-19-related rent concessions while still enabling them to provide useful information about their leases to investors.

IFRS 16 specifies how lessees should account for changes in lease payments, including concessions. However, applying those requirements to a potentially large volume of covid-19-related rent concessions could be practically difficult, especially in the light of the many challenges stakeholders face during the pandemic. The Standard requires lessees to assess individual lease contracts to determine whether the concessions are to be considered lease modifications and, if that is the case, the lessee must re-measure the lease liability using a revised discount rate.

The proposed amendment would exempt lessees from having to consider whether particular covid-19-related rent concessions are lease modifications, allowing them to account for these changes as if they were not lease modifications. The amendment would apply to covid-19-related rent concessions that reduce lease payments due in 2020.

Summer 2020 | The Cooperative Accountant

The Board has responded quickly to provide support to stakeholders at this difficult time. Accordingly, the comment period on the proposal is short – 14 days.

The Board aims to issue the final amendment, which would be available to lessees immediately, in May 2020.

IASB PROPOSES DEFERRING IAS 1 AMENDMENTS’ EFFECTIVE DATE DUE TO COVID-19 On May 4, 2020, the International Accounting Standards Board (Board) proposed to defer by one year the effective date of Classification of Liabilities as Current or Noncurrent, which amends IAS 1 Presentation of Financial Statements.

The IAS 1 amendments were issued in January 2020, effective for annual reporting periods beginning on or after January 1, 2022. However, in response to the covid-19 pandemic, the Board is proposing to provide companies with more time to implement any classification changes resulting from the amendments by deferring the effective date by one year to annual reporting periods beginning on or after January 1, 2023.

The Board is not proposing any changes to the original amendments other than the deferral of the effective date.

The Board has responded quickly to provide support to stakeholders at this difficult time. Accordingly, the comment period on the proposal is short – 30 days. The comment deadline is June 3, 2020.

Go to comment letter page at https://ifrs. org to view the Exposure Draft Classification of Liabilities as Current or Non-current – Deferral of Effective Date and submit comments.

Resources: IFRS (May 2020). Latest News. Retrieved from https://ifrs.org.

FASB (May 2020). In The News… Retrieved from https://fasb.org.

SEC (May 2020). Press Releases. Retrieved from https://www.sec.gov.

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TAXFAX

TAXFAX EDITOR George W. Benson Counsel McDermott Will & Emery LLP 444 West Lake Street Suite 4000 Chicago, IL 60606 (312) 984-7529 gbenson@mwe.com

COVID-19: NOTABLE TAX PROVISIONS FOR COOPERATIVES

By Rebecca L. Smith, CPA On March 18, 2020, President Trump signed the Families First Coronavirus Response Act (FFCRA), which provides paid leave under the Family Medical Leave Act and paid sick leave for absences resulting from COVID-19. This act also provides to employers reimbursement of the amounts paid to employees under this Act in the form of tax credits.

Payroll Credit for Paid Sick Leave – A refundable tax credit to offset the employer burden of payment under the Family Medical Leave Act. The credit can be taken against the employer portion of Social Security taxes due on required wages paid for emergency sick leave. For wages paid to fulltime employees that obtain a diagnosis, or are subject to isolation and take sick leave, the credit is limited to $511 per day. For amounts paid to employees caring for sick relatives or caring for a child whose school has been closed, the credit is limited to $200 per day. If the credit exceeds the employer liability, then the balance is refundable.

GUEST WRITERS Kevin J. Feeley McDermott Will & Emery LLP 444 West Lake Street, Suite 4000 Chicago, Illinois 60606-0029 tel: (312) 984-7501 fax: (312) 984-7700 kfeeley@mwe.com Marlis Carson General Counsel Vice President – Legal, Tax and Accounting National Council of Farmer Cooperatives 50 F Street, N.W. – Suite 900 Washington, D.C. 20001 tel: (202) 879-0825 fax: (202) 626-8722 mcarson@ncfc.org Rebecca L. Smith, CPA Director, Cooperatives CliftonLarsonAllen LLP 10700 Research Drive, Suite 200 Milwaukee, WI 53226 tel: (414) 721-7513fax: (414) 476-7286 rebecca.smith@claconnect.com

Payroll Credit for Emergency Family Leave – Qualified wages are those required to be paid in accordance with the Family Medical Leave Act changes. The amount of wages considered for each employee is limited to $200 per day and capped at $10,000. If the credit exceeds the employer’s total liability, then it can be refunded.

Nine days later on March 27, the President signed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Of the Acts passed to date this is the largest stimulus package in U.S. history and provides tax relief for businesses and individuals. The tax 20

Summer 2020 | The Cooperative Accountant

TAXFAX provisions most relevant to cooperatives are outlined below.

Deferral of Employer Social Security Tax – The employer share of the 6.2% Social Security tax on wages paid from March 27, 2020 through December 31, 2020 is deferred, with 50% due on December 31, 2021, and 50% due on December 31, 2022.

The deferral is not available to taxpayers that take advantage of loan forgiveness under the paycheck protection program.

Employee Retention Credit – A refundable payroll tax credit equal to 50% of certain compensation (including health benefits) paid by eligible employers from March 13, 2020 to December 31, 2020. An eligible employer is one whose: ● Operations were fully or partially suspended due to a COVID-19 related shutdown order, or ● Gross receipts declined by more than 50% when compared to the same quarter in the prior year. The employer remains an eligible employer in subsequent quarters until the gross receipts exceed 80% of gross receipts compared to the same quarter for the prior year.

If the employer has more than 100 employees, the credit is available only for compensation paid to employees who are not working as a result of a COVID-19 related shutdown order or the significant decline in gross receipts. For employers with 100 or fewer employees, any compensation paid during the period when the operations were fully or partially suspended or during a quarter in which gross receipts have significantly declined are eligible for the credit, even if paid to an employee who is still working.

The credit is limited to the first $10,000 of compensation paid to a particular worker.

The credit is not available for compensation taken into account in computing the sick leave or family medical leave credits under Summer 2020 | The Cooperative Accountant

the FFCRA discussed above. Similarly, the credit is not available to employers who take advantage of a loan under the paycheck protection program.

5-Year Net Operating Loss Carryback – As a result of the 2017 Tax Cuts and Jobs, NOLs generated in tax years beginning in 2018 and later years could not be carried back and only could be carried forward to offset up to 80% of taxable income in carryover years. The CARES Act permits NOLs from the 2018, 2019, and 2020 tax years to be carried back to the previous five tax years beginning with the earliest years first. Also the CARES Act suspended the 80% taxable income limitation on carryovers through the 2020 tax year (100% of taxable income can be offset). For calendar year 2021 and fiscal year 2022 and forward, the 80% limitation is applicable and the carryforward rules from TCJA are applicable (100% of TI can be offset with losses from years prior to 2018, losses from 2018 and after can offset only 80% of TI). Both the 5-year carryback and the 80% limitation on carryovers suspension applies to 2018, 2019, and 2020 calendar years and 2019, 2020, and 2021 fiscal years.

Taxpayers can elect to waive the loss carryback. For losses generated during the 2018 and 2019 tax years, the waiver needs to be made by the extended due date for the tax return for the first year ending after the CARES Act is enacted. A taxpayer elects to waive a carryback from 2018 and 2019 tax years by attaching a separate election statement to its tax return filed for the first taxable year ending after March 27, 2020 for each year for which the taxpayer is making the election. The election statement must state that the taxpayer is electing to apply section 172(b)(3) under Rev. Proc. 2020 – 24 and the year for which the election is being made. For example, a calendar year corporation with an NOL in 2018 but income in 2019 and 2020 would need to waive the carryback for the 2018 year by the due date of the 2020 tax return. Taxpayers cannot 21

TAXFAX elect a reduced carryback period, it is a fiveyear carryback or none.

This is a great opportunity from a cash flow perspective and also an opportunity to secure permanent tax savings by using losses to offset income generated prior to tax reform when the tax rates were higher.

However, it is important to analyze the tax rates in the carryback period versus those in the carryforward period as the benefit may be greater in a carryover period if the tax rates were lower than 21% in the earlier years. Also consideration should be given to accounting method changes, such as accelerating deductions and deferring income to maximize the amount of an NOL that can be carried back.

Besides cash flow and tax rate differentials you will want to consider if there are uncertain tax positions in closed tax years that you prefer to leave closed. If an NOL is carried to a closed year, the IRS can offset the refund with other adjustments in the carryback year even though the statute of limitations is closed. Another consideration is if someone other than the taxpayer is entitled to the refund. For example, some purchase agreements may stipulate that the seller is entitled to any refunds of tax during pre-closing years, even if the refund is attributable to a loss generated during a post-closing year.

In addition the CARES Act fixed the drafting error for carrybacks as part of the TCJA. For losses generated in a year beginning in 2017 and ending in 2018 the loss can now be carried back 2 years. A taxpayer can elect to waive this carryback by filing an amended return or Form 1139 containing only the taxpayer’s name, address, and taxpayer identification number and attaching an election statement with the words “Filed Pursuant to Rev. Proc. 2020 – 24” at the top. The election is due July 27, 2020. If the taxpayer previously elected to waive a carryback for a tax year beginning in 2017 and ending in 2018, the taxpayer has until July 27, 2020 to revoke the prior waiver election.

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AMT Credit Recovery – The CARES Act allows for immediate recovery of 100% of the AMT credit carryforwards that existed prior to the TCJA for 2019 calendar years and 2020 fiscal years. Alternatively a corporation can elect to claim a refund for the unused carryovers for the 2018 calendar year/2019 fiscal year.

In order to make the election to take the entire refundable AMT credit amount in 2018 the taxpayer can file a tentative carryback refund claim on Form 1139. For a taxpayer that has not yet filed their 2019 fiscal year return you can make an election on the tax return by attaching a statement indicating the taxpayer is making an election under Section 53(e).

Business Interest Limitation Modification – The business interest limitation was added as part of the TCJA and generally limits the deduction for business interest expense to the sum of (i) business interest income, (ii) 30% of adjusted taxable income (ATI), and (iii) floor plan financing interest. Certain small taxpayers are exempt from the limit. The CARES Act increases the limit to 50% of ATI for 2019 and 2020, potentially increasing interest expense deductions and reducing taxable income. Taxpayers can elect to use their 2019 ATI in computing the 2020 limit, providing relief to those whose income declines in 2020. Taxpayers can also make an irrevocable election out of the increased limitation and apply the more restrictive 30% of ATI limit if desired.

As of the drafting of this article final regulations have yet to be issued with respect to the business interest expense limitation and it is unknown if patronage dividends will be excluded from the computation of adjusted taxable income.

For those with an interest in a partnership a special rule applies to partnerships in 2019.

Instead of increasing the limit from 30% of ATI to 50% of ATI, half of the excess business interest of a partnership is treated as business interest of the partner in 2020 and is not Summer 2020 | The Cooperative Accountant

TAXFAX subject to the business interest limit at the partner level. The other half of the excess business interest expense is subject to the normal rules for excess business interest.

Partners can elect out of this relief provision if desired. The 50% of ATI limit applies to partnerships in 2020.

Bonus Depreciation on Qualified Property – Qualified improvement property (QIP) was supposed to have a 15-year cost recovery period and be eligible for 100% bonus depreciation under tax reform. A drafting error, however, caused QIP to have a 39year cost recovery period, and be ineligible for bonus depreciation. The CARES Act retroactively corrects the drafting error for QIP acquired and placed in service on or after 1/1/18. The retroactive fix presents an opportunity for many taxpayers to accelerate depreciation, either by filing a Form 3115 or, in some cases, by filing an amended tax return. Taxpayers who use the alternative depreciation system, including those who elected out of the business interest limitation, are ineligible for bonus depreciation on QIP. Charitable Contribution Limitations – For corporations making contributions in 2020 the limitations have been increased. For cash contributions the 10% limit increased to 25% of taxable income and for contributions of food inventory the limitation increased from 15% to 25%.

On April 24, 2020, the President signed the Paycheck Protection Program and Health Care Enhancement Act, a $484B Phase 3.5 coronavirus stimulus package. This Act does not contain any tax provisions outlined.

Congress is working on a Phase 4 program, but its outlines remain unclear at this time.

As we continue to navigate the COVID-19 pandemic in the weeks and months to come many things remain to be seen, including what our new normal is and how beneficial the relief provided in these stimulus packages are to taxpayers.

Summer 2020 | The Cooperative Accountant

NCFC COVID-19 RESPONSE

By Marlis Carson The team at NCFC is actively working on several areas of COVID-19 response. More information is available on NCFC’s website at http://ncfc.org/covid-19-response/.

Essential Workers. Perhaps the first issue to require immediate attention was that, as state and local governments declared “shelter in place” or “stay at home” orders, NCFC worked to ensure that employees of farmer cooperatives were able to continue reporting to work. NCFC distributed a Critical Infrastructure Designation template letter for co-ops to customize. Cooperative leaders gave their employees this letter to carry with them in order to respond to any attempts to limit workers from reporting for duty during the critical spring planting season. NCFC and other ag groups also sent a letter to the nation’s governors, urging them to recognize the importance of agriculture workers. A comprehensive list of links to state essential worker documents is available on NCFC’s website.

Human Resources. The CARES Act imposed new leave and health care requirements for businesses with fewer than 500 employees.

Utilizing the expert advice of members of its Legal, Tax, and Accounting Committee, NCFC provided updates and webinars for the human resources personnel of farmer cooperatives to help with understanding and complying with the new requirements.

H2A Visas. Working with the Ag Workforce Coalition and federal agencies, NCFC staff have also been striving to ensure that critical workers in need of H2A visas are able to obtain documentation and to travel to the United States. The United States Department of Agriculture worked diligently with the Department of Labor, Homeland Security, and the State Department to limit the disruption in the H-2A workforce caused by COVID-19.

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TAXFAX Transportation. On the transportation front, NCFC communicated with the Federal Motor Carrier Safety Administration (FMCSA) of the Department of Transportation (DOT). FMCSA addressed several concerns expressed by NCFC and its members, including: 1. Providing a waiver extending Commercial Drivers Licenses (CDLs) and DOT required medical exams that expire after February 29 to June 30.

2. Issuing guidance which provides flexibility to mandatory random drug and alcohol testing.

3. Expanding relief of hours of service (HOS) limitations to agricultural supplies and several commodities, including fertilizer and feed.

SBA Loans. NCFC worked with Congressional staff and the Small Business Administration to help ensure that farmer cooperatives and their farmer-members are eligible to participate in two programs administrated by the Small Business Administration. The Paycheck Protection Program and the Emergency Industry Disaster Loan Program were put in place to assist small businesses in all sectors of the economy. NCFC worked to enable farmer cooperatives’ participation.

Tax. The CARES Act also included tax relief provisions that may be of help to farmer cooperatives, including expansion of net operating loss provisions, enhanced business interest expensing, an employee retention credit, and acceleration of AMT credits. A working group of members of the Legal, Tax and Accounting Committee reviewed and discussed the provisions.

NCFC is also monitoring developments relating to final regulations under section 199A(g). We understand that the proposed regulations are set for final review by the Treasury Department, but COVID-19 activity has caused a delay. We hope to be able to weigh in again with NCFC-member concerns once the proposed regulations are sent to 24

the Office of Management and Budget.

Chief among the concerns is eliminating nonpatronage income from the 199A(g) deduction calculation. This is in clear violation of the statute and of the deal struck

by NCFC members and private grain interests when addressing the “grain glitch” in 2018.

Other COVID-19 Response Resources. This description of NCFC’s activities was prepared in mid-April. Please go to NCFC’s website to see our activities since then.

NCFC’s website contains links to tax filing resources, USDA guidance, and unemployment benefit information. In addition, many law firms and accounting firms that serve NCFC members are providing useful information for addressing COVID-19 issues. NCFC has provided links to those organizations on its COVID-19 response page.

IRS RULES THAT LIQUIDATING DISTRIBUTION FROM A COOPERATIVE QUALIFIES AS A DEDUCTIBLE PATRONAGE DIVIDEND

By Kevin J. Feeley In P.L.R. 202014011 (the “Ruling”), the Internal Revenue Service (“IRS”) continued a favorable line of rulings on the patronage treatment of liquidating distributions, finding that the net gain realized from the sale of substantially all of the assets of a cooperative constituted patronage income and that the distribution of such income to its members qualified as a deductible patronage dividend.

The taxpayer at issue (the “Taxpayer”) was organized as a corporation and operated on a cooperative basis. Upon its formation, it acquired a business from a for-profit subsidiary of a trade organization whose members consisted of federally chartered and state chartered credit unions. The Taxpayer offered the customers of the business the opportunity to become shareholder-members of the Taxpayer. The ruling describes the Summer 2020 | The Cooperative Accountant

TAXFAX Taxpayer’s purpose generally as providing various networking services to its members on a cooperative basis. The Taxpayer represented that it was a nonexempt cooperative subject to tax under Subchapter T of the Internal Revenue Code. Taxpayer conducted business and provided network services to nonmembers on a nonpatronage basis as well.

Taxpayer had many years of successful operations. However, its service offering was somewhat limited. In the face of increased competition in its industry, Taxpayer undertook a strategic review of its options.

The review revealed several threats to its business. During the course of this review, an unrelated corporation offered to buy the Taxpayer’s business. Taxpayer sought and received the approval of its members to accept the offer and proceed with an orderly liquidation. In the sale transaction, the purchaser acquired all of the Taxpayer’s real property, tangible assets, and intangible property, with the exception of cash and various books and records.

Taxpayer’s bylaws imposed an obligation to distribute patronage earnings to members on a patronage basis. The bylaws required that upon dissolution, any residual assets left after the payment of all debts and the retirement of allocated equity be distributed to shareholders, whether or not they were active or inactive, based on a historic patronage. The bylaws did not specify the period of patronage activity that would determine members’ relative shares of gain from the sale of assets, nor did they define historic patronage in term of how far back the cooperative had to go.

As required by its bylaws, Taxpayer planned to distribute liquidation proceeds to members, both active and inactive, based on patronage over a period of “X” years for which the Taxpayer was in possession of data on its patronage and nonpatronage activities.

Taxpayer acknowledged that its patronage records did not go back to the date of its formation and, as a result, the liquidation Summer 2020 | The Cooperative Accountant

allocation would not account for patronage in the early years of the Taxpayer’s existence.

Taxpayer determined the percentage of the gain from the sale that it would treat as patronage income (the “Member Portion”) based on the relative proportion of patronage business versus nonpatronage business in the years for which the Taxpayer had records.

The remaining portion gain would be treated as nonpatronage income, the distribution of which would not give rise to a deduction.

Taxpayer represented that it was likely that the Member Portion would have been even higher if information for the earlier years was available.

Taxpayer sought two rulings. First, Taxpayer requested a ruling that the Member Portion of the net gain from the sale of substantially all of its assets was net income from business done with or for patrons (i.e., patronage income). Second, Taxpayer sought a ruling that it would be allowed to exclude or deduct as a patronage dividend a portion of the patronage-based distributions equal to the Member Portion.

On the first requested ruling, the Service applied the “directly related” test articulated in Farmland Industries, Inc. v. Comm’r, 78 T.C.M. 846 (1999). This case involved a cooperative that sought to classify the gains from the sales of various assets, including stock in three subsidiaries and processing facilities, as patronage source income. The court found that income at issue would be treated as patronage source if the income was generated from a transaction that was directly related to the cooperative enterprise in that it facilitated the activities that the cooperative performed for its members. The court distinguished such directly related transactions from incidental transactions that do nothing more than improve the overall profitability of the cooperative. The analysis comes down to an assessment of the degree of relatedness based on the totality of the circumstances. The court held that Farmland’s asset sales met the directly related test and thus the gains therefrom were patronage sourced.

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TAXFAX On the second ruling, the Service stated that Service’s recognition of the practical constraints

By Barbara A.for Wech gains from the sale of capital assets must be determining the allocation of the gain among allocated to the patrons in the year of sale if past and present patrons. the assets were both acquired and sold in such taxable year. If, however, the holding period of the assets extended beyond one year, the gain CARES ACT CHANGES – SPECIAL RULES must be allocated, to the extent practicable, the FOR PARTNERSHIPS patrons during the years in which the asset was

By George W. Benson owned in proportion to the patronage done by such patrons during those years.

Several years ago, the procedural rules The Service granted the Taxpayer’s ruling applicable to partnerships and partners requests. Specifically, it found that the net were completely rewritten. For fiscal years gain from the sale of the Taxpayer’s assets was beginning in 2018, the “centralized audit directly related to the business conducted by regime” established by the Bipartisan Budget the Taxpayer on a patronage basis and that “X” Act of 2015 (BBA) (Sections 6221 to 6241 of the years of patronage activities were a sufficient Code) replaced the much maligned “TEFRA period of time for determining the members’ regime.” The centralized audit regime generally allocable shares of the gain. Accordingly, the determines, assesses and collects tax at the Service held that the Member Portion of the partnership level. It applies to all partnerships net gain was patronage income eligible the other than those that elect out in accordance patronage dividend deduction. with Section 6221(b). The rules are complicated, particularly as they apply to the consequences The Ruling does not represent a departure of changes made as a result of audits of a from the Service’s position on the treatment of partnership return, but the TEFRA rules were asset gains as patronage sourced. Since the also complicated and in many situations Service’s acquiescence to the Farmland case incomprehensible.

(AOD 2001-03), wherein the Service agreed to Under the centralized audit regime, amended apply the “directly related” test, the Service returns are no longer permitted except as has issued a number of rulings characterizing authorized by the Secretary of the Treasury. gain from the sale of assets used in the Section 6031(b). Once a partnership has filed cooperative’s business as patronage sourced, its return for a year and provided K-1s to its whether or not the sale was in connection with partners, changes generally may be made only a liquidation of the cooperative. See e.g., by filing an administrative adjustment request P.L.R. 201105008 (sale of crop auction house (“AAR”) with the IRS. See, Section 6227. by marketing cooperative); P.L.R. 200935019 When an AAR is filed by a partnership (sale of warehouse and distribution facility); with respect to a year (the “reviewed year”) P.L.R. 200842011 (sale of warehouse); P.L.R. and the adjustments do not result in an 200625021 (sale of purchasing cooperative’s imputed underpayment for the partnership, assets, including employee workforce and the partnership is required to notify persons goodwill); P.L.R. 200252027 (sale of all physical who were partners during the reviewed year assets followed by liquidation). Thus, while (“reviewed year partners”) and to provide each the Ruling does not break new ground, it is a reviewed year partner with information as to helpful reaffirmation that the Service will take a his or her respective share of the adjustments. reasonable approach in assessing whether the Treas. Reg. § 1.6227-1(d) and (e). The reviewed acquisition and ownership of the sold asset year partner then reflects the effect of the was sufficiently in furtherance of a cooperative’s adjustments on his or her return for the year the business to treat the resulting gain as patronage AAR is requested (the “reporting year”). This sourced. Just as important, however, was the procedure delays realization of any benefit from 26

Summer 2020 | The Cooperative Accountant

TAXFAX the AAR (and, in some situations, it could lead to the loss of any benefit or worse).

As described in Becky Smith’s article elsewhere in this month’s TAXFAX Column, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) retroactively corrected what was perceived as an error in the Tax Cuts and Jobs Act of 2017 (the “TCJA”). The TCJA treated qualified improvement property (“QIP”) as nonresidential real property with a 39-year life for depreciation purposes. Section 168(e) (6) defined QIP as “any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.” Not only was this life unreasonably long, it prevented QIP from qualifying for 100% bonus depreciation.

For most taxpayers affected by correction of this error, the CARES Act opens the way to file amended returns for 2018 and 2019 claiming tax refunds. (See Rev. Proc. 202025 describing in detail amended returns and other options available for taxpayers for coming into conformity with the retroactive change.) For some, the amended returns might result in (or increase) net operating losses which can be carried back five years as provided elsewhere in the CARES Act. With some luck, resulting refunds might end up in taxpayers’ hands relatively promptly, helping provide needed liquidity in a difficult time.

But for partnerships and partners subject to the centralized audit regime, such quick relief was not possible. An AAR filed in 2020 reporting changes to a partnership return for 2018 would typically be reported in a partner’s 2020 return filed in 2021.

Realizing this, the IRS released Rev. Proc. 2020-23 exercising its authority under Section 6031(b) to permit partnerships to file amended returns for taxable years beginning in 2018 and 2019 “tak[ing] into account tax changes brought about by the CARES Act as well as any other tax attributes to which the partnership is entitled by law.” The IRS Summer 2020 | The Cooperative Accountant

stated: “Without the option to file amended returns, as granted in section 3 of this revenue procedure, BBA partnerships that already filed their Forms 1065 for the affected years generally are unable to take advantage of the CARES Act relief for partnerships except by filing Administrative Adjustment Requests (AARs) pursuant to section 6227. Filing an AAR would result in the partners’ only being able to receive any benefits from that relief on the current taxable year’s federal income tax return. Thus, if an AAR were filed, the partners generally would not be able to take advantage of CARES Act benefits from an AAR until they file their current year returns, which could be in 2021. This process would significantly delay the relief provided in the CARES Act intended to apply to the affected taxable years and provide an immediate benefit to taxpayers.”

Rev. Proc. 2020-23 does not require partnerships to file amended returns, and there may be some instances where amended returns might not make sense. Other options are outlined in Rev. Proc. 2020-25. Amended returns cannot be filed for taxable years beginning in 2019 if the return for that year is filed on or after April 8, 2020. Any amended returns must be filed before September 30, 2020.

Another of the relief provisions described

by Becky Smith in her article contains its own special approach for applying the provision to partnerships, namely the provision making changes to Section 163(j) applicable to taxable years beginning in 2019 and 2020 (note that taxable years beginning in 2018 are not included). Section 163(j) contains special rules under Section 163(j) limiting deduction for interest paid by partnerships which essentially silo each partnership and add significant complications for partners of partnerships. See, Section 163(j)(4).

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TAXFAX The Section 163(j) provisions of the CARES Act contain special rules for partnerships.

See, Section 163(j)(10)(A)(ii). For partnerships for taxable years beginning in 2019, the increase of the adjusted taxable income limitation from 30% to 50% will not apply, but 50% of any excess interest allocated to a partner with respect to that year will be treated as deductible business interest (not subject to the Section 163(j) limitation) in the partner’s first taxable year beginning in 2020. The remaining 50% of the 2019 excess business interest remains subject to Section 163(j). Partners are allowed to elect out of the special rule with respect to 2019, and partnerships are allowed to elect to use 2019 adjusted taxable income in 2020 and to elect out of using 50% (instead of 30%) for 2020.

How and when those elections are to be made is described in Rev. Proc. 2020-22.

Taxpayers have been waiting for final regulations implementing Section 163(j).

Earlier this year, Treasury/IRS indicated that it was likely they would be released by the end of March, and the regulations package cleared OMB/OIRA review, normally one of the last steps in the process. However, the coronavirus and the passage of the CARES Act have upset the process. As this article is being written (mid-April), it is not known when the final regulations will be issued. The package the Treasury/IRS was working on might be released with a caveat that it does not reflect the CARES Act changes. However, there is speculation that the Treasury/IRS may decide to revise the final package so that it incorporates the CARES Act changes, which could significantly delay the guidance.

It is hoped that the final regulations will authorize Subchapter T cooperatives to add back patronage dividends when they compute adjusted taxable income. The Treasury/IRS is given authority to do so pursuant to Section 163(j)(8)(B), but it must exercise that authority.

For many farmer cooperatives, the changes 28

made by the CARES Act to the treatment of Section 163(j) may be largely irrelevant.

Certain farmer cooperatives are given the option to elect out of Section 163(j)

by Section 163(j)(7)(C)(ii). While the scope and effect of the election are not clear in all instances (perhaps there will be more guidance in the final regulations), it is clear that the election has a price – cooperatives making the election must use the alternative depreciation system (“ADS”) for property with a recovery period of ten years or more.

See, Section 168(g)(1)(G). Given the impact of accelerated and 100% bonus depreciation on patronage dividends, many farmer cooperatives believe this is a small price to pay (particularly if their business is largely patronage) and have elected out of Section 163(j).

However, because of the CARES Act changes (including permitting taxpayers to carry 2018, 2019 and 2020 losses back five years), the IRS has decided to give taxpayers who were given the option of electing out of Section 163(j) (including cooperatives) an opportunity to change prior decisions to elect out or not. Rev. Proc. 2020-22 describes how and when changes can be made.

Whether or not it makes sense to change a prior election with respect to Section 163(j) depends upon an analysis of the facts and circumstances in each case. Changing a prior election may very well not be beneficial in most cases for cooperatives, but each cooperative will need to evaluate its own situation. Cooperatives should note that they still are potentially affected by the change in treatment of QUIP, even if they have a Section 163(j) election in effect, because the CARES Act reduced the ADS life of QUIP to twenty years.

Note that the CARES Act changes described above are federal changes. Not all states are following the changes made by the CARES Act adding further complications to any analysis.

Summer 2020 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM

Thanks to NRECA for giving us permission to reprint from their July 2017 edition of the NRECA Legal Reporting Service (LRS) Fraud, misappropriation, embezzlement, and internal fraud are all terms used synonymously in situations involving the perpetration of theft from a company by its own employees. In contrast with external fraud such as identity theft or cyber- attack, internal fraud is intensely personal because it is committed by your own people; people you know, work with, and trust. This personal factor is validated by investigative experience which indicates that 95 percent of all frauds investigated are committed by people who have found themselves in a situation of severe external financial pressure, and who work in a position in their cooperative with little to no internal controls or anti-fraud measures.

A change in mindset about the type of individual who is likely to commit fraud is necessary to understand what cooperative boards and management should consider with respect to their responsibility to develop an anti-fraud program sufficient for the size and complexity of their operations.

Summer 2020 | The Cooperative Accountant

TAXFAX

EDITOR Barbara A. Wech, Ph.D. Department of Management, Information Systems, and Quantitative Methods University of Alabama at Birmingham Collat School of Business bawech@uab.edu GUEST WRITER Steve Dawson CPA, CFE Dawson Forensic Analytics, PLLC d/b/a DAWSON FORENSIC GROUP P.O. Box 54462 Lubbock, Texas 79453 Office: 806-368-5779 Mobile: 806-239-7865 dawsonforensicgroup.com

WHY THE NEED?

Russell was the purchasing agent for his cooperative. After working his way up from a part time warehouse and yard clerk to the primary materials purchasing agent for the cooperative, Russell was staring directly into the face of the last five years of his 35-year career. Concerned whether he had “enough� put away for retirement, he decided to put a little extra away, at the expense of the cooperative he had served so faithfully. To obtain these extra funds, Russell devised a simple, yet effective and lucrative plan referred to as shell company fraud. He created a separate company, 29

TCA SMALL BUSINESS FORUM opened a separate bank account, subscribed to a mail drop service, and obtained an endorsement stamp for his new company.

He then created fictitious invoices from his new company to the cooperative for alleged transformer purchases. Once paid by the cooperative, the check would be mailed to the mail drop location, the mail drop service would send the check to Larry who endorsed it with the signature stamp, and the check was then deposited into his new company bank account. Approximately $3.8 million later, Russell had enough to satisfy his future retirement fund concerns. Unfortunately for Russell, his ultimate retirement housing would be the state prison instead.

Angie served as the chief accountant for her cooperative. To help make ends meet in her busy life with four children and a husband, Angie needed periodic cash flow boosts. She accomplished these boosts by purchasing kitchen goods, water, gift cards for various needs, and yes, even toilet paper, through the cooperative office supply credit account. Angie was responsible for preparing the supporting documentation along with the check for signature by the overloaded chief financial officer. Why the office supply account? Because in the control requirement to review the supporting documentation prior to signing the check, the cooperative office supply account is least likely to be “reviewed” thoroughly. After all, every company needs office supplies. Angie averaged an annual cash flow boost of$25,000 over an approximate six-year period.

As the long-term accountant for her cooperative, Sheila managed to register her personal credit card account to be paid with the cooperative bank account.

Through the easy “pay your bill online” option and the paperless statement delivery option, this fraud was simple to conceal since no statements were ever mailed to the cooperative and no checks ever had to be 30

written. Over a three-year period, Sheila increased her personal cash flow by over $400,000.

These examples serve to illustrate that internal fraud is real, it is happening now, and it does not have to be particularly complex.

What can be done to address this increasing trend; what should be done; and what is the role of the board and management at an electric cooperative to address the issue?

The first step in answering these questions is to recognize that as a board, as part of your fiduciary duty and oversight responsibilities, you have a responsibility to safeguard the assets of the cooperative, which may include establishing an anti-fraud program. The reality that often people commit fraud when hard-pressed cannot be ignored. Once you have adopted this mindset, you can get down to the business of establishing an anti-fraud program.

Additionally, it is also important to understand that your external auditors are not a substitute for an anti-fraud policy and program. Independent financial audits are not a substitute for internal policies, procedures, and controls.

ANTI-FRAUD PROGRAM DESIGN A framework for establishing an antifraud program, based upon other antifraud programs, is presented as a six-step design process as follows: (1) Anti-Fraud Environment; (2) Fraud Risk Assessment; (3) Control Activities Design and Implementation; (4) Program Documentation; (5) Program Training – Fraud Awareness Training; and (6) Compliance Monitoring and Routine Maintenance. Before panic sets in, the first, and only the first, element of the framework, the anti- fraud environment, involves the board. The remaining elements fall to executive management, middle management, and to the workforce to insure the effective administration of and compliance with the established program.

Summer 2020 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM

THE ANTI-FRAUD ENVIRONMENT The anti-fraud environment includes those actions to be performed by the board to direct that an anti-fraud program be established. This element includes the necessary and often referenced establishment of the “tone-at-the-top.” As the board directs that the cooperative address issues of suspected internal fraud and that this fraud will be dealt with accordingly, the entire workforce begins to understand that the issue is real. Included with any and all internal controls that a cooperative may establish, “increasing the perception of detection” is number one. The board directing the establishment of a proper anti-fraud program is the primary procedure that begins the process of increasing the perception of detection. Once this is accomplished, there is more work to be done.

ANTI-FRAUD POLICIES The adoption of policies is one of the many important functions of a board. As relates to the anti-fraud environment, certain policies must serve as the foundation for an anti-fraud Summer 2020 | The Cooperative Accountant

program. Specifically, these policies include a fraud policy and a fraud reporting policy.

Some cooperative’s combine these into one policy. The specific wording and necessary provisions of these policies are beyond the scope of this article. As such, this information provides an understanding of the concepts of these policies.

The Fraud Policy. The fraud policy tells an employee that it is wrong to steal. In two circumstances in my career, we have polled the jury to ask why they rendered a notguilty verdict on a seemingly simple openand-shut case. In both of these situations they responded with the statement that “the company never told them it was wrong to steal.” As such, along with other provisions, the primary purpose of the fraud policy is to inform each employee that it is wrong to steal. Ideally, this type of policy is reviewed annually and revised if necessary.

Similarly, ideally, and as part of the element of program training, the policy is reviewed at least annually with the workforce and the acknowledgement signature of each employee obtained.

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TCA SMALL BUSINESS FORUM The Fraud Reporting Policy. The fraud reporting policy (sometimes referred to as a “whistleblower policy”) establishes a process whereby employees may anonymously report suspicions of fraud. When fraud is occurring in an organization, sometimes one or more people in the organization know, or at least suspect, that it is happening. There have been numerous situations where an employee or employees suspected that fraud was occurring, yet they had no avenue of release to report these suspicions. This individual pressure has led to situations where the once model employee begins to loathe their job, loathes the thought of waking up each morning to do their job, and progresses to the point of ineffectiveness in doing their job. A board can help ensure that the cooperative’s workforce is not put in this position by adopting a fraud reporting policy that includes the release necessary to avoid this type of feeling. Again, the specific provisions, including a whistleblower protection section, are beyond the scope of this article. The conceptual understanding that you must provide an avenue of reporting for your employees is the focus.

Based on the size and complexity of operations, the fraud reporting mechanism may be accomplished through outside “tip hotline” companies, or administered internally.

OTHER CONSIDERATIONS OF THE ANTI-FRAUD ENVIRONMENT Once these two foundational policies are adopted, consideration should be given to requiring the following for an anti-fraud environment to be implemented: Organizational Chart. We continue to encounter situations where cooperative employees really do not know or understand who they report to or who reports to them.

This does nothing but to serve to frustrate the workforce, sometimes to the point of 32

providing rationalization to commit fraud against the cooperative. The organizational chart provides a clear picture in response to these potential sources of frustration.

Formal Written Job Descriptions. As a companion to the Organizational Chart, formal written job descriptions provide each employee with a representation of what their job duties really are. Job descriptions create accountability and clear authority for job responsibilities, like procurement and check signing.

Pre-employment Background Checks. We continue to encounter those perpetrators who are continuing their life of crime with each new employer. The requirement to perform a pre-employment background check would have saved these cooperatives money in immeasurable amounts; a point most often understood after the fact.

Annual Employee Evaluations. Most employees want to know how they are doing. A fraud-free workforce often includes employees that care about their job functions and that want feedback regarding their performance.

Receiving feedback – whether positive or negative – often decreases workforce frustration levels and the rationalization to commit fraud. Evaluating individual employees on at least an annual basis should be considered.

Payroll Advance / Employee Loan / Financial Counseling Programs. A severe external financial pressure on an individual can serve as the impetus to commit fraud.

With feelings that there is nowhere to turn or that it cannot be shared with anyone, the employee feels trapped between the proverbial “rock and a hard place.”

The existence of somewhere to turn often relieves the pressure and provides Summer 2020 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM program design, the more ownership they feel, and the less likely they will be to steal from themselves.

Fraud is happening, fraud is real, and we must adopt the mindset that even your good people may push themselves to the brink Employee Dishonesty Insurance Coverage/ of committing fraud. While you obviously hope that nothing like this will ever happen Fidelity Bond Coverage. It is often said in your cooperative, the statistics reveal that that locks keep out the honest people. This “hope” is not enough to prevent fraud. The concept applies to fraud prevention as well. establishment of an anti-fraud program is Even with the most efficient and effective proactive rather than reactive, which in turn anti- fraud program in place, fraud saves time, money, and a stellar may still occur. The design and reputation. It all starts with the existence of the program environment, which starts serves to reduce the with the board. probabilities of fraud, A sample fraud Fraud is happening, yet no single program policy and a sample fraud is real, and we must can prevent all fraud. fraud reporting policy Remember, fraud adopt the mindset that even as referenced in this can be committed by article are available by your good people may push anyone. Thus, when request. These policies themselves to the brink of all else fails, the board provide the outline of and management committing fraud. the necessary provisions should consider that of each and should be potential losses are tailored to the specific covered through the proper needs of the cooperative, in type of insurance. However, do conjunction with the input, review, not rely on this to avoid establishing and approval of the cooperative’s legal an anti-fraud program. The additional costs counsel. For questions, or to obtain a copy of investigation, legal fees, and insurance of the sample policies, please email Steve deductibles can leave the cooperative with Dawson. has helped electric cooperatives an unrecoverable loss. It is best to attempt to with internal fraud matters, including prevent the loss up-front with a functioning auditing, litigation support, internal control anti-fraud program. design, and similar issues.

These considerations represent the role of the board and management in internal fraud Hypotheticals are based on real events prevention. It is important that executive investigated by the Dawson Forensic Group. management understands this role and works in conjunction with the board to see that their Information about the author: directives are implemented. The remaining Steve Dawson CPA, CFE is: five elements of an anti-fraud program are

to be designed and implemented with the Author of: Internal Control / Anti-Fraud input of all levels of the workforce. After all, Program Design for the Small Business the more employees feel they are part of the Available through Wiley Publishing the employee with an option other than to commit fraud. The payroll advance / employee loan / financial counseling program availability provides this other avenue to travel.

Summer 2020 | The Cooperative Accountant

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Internal Controls To Prevent & Detect Fraud

By Bill Erlenbush, CPA, NSAC Director of Education Published on January 29, 2016 The NSAC Connect, our new online community platform, will soon house all of the information that is currently located in the members only section of the website. Another feature of our website is the Best Practices. To explore the Best Practices, visit the Benefits tab on the website home page and click on the heading: Best Practices. Here you will find great content, information and helpful tips. In a time where many members find themselves wearing additional “hats” the Best Practices section of the NSAC website, might be your best resource and friend. The article below is a re-post of a Best Practices listing.

A recent “KPMG Fraud Survey” found that organizations are reporting more experiences of fraud than in prior years and that three out of four organizations have uncovered fraud. Below are some internal control “Best Practices” that can reduce fraud opportunities or help detect fraud.

1.Use a system of checks and balances to ensure no one person has control over all parts of a financial transaction. ● Require purchases, payroll, and disbursements to be authorized by an appropriate designated person. ● Separate handling (receipt and deposit) functions from record keeping functions (recording transactions and reconciling accounts). ● Separate purchasing functions from payables functions. ● Ensure that the same person isn’t authorized to write and sign a check. ● When opening mail, endorse or stamp checks “For Deposit Only” and list checks on a log before turning them over to the person responsible for depositing receipts. Periodically reconcile the incoming check log against deposits. If possible use a lock box deposit system so that checks are sent directly to the bank and deposited. ● Require supervisors to approve employees’ time sheets before payroll is prepared. ● Require paychecks to be distributed by a person other than the one authorizing or recording payroll transactions or preparing payroll checks.

Where possible, require direct deposit of payroll checks to the employees’ bank accounts. ● If the company is so small that you can’t separate duties, require an independent check of work being done. ● Require accounting department employees to take vacations.

10. Reconcile bank accounts every month.

Require the reconciliation to be completed by

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an independent person who doesn’t have direct bookkeeping responsibilities for the accounts or check signing responsibilities or require supervisory review of the reconciliation.

Examine canceled checks to make sure vendors are recognized, expenditures are related to company business, signatures are by authorized signers, and endorsements are appropriate.

Examine bank statements and cancelled checks to make sure checks are not issued out of sequence.

Initial and date the bank statements or reconciliation report to document that a review and reconciliation was performed and file the bank statements and reconciliations.

5. Restrict use of company credit cards and verify all charges made to credit cards or accounts to ensure they were business-related. ● Limit the number of company credit cards and users. ● Establish a policy that credit cards are for business use only; prohibit use of cards for personal purposes with subsequent reimbursement. ● Set account limits with credit card companies or vendors. ● Inform employees of appropriate use of the cards and purchases that are not allowed. ● Require employees to submit itemized, original receipts for all purchases. ● Examine credit card statements and corresponding receipts each month, independently, to determine whether charges are appropriate and related to company business.

7. Prepare all fiscal policies and procedures in writing and obtain Board of Directors approval.

Include policies and/or procedures for the following: ● cash disbursements ● attendance and leave ● expense and travel reimbursements Summer 2020 | The Cooperative Accountant

INTERNAL CONTROLS TO PREVENT & DETECT FRAUD ● ● ● ●

use of company assets purchasing guidelines petty cash conflicts of interest

8. Ensure that company assets such as vehicles, cell phones, equipment, and other company resources are used only for official business. ● Examine expense reports, credit card charges, and telephone bills periodically to determine whether charges are appropriate and related to company business. ● Maintain vehicle logs, listing the dates, times, mileage or odometer readings, purpose of the trip, and name of the employee using the vehicle. ● Periodically review the logs to determine whether usage is appropriate and related to company business. ● Maintain an equipment list and periodically complete an equipment inventory.

5. Protect petty cash funds and other cash funds.

Limit access to petty cash funds. Keep funds in a locked box or drawer and restrict the number of employees who have access to the key. ● Require receipts for all petty cash disbursements with the date, amount received, purpose or use for the funds, and name of the employee receiving the funds listed on the receipt. ● Reconcile the petty cash fund before replenishing it. ● Limit the petty cash replenishment amount to a total that will require replenishment at least monthly. ● Keep patient funds separate from petty cash funds. ●

6. Protect checks against fraudulent use.

Prohibit writing checks payable to cash.

Deface and retain voided checks.

Store blank checks in a locked drawer or cabinet, and limit access to the checks. ● Require that checks are to be signed only when all required information is entered on them and the documents to support them (invoices, approval) are attached. If using facsimile or stamped signatures, secure the signature plates or stamp. ● Require two signatures on checks above a specified limit. (Ensure that blank checks are not pre-signed.) ● Mark invoices “Paid” with the check number when checks are issued. ● ● ●

Summer 2020 | The Cooperative Accountant

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Enable hidden flags or audit trails on accounting software.

8. Protect cash and check collections.

Ensure that all cash and checks received are promptly recorded and deposited in the form originally received. ● Issue receipts for cash, using a pre-numbered receipt book. ● Conduct unannounced cash counts. ● Reconcile cash receipts daily with appropriate documentation (cash reports, receipt books, mail tabulations, etc.) ● Centralize cash receipts whenever possible. ●

6. Avoid or discourage related party transactions.

Require that a written conflict of interest and code of ethics policy is in place and that it is updated annually. ● Require that related party transactions be disclosed to the appropriate management or the Board of Directors. ● Require competitive bidding for major purchases and contracts. ● Discourage the hiring of relatives of Board members and employees, where possible. If not possible, do not let family members supervise each other. ●

5. Provide for Board of Directors oversight of company operations and management. ● Monitor the company’s financial activity on a regular basis, comparing actual to budgeted revenues and expenses and report to the Board of Directors. ● Provide to the Board explanations of any significant variations from budgeted amounts. ● Document approval of financial procedures and policies and major expenditures in the board meeting minutes. ● Require independent auditors to present and explain the annual financial statements to the Board of Directors and to provide management letters to the Board. ● Evaluate the Manager’s performance annually against a written job description. ● Participate in the hiring/approval to hire consultants including the independent auditors.

DISCLAIMER FOR NSAC BEST PRACTICES The NSAC Best Practices are developed from accounting literature, Internet articles, and from personal experiences and are intended to be instructive and illustrative in nature and should not be considered all inclusive, nor a guarantee. If utilized individual results may vary.

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136 Keowee Street Dayton, Ohio 45402 Phone: (937) 222-6707 Fax: (937) 222-5794 www.nsac.coop

This two-day virtual program offers proven strategies, tools and resources to help your co-op increase efficiencies, improve financial controls, streamline regulatory compliance and make transactions manageable. All registrants will have access to the virtual conference and recordings of all offered sessions.

www.nsac.coop

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Summer 2020 | The Cooperative Accountant