Download Leadership: Nurturing Opportunity and Vision

FA L L 2 0 0 8
horizons
A
Publication
by
RubinBrown
LLP
Leadership: Nurturing Opportunity and Vision
INSIDE
SETTING THE TONE FOR CHANGE
41280.indd COVERI
LEADERSHIP FROM AN INTERNATIONAL PERSPECTIVE Page 9
LEADING THROUGH CHANGE: FRONT-LINE LESSONS Page 13
MODIFYING YOUR LEADERSHIP APPROACH TO EFFECT CHANGE Page 19
LEADING THE FIGHT AGAINST HOMELESSNESS Page 23
AND MORE
9/4/08 9:40:18 PM
horizons
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
CONTENTS
ii
Welcome
1-4
RubinBrown New Hires & Promotions
5-6
Announcements
7-8
For Your Money
9-10
International News: Baker Tilly International
11-12
General Topics: Leadership In A Changing World
13-15
General Topics: Leading Through Change
17-18
General Topics: RubinBrown LEAD Program
19-22
Guest Feature: Modifying Your Leadership
Approach To Effect Change
23-26
Guest Article: Dan Buck, CEO, St. Patrick Center
27-30
Client Spotlight: The Sound Room
l
INDUSTRY NEWS
31-32
CONTRACTORS
33-34
HOME BUILDERS
35-36
HOSPITALITY AND GAMING
37-38
MANUFACTURING AND DISTRIBUTION
39-41
NOT-FOR-PROFIT
43-45
PUBLIC SECTOR
47-48
REAL ESTATE
INFORMATION
Editor: Tim Shannon
Graphic Design: Hughes
Communications Specialist: Michelle Ward
Horizons, a publication of RubinBrown LLP, is designed to provide general information regarding the subject matters
covered. Although prepared by professionals, its contents should not be construed as the rendering of advice regarding
specific situations. If accounting, legal or other expert assistance is needed, consult with your professional business advisor.
Please call RubinBrown with any questions.
Located in St. Louis and Kansas City, RubinBrown has become one of the largest accounting and business consulting firms in
the Midwest.
www.rubinbrown.com
41280.indd Sec2:i
9/4/08 9:40:32 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
John F. Herber Jr., CPA
Managing Partner
Welcome
Leadership. Many times this word is reserved for veteran business
owners, managers and entrepreneurs. We feel true leadership
is something that can and should be displayed at all levels
within an organization. As business owners, we are challenged
with defining the future of our organization. We must position
ourselves to remain competitive and successful. As a result, it is
our responsibility to make certain our future leaders are prepared
for the responsibilities that lie ahead.
At RubinBrown we recognize the immediate need for genuine
leaders. We devote time and resources to cultivating team
members who display the desire and natural abilities to provide
direction and guidance for our business community. We also
encourage our team members to give of themselves and use their
leadership skills to help build and grow our communities.
In this issue, we look into how valuable leadership can be to
any organization. Dan Buck shares his passion for empowering
individuals and leading one of St. Louis’ largest charitable
institutions. We learn from David Young, founder of The Sound
Room, the importance of being on the leading edge of innovation
and superior customer service. And finally, Ken Harrington shares
his views on a leader’s role in effecting change.
St. Louis office
RubinBrown
One North Brentwood
St. Louis, MO 63105
Kansas City office
10975 Grandview Drive
Suite 600
Overland Park, KS 66210
41280.indd Sec2:ii
I invite you to read this publication and offer us your feedback.
Our goal, as with everything we do, is to have totally satisfied
team members and clients. We hope to hear from you –
[email protected].
Pleasant reading.
9/4/08 9:40:37 PM
RubinBrown New Hires & Promotions
NEW PARTNERS
Daniel Raskas joined RubinBrown as a
partner to lead an expansion of RubinBrown’s
business and technology consulting services.
Raskas focuses on transaction consulting,
including due diligence and post-merger
integration, business performance analysis
and management consulting. He also
oversees strategic planning and business process
improvement in operations and information technology.
Raskas brings more than 20 years of business and
technology consulting experience, most recently serving
as president of DBR Consulting. He also helped found and
served as executive vice president of consulting services
at Hitachi Consulting and was a principal at Grant Thornton.
Raskas serves as vice president of the board of trustees
and on multiple committees for the United Hebrew
Congregation. He also serves on the regional council
board for the Union for Reform Judaism. He holds a
bachelor’s degree in computer information systems from
Drake University.
PROMOTED TO PARTNER
Chelle F. Adams, CPA, was promoted to partner
in the Internal Audit Services Group. With her
expertise in the gaming industry, she oversees
adjusted gross receipts audits and operational
audits,
including
currency
transaction
reporting, slot data systems and related
construction projects for casino clients. Adams
concentrates her efforts on Sarbanes-Oxley compliance, risk
assessments, business process improvements, franchise
royalty audits and internal audit special projects. Adams
has more than 13 years of experience in the accounting
industry. Prior to joining RubinBrown in 2003, she gained
extensive experience in the internal audit field with a focus
on gaming at Deloitte & Touche LLP. Adams is a member
of the American Institute of Certified Public Accountants and
the Institute of Internal Auditors. Adams holds a bachelor’s
degree in accounting from Truman State University.
Eugene C. Hendrickson, CMI, was promoted
to partner in the State and Local Tax
Services Group. With more than 30 years of
experience in property taxation, Hendrickson
has worked within private industry and as a
consultant to property owners. During his
career, he has represented property owners
and businesses before taxing officials and review boards
in more than 20 states. Hendrickson specializes in property
tax consulting, state and local tax, tax incentives and tax
planning. Prior to joining RubinBrown in 2005, he served as
a senior manager in the property tax consulting practice of
PricewaterhouseCoopers in St. Louis. He also has worked
for KPMG, Arthur Andersen, McDonnell Douglas Corp. and
Ex-Cell-O Corp. Hendrickson holds a bachelor’s degree in
accounting from Central Michigan University. He is a Certified
Member of the Institute for Professionals in Taxation and
is a member of the Associated Industries of Missouri’s Tax
Committee. Hendrickson is a licensed Property Tax Agent in
Arizona and Tennessee. He also is a former member of the
board of directors for the Francis Howell School District and
Saints Joachim & Ann School Board.
Jay E. Power, CPA, has been promoted
to partner in the Tax Consulting Services
Group. Power has 18 years of tax accounting
experience, specializing in tax return
preparation and tax planning. He serves
clients in the contracting, home building,
manufacturing and distribution, and notfor-profit sectors. Power joined RubinBrown in 2006 as
a manager in the Tax Consulting Services Group. Prior to
joining RubinBrown, Power served as a tax director for
Employers Reinsurance Corp., headquartered in Overland
Park, Kan. He is a member of the American Institute of
Certified Public Accountants and the Missouri Society of
Certified Public Accountants. Power holds a bachelor’s
degree in accounting from Kansas State University.
Scott M. Quinn, CPA/PFS, has been
promoted to partner in the Tax Consulting and
Wealth Management Services Groups. Quinn
provides financial planning, tax compliance
and consulting, and estate planning services,
specializing in high net worth individuals,
corporate executives and professional
athletes. Quinn has more than 18 years of experience in
the industry, having been employed as a senior manager
at KPMG Peat Marwick and a senior analyst at Laclede Gas
Co. prior to joining RubinBrown in 2002. Quinn is a member
of the American Institute of Certified Public Accountants
and the Missouri Society of Certified Public Accountants. He
also is licensed as an investment advisor representative by
the National Association of Securities Dealers and certified
as a personal finance specialist by the AICPA. Quinn
holds a master’s degree in accounting from the University
of Missouri-St. Louis and a bachelor’s degree in business
administration from the University of Missouri-Columbia.
1 ◆ fall 2008 issue
41280.indd Sec1:1
9/4/08 9:40:39 PM
knowledge. commitment. value.
NEW MANAGERS
Richard G. Heinrichs Jr., CTFA, joined
RubinBrown as a manager in its Tax
Consulting Services Group and services
clients in the firm’s Wealth Management
Group. He is responsible for overall client
relationships, which includes developing
investment objectives, analyzing performance
of investments and recommending actions as appropriate.
He also is responsible for new client development. Prior
to joining RubinBrown, Heinrichs worked at several other
firms, including AG Edwards Trust Co., where he served
as an associate vice president and handled the portfolio
management for the company’s founding family. He is
a member of American Bankers Association Institute
of Certified Bankers and North American Securities
Administrators Association. Heinrichs holds a bachelor’s
degree in business administration from Rockhurst
University in Kansas City.
Ted Williamson, CPA, joined RubinBrown
as a manager in its Assurance Services
Group. He manages financial statement
audit and A-133 single audit engagements
for RubinBrown, specializing in not-for-profit
organizations, city and county governments,
and colleges and universities. His duties
include audit, plan audits, risk-based audit planning and
tax return preparation. Prior to this position, Williamson
served as a senior manager for a national accounting firm,
managing a variety of audit engagements for not-for-profits,
city and county governments, colleges and universities
and publicly traded companies. He is a member of the
American Institute of Certified Public Accountants, the
Missouri Society of Certified Public Accountants and the
Government Finance Officers Association. Williamson also
serves as a deacon at Riverside Church. Williamson holds a
bachelor’s degree in accounting and political science from
William Jewell College.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
PROMOTED TO MANAGER
Sarah Colombo Casey, CPA, was promoted
to manager in the Tax Consulting Services
Group. Based in the Kansas City office,
she provides services to a variety of clients,
specifically in the areas of return preparation
and tax planning for contractors, home
builders and law firms. Casey is a member of
the Missouri Society of Certified Public Accountants and the
American Institute of Certified Public Accountants. She also
serves as treasurer for St. John’s United Methodist Church.
Casey holds a bachelor’s degree in accounting from the
University of Missouri-Kansas City.
Greg Herbster was promoted to manager
in the Internal Audit Services Group. He
performs operational and financial internal
audits, risk management and business
process re-engineering. Herbster also serves
in a leadership role within the Manufacturing
and Distribution Services Group, with
expertise in inventory management and lean manufacturing.
He has more than 12 years of accounting and consulting
experience, most recently serving as a senior business
analyst for GKN Aerospace and senior consultant for
Deloitte & Touche LLP. Herbster holds a master’s degree
in strategy and finance from Washington University’s Olin
School of Business in St. Louis, along with a bachelor’s
degree in finance and economics from Spring Hill College
in Mobile, Ala.
Christine Kahle, CPA, was promoted to
manager in the Assurance Services Group. In
this role, Kahle provides audit and attestation
services, specializing in the areas of real
estate, architecture and mortgage banking.
She also provides plan audit services to a
variety of clients. Kahle joined the Assurance
Services Group at RubinBrown in 2003 upon her completion
of graduate school. Kahle is a member of the Missouri
Society of Certified Public Accountants as well as the
American Institute of Certified Public Accountants. She
also participated in the Baker Tilly International Exchange
Program in 2006, working for an affiliated member firm in
London to gain an international perspective. Kahle holds
both master’s and bachelor’s degrees in accounting from
the University of Missouri-St. Louis.
2 ◆ fall 2008 issue
41280.indd Sec1:2
9/4/08 9:41:07 PM
NEW MANAGERS (cont.)
Chester Moyer, CPA, was promoted to
manager in the Assurance Services Group.
As a manager in the Kansas City office,
Moyer provides audit and attestation
services, specializing in the manufacturing
and distribution, home building and public
sectors. Moyer is a member of the American
Institute of Certified Public Accountants and the Missouri
Society of Certified Public Accountants. He has served
as an adjunct instructor of accounting at the University of
Missouri-Columbia and Rockhurst University. Moyer holds
master’s and bachelor’s degrees in accountancy from the
University of Missouri-Columbia.
Mark Paradis, CPA, has been promoted to
manager in the Plan Audit Group. In this role,
Paradis is responsible for audit, employee
benefit and qualified plan services. He has
more than 13 years of experience and is
a member of both the American Institute of
Certified Public Accountants and the Missouri
Society of Certified Public Accountants. Paradis previously
was a manager at MetLife and worked as a consultant for
JeffersonWells International as a consultant. He also held
a position in the Missouri State Auditors Office in Jefferson
City. Paradis holds a bachelor’s degree in accounting from
the University of Missouri-Columbia.
Jeff Sparks, CPA, was promoted to manager
in the Assurance Services Group. In this role,
Sparks serves mid-size public and privately
held organizations, specializing in the
technology, distribution and manufacturing
industries. Sparks works in audit, accounting,
income tax and SEC reporting matters. He
is a member of the Missouri Society of Certified Public
Accountants and the American Institute of Certified
Public Accountants. Sparks participated in the Baker
Tilly International Exchange Program in 2006, working
for Staples Rodway in Auckland, New Zealand. Sparks
holds a master’s degree in accountancy and a bachelor’s
degree in accountancy with a minor in decision sciences
from Miami University in Oxford, Ohio. He is involved with
the Jewish Federation of St. Louis, sitting on the Israel &
Overseas Allocation Subcommittee and serving as a
member of the Montefiore Society and as vice president
within the Young Professionals Division.
Jessica Ricke, CPA, was promoted to
manager in the Assurance Services Group.
Ricke specializes in assurance services
for media and entertainment clients and
contractors, as well as providing assurance
and operational review services for home
builders. Ricke is a member of the American
Institute of Certified Public Accountants and the Missouri
Society of Certified Public Accountants. She also is actively
involved in the Home Builders Association and Volunteer
Lawyers & Accountants for the Arts. Prior to starting at
RubinBrown in 2005, Ricke was a financial analyst at
American Water Co. She holds a bachelor’s degree in
accounting, business administration and management
information systems from Westminster College in Fulton, Mo.
3 ◆ fall 2008 issue
41280.indd Sec1:3
9/4/08 9:41:14 PM
OTHER NEW HIRES
AND PROMOTIONS
Jennifer Jones, CPA, joined RubinBrown
as controller. She provides leadership and
coordination of the firm’s internal financial
accounting and reporting. Jones brings more
than 15 years of experience to RubinBrown,
having previously served as division controller
for Compass Group’s Canteen Vending Sector
and as controller for the Flex-O-Lite Division of Jackson
Products. Prior roles include controller for Bellerive Country
Club and senior accountant at PricewaterhouseCoopers.
Jones serves on the finance committee and board of
directors of Gateway Homeless Services and on the
Christian Education Committee and Youth Ministry Team of
First Congressional Church of Webster Groves. She holds
a bachelor’s degree in accounting from the University of
Missouri-Columbia.
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
Tim Shannon was named director of
marketing and client relations at RubinBrown.
Shannon oversees marketing, client relations,
practice development and public relations
activities for the firm and its affiliates. Prior to
this position, Shannon served as a marketing
specialist with the firm. Before joining
RubinBrown, he worked as a market representative for the
May Merchandising Co. and as regional sales and marketing
manager for the Schwan Food Co. Shannon is chair of the
Baker Tilly North America Communications Subcommittee,
a member of the Association for Accounting Marketing,
and serves on the east Missouri chapter and Missouri state
boards of Bikers Against Child Abuse. He holds a bachelor’s
degree in English literature and a master’s degree in
marketing from Lindenwood University.
Awards
James G. Castellano, CPA, chairman of
the board of RubinBrown LLP and chairman
of Baker Tilly International Ltd., was named
to the St. Louis Business Journal’s list of
Most Influential St. Louisans. Featured in the
Feb. 28, 2008, issue of the St. Louis Business
Journal, Castellano was recognized among
area business leaders and decision-makers. He also served
as chairman of the board of directors of the American
Institute of Certified Public Accountants in 2002.
Todd Pleimann, CPA, managing partner of
RubinBrown’s Kansas City office, was named
to Ingram’s 40 Under 40 Class of 2008. The
honorees were featured in the April 2008
issue of Ingram’s. Pleimann has held several
leadership roles since joining RubinBrown,
including serving as a career development
coordinator and mentor and as a key developer of RubinBrown
University. The program now includes more than 150
continuing education courses offered to all team members.
4 ◆ fall 2008 issue
41280.indd Sec1:4
9/4/08 9:41:20 PM
ANNOUNCEMENTS
RubinBrown
Expands
Service Groups
Over the past six months, RubinBrown has greatly
expanded and enhanced its services in three major
areas. The firm launched the St. Louis area’s first Media
and Entertainment Services Group, formed a Professional
Services Group, and expanded the Hospitality Services
Group to include gaming.
“We’re proud to have longtime expertise in each of these
areas,” said John F. Herber Jr., CPA, managing partner.
“The media and entertainment and gaming industries
represent rapidly growing segments of the market, and
professional services firms are key players in so many
industries. Our partners and team members have the
experience and knowledge to guide their businesses’
growth and profitability.”
Media and Entertainment
Services Group
Headed by Lawrence E. Rubin, CPA, the Media
and Entertainment Services Group offers traditional
accounting, auditing, tax and consulting, as well as
wealth management, assurance and litigation support
services.
“RubinBrown has been working in this area for 50plus years, and the growth has been explosive in the
last three to five years,” explained Rubin. “St. Louis is
home to several nationally known entertainers, authors,
broadcasters, athletes and sports agents, plus we
represent broadcast and cable groups across the
country. We have approximately 15 team members
working in this area now, so we wanted to formalize our
focus on the media and entertainment industries.”
Lawrence E. Rubin, CPA, Partner-in-Charge,
Media and Entertainment Services Group
5 ◆ fall 2008 issue
41280.indd Sec1:5
9/4/08 9:41:45 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
Rubin added that he’s enjoyed working with the new
category of clients because the work is always interesting
and challenging. Among the firm’s clients are entertainer
Nelly, basketball great Larry Hughes and The Pageant,
just to name a few.
“The gaming industry is growing in Missouri and other
states,” said Mather. “There are numerous new casino
developments in St. Louis and Kansas City, as well as
other areas of the state. We have the experts on staff to
provide excellent service in this industry.”
Professional Services Group
There are more than 10 accountants currently assigned
to the group, including partner Chelle F. Adams, CPA,
who joined Rubin Brown five years ago with extensive
gaming experience, both with commercial and tribalowned casinos. With this expertise and a presence in
both St. Louis and Kansas City, RubinBrown is wellpositioned to be a key player in the gaming industry.
RubinBrown already has more than 300 clients in
professional services, which encompass a wide range
of companies. Clients include architects and engineers;
law firms; physician and other health care practices;
advertising agencies and public relations firms;
insurance agencies; investment advisors; management,
marketing, technology and other consultants; interior
designers; staffing firms and travel agencies.
“We previously had specific groups for some of these
industries,” explained Kenneth L. Rubin, CPA, partnerin-charge of the new group. “However, we discovered
that these organizations deal with many of the same
practice management issues, such as controlling costs
by engagement and billing issues, as well as succession
planning. Many tax issues, including accounting methods
and compensation-related issues, are also comparable.
These similarities should provide insight across all
professional services firms.”
Including Rubin, the Professional Services Group includes
five partners – Don Esstman, CPA, Mark Jansen, CPA,
Theresa Lynch Ruzicka, CPA, and Ed Warren, CPA,
CFP. Supported by a team of experienced managers,
the group is well-trained in the accounting and tax
requirements for service firms in specific industries.
Entrepreneurial Services Group
Looking for the Small Business Group? We’ve renamed
it the Entrepreneurial Services Group to reflect its focus
on both small and mid-size companies. Theresa Lynch
Ruzicka is the partner-in-charge of the group. The
Entrepreneurial Services Group provides accounting,
tax and business advisory services to emerging and
established businesses.
“The media and
entertainment and gaming
industries represent
rapidly growing segments
Hospitality and Gaming Services Group
The newly expanded Hospitality and Gaming Services
Group now offers a specialization in casinos and gaming
enterprises. Jim Mather, CPA, continues as partner-incharge of the group, which also serves hotels, restaurants,
golf courses, private clubs, retailers, resorts, movie
theaters, convenience stores and franchise operations.
of the market, and
professional services
firms are key players
in so many industries.”
6 ◆ fall 2008 issue
41280.indd Sec1:6
9/4/08 9:41:52 PM
FOR YOUR MONEY
The Importance
of Portfolio
Rebalancing
By Mike Ferman, CPA
The recent volatility in the equity markets presents a
good opportunity to review your portfolio as it pertains
to your original goals and objectives. It is likely that your
portfolio is now over or under-weighted in the various
asset classes originally selected, which could change
your risk/return profile.
When establishing your initial asset allocation strategy,
you most likely went through a detailed discovery process
with your advisor to identify your goals, objectives and
investment time horizon; assess your risk tolerance;
and evaluate your financial condition and tax situation.
Your resulting initial asset allocation contained various
percentages of stocks, bonds, cash and alternative
investments. At that time, this portfolio represented the
optimal combination of the various asset classes that
you and your advisor believed would generate sufficient
returns to meet your objectives at an acceptable level
of risk. However, individual asset classes come in and
out of favor at different times in the business cycle and,
accordingly, the percentages of these various asset
classes in your portfolio will change over time. Therefore,
to stay on track, you should periodically review and
rebalance your portfolio.
Rebalancing your portfolio is an integral part of risk
control. While rebalancing may sound logical, it can
feel uncomfortable in practice. It requires selling highperforming assets and purchasing currently unfavorable
assets – in other words, using the profits from your
winning assets to buy others that are likely to rebound as
the business cycle evolves.
In rising stock markets, investors may become
overconfident and take on more risk than they originally
intended. A belief popular among many investors is
7 ◆ fall 2008 issue
41280.indd Sec1:7
9/4/08 9:41:52 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
that if an investment has performed well in the past, it
should perform well in the future. Unfortunately, past
performance is not always a good indication of future
results. Many investors, however, remain heavily invested
in last year’s winners and diminish or drop last year’s
losing asset classes. We saw this in the late ’90s, when
a large number of investors focused on large growth
stocks and did not rebalance with the shifting market.
Therefore, they ended up with a larger percentage
of large cap growth stocks than their risk parameters
warranted, due to market actions alone. Several even
presumed the trend of high performance would continue
for an indefinite period and bought more, adding to
their already over-weighted technology positions. As the
business cycle evolved, the market fell sharply in 2000,
causing their equity values to plummet much more than
they would have had they rebalanced. Today the same
holds true with the recent strong performance of bonds
and commodities and real estate before them.
Many times the investors’ first indication they have taken
on too much risk is when they experience the negative
effects of a market downturn. Fear leads either to a rush
to sell or, even worse, hold on to losing assets and hope
for a rebound. When the sale is finally made, it usually
results in a significantly depleted investment value.
Those who increased their stock positions during the
rise countered conventional thinking by buying high and
selling low.
Large institutional investors, like pension plans and
foundations that manage billions of dollars, have gained
crucial insight into the need for regular rebalancing. Most
have formal policies on the frequency of rebalancing
and investment committees that regularly evaluate
their portfolios’ current allocations and decide whether
to rebalance. This practice is equally applicable to
individual investors as a means to control risk.
Regular rebalancing helps to bring a disciplined approach
to your investing process. The value of this discipline is
demonstrated in a chart created by the Schwab Center
for Financial Research, which looks at the risk and
return of annually rebalanced portfolios versus portfolios
that were stagnant. In most cases, a rebalanced portfolio
had lower risk and similar to slightly higher returns. The
chart to the right shows the results of a rebalanced
portfolio with a moderate risk profile annually from 1970
through 2006.
Source: The Schwab Center for Financial Research
with data from Ibbotson Associates Inc.
This practice is successful due to the contrarian nature
of rebalancing. In rebalancing, you buy low and sell
high. As the business cycle evolves, underperforming
asset classes begin to outperform and vice versa.
Another approach to rebalancing is from a tax-smart
perspective, like using a tax-deferred account to avoid
taxable gains. There also is the option of allocating any
new savings to the asset class that has dropped. Another
choice is to have dividend and capital gain distributions
received in cash and reinvest them in under-weighted
asset classes. All of these methods can assist you in
regaining your target allocations without unwanted fees
and/or taxes on your investments.
As far as timing, we recommend a quarterly assessment
of your portfolio, thinking about reducing any asset
class that has surpassed its target by more than
5 percent. There is no set formula for rebalancing.
Talk to your financial advisor for assistance with your
rebalancing strategy.
Questions? Contact:
Mike Ferman, CPA
Partner
RubinBrown Advisors
314.290.3211
[email protected]
8 ◆ fall 2008 issue
41280.indd Sec1:8
9/4/08 9:41:55 PM
INTERNATIONAL NEWS
◆
Baker Tilly International
Leadership
from an
International
Perspective
By James G. Castellano, CPA
We are very proud that in just
20 years, Baker Tilly
International has become the
network of choice for the
middle market.
When one explores the world’s leading accounting
networks, Baker Tilly International stands out
prominently among the largest and most successful.
Started 20 years ago as a collection of independent
accounting firms in 20 countries around the world,
today Baker Tilly International is one of the world’s
10 largest networks, with aggregate revenue of $2.5
billion and coverage in more than 100 countries. It is
recognized as a global network of closely aligned,
premier, independent accounting firms serving leading
national and global organizations.
Baker Tilly International has achieved this position
of leadership by relentless pursuit of a number of
strategic initiatives.
• First and foremost, the unwavering commitment of
its independent firms to provide services that meet
the highest professional standards and a rigorous
quality assurance program to monitor compliance.
9 ◆ fall 2008 issue
41280.indd Sec1:9
9/4/08 9:41:55 PM
• Our network has aggressively recruited some of
the finest, most successful independent accounting
firms around the world, now providing worldwide
coverage with high-quality professionals on every
continent and in all major financial centers.
• Economic development in China has impacted
our global economy immensely, and Baker Tilly
International continues to invest significant resources
to build our capabilities to serve our clients doing
business there.
• Collaboration of our independent member firms,
facilitated by Baker Tilly International, enables our
members to bring the specialized talent of the entire
network together to meet the needs of our clients.
• Investment in world-class methodologies, training
programs, technical practice aids and leadership
development programs for our partners and
staff have helped propel our network to
leadership status.
• Our exchange program, whereby professionals
experience the opportunity to work and live in
another country for extended periods, enables our
members to attract and retain outstanding talent, as
well as expand their knowledge of global business
and social customs.
5 ◆ winter 2007 issue
41280.indd Sec1:10
We are very proud that in just 20 years, Baker Tilly
International has become the network of choice
for the middle market. For a copy of the
“Annual Review, Tax Guides or Guides to
Doing Business” in many countries or access
to the worldwide directory to find a firm in a
region important to you, please refer to our
Web site at www.bakertillyinternational.com.
Of course, we also invite you to contact us
directly to learn more about our “Great firms,
outstanding network.”
Questions? Contact:
James G. Castellano, CPA
Chairman, Board of Directors
Baker Tilly International Ltd.
314.290.3300
[email protected]
or
Geoff Barnes
Chief Executive Officer
Baker Tilly International Ltd.
44 (0) 20.7314.6875
[email protected]
10 ◆ fall 2008 issue
9/4/08 9:41:57 PM
GENERAL TOPICS
Leadership in
a Changing
World
By Kristin Parshay
“There is nothing more difficult
to take in hand, more perilous to
conduct, or more uncertain in its
success, than to take the lead in
the introduction of a new order
of things.”
The Prince, Niccolo Machiavelli – 1532
Change is one idea that by nature instills automatic
resistance within most of us. However, change is as
necessary today as it was centuries ago because of the
economic and cultural influences that require us to be
better, faster and smarter than our competition. Those
organizations that do not successfully embrace change
not only find themselves in a position where healthy
growth and profitability is a figment of the past, but
oftentimes find themselves on a path to certain failure
in the future.
RubinBrown Internal Audit has partnered with many
organizations to successfully transform their businesses.
These changes range from re-engineering individual
business processes to a complete reorganization of
the people, processes and systems of the organization.
These companies have set the tone to drive change into
the very fabric of their organization. They have turned a
negative situation into positive action that is embodied
from the highest executive to the most entry-level
position. As a result, we would like to share with you the
five best practices used by those leaders of change.
1. Define the Vision
The most meaningful changes that move an organization
forward are not those that are made individually but those
that are made as a team. The success of the team lies in
the ability of the team’s leader to inspire every member
to bring his or her best each day. A leader will not be
successful in inspiring his/her team if the team is not
focused on a defined vision. A defined vision becomes
the center of the team’s ability to make the decisions
necessary in the execution of meaningful change.
2. Establish Clear and Honest Communication
It is human nature to fear the unknown, and the
responsibility of the organization’s leadership is to
eliminate the unknown by establishing an environment
that supports clear and honest communication.
Communication must be a two-way process in which
ideas and concerns communicated from the bottom
up are addressed with the same vigor as the
expected response to the top-down communication
from the organization’s leadership.
3. Set Meaningful Milestones
To achieve sustained change, it must become part
of the organization’s culture. Sustained change, by
definition, requires continuous focus; however,
employees must have meaningful milestones to work
toward; otherwise they will lose sight of the end goal.
Make the achievements visual by continually posting
the metrics to show the continuous improvements.
4. Align Incentives
One of the most successful tools to inspire your
team into action is to give an employee a meaningful
stake through defined incentives in the successful
execution of established milestones.
5. Provide Continuous Guidance and Support
Meaningful change is not achieved without the
team facing a series of barriers in its execution. A
successful leader is a vital resource in assisting his/
her team in remaining focused on the goals and not on
the problems by providing continuous guidance and
support in identifying the solutions to break through
those barriers.
11 ◆ fall 2008 issue
41280.indd Sec1:11
9/4/08 9:41:58 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
RubinBrown has been working with the Penn Traffic
Co. as it has embarked on a turn-around venture. Penn
Traffic is a billion-dollar grocery retailer and distributor.
Its CFO summarizes his leadership methodology in the
following comments:
“In my mind, there are three key
ingredients for driving change
effectively. First, a leader must lead
change through example by embracing
the change, not defending the status
quo, while also allowing their team to
experience learning from failure as well
as success. Second, it is absolutely critical to have
complete honesty and integrity in your communication
of change. That does not mean you make promises
you cannot keep, but rather make sure people clearly
understand why change is needed, what the expected
benefit will be and how long it might take. Third, a
leader of change must be willing to challenge and
manage resistance to change. If you head into change
thinking people will simply change because of your title
or authority, you are sadly mistaken. Head into change
knowing there will be pockets of resistance, and it
is your job as a leader to knock down those barriers
in the most efficient manner possible - some easy,
some difficult. At the end of the day, change should
drive improvement. If that is not a pillar for driving the
change you are contemplating, it is probably not worth
the effort or resources.”
The tone of an organization starts with its leadership.
Those leaders who embrace the idea that change is not
an option but an opportunity drive focused organizations
that make the most of those opportunities and, as a
result, ensure success in the future. RubinBrown Internal
Audit’s business process transformation methodology
assists dynamic organizational leaders in their efforts
to successfully lead their teams to achieve strategic
objectives of the organization.
Questions? Contact:
Steve Newstead, CPA, FLMI
Partner-in-Charge
Internal Audit Services Group
314.290.3325
[email protected]
or
Cathy Behnen, CPA, CIA
Partner
Internal Audit Services Group
314.290.3204
[email protected]
Tod Nestor
Senior Vice President and Chief Financial Officer
The Penn Traffic Co.
12 ◆ fall 2008 issue
41280.indd Sec1:12
9/4/08 9:41:59 PM
GENERAL TOPICS
Leading Through
Change –
Lessons from
the Front Lines
By Dan Raskas
For leaders in any organization, it often is difficult
to accurately forecast the future. We spend a
significant amount of time building strategies based
upon assumptions, market intelligence, forecasts and
historical data, all with the hope that our prediction
will at least be close to what actually occurs. There is
one thing, however, of which we can be sure, and that
is change. Planned or unplanned, change can teach
valuable lessons that help leaders to not only manage,
but take advantage of the opportunities they present.
Some specific examples include taking over the
leadership of an organization after the departure
of existing leadership, selling a major division of a
company, leading a new entity, acquiring and integrating
companies into an organization, growing a company in a
down market, or shifting an organization’s focus through
personnel changes and acquisitions.
No matter what the circumstance, each change can
teach lessons along the way that help not only in
successfully managing the change, but also serving as
a catalyst to dramatically improve the organization. While
there are many leadership skills that are required to lead
an organization and lead significant change, there are
three that have proven beneficial in succeeding in a
range of unique situations.
that are occurring will have minimal, if any, impact. While
it is important to establish a sense of stability and order,
too much control and dominance can suppress the
potential opportunity for improvement.
For example, one company recognized that the only way
to truly grow one of its divisions was to sell the group to a
buyer who viewed it as strategic and was willing to invest
in the business. Company leaders could have simply
made the decision, obtained approval from the board,
and made it happen. Instead, they carefully orchestrated
the process to involve key people within the group at
various points so that they felt involved in the process as
a whole. While the board needed to approve the concept
up front, these key people were able to dictate much of the
transaction, like attributes of the buyer and execution of
the transaction. Toward the end of the process, everyone
in the group was completely energized. People on staff
even created a logo that represented the quest for the
new company and distributed shirts to all employees.
Productivity and sales significantly increased during the
time they were looking for a buyer.
As a leader, setting the vision and reaching out to people
in the organization to make them part of the solution
results in the maximum benefit. The negative impact of
the changes in every scenario gets minimized, shifting
the focus from the change to the opportunity to make a
difference and be part of the new future. By employing
this skill, leaders will find they have a group of highly
motivated individuals who play a large part in executing
the solution because they had ownership in the plan to
get there.
Lesson 2 – Communicate
Lesson 1 – Lead, don’t do
One of the most critical aspects of managing significant
change is a leader’s ability to effectively communicate
to the various stakeholders. These stakeholders include
not only people within the organization, but also people
outside the organization, such as customers, suppliers
and investors. The communications must be timely and
contain relevant information; avoid communicating for
the sake of communicating.
Many leaders have a tendency to try to take over
when significant change occurs. They feel a need
to demonstrate that they are “in total control” of the
situation, hoping to portray the image that the changes
Communications should take many forms, the most
effective of which is face-to-face interaction with people.
Direct contact is the best way to share information and,
more importantly, listen to what people have to say.
13 ◆ fall 2008 issue
41280.indd Sec1:13
9/4/08 9:42:03 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
One executive recalls a time when he was chosen to take
over a division that had suddenly lost its leader. His first
priority was to meet with people, talk with them and listen
to their concerns and ideas on where they could take
the business. This led the staff to rally behind its new
leader, taking the business from a non-profitable unit
to the fastest-growing, most profitable unit in the entire
company in just one year.
Lesson 3 – Be human
A leader during dramatic change often is expected
to have all the answers. Most of the time there are not
answers to everything, so there is no need to pretend to
have them. It is important, however, to portray confidence
when admitting to not having all of the answers. A leader
must send the message that they will provide solutions
that will result in a better situation, which would not
have been possible had the change never occurred.
This attitude will counter any perceptions of loftiness
and shows the team a willingness to work with them. A
leader’s position will grow even stronger based on the
renewed trust and respect from the team.
In one situation, an executive was leading a company
with 350 professional staff and acquiring a company
that would add an additional 125 members, including
several senior leaders. Many questions were raised, both
within the company and within the group being acquired.
Naturally, the leader proactively communicated the
answers that he did have, but there were some questions
he could not answer. It would have been easy for him to
avoid the questions or mislead people by telling them
what he thought they wanted to hear. Instead, he chose
to be very candid and let them know that there were still
some unanswered questions. He quickly followed that up
by disclosing to them the process company leadership
was going through to get the answers and the timeframes
14 ◆ fall 2008 issue
41280.indd Sec1:14
9/4/08 9:42:04 PM
GENERAL TOPICS
Lessons from the Front Lines (cont.)
they were following. He also shared with them who
was leading the team to make the determinations and
provided them an avenue to submit any input they had
that could help the process.
The team knew that they could ask anything and would
get a candid answer. They also respected the fact that
if he did not have an answer, he would admit it and take
the time to explain how they would get there. The leading
executive gained respect by thanking employees for
pointing out things that may have been overlooked and
quickly addressing those things. By listening to his staff,
the leader showed them that people at every level had
the opportunity to be part of the process.
Change is one of the most difficult events that a leader
will face in any organization. It also is one that can be
counted on to occur whether unexpected or planned.
An organization that can effectively manage change
and capitalize on it will be in a tremendous position to
perform in any market. There is no magic formula for
successfully leading an organization through change, as
there are many moving parts, personnel concerns and
unique circumstances that come with any situation. The
three lessons described above can help provide some
guidance on how to take a step back and strategize the
most successful approach to your particular situation.
Questions? Contact:
Dan Raskas
Partner
Corporate Finance and Forensic Services Group
314.678.3530
[email protected]
15 ◆ fall 2008 issue
41280.indd Sec1:15
9/4/08 9:42:06 PM
You’ve gained the knowledge.
Do you have the commitment?
Commitment. It’s a special value here at RubinBrown. It describes the professional pride in the work we do.
It also defines the personal care we take in the relationships we build – with our clients, with our partners
and, of course, with one another.
For the career minded individual looking to grow and advance in the accounting profession, it means an
unparalleled opportunity to work alongside a team of leading experts. To grow your knowledge by drawing
upon the global resources of Baker Tilly International. And ultimately to realize the rewards that come from
a firm-wide commitment to being the very best.
We invite you to explore the RubinBrown difference.
www.RubinBrown.com
Certified Public Accountants and Business Consultants
Knowledge. Commitment. Value.
Assurance | Internal Audit | Litigation Support | Qualified Plan Audit | SEC Advisory | Small Business
State and Local Tax | Tax and Compliance | Valuations | Wealth Management
16 ◆ fall 2008 issue
41280.indd Sec1:16
9/4/08 9:42:35 PM
GENERAL TOPICS
RubinBrown
Develops
Future
LEADers
By Jeff Sparks, CPA
...LEAD participants have
gained a tremendous
perspective on their
personal abilities and
the firm as a whole...
Leadership skills are a valuable attribute of a team
member in any organization. From working with
other team members, to clients, to professionals in
the community at large, strong leadership skills are
invaluable to being successful at RubinBrown. For this
reason, the RubinBrown|LEAD (Leadership, Education
and Development) program was created several years
ago to help further develop and retain high performers
in the firm. Team members are selected for this program
after a rigorous application process based on work
experience, involvement in the firm, community activities
and professional achievements. In short, each applicant
has to have demonstrated the potential to be a future
leader of RubinBrown.
Through the application and interview process,
the Governing Board, made up of three partners,
recommends participants on an annual basis, with the
program lasting for a two-year period. Monthly meetings,
quarterly events and activities, and a required reading
list are all key elements to the program. While the
program is partially self-directed by the participants,
17 ◆ fall 2008 issue
41280.indd Sec1:17
9/4/08 9:42:41 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
an advisory board of past participants helps guide the
group. Recently, the group selected and focused on the
following topics:
• Performance management, feedback and motivation
• Engagement management and team building
• Work/life balance
• Negotiation skills and proposals
For each of these topics, the LEAD program participants
have selected partners and managers in the firm to be
in the “hot seat” and answer personal and professional
questions on the subject matter. Questions have ranged
from the roles mentors have played in their development
to techniques used to pull their work team back together,
to the most difficult feedback they have given and how
they delivered it. While the “hot seat” participant is put on
the spot with some personal questions, the group finds
it beneficial to hear the challenges the participant has
overcome and the best practices that have helped him
or her achieve success. Required reading has included
books such as “Classic Drucker” by Peter F. Drucker
and “The Power of Feedback” by Joseph R. Folkman
and John H. Zenger. A lively group discussion on how
elements from the books can be integrated into our
personal and professional lives always follows.
Claire Keeling, with Sort It Out Organization Consultants,
recently gave a presentation on work-life balance,
providing information and education focused on
integrating work and personal life, including prioritizing,
time management, action systems and calendar
management, followed by a Q&A session. Chris Jehle,
founder and director of Kansas City’s Hope Center,
an organization focused on developing urban youth
into leaders, spoke on his experiences of building the
organization, the leadership lessons incurred, and the
leadership qualities they are working to instill within the
urban youth.
One of the highlights of this year’s program was the
opportunity for the group to travel to our Kansas City
office for a two-day retreat focused on engagement
management and team building. The group heard from
Todd Pleimann, Kansas City office managing partner,
on the expansion of RubinBrown into the Kansas City
market, challenges associated with the expansion, and
the many opportunities to come as the firm continues
to expand regionally. Jim Castellano, chairman, John
Herber, managing partner, and Fred Kostecki, partnerin-charge of the Assurance Services Group, shared with
the group how they have grown as firm leaders and the
key metrics associated with firm growth and profitability
in today’s market. Participants found the information that
was shared to be invaluable in understanding the key
role that each team member plays in the overall firm
mission and grasping where the firm is heading. Outside
of the formal sessions, this retreat gave the group time
to bond with each other, tour the Kansas City office and
experience some of the great KC barbecue and nightlife
we had all heard about.
Participants always agree that while the speakers and
books provide excellent perspective and information
on the topics, the real value in the program is achieved
by the interactions with others involved in the program.
This interaction ranges from the questions asked and
discussions with presenters, informal conversation after
the meetings on various topics, to overall relationships
formed in the group. Through taking the time to personally
assess one’s strengths and weaknesses and then draw
from what has been learned in the LEAD program,
participants are provided with excellent insight on
ways to enhance their personal leadership abilities.
Friendships that are developed further enhance this
benefit and help to bridge gaps between service lines
and industry groups, allowing participants to ultimately
serve clients with a one-firm approach. It is safe to
say that the current LEAD participants have gained a
tremendous perspective on their personal abilities and
the firm as a whole, which will no doubt serve as a
great tool to becoming a future leader in the firm and
community.
Questions? Contact:
Fred Kostecki, CPA
Partner-in-Charge
Assurance Services Group
314.290.3398
[email protected]
18 ◆ fall 2008 issue
41280.indd Sec1:18
9/4/08 9:42:46 PM
GUEST FEATURE
Ken Harrington, Center for Entrepreneurial Studies
Washington University in St. Louis
Modifying Your
Leadership
Approach to
Effect Change
What do you do if you are
a leader who wants to
inspire more innovation and
entrepreneurial growth?
Let’s start with a standard definition of leadership
– “the ability to guide, direct or influence people;
the techniques and expertise of efficient organization,
planning, direction and control of the operations of a
business.” So, a leader has the authority to allocate
resources, set policy, decide strategy, direct others and
set the tone for an organization or group.
My first reaction when reading this definition was that there
is something missing – the ability to allow entrepreneurial
innovators to take action without disrupting the core
activities of an enterprise. In some way, leaders need
to incite valuable change without losing control.
In other words, leaders need to spend more time,
energy and resources stimulating change instead
of protecting what an organization already has.
Strategic plans focus on barriers to entry, protecting
customers, optimizing processes, increasing shareholder
value (financial return percentage and consistency),
deciding upon core competencies and reviewing SWOT
analyses (strengths, weaknesses, opportunities,
threats). Increasingly sophisticated analytical tools,
including enterprise information systems, benchmarking,
19 ◆ fall 2008 issue
41280.indd Sec1:19
9/4/08 9:42:48 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
best practices and other techniques, can consume a
leader. Better information and analytical tools yield better
returns and higher productivity.
With all of these new tools and information, the hypothesis
would be that we are creating better leaders because
they are making fewer mistakes. Leaders are right more
often, especially about big decisions. If these points are
correct, then wouldn’t organizations and their leaders be
more sustainable? Shouldn’t they survive longer?
Average Age of S&P 500 New Entrants
40
35
30
25
20
15
10
5
I did some research on this point for a book titled
“Revitalizing the American Dream,” which Bob
Skandalaris authored and I supported, and found that
public corporations are dying more quickly. In a 10-year
period of dynamic prosperity (1990s), more than 50
percent of the S&P 500, our most revered organizations,
ceased to be a part of the list. This drop-off was an
increase from 24 percent in the ’60s and ’70s. How could
this be happening if we have better leaders making
better decisions? What is missing?
Number of Exits from S&P 500
300
250
200
150
100
50
0
1960s
1970s
1980s
1990s
Source: S&P 500 History
Next, I looked at how long it took a company to be
accepted as a new S&P 500 entrant. I checked the
number of years from the time a company first publicly
offered stock (initial public offering date) until they
pushed another company out of the S&P 500. The
average age of new entrants has steadily declined from
36 years in the early ’60s to 12 years in the first three
years of the 21st century.
0
60-64
65-69 70-74 75-79 80-84 85-89 90-94 95-99 00-03
Source: S&P 500 History
This decline means that the measure of success has
changed and leaders need to react. It is clear to me
that leaders need to spend more energy creating the
new rather than optimizing the old. It is time for leaders
to more explicitly and consciously add “entrepreneurial
catalyst” to their leadership toolkit. I believe leaders
need to focus more resources and attention on “what
isn’t” rather than “what is.” Many leaders seem to be
searching for an answer to this issue. Let me explain one
approach that might help leaders deal with this point.
First let’s assume that a current leadership approach
focuses too much attention and resources on preventing
mistakes. This statement may seem ludicrous, but to
be effective in a world of rapid change, mistakes are
a necessity. These mistakes can be the least costly
way to get insights and information when there is a
high degree of uncertainty. This is often the case if an
idea or business area is new and disruptive; these are
opportunities that, by their very nature, have high levels
of uncertainty (notice I have consciously not chosen
the word “risk”). Trying new things and being flexible,
intuitive and responsive can be a good approach to
getting information; action can be better than planning.
But how do leaders take the time to analyze these often
numerous new, highly uncertain (low on information)
situations? They can’t take the time to pursue all these
opportunities themselves, and the organization will be
strategically late if the market finds the answer first.
20 ◆ fall 2008 issue
41280.indd Sec1:20
9/4/08 9:42:53 PM
GUEST FEATURE
Ken Harrington, Center for Entrepreneurial Studies
Washington University in St. Louis (cont.)
Leaders and organizations that try to “always be right” in
these situations are particularly handicapped. It is their
nature, and their people expect this style. Net Present
Value, Return on Investment, scenario assumptions,
discount rates and cost accounting allocations provide
good answers. How do they change their approach?
d. Being focused on picking only winners
I would suggest that leaders use delegation to allow
virtual teams to form. These teams can then employ
self-directed collaboration and dynamic actions without
the leader’s involvement. To make these teams effective,
the leader needs to provide small amounts of innovation
resources that can be autonomously used to experiment
and pursue their ideas. In other words, catalyze people
to be more entrepreneurial. Ideas, innovations and
individuals stagnate and smolder when waiting their turn
in the approval, meeting, scheduling queue. Leaders will
benefit by letting them pursue their ideas.
g. A history of being slow to decide and, even
worse, being slow to stop when a decision
proves wrong
But how does a leader allow this change without inviting
entrepreneurial anarchy? How does a leader allow
mistakes and still achieve the results that are required in
the current enterprise? It actually can be quite simple. It
also is less costly, lower risk and more fun than one might
think. It is about lubricating the relationships between
your people so that they collaborate more frequently and
effectively.
To make this type of change, leadership action needs to
be taken at two levels. Here are my thoughts and ideas.
Outcomes may come more quickly than you think.
I. CEO or Senior Executive Leadership Actions
1) Retain the organization’s current structure,
resource allocations, controls and decision-making
approaches. To repeat the old cliché, don’t throw
the baby out with the bathwater.
2) Check to see if there is hidden innovation energy in
the organization’s people. Some signs are:
a. Frustrated people
b. Functional groups or business units that are in
silos and compete internally
c. Leaders trying to make only “big bets”
e. Team meetings in which people argue about
being right versus trying to understand the
other team members
f. Betting more on logic than passionate,
committed people
h. Pleas for big resource commitments to spur
innovation
3) If point No. 2 is true, then formally appoint, fund
and announce an innovation director who reports
directly to the CEO or top executive. Select
someone who is collaborative, fair and willing to
direct credit to others when innovations happen
(see “The New Principles of Swarm Business,”
MIT Sloan Management Review, Spring 2007,
Gloor & Cooper, for some principals).
4) Be patient. Be content with 1 percent participation
and involvement at the beginning. Most people
will need to see how others do and how they are
treated before they will participate.
II. Information Director Leadership Actions
1) Create low-cost and high-energy events and
activities that reduce the separation between
scientists, functional groups and business units.
These events should cause people to meet,
collaborate, exchange ideas and form teams.
(See “Managing Creativity in Small Worlds,”
California Management Review, Summer 2006,
Fleming & Marx, for some ideas.)
2) Focus on creating an environment that tries new
things.
3) DO NOT try to pick idea winners. Let the free
market (collaborators, customers, secondary
funders) decide who survives. Individual
persistence may be more important than initial
idea quality.
21 ◆ fall 2008 issue
41280.indd Sec1:21
9/4/08 9:42:54 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
4) Identify entrepreneurial idea champions and
then mentor and coach them. However, do not
take responsibility for their results. Guard against
the charismatic lone wolf who wants to work by
himself/herself (this attitude may sometimes be
OK for an inventor but is not good for go-to-market
implementation).
5) Identify policies, incentives and other factors
that restrict collaboration, openness and
entrepreneurial action. Discuss these issues with
the CEO.
6) Consider creating separate, innovation directorcontrolled policies and incentives, including new
wealth-sharing concepts.
7) Treat people as if they are entrepreneurs.
a. Expect champions to work nights and weekends
to pursue their idea. Ensure the incentives make
this worthwhile.
b. Invest in people, not businesses; make
employees better business people and
innovators. Build entrepreneurial knowledge
capacity.
To summarize, leaders who wish to become an
“entrepreneurial catalyst” need not disrupt current
decision-making approaches and control systems. They
should not make large changes to current structures,
financial objectives or resource allocations. They can
invite participation from people by using innovation
directors to support innovation activities that do not
require senior management review. Innovation director
activities will create innovation momentum that currently
is hidden in an organization’s people, leading to gradual
but lasting cultural changes that become part of a
leader’s organization and its people. People will
gradually learn to collaborate and eventually help
change the structure of control systems and policies
that are the basis of current leadership methods.
The ideas and people that blossom will deliver high
returns, provided leadership fairly rewards and
recognizes collaborative contributions.
Kenneth A.
Harrington
Managing Director, The Skandalaris
Center for Entrepreneurial Studies and
Senior Lecturer in Entrepreneurship
Ken Harrington is managing
director of the Skandalaris Center
for Entrepreneurial Studies at
Washington University in Saint
Louis and a senior lecturer in
entrepreneurship. He serves on
numerous not-for-profit and early
stage company advisory boards.
He directs a fully encompassing,
cross-campus entrepreneurship effort impacting all
schools and academic disciplines. Under Harrington's
leadership, Washington University's entrepreneurship
programs have received broad recognition, one of
the most notable being selection as one of the first
Marion Ewing Kauffman Foundation's Campuses
Initiative schools.
Harrington holds a master’s degree in business
administration from the University of Pennsylvania
Wharton School and a bachelor’s degree in science
from the University of Vermont.
Prior to joining Washington University, he spent nearly
30 years in the technology industry, working for Booz,
Allen and Hamilton in New York, focusing on technology
strategy consulting for such clients as AT&T, United
Technologies, Stanford University and numerous other
technology hardware and software companies.
Harrington and Robert Skandalaris collaborated on
their recently published book, “Rebuilding the American
Dream, Restoring American Jobs and Competitiveness
through Innovation and Entrepreneurship.”
22 ◆ fall 2008 issue
41280.indd Sec1:22
9/4/08 9:42:54 PM
GUEST ARTICLE
Dan Buck, St. Patrick Center
Once a prominent St. Louis television anchor and radio
host, Dan Buck made the choice five years ago to leave
his high-visibility career and lead one of the city’s largest
charitable institutions. As the chief executive officer of
St. Patrick Center, Buck heads up the largest provider
of homeless services in the state of Missouri. In an indepth conversation with Buck, the HORIZONS editorial
staff discussed the numerous examples of leadership
he displays and witnesses in the St. Louis community
every day.
What changes have you observed recently in
corporate giving?
The entire landscape of corporate giving has changed
in recent years. At one time, company philanthropy
was mainly focused on an executive’s pet project,
with little input from the company’s employees. Now,
more and more executive leaders are sensitive to
community needs and the philanthropic desires of
their employees. These employees have more sayso than ever in the company’s choice for community
contributions. I commend corporations for gaining this
type of insight. Also, they like to see their employees get
involved in hands-on volunteer opportunities, and we
truly appreciate that encouragement and commitment
as well.
St. Patrick
Center:
Leading the
Fight Against
Homelessness
in St. Louis
What are the center’s main goals for 2008, and how are
you progressing toward those goals?
2008 has been our most challenging year since I began,
with $10 million in new capital projects in the works.
Thanks to grant funding that partners public and private
resources, these projects will be free of any capital debt
moving forward. The first major project is Rosati House,
a new 26-unit living facility for the chronically homeless.
These residents are those who’ve been on the streets for
years and are often fighting substance abuse, as well
as mental illness. We expect this permanent, supportive
housing project to be completed in October of this year.
The second major new initiative is happening within our
Partnership Center. The fourth and fifth floors have been
dedicated to a new trades center and small business
incubator. The center will offer training for a variety of
trades, like carpentry, heating and air-conditioning,
plumbing, hospitality training and other high-growth
employment areas. Our goal is to see this project
finished in September.
23 ◆ fall 2008 issue
41280.indd Sec1:23
9/4/08 9:42:54 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
How is the current economic situation affecting
St. Patrick Center’s operation? Is the center doing
anything differently to react to the economy?
A bad economy always impacts philanthropic giving. It’s
a reality that all non-profits are facing. Donors have to
be more conscious of the impact their money is making
in the community. On our end, we focus a great deal
on communicating our growth and strength. We also
reinforce the message that tough times mean there are
more people in need. We generally find that people step
up to the plate more during a slow economy because of
this recognition. Our staff operates under the principle
that communication brings education, which leads to
knowledge – and knowledge leads to funding.
Also, as an organization, our fundraising is very strategic,
based upon the economic landscape. For example, this
year unrestricted foundation giving is soft, so we placed
a larger focus on government spending. If this balance
gets too lop-sided, it places our budget in danger. Our
strength is in our diversity of funding sources. When one
area suffers, we step it up in another.
In recent years, we have seen a transition of leadership
from the baby boomer generation to a younger class of
leaders. How has this played out with St. Patrick Center
and its corporate volunteers?
Our Board of Trustees represents a new generation of
corporate volunteers, most balancing the obligations
of work, family and community contributions. What
distinguishes them most, however, is the vibrant energy
they possess toward our initiatives. This group has
truly helped to grow the networking circle of St. Patrick
Center with new contacts, innovative ideas and a can-do
attitude. With them, nothing is unattainable – no goal too
lofty. In addition to meeting four times a year, they have
a large presence at all of our events and community
outreach activities. The prevailing attitude our young
leaders exude is their refusal to accept the status quo.
They are constantly looking for ways to make St. Patrick
Center better and more effective.
24 ◆ fall 2008 issue
GUEST ARTICLE
Dan Buck, St. Patrick Center (cont.)
Describe some of the strong leadership examples you
have seen lately from St. Patrick Center supporters in
the community.
The best leadership examples have come from our
incredible board members. They unselfishly give of their
time and resources on a regular basis. They are in their
neighborhoods and workplaces, asking their friends for
support and often hosting fundraisers in their homes. It’s
wonderful to see this group of often wealthy, influential
individuals attending our events and pitching in so
tirelessly. Their resources could be going toward their
families or professions, but they choose to invest them
with us.
Since taking on your role as CEO, what major changes
have you implemented within the organization?
Any great leader is aware of his/her succession plan.
The CEO before me had operations down to a science
but realized that a new visionary was needed. When I
took the helm, the center didn’t need a new captain, just
someone to put a bright light on the ship. Coming from a
long background in television and radio communication, I
was well-equipped to make strides in gaining recognition
on the center’s efforts and successes. We established a
communications center that produces media updates,
webcasts and performance videos for our funders.
The communications team also enables us to give
better visual presentations at events and meetings.
Thanks to these efforts, we have seen an increase in
25 ◆ fall 2008 issue
community awareness and contributions. We are now
a center with the capacity to track visual outcomes
and provide meaningful results for our donors. We are
constantly putting out the message of our economic
impact on downtown St. Louis. Through our employment
rehabilitation services, we are moving people from tax
burdens to tax payers. We create economic stimulus
through job training and housing placements and by
reducing crime, while ending homelessness for hundreds
each year in our community.
What are some of the center’s largest fundraising
initiatives in terms of participation and success?
The Irish Open golf tournament raises more than
$330,000 each year and receives a lot of participation
and support from our corporate community. Our Sports
Trivia Championship, presented by Budweiser, is entering
its sixth year, draws more than 1,200 contestants and is
televised in four prime-time episodes on Fox Sports
Midwest. We also do our Pot of Gold Drive each year
during St. Patrick’s Day weekend and have seen a lot
of positive feedback from the 400 volunteers who make
that event happen. One of our corporate sponsors,
Wells Fargo, puts on an independent third-party golf
tournament each year, which generates more than
$200,000. Most recently, we saw great success in the
first year of the Key Player Initiative. There are
tremendous growth opportunities with all of these
events, as well as several smaller events that we have
throughout the year.
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
Outside of these events, we receive a lot of general
donations from individuals and families. We are
continually surprised by the level of generosity that exists
in the St. Louis community.
How does the Key Player Initiative cultivate leadership
in the city’s youth?
Kids are amazing. They don’t complicate things with
doubt and pessimism. They are naturally hopeful and
optimistic. When they see something as unacceptable as
homelessness in the wealthiest nation in the world, they
just set out to end it, no questions asked. The Key Player
Initiative was started to show the community, through the
eyes of our youth, that we can end homelessness. This
year, the Archdiocese of St. Louis Catholic Schools alone
raised $203,000, effectively reinforcing our point. One
school set out to collect 1 million pennies over the course
of two years to raise money for the center. Within seven
months, they had collected 900,000 pennies, putting
them on track to meet their goal well before even the
first year. Starting this initiative in schools was the best
decision we could have made. Our goal is to make this
a $1 million campaign to fund affordable housing-assist
programs by the year 2012. Once the corporations,
organizations and individuals in our community see what
these kids were able to do as a collective, single voice,
I think they will respond with incredible matching gifts
to let those kids know that they’re right – “In America,
Homelessness is Unacceptable!”
St. Patrick Center relies heavily on volunteer support,
but you also have a dedicated staff of employees. What
efforts do you have in place to ensure a positive work
environment?
We rely on our employees to operate the center’s three
major areas: housing, mental health and employment. In
a business that can often be disheartening, we do a lot
to let them know how much we appreciate the hard work
they put in. As a fairly large organization, we encourage
people to come out of their offices by taking turns hosting
department coffee hours. We invest in our staff by paying
for conferences and seminars, as well as hosting in-house
training sessions. Our new building project includes a
work-out and wellness center for our staff to use, and we
have initiated an office fitness challenge to encourage
healthy living. We also offer incentives and recognition for
good work, like our “You Made My Day” cards.
Our staff members build relationships with the clients we
serve, so it is always tough to see a loss. Each year, we
hold a service to recognize those who have passed. All
of these efforts contribute to great employee morale and
commitment. We see 40 to 60 employees volunteering at
every event we host because they believe in the mission
they work for and in the clients they serve.
What is your and your executive staff’s vision for the
future of St. Patrick Center and its role in the St. Louis
community?
I was once asked, “If St. Patrick Center succeeds at
ending homelessness in St. Louis, would it run itself
out of business?” The question is not as outlandish as
it seems. With 550 chronically homeless, St. Louis is
poised more effectively than almost any city in the country
to end the problem, for three reasons. One, its numbers
are manageable. Two, the city has high philanthropic
participation. And three, the city’s infrastructure of
charitable organizations is solid. Should we witness an
end to homelessness in this city, I would love to see
St. Patrick Center serve as a nationally recognized
education and empowerment center for job creation,
training and business. We’re aiming to focus on housing,
so there will come a time when anyone in need can
be placed in a safe, clean space almost immediately
upon becoming homeless. We plan to build strong
partnerships with area developers to create more units of
affordable housing for our community’s most vulnerable
neighbors.
Finally, I want our programs and the services of our
Partnership Center to be so comprehensive and effective
that anyone can walk up to a homeless person and say
with confidence, “We’ve got a place for you.”
26 ◆ fall 2008 issue
41280.indd Sec1:26
9/4/08 9:43:00 PM
CLIENT SPOTLIGHT
The Sound Room
Young, founder and owner of The Sound Room, has
been providing St. Louisans with entertainment and
sound systems since 1983. “I used to stock turntables
and speakers,” observes Young. “Today it’s flat panel
HDTVs and surround sound, lighting and home theatre
systems, video projectors, concealing screens and
‘Smart Home’ control systems.”
Young believes he has one of the best jobs in the world.
“I get to give people part of their day back,” he states.
“People can enter their homes and, with the touch
of a screen, turn on all their lights, adjust the room
temperature and select a home movie, sports venue or
surround sound music environment. We’re able to give
our customers more time with their families and loved
ones. That’s worth everything.
“It’s all about making things easy for our customers,” says
Young. “Our designers and technicians take care of the
technology. The last thing people want is to have to struggle
with multiple remotes and malfunctioning equipment. Our
systems are easy to use, fully integrated and interactive.
We call it the babysitter standard. If the babysitter can’t
operate the system, then something is wrong.”
Leadership
in Home
Entertainment
and Technology
What started as a passion for music and highfidelity systems for teenager David Young has evolved
into a successful business creating state-of-the-art
home entertainment and technology systems for many
of the St. Louis area’s finest homes and condominium
developments.
Over the years, Young has learned that approximately
10 percent of his customers are highly tech-savvy, while
the other 90 percent just want the pleasure of the home
entertainment system, but they don’t necessarily want to
deal with the technical aspects. So, The Sound Room
strives to make the technology do all the work.
“We like to empower our customers,” says Young.
“Entertainment shouldn’t be work. It’s supposed to be fun.”
Young started living his passion for sound during his
college years as a media major at Webster University,
while working part-time for a company that sold sound
equipment. “I wanted to take it to the next level and, in
1983, was able to open my first store at Ballas and Olive
with the help of a few key customers.”
Now, 25 years later, Young heads one of the area’s
largest home entertainment companies, with expansive
showrooms in Chesterfield and Creve Coeur and a
new 7,000-square-foot operations center in Chesterfield
Valley. “With centralized warehousing and plenty of room,
our technicians are able to build and test our systems,
minimizing time spent in homes installing systems,” adds
27 ◆ fall 2008 issue
41280.indd Sec1:27
9/4/08 9:43:01 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
Young. “We want our equipment totally programmed and
100 percent install-ready when we go to the home.”
Young believes his 46-person team is at the heart
of his success. “We have 26 technicians and
programmers, 100 percent of whom are certified by
the Custom Electronic Design & Installation Association
as ESTs, Electronic Service Technicians. These are
the people who design, build, install and service our
equipment. They go through a 52-week rigorous
training and certification that challenges them to keep
their skills honed. They don’t leave anything to chance.”
Implementing new technologies and constant training
is an integral part of The Sound Room’s successful
business model. Young and his colleagues travel
to several shows and conventions during the year
sponsored by the Technology Committee of Home
Theatre Specialists of America, a 60-member
organization of the top independent specialty retailers
in the country. He also can be found at the Consumer
Electronics show, where the latest in home entertainment
technology is unveiled each January.
HTSA also represents a half-billion dollars in buying
power, so The Sound Room and other members can
compete against national retailers. “The 60 HTSA
members are the dominant retailers in home theatre and
technology in their respective cities. Working together,
we’re able to negotiate the same deals as the Big Box
retailers,” observes Young. “Also through HTSA, we’re
able to lead the way on new product launches. If the
technology is out there, you can find it at one of our
stores. Just recently, we added McIntosh Labs products,
the premiere audio-video component line.”
Young also utilizes the strong HTSA network of dealers
to service customers in remote locations. The Sound
Room will handle installations within a 250-square-mile
area. “If we have a customer who has a second home
or remote installation, we can be confident in calling on
one of our HTSA colleagues. They have our same high
standards and carry the same caliber equipment as we
do. Likewise, we handle any St. Louis area installations
for them.”
28 ◆ fall 2008 issue
41280.indd Sec1:28
9/4/08 9:43:03 PM
CLIENT SPOTLIGHT
The Sound Room (cont.)
The Sound Room has grown up along with the home
entertainment industry, opening its second location in
Chesterfield in 1986, expanding to its current location
at 1661 Clarkson in 1991, and unveiling an expanded
showroom at 11641 Olive Blvd. in Creve Coeur in 2000.
“The move from analog to digital systems and the CD
player transformed everything. Then we had high-fidelity
VCRs and sound systems in TVs. In the past two to three
years, we’ve seen the explosion in home automation and
control systems, whereby our systems control everything
from lighting and HVAC to entertainment and security. It
was the birth of the networked/connected home. Now
everyone is moving to high-definition.”
Today, video surveillance and remote access, wholehouse integration and energy-saving systems are
driving the market. The Sound Room’s customers can
monitor properties remotely from a laptop and/or send
instructions to the home.
“In the past, these systems were just for rich people,”
says Young. “Wireless technology and economies of scale
have made these systems much more affordable. A whole
new market of home owners has opened up for us.”
With the buying power of the national retailers and the
emphasis on service and installation, The Sound Room is
able to attract today’s middle-class home owner as well
as the high-end user. “We want to give the customer the
best system for his or her needs,” says Young. “Today we
see younger buyers, families as well as empty nesters.
It’s all over the board.”
The Sound Room goes the extra mile in delivering
customized turn-key systems. In addition to designing,
installing and servicing the equipment, it also offers an
easy-to-use software integration package that allows
customers to upload their personal DVD or music library,
which can be easily accessed through a touch screen.
The program even rearranges viewer menus and offers
selection suggestions based on the last entertainment
option selected.
“If the family is in the home theatre and just finished
watching ‘Aladdin,’ then similar preferences will be next
on the menu,” says Young. “If the teens are into action
movies, then the menu options will reflect that. Again, it’s
all about making it interactive and user-friendly.”
29 ◆ fall 2008 issue
41280.indd Sec1:29
9/4/08 9:43:07 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
Because of its successful track record and hard-earned
reputation for quality, The Sound Room was selected to
provide home entertainment systems for the Crescent,
Maryland Walk, the Plaza in Clayton and, most recently,
Clayton on the Park. It also has designed installations for
major commercial building projects, including schools,
museums and corporate board rooms.
Kenneth Rubin, CPA and partner at RubinBrown, has
known Young since they were classmates at Ladue High
School. “David has developed a really nice niche in the
home entertainment market,” said Rubin. “Over the years,
I’ve seen him fight off the competition and the Big Box
retailers with millions in advertising behind them. He’s
succeeded because of his focus on quality and service.
Customers appreciate the expertise and attention The
Sound Room employees provide. Unlike other retailers,
The Sound Room stays with the customers after the sale.
David and his team want you to be a customer for life.”
Similarly, RubinBrown has been providing The Sound Room
with accounting and business consulting services since its
inception. “I don’t like to make a major business decision
without talking to RubinBrown,” says Young. “They’ve been
my trusted business advisors for 25 years. Ken has been
by my side in every major business move.”
Young is invigorated by the constant infusion of new
technologies and approaches to the home entertainment
industry. He sees The Sound Room continuing to grow
with additional locations and services and, of course,
new technologies. “When I started this business in 1983,
I had no idea that we’d be able to offer systems that do
all they do. Who knows what magical media may be
down the road?”
When asked if he likes what he does, Young replied, “You
must be kidding. I have the most fun job of anyone in
the world. I’m surrounded by the latest gadgets and toys
and quality entertainment and sound systems. I’d want
to do this even if I wasn’t getting paid.”
RubinBrown has been
providing The Sound Room
with accounting and business
consulting services since its
inception. “I don’t like to make
a major business decision
without talking to RubinBrown,”
says Young. “They’ve been my
trusted business advisors for 25
years. Ken has been by my side
in every major business move.”
30 ◆ fall 2008 issue
41280.indd Sec1:30
9/4/08 9:43:12 PM
INDUSTRY
◆
CONTRACTORS
Tax Savings
on Equipment
Purchases
By Frank Hogg, CPA
The Economic Stimulus Act of
2008 provides several incentives
for contractors to purchase new
equipment during 2008. These
incentives include:
Boosted Section 179 Expensing. Under pre-act law,
taxpayers can generally expense (i.e. deduct currently,
as opposed to taking depreciation deductions over a
period of years) up to $128,000 for 2008. This annual
expensing limit is reduced (but not below zero) by the
amount by which the cost of qualifying property placed
in service during 2008 exceeds $510,000. The amount
of the expensing deduction is limited to the amount of
taxable income from any of the taxpayer’s active trades
or businesses.
Under the act, for tax years beginning in 2008, the
$128,000 expensing limit is increased to $250,000, and
the overall investment limit is increased from $510,000
to $800,000.
As a result of this incentive, most small businesses, and
even some moderate-sized businesses with moderate
capital equipment needs, will be able to obtain a full
deduction for the cost of business machinery and
equipment purchased in 2008, thereby reducing the
effective cost of those assets. Further, there is no
alternative minimum tax adjustment with respect to
property expensed under Section 179.
Bonus Depreciation Makes a Comeback. Bonus firstyear depreciation was first allowed following the terrorist
attacks of 2001 but generally is not available for property
acquired after 2004.
The act provides for bonus (accelerated) depreciation by
allowing a bonus first-year depreciation deduction of 50
percent of the adjusted basis of qualified property placed
in service after Dec. 31, 2007, and, generally, before
Jan. 1, 2009. The basis of the property and the
depreciation allowances in the year the property is
placed in service and later years are appropriately
adjusted to reflect the additional first-year depreciation
deduction. The amount of the additional first-year
depreciation deduction is not affected by a short
taxable year. The taxpayer may elect out of additional
first-year depreciation for any class of property for any
taxable year.
Bonus depreciation is allowed for AMT purposes as
well as for regular tax purposes. Additionally, bonus
depreciation is permitted only for: (1) tangible property
that has a recovery period of 20 years or less, (2) water
utility property, (3) non-custom-made computer software,
and (4) qualified leasehold improvement property.
Original use of the property must begin by the taxpayer
after Dec. 31, 2007.
31 ◆ fall 2008 issue
41280.indd Sec1:31
9/4/08 9:43:16 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
Be Vigilant
for Fraud
By Frank Hogg, CPA
Contractors are vulnerable
to fraud by the very nature of
their operations, which usually
involve numerous job sites and
employees. In addition, fraud
often becomes more prevalent
during tougher economic
conditions.
The following are various fraud schemes that are
common to contractors and possible controls that can
be implemented to prevent or detect the fraud.
Cash Disbursements – This type of fraud involves
schemes in which the embezzler uses company checks
to either withdraw cash directly for his or her benefit or to
pay personal expenses.
Possible Controls: Different personnel should be
responsible for the authorizing, processing, recording
and custody functions. Only authorized signers should
sign checks. Someone independent of the accounting
function should receive all bank statements, unopened,
directly from the bank and thoroughly review all cancelled
checks.
Fictitious Vendors – A common type of fraud is payment
of invoices to a fictitious vendor. This fraud occurs when
the embezzler establishes a fake vendor and enters it
into the company’s records as a legitimate one.
Possible Controls: Senior management should
periodically examine the company’s approved vendor
list. Further investigation should be performed on those
vendors that are unfamiliar to senior management.
Ghost Employees – Under this scheme, the embezzler
enters fictitious employees into the payroll system after
they have left their jobs or keeps terminated employees
on the payroll and receives the resulting payroll checks.
Possible Controls: A “surprise” distribution of payroll
checks by someone independent of the field and payroll
operations is a good procedure for detecting this fraud.
Construction Theft – Construction equipment and tools
are attractive targets for thieves.
Possible Controls: Restrict access to job sites by physical
security measures, require proper identification to enter
worksites, and engrave or spray-paint a distinctive logo
on the equipment or tools. Photograph all equipment,
maintain serial numbers and observe the equipment on
a regular basis.
Company Equipment – Another fraudulent scheme
involves the use of company equipment, materials or
labor to perform jobs on the side. The employees then
pocket all of the revenue from the side jobs.
Possible Controls: This type of fraud can be very difficult
to detect. A “surprise” inspection of company equipment
at night or on weekends may be effective in identifying
unauthorized use of company equipment. This type of
fraud often is discovered when an event (i.e. customer
complaint, employee injury) occurs at the previously
unknown job site.
Implementing a strong system of internal controls is the
best way to prevent or detect all of the aforementioned
fraud schemes. Once established, the system should
be periodically reviewed to ensure the internal controls
are operating as designed. Although no company is 100
percent fraud-proof, solid internal controls and effective
management oversight can keep your company from
being victimized by the many fraudulent schemes that
we have discussed.
Questions? Contact:
Frank Hogg, CPA
Partner-in-Charge
Contractors Services Group
314.290.3413
[email protected]
32 ◆ fall 2008 issue
41280.indd Sec1:32
9/4/08 9:43:17 PM
INDUSTRY
◆
HOME BUILDERS
What Are the
“Top 10” Numbers
in Managing Your
Home Building
Company to
Success?
By Steve Hays, CPA
1. Net Income (Profit) Percentage (Return on Sales)
Net Income
Net Sales
3. Gross Margin
Net Sales
(Developed Lot Costs)
(Direct Construction Costs)
Gross Margin
A measure of dollars remaining after direct costs of
construction are deducted in order to cover remaining
variable and fixed costs.
Gross margin decreases represent a home builder
giving the home buyer “too much house for the sales
price.” The key to maintaining an adequate gross
margin is buying a piece of land at the right price
and designing your base home (direct construction
costs) correctly. Total “direct” costs of construction
(developed lot costs and direct construction costs)
should not be more than 80 percent of the sales price
in today’s market.
4. Gross Profit Percentage
Gross Profit
Net Sales
A measure of net income dollars generated by each
dollar of sales.
A measure of gross profit dollars generated by each
dollar of sales.
Net income (profit) percentage is the most important
number to manage. Often referred to as “the bottom
line,” it typically is the first number an owner, banker or
investor looks at for the overall health of the company.
Certain cost savings are said to drop straight to the
bottom line and a dollar savings in certain cost areas
increases your net income by that same dollar.
The difference between gross margin and gross profit
is the inclusion of indirect construction costs. This
key financial measure represents a home builder’s
ability to cover or absorb other operating expenses.
If a home builder cannot maintain an adequate gross
profit percentage, it is unlikely he or she can obtain
an acceptable net profit percentage. Maintaining an
acceptable gross profit percentage is essential to
long-term economic viability.
2. Direct Construction Costs Percentage
Direct Construction Costs
Net Sales
A measure of direct construction cost dollars spent for
each dollar of sales generated.
They are the biggest costs a home builder incurs, yet
some builders do little to control these costs. Managing
this number – the “sticks and bricks” that go into a
house – is critical. A common characteristic of the
best builders is their ability to monitor and manage
direct construction costs. Even a small reduction in
direct construction costs as a percentage of sales
price can significantly increase a builder’s bottom
line. Any costs that can be removed or decreased
from a house and multiplied with direct construction
cost savings from other units can provide substantial
income improvement.
5. Break-Even
Fixed Costs or Expenses
(Unit Price - Variable Unit Cost)
Number of units that must be closed in order to
cover all costs and expenses of the company. This
calculation assumes zero profit.
Break-even analysis is a tool to calculate the sales
volume at which the variable and fixed costs of
producing a home will be recovered. The break-even
point is the point at which your homes stop costing
you money to produce and sell and start to generate
a profit for your company.
33 ◆ fall 2008 issue
41280.indd Sec1:33
9/4/08 9:43:18 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
6. Debt to Equity
Total Debt (Includes all liabilities)
Total Equity
Measures a company’s reliance on lender or creditor
financing as well as the business’ indebtedness
compared to the amount invested by its owners.
The debt to equity ratio indicates the ratio of the
dollars of liabilities the company has for every dollar
of stockholders’ equity. This ratio is a good indicator
of a company’s capacity to repay its lenders and
creditors.
7. Backlog
At any point in time, backlog represents the number
of homes sold (under firm contract) but not yet closed
(future firm sales).
Backlog provides owners, management, bankers and
investors with a short-term forecast should no other
homes sell. When used in conjunction with breakeven, it can help determine immediate sales needs
and help plan for future production capabilities.
8. Sales per Employee
Net Sales
Number of Employees
A measure of sales dollars generated by each employee.
Sales per employee benchmarks should be
established for each class of employees measured.
It is a good tool to let you know if you have excess or
not enough capacity in any class of employees. As a
general rule, each employee (when measured in total
employees) should generate $1.5 million in sales.
9. Cycle Time
Contract Approved to Start Date
+ Start Date to End of Construction
+ End of Construction to Closing Date
Total Cycle Time (measured in days)
A measure of the number of days it takes a builder to
complete a home.
Cycle time can be used to determine the phase
during which building inefficiencies occur. It should
be measured in conjunction with the home builder’s
average selling price because it can take longer to build
a bigger, more expensive home. Cycle time can be
broken down into further phases for better analysis.
10. Return on Equity
Net Income
Stockholders’ Equity
A measure of how much profit a company generates
with the money stockholders have invested.
Return on equity will vary by company based on
equity structure. Some companies prefer to track
return on total assets.
The Market
The 2008 selling season is off to the same start as the
weather – warm one day, then cloudy and raining the
next. While traffic has been inconsistent, the quality of
the buyer has generally been pretty good. Unfortunately,
sales in the first half of the year have been relatively flat.
Creative marketing and concessions continue to play a
significant role in sales. The public has heard but does
not truly understand that it certainly is a great time to
buy a house.
As for what to expect further in 2008, it is impressive to
see how all – home builders, lenders, subcontractors,
suppliers and others – are working together to survive
this crisis. Spec inventory levels have been reduced in
recent months to manageable levels, although relatively
low backlogs in the market, runaway gas prices, and the
overall health of the economy are concerns. Improvement
is being seen on some gross margins, especially on
homes to be built. The bottom of the market may not
yet be in sight, but it appears many builders have fully
buttoned down to weather the storm.
When the market does turn, builders will be leaner, with
better systems and processes in place to satisfy what
should be some pent-up demand. It is hopeful that all
of the Fed’s interest rate cuts will translate to even lower
long-term mortgage rates.
Stay Tuned!
Questions? Contact:
Steve Hays, CPA
Partner-in-Charge
Home Builders Services Group
314.290.3336
[email protected]
34 ◆ fall 2008 issue
41280.indd Sec1:34
9/4/08 9:43:19 PM
INDUSTRY
◆
HOSPITALITY AND GAMING
Private
Country Clubs’
Compensation
Not So Private!
By Jim Mather, CPA
The IRS has published a fairly significant update to
the Form 990 filing requirements that will impact the
private club industry. The revisions have created a buzz
throughout the private club industry and will take effect
for filing years due in 2009. The updated filing guidance
requires additional compensation disclosures for certain
key employees, directors, officers and other highly
compensated employees of private clubs.
Clubs previously were required to report the names and
salaries of officers, trustees, directors and certain key
employees, but the updated Form 990 guidance will
require the listing of the salaries and names of the club’s
top five highest-paid employees (other than an officer,
trustee, director or key employee).
The updated guidance as published by the IRS within
its draft instructions covering Part VII of the Form
990 requires the disclosure of compensation of the
following officers, directors, trustees and employees of
the organization:
• Current officers, directors and trustees (no minimum
salary – report all)
• Current key employees (compensation exceeding
$150,000)
• Current five highest-compensated employees other
than officers, directors, trustees or listed employees
(only those that exceed $100,000)
• Former officers, key employees and highest-paid
compensated employees (compensation exceeding
$100,000)
• Former directors and trustees ($10,000 in the capacity
as a former director or trustee)
The definition of a “key employee” according to Form
990 is someone other than an officer, director or trustee
who meets the following criteria:
• Has responsibilities, powers or influence over the
organization as a whole that is similar to those of an
officer, director or trustee
• Manages a segment or activity of the organization that
represents 5 percent of the organization’s activities,
assets, income or expenses of the organization
35 ◆ fall 2008 issue
41280.indd Sec1:35
9/4/08 9:43:20 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
• Has, or shares, the authority to control 5 percent of the
organization’s capital expenditures, operating budget
or employee compensation
Compensation is defined as the amounts reported in Box
5 of Form W-2 for employees or Box 7 of Form 1099Misc. for any directors or trustees.
Other items management should note within Form 990
include questions in section VI under “Policies.” The
questions require “yes” or “no” answers regarding the
implementation of the following:
• “Conflict of Interest Policy”
• “Annual Disclosure of Interests”
• “Enforcement of Conflicts Policy”
• “Whistleblower and Document Retention Policy”
These are fairly self-explanatory and are some of
the best practice policies pulled from the SarbanesOxley guidance that should be implemented by taxexempt organizations.
Form 990 also requests a “yes” or “no” answer covering
the organization’s process for determining compensation
reported in Part VII for the CEO, executive director
and other top management. The question asks if
there is 1) a review and approval by the governing
body or compensation committee, 2) use of data for
comparison to similar qualified positions in comparable
organizations, and 3) retention of documentation with
respect to the deliberations and decisions regarding the
compensation arrangement.
All of the items noted above may require some additional
thought and consideration prior to the end of the club’s
fiscal year and filing of the related Form 990.
Questions? Contact:
Jim Mather, CPA
Partner-in-Charge
Hospitality and Gaming Services Group
314.290.3470
[email protected]
36 ◆ fall 2008 issue
41280.indd Sec1:36
9/4/08 9:43:22 PM
INDUSTRY
◆
MANUFACTURING AND DISTRIBUTION
Green and
Lean –
Enhancing
Your Lean
Manufacturing
Efforts by
Going Green!
By Mike Lewis, CPA
Mitch Kidwell of the U.S.
Environmental Protection
Agency says “lean usually helps
the environment without really
intending to.”
Green is in! Growing media attention and increased
consumer awareness of green initiatives is a reality
for today’s manufacturers and distributors. Add to that
the increased regulatory scrutiny and green does not
appear to be a passing fad.
On the surface, green and “lean” may appear to be
an unlikely combination. Lean enterprises focus on
eliminating waste to increase cash flow and capacity
to grow their businesses. This enterprise strategy gives
the company a competitive edge. Lean enterprises
accomplish this by eliminating waste and non-value
added activities while delivering what the customer
wants, when they want it.
37 ◆ fall 2008 issue
41280.indd Sec1:37
9/4/08 9:43:27 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
On the manufacturing floor, environmental wastes do
not add value to the customer and many times result in
bottlenecks to one-piece flow. In addition, disposal of
environmentally hazardous material can be a very costly
process. These facts make these processes ripe targets
for lean initiatives. The opportunity to improve these
processes also can result in significant cost reductions.
A lean and environmental pilot project completed in
Washington state resulted in reduced energy costs of
$99,000 annually, reduced hazardous waste by more
than 60,000 pounds, and reduced solid waste by more
than 500,000 pounds annually.
You can download a copy of the toolkit
www.epa.gov/lean/toolkit/leanEnviroToolkit2.pdf.
Mitch Kidwell of the U.S. Environmental Protection
Agency says “lean usually helps the environment without
really intending to.” Kidwell believes that lean and green
are a natural fit. The EPA has developed the “Lean
and the Environment Toolkit.” The toolkit assembles
practical experience collected by the EPA from a group
of partner companies and organizations that have had
experience with coordinating lean implementation and
environmental management. The focus of the toolkit
is to improve both the business performance and
the environmental performance of the company and
offers practical strategies and tools for integrating
environmental considerations in lean initiatives. The
toolkit will help you:
Many lean initiatives can qualify for the R&D tax credit for
Federal Income Tax purposes. Re-engineering day-today operations such as engineering, production, quality
assurance, purchasing and information technology all
may include activities that qualify for the R&D Credit.
If your lean initiatives focus on improving existing
products, processes, techniques, etc., these costs may
qualify as research expenses.
• See hidden environmental wastes and hazards.
Many times, environmental wastes are overlooked
during lean initiatives and therefore go unaddressed.
Costs including material disposal costs for compliance
with environmental regulations and water, chemical
and energy usage can be reduced if they become the
target of a lean initiative.
• Enhance the effectiveness of lean implementation.
Coordination of lean and environmental initiatives can
lead to improved bottom-line results by eliminating
waste and improving usage of raw materials.
• Deliver what the customers and the employees want.
Consumers want environmentally friendly products.
Companies that can deliver these products have
a competitive advantage over those that do not.
Improving the work environment can result in a positive
effect on employee morale and reduce exposure
to environmentally unfriendly chemicals or other
substances.
at
Potential Tax Savings for Green and Lean Initiatives
Recently issued IRS regulations have made qualifying
for the research and development tax credit more
appealing to many companies and industries. The new
regulations are taxpayer friendly and reflect a profound
change in the position of the IRS and state taxing
authorities by dramatically broadening the traditional tax
definition of “R&D.”
Beginning in 2007, eligible taxpayers can elect to use
the alternative simplified credit as a substitute for the
more complex, traditional research credit. The traditional
credit required the taxpayer to obtain records for base
periods from the 1980s. For those taxpayers that have
never taken the credit, the ASC calculation does not
require a look back to historical-based periods. In
addition, for those taxpayers whose research expenses
no longer exceed the base period hurdle, the ASC
provides an opportunity for a reduced R&D credit. In
summary, the ASC can generate additional tax savings
not available under the traditional research credit with a
simpler calculation.
Questions? Contact:
Mike Lewis, CPA
Partner-in-Charge
Manufacturing and Distribution Services Group
314.290.3391
[email protected]
38 ◆ fall 2008 issue
41280.indd Sec1:38
9/4/08 9:43:28 PM
INDUSTRY
◆
NOT-FOR-PROFIT
Alternative
Investments
By Ted Williamson, CPA
Alternative investments are investments for which a readily
determinable fair value does not exist. Unlike traditional
investments such as common stocks or government and
corporate bonds, quoted market prices for alternative
investments are not available on national exchanges
or within financial publications. Examples of alternative
investments include hedge funds, private equity funds,
real estate funds, venture capital funds, commodity funds,
offshore fund vehicles and funds of funds.
Over the past decade, not-for-profit organizations
throughout the United States have devoted progressively
larger shares of their investment portfolios to alternative
investments, often at the behest of their investment
advisors. With the stock market producing less favorable
returns than in the late 1990s, alternative investments
have been viewed by many not-for-profits as a way
to guarantee perennial double-digit returns on their
endowments. However, in their zeal to achieve improved
investment performance, many not-for-profits have failed
to consider the financial reporting complications arising
from alternative investments.
Financial Reporting Consequences of
Alternative Investments
Most not-for-profit organizations are required by
generally accepted accounting principles to report
investments at fair value within the financial statements.
For traditional marketable securities, the fair value can
be derived by simply obtaining the closing price for
the security on a national exchange as of the financial
statement date. Similar market data is not available for
alternative investments, and thus other sources of fair
value information must be identified. This assessment
usually involves the following complications:
• For many alternative investment funds, fair value
information comes directly from the fund itself, making
it difficult to perform an independent verification of this
information.
• Many alternative investment funds consider their
investment holdings and strategies to be proprietary
information. Thus, they are often reluctant to share
information that would be helpful in calculating a fair
value for the fund (such as a listing of investments held
by the fund).
• Financial information (such as monthly investment
statements or audited annual financial statements)
is usually received in a much less timely fashion
from alternative investment funds than from traditional
investment funds, especially if the alternative investment
fund itself invests in other alternative investments. This
lag has the potential to delay a not-for-profit’s financial
reporting process significantly.
39 ◆ fall 2008 issue
41280.indd Sec1:39
9/4/08 9:43:28 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
• Most alternative investment funds have Dec. 31 fiscal yearends, meaning not-for-profit organizations with different
fiscal year-ends may have difficulty obtaining fair value
information as of their financial statement dates.
• Ongoing monitoring after investing in the fund.
Controls might include periodic meetings with the
fund’s management, on-site visits, review of SAS 70
reports for the fund (if available), review of fund reports
and monitoring of fund performance.
For not-for-profit organizations for which alternative
investments constitute a significant portion of their
assets, failure to obtain appropriate fair value information
for these investments potentially could result in a scope
limitation within the independent auditors’ report on the
financial statements. Thus, not-for-profits should regard
the proper valuing of alternative investments as an
important management responsibility.
• Financial reporting related to alternative investments.
Controls might include the maintenance of an
investment policy by the not-for-profit organization,
the formation of an investment committee, review of
audited financial statements for alternative investment
funds, and maintenance of a listing of alternative
investments held by the organization.
Management’s Responsibility for the
Valuation of Alternative Investments
The responsibility for valuing alternative investments
within a not-for-profit’s financial statements rests with
management of the organization. This responsibility
cannot be outsourced to any party outside of the
organization. While management may utilize investment
valuations prepared by the alternative investment
fund, management should have sufficient information
to evaluate and independently challenge the fund’s
valuation.
At a minimum, management should have a sufficient
understanding of:
• The nature of the underlying investments held by the
alternative investment fund;
• the portfolio strategy of the alternative investment
fund;
• and the method and significant assumptions used
by the fund manager to value the underlying
investments.
To obtain this understanding, management should institute
a system of internal control over alternative investments
that encompasses the following elements:
• Initial due diligence before investing in the fund.
Controls might include face-to-face meetings with the
fund’s management, on-site visits, reference checks
and inspection of legal documents.
The AICPA Practice Aid titled “Alternative Investments
– Audit Considerations” identifies additional examples
of internal control procedures that a not-for-profit
organization may wish to consider relative to alternative
investments.
Possible Sources of Fair Value
Information for Alternative Investment
Funds
The following represent possible sources of information
from which management can derive the fair value of
an alternative investment. These sources may or may
not be applicable for a given alternative investment.
Management of a not-for-profit organization may
need to determine the most appropriate method to
value its alternative investments on an investment-byinvestment basis.
• Fair value of investments held by the alternative
investment fund: As mentioned earlier, many
alternative investment funds will not provide a detailed
listing of investments held by the fund as they
consider this information to be proprietary. However,
if an alternative investment fund does provide
such information, and if the underlying investments
themselves have quoted market prices, management
may derive the total fair value of the alternative
investment fund by summing the fair values of the
investments held by the fund. This total may be
multiplied by the not-for-profit’s percentage interest
in the alternative investment fund to arrive at the fair
value of the not-for-profit’s interest in the fund.
40 ◆ fall 2008 issue
41280.indd Sec1:40
9/4/08 9:43:30 PM
INDUSTRY
◆
NOT-FOR-PROFIT
Alternative Investments (cont.)
• Audited financial statements for the alternative
investment fund: Audited financial statements are
available for most alternative investment funds.
These financial statements often contain an appendix
indicating the value of each investor’s interest in the
fund or identify a per share value from which the value
of the investor’s interest in the fund can be calculated.
However, if the not-for-profit organization and the
alternative investment fund have different fiscal yearends, the audited financial statements of the fund will
not be of use in calculating the value of the not-forprofit’s interest as of the financial statement date.
• Transactions at or near the financial statement date:
If the not-for-profit organization purchased or sold
shares in an alternative investment fund at or near
the financial statement date, the price per share at
which the investments were purchased or sold may be
utilized to calculate the value of the shares held
by the not-for-profit organization as of the financial
statement date.
• Independent appraisal: For certain alternative
investments, an independent appraisal of the
investment’s value may be obtained. For example, for
certain real estate funds, an appraisal of the value of
the underlying property held by the fund may be useful
in calculating the value of the not-for-profit’s interest
in the fund.
Impact of SFAS 157 on Alternative
Investments
Statement of Financial Accounting Standards No. 157,
Fair Value Measurements, is effective for fiscal years
ending after Nov. 15, 2007, for financial assets and
liabilities. SFAS 157 establishes a three-level hierarchy
of inputs into the calculation of fair value. These levels
are as follows:
• Level 1: Quoted market prices in active markets for
identical assets or liabilities.
Since, by definition, alternative investments do not
have readily available quoted market prices in active
markets, level 1 inputs will rarely, if ever, be available for
alternative investment fair value calculations. However,
not-for-profit organizations are reminded that the SFAS
157 hierarchy does apply to alternative investment
valuations. Therefore, when multiple possible sources of
fair value information for a given alternative investment
are available, preference should be given to level 2
inputs over level 3 inputs. For example, when valuing real
estate assets held by a real estate fund, market prices
for similar real estate assets (a level 2 input) should be
given preference over the not-for-profit’s own discounted
cash flow analysis (a level 3 input).
Summary
Alternative investments are inherently difficult to value
due to the unavailability of quoted market prices or other
easily accessible fair value measurements for these
instruments. The preponderance of these investments
within the not-for-profit industry has complicated the
financial reporting process for some organizations.
Management should establish sound control procedures
over the selection, monitoring and reporting of alternative
investments and should identify appropriate sources of
financial information to utilize in developing a fair value
for its alternative investments. Not-for-profit organizations
are encouraged to be proactive in carrying out their
responsibility for the valuation of alternative investments
in order to avoid adjusting entries, control deficiencies
or opinion modifications during the annual independent
audit process.
Questions? Contact:
Judy Murphy, CPA
Partner-in-Charge
Not-for-Profit Services Group
314.290.3496
[email protected]
• Level 2: Inputs other than quoted prices that are
observable for the asset or liability, either directly or
indirectly.
• Level 3: Unobservable inputs, which are an entity’s
own assumptions about what market participants
would assume when determining a price to pay.
41 ◆ fall 2008 issue
41280.indd Sec1:41
9/4/08 9:43:31 PM
Broadening your business horizons?
Time to call on RubinBrown.
As the world continues to shrink, opportunities expand. But to reach your international potential, you
need a financial partner who will add real value. And that’s where we can help.
We’re RubinBrown, a member of Baker Tilly International, a leading global network of independent
accounting firms. Through Baker Tilly International, we offer our clients unparalleled access. Local
market expertise. The kind of solutions you need to advance your global business plans.
Wherever success may lead, when you’re thinking globally, think RubinBrown. Contact us today and
discover the RubinBrown difference.
®
www.RubinBrown.com
Certified Public Accountants and Business Consultants
Knowledge. Commitment. Value.
Assurance | Internal Audit | Litigation Support | Qualified Plan Audit | SEC Advisory | Small Business
State and Local Tax | Tax and Compliance | Valuations | Wealth Management
42 ◆ fall 2008 issue
INDUSTRY
◆
PUBLIC SECTOR
When
Not-for-Profit
Organizations
Should Use
Governmental
Accounting
By Jeff Winter, CPA, CGFM
In 1993, the Governmental Accounting Standards Board
issued a staff paper titled “Applicability of GASB Standards
to not-for-profit entities.” This document was a collaborative
effort between the Financial Accounting Standards Board
and the GASB, where jointly the two bodies agreed
to a definition of “government.” This definition was
expected to be particularly helpful for certain not-for-profit
organizations in determining whether to follow generally
accepted accounting principles applicable to state and
local governments or GAAP for other nongovernmental
entities, such as FASB Statement No. 116, “Accounting
for Contributions Received and Contributions Made,” and
117, “Financial Statements of Not-for-Profit Organizations.”
Neither board issued an accounting standard, so the
GASB staff paper is the highest level of authoritative
guidance that exists. Unfortunately, even 15 years later,
inconsistencies and some confusion still exist about which
GAAP to follow for situations that involve not-for-profit
entities that have governmental characteristics or are
created by a government.
The issue of what GAAP to follow applies to not-for-profit
entities such as health care organizations, colleges and
universities, libraries, public radio or television stations,
and school foundations. The difficulty is caused by the
variety of ways in which governments are created as
well as the extent to which these entities either perform
functions that could be considered “governmental” in
43 ◆ fall 2008 issue
41280.indd Sec1:43
9/4/08 9:43:36 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
nature or are controlled by other governmental bodies.
These not-for-profit organizations often fall into a gray
area between private and government and should follow
this guidance on deciding whether to apply government
accounting standards or private-industry accounting
standards. Many of these entities are not created by
state statute as a body corporate or politic, but rather
under the state’s general corporate or not-for-profit
corporation laws. Many entities also do not perform
governmental functions and are not controlled by other
governmental bodies through the appointment process.
Such entities should closely evaluate the parameters of
the staff paper.
The obvious and most primary unit of government –
excluding the federal government – is a state or territory of
the United States of America and the District of Columbia.
Other entities that are considered governments result from
their creation by the state to perform or to facilitate the
performance of a state’s functions. These governments
are those that are created by state constitution or statute,
statutory enabling legislation or local ordinance. Those
created by a state are often defined as either municipal
or quasi-municipal corporations. They are further divided
into general-purpose governments, which include cities
and counties, and special purpose governments, which
include school districts, special districts and public
authorities.
Some organizations that are considered governments
are not created by state statute or local ordinance
but are created by both elected or appointed officials
acting in their capacity as public officials through a
state’s general and not-for-profit corporation laws. These
entities should be considered governments and follow
governmental GAAP if they possess one or more of the
following characteristics:
• Popular election of officers or appointment (or
approval) of a controlling majority of the members of
the organization’s governing body by officials of one
or more state or local governments.
• The potential for unilateral dissolution of the organization
by a government with the net assets reverting to the
government.
• Have the ability to issue directly (rather than through
a state or municipal authority) debt that pays interest
exempt from federal taxation.
• The power to enact and enforce a tax levy.
The staff paper also discusses that in certain
circumstances, organizations that are not created
by governments or their public officials but perform
government functions may need to be accounted for
under governmental GAAP. This analysis requires
professional judgment, and the decision should be
based upon factors including previous legal decisions
within the jurisdiction; classifications by the U.S. Bureau
of Census; the relationship between a governmental
entity and the not-for-profit concerning management and
the use or sharing of resources; and, finally, the basis for
the organization’s federal income tax exemption.
Some illustrations, which are discussed in the staff
paper, demonstrate how certain organizations would be
classified under various facts and circumstances(1):
1. Drug counseling, job training and youth recreation
services are provided in four cities through multiservice centers. In each city, 100 percent of the costs of
operating the center is financed (derived from federal,
state and city grants) through contracts between the
city and the multi-service center. All of the contracts
with the multi-service centers are based on budgets
and program plans submitted by the centers to the
cities; all of the contracts require monthly performance
reporting to the city’s social services departments; and
all are subject to audit for compliance with contract
clauses and reasonableness of costs incurred.
In each city, however, the multi-service center is
organized differently:
a. City A’s multi-service center was created by city
ordinance pursuant to state enabling legislation
as a “body corporate and politic.” It financed its
building by directly issuing tax-exempt debt, as
authorized by law. Its three-member governing
body is appointed by and serves at the pleasure of
the mayor.
b. City B’s center was incorporated under the
state’s not-for profit corporation laws and is
an IRC 501(c)(3) corporation. The city’s social
services commissioner and her counsel were the
incorporators. It financed its building through taxexempt debt issued by the state’s housing finance
(1) Governmental Accounting Standards Board, November 1993,
“Applicability of GASB Standards to Not-for-Profit Entities – A Staff Paper.”
44 ◆ fall 2008 issue
41280.indd Sec1:44
9/4/08 9:43:38 PM
INDUSTRY
◆
PUBLIC SECTOR
Not-for-Profits and Governmental Accounting (cont.)
agency, making semiannual rental payments
equal to the debt service. In accordance with
the corporation’s charter, its three-member board
consists of city officials serving ex officio.
c. City C’s center was incorporated under the
state’s not-for-profit corporation laws and is an
IRC 501(c)(3) corporation. The corporation was
organized by the Committee of 100, a local civic
group, at the suggestion of the mayor and the city’s
social service commissioner. It financed its building
through tax-exempt debt issued by the state’s
housing finance agency, making semiannual rental
payments equal to the debt service. Its threemember board consists of the president of the
Committee of 100 and two people selected by the
committee’s membership.
d. City D’s center is operated by City Services,
a subsidiary of a private corporation, which
purchased the assets from the city’s social
services department (the previous operator of
the center) under the city’s new privatization
program. The individual contracts with the
corporation are similar to those of the other
cities, except that they all contain clauses stating
that if the city deems it to be no longer in the city’s
interest to contract with City Services, the city has
an option to purchase the assets from City Services
at cost minus depreciation.
(The centers operated in City A and City B are
governmental. Both were created by the cities. City
A’s center is a municipal corporation whose board is
appointed by the mayor. City B center’s board consists
entirely of government officials. The centers operated
in City C and City D are not governmental. City C’s
center was created by private individuals, albeit at
the behest of city officials. It possesses none of the
characteristics of government. Despite the significant
budgetary and operating controls exercised over it
by the city, and even though a state agency issued
tax-exempt debt on its behalf, there is no evidence
that it is governmental. City D’s center is owned by
a private corporation and operates under contractual
arrangements and controls designed to protect the
city’s interests.)
2. A community college has an active interscholastic
sports program. With the encouragement of the
college administrators, a group of alumni incorporate
the college booster club as a not-for-profit corporation.
The club’s board members are elected by the
club membership. College administrators have no
contractual relationship with the club. The club solicits
donations from the local citizenry in the name of the
college booster club. The donations are used to
purchase uniforms for the players on all of the teams
and the school’s marching band. The donations also
are used to pay a significant salary supplement to
the football coach, who also is a full-time member
of the college’s hygiene department; the amount of
the salary supplement is negotiated with the college
administrators.
(Despite its close ties to the college, the booster club
is not governmental because it was not created by
the college administrators, possesses none of the
characteristics of government, and is not controlled
by the college.)
The issue of what GAAP to follow for certain not-forprofit organizations is not always a simple concept
to implement. The staff paper does an excellent job
of providing guidance; however, more and more
governments are using not-for-profit organizations to
expand the services they provide and also to raise
money through non-traditional means and are not aware
of the rules that exist. Utilizing the wrong set of GAAP
would be paramount to issuing a financial statement that
is not in accordance with GAAP and should cause the
auditor to render a qualified opinion.
Questions? Contact:
Jeff Winter, CPA, CGFM
Partner-in-Charge
Public Sector Services Group
314.290.3408
[email protected]
45 ◆ fall 2008 issue
41280.indd Sec1:45
9/4/08 9:43:38 PM
The knowledge you need.
The commitment you expect. The value you deserve.
For more than half a century, RubinBrown has been making a lasting mark on business.
Our unique, one-firm approach means you benefit from the best of both worlds –
specialized expertise and comprehensive services. All designed to deliver the kind of
insights and solutions you need to succeed.
A passionate, professional team. A one-firm approach to service excellence. It’s how we
bring real value to our clients. And it’s why they remain clients for decades, not just years.
That’s the RubinBrown difference.
®
www.RubinBrown.com
Certified Public Accountants and Business Consultants
Knowledge. Commitment. Value.
Assurance | Internal Audit | Litigation Support | Qualified Plan Audit | SEC Advisory | Small Business
State and Local Tax | Tax and Compliance | Valuations | Wealth Management
INDUSTRY
◆
REAL ESTATE
For example, a project that was originally underwritten
in the low 90 cent (per dollar of tax credit) range may
now be looking at pricing in the low 80 cent range. The
result is that many of these deals now have significant
budget shortfalls and may not be completed. Beyond the
challenge of low prices, many developers are having a
difficult time finding investors for their projects.
Housing Tax
Credit Industry
Continues to
Struggle
The shortage in equity has left both developers and
state agencies scrambling to find creative ways to fund
gaps in development sources. Those investors that are
still in the market are being flooded with proposals from
desperate developers. Basically, there are too many
deals chasing the small number of investors that are
still in the market. For the first time in a long time, the
demand and supply for tax credit equity is out of balance
and, as of press time, it is still uncertain when the market
will stabilize.
LIHTC syndicators are searching for the point at which
prices to developers allow projects to be completed
and yields to investors are high enough to attract tax
credit buyers. In 2007, the yields to investors dipped to
historic low rates of 4.5 percent to 4.75 percent, as many
developments were being priced higher. Today, many
syndicators believe that yields to investors will need
to be in the 6.5 to 7 percent or higher range to attract
investors back to the market.
So what does all this mean?
By Bryan Keller, CPA, and David Herdlick, CPA
The low-income housing tax credit (LIHTC) program
has been on its heels for much of 2008 and continues
to face several challenges. The problem is so great that
many industry experts predict that a number of new
projects with 2007 and 2008 tax credit reservations will
not get their equity this year since the project may no
longer be feasible.
The situation was led by the withdrawal of several major
investors, including Fannie Mae and Freddie Mac.
Several of these investors have pulled completely out
of the market or, at best, have significantly reduced
their investments in LIHTC projects for 2008. It is
estimated that approximately 40 percent of the market
is missing in action. In turn, this situation has continued
to put downward pressure on the price for LIHTCs.
Developers and state housing agencies are looking
for creative ways to fill the financing void. As an
encouraging example of how state agencies are
attempting to alleviate the problem, the Missouri
Housing Development Commission has requested that
all 2008 applicants resubmit their development source
and use schedules according to terms more reasonably
achievable with today’s marketplace. MHDC is preparing
for the recapture of reserved tax credits, and it hopes
to determine which projects initially denied credits
could potentially move forward with construction using
this reserve.
Another recommendation made by the staff at MHDC
is to provide additional HOME funds in order to fill the
financing gaps. MHDC commissioners, however, have
been hesitant to back this recommendation prior to
knowing to what extent, if any, the fallout of awarded
47 ◆ fall 2008 issue
41280.indd Sec1:47
9/4/08 9:43:51 PM
knowledge. commitment. value.
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS
projects will be. A number of other state housing
agencies have indicated that they are taking, or planning
to take, action to ensure the viability of the developments
that have already been awarded tax credits.
Despite the current challenges, there are things
developers can and should be doing. For example,
developers should seek out more soft funds, lock in
permanent financing while interest rates remain low and,
above all else, underwrite projects on very conservative
terms. The latter is especially important in this
market as many investors are underwriting with tougher
deal terms. Availability for soft funds is scarce, and the
competition for such funds is very fierce these days.
These are a few of the trends we are seeing across
the board with our LIHTC clients.
Even with the current dark cloud over the LIHTC market,
the program has 22 years of proven and positive history
behind it, and industry experts are optimistic about
seeing the market stabilize in 2009.
Major Victory as President Bush signs into
law H.R. 3221, the Housing and Economic
Recovery Act of 2008
On July 30, 2008, President George W. Bush signed into
law H.R. 3221, the Housing and Economic Recovery Act
of 2008. H.R. 3221 is a package of housing legislation
approved by Congress in late July that includes
significant modifications and program enhancements
to the low-income housing credit, rehabilitation tax
credit and tax-exempt bond programs, as well as
a temporary LIHTC cap increase and numerous
other provisions designed to bolster the housing and
financial markets.
Major provisions in the bill include:
• An $11 billion 2008 Housing Bond cap increase;
• A 10 percent Housing Credit cap increase in 2008 and
2009;
• Permanent AMT relief for Housing Bonds and Credits;
• Temporary MRB refinancing authority;
• Numerous Housing Bond and Credit modernization
provisions;
• GSE reform establishing a state-administered affordable
housing fund;
• Temporary authority for Treasury to lend money to and
purchase equity in Fannie Mae and Freddie Mac;
• A temporary consultative role for the Federal
Reserve Board on GSE capital standards and other
regulations;
• FHA modernization;
• A new FHA foreclosure prevention refinancing
program;
• $180 million for foreclosure mitigation and counseling
and legal assistance;
• $3.92 billion in neighborhood stabilization funding
to help states and localities turn around foreclosed
properties; and
• A new first-time homebuyer credit worth up to $7,500
for purchases on or after April 9, 2008, and before
July 1, 2009.
With this great news, much work is still to be done as
state housing agencies and industry partners will be
busy putting these new resources to quick and effective
use. Many thanks go to the National Council of State
Housing Agencies. NCSHA has proposed many of the
LIHTC program changes and pursued them for several
years. NCSHA is a national, nonprofit organization
created more than 30 years ago by the state Housing
Finance Agencies to coordinate and leverage their
federal advocacy efforts for affordable housing.
Please contact us for further information and a detailed
review on how we can assist you in making these
program changes work for you.
Questions? Contact:
Bryan Keller, CPA
Partner-in-Charge
Real Estate Services Group
314.290.3341
[email protected]
or
David Herdlick, CPA
Partner
Real Estate Services Group
314.290.3383
[email protected]
48 ◆ fall 2008 issue
41280.indd Sec1:48
9/4/08 9:43:52 PM
Knowledge. Commitment. Value.
One North Brentwood
St. Louis, Missouri 63105
Timely Reminders
Sept. 15, 2008
Individuals. Make a payment of your 2008 estimated tax on Form 1040-ES. This is the third installment date for estimated
tax in 2008.
Corporations. File a 2007 calendar year income tax return (Form 1120) and pay any tax due if you timely requested an
automatic six-month extension.
Deposit the third installment of estimated income tax for 2008.
S corporations. File a 2007 calendar year income tax return (Form 1120S) and pay any tax due if you timely requested
an automatic six-month extension. Provide each shareholder with a copy of Schedule K-1 (Form 1120S) or a substitute
Schedule K-1.
Oct. 15, 2008
Individuals. If you have an automatic six-month extension to file your income tax return for 2007, file Form 1040, 1040A or
1040EZ and pay any tax, interest and penalties due.
Partnerships. File a 2007 calendar year return (Form 1065). This due date applies only if you were given a six-month
extension. Provide each partner with a copy of Schedule K-1 (Form 1065) or a substitute Schedule K-1.
Trusts. File a 2007 calendar year return (Form 1041). This due date applies only if you were given a six-month
extension.
“Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication
is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be
imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another
party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any
recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.”
41280.indd Sec1:49
9/4/08 9:43:55 PM