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News for Corporate Professionals from Checkpoint Learning
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April 2014

In This Issue

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Cyber Scare: An International Affair Affecting Millions
Cyber Scare: An International Affair Affecting Millions When a business or municipality allows sensitive customer information to be compromised as a result of exposure to cyber criminals through malicious software (malware), the potential risk for victims can be exponential. A specific combination of customer name, financial data (credit and/or debit card information), personal identification numbers (PIN), passwords, driver's license number, or Social Security Number can open the floodgates to identity theft and the loss of millions of dollars to consumers and businesses.

The Identity Theft Resource Center (ITRC) tracks and reports published security breaches. According to ITRC, over 624 million records have been exposed since 2005 with a total number of 4,366 recorded data breaches during that time period. In 2013, the largest such data breach was that of the nationwide retail giant Target Corp with approximately 70 million customer financial and personal records having been exposed during the height of the holiday season. In January 2014, Neiman Marcus responded to a possible data breach involving 1.1 million records containing customer credit and debit card information. And even more recently, Sally Beauty Holdings, a nationwide cosmetics and beauty retailer confirmed that hackers had broken into its networks and stolen credit card data from stores presumably by the same criminals that compromised the customer data from Target Corp.

Typical anti-virus solutions were not able to catch the malware which affected the Target point-of-sale (POS) terminals where customers swipe their credit and debit cards. Information from this episode of cybercrime linked the malware to Russia by virtue of the computer code.

A cyber criminal ring targeting small retailers in 11 countries stole data on 49,000 payment cards using malware called "ChewBacca" (malware specifically designed to infect computers such as point-of-sale systems that process credit card transactions) before the operation was shut down. Victims included small companies in the United States, Russia, Canada and Australia. They managed to steal details from some 24 million payment card transactions over two months according to RSA FirstWatch.

A Russian national recently pleaded guilty to conspiracy to commit wire and bank fraud for his role as the primary developer and distributer of a sophisticated malicious computer code designed to automate the theft of confidential personal and financial information, such as online banking credentials, credit card information, usernames, passwords, PINs, and other personally identifying information. According to the FBI website,, this particular malware infected more than 1.4 million computers in the United States and abroad.

The United States Secret Service is responsible for maintaining the integrity of the nation's financial infrastructure and payment systems. As a part of this mission, the Secret Service constantly implements and evaluates prevention and response measures to guard against electronic crimes as well as other computer related fraud. The Secret Service derives its authority to investigate specified criminal violations from Title 18 of the United States Code, Section 3056.

There are a number of government agencies working in coordination to investigate and prosecute international and domestic cyber criminals including the U.S. Secret Service Electronic Crimes Task Force, the U.S. Immigration and Customs Enforcement's Homeland Security Investigations (HSI), and the Global Illicit Financial Team (GIFT). The President's Financial Fraud Enforcement Task Force was established as an interagency task force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.

According to a January 2014 press release from the United States Secret Service, a Ukrainian national was charged and pleaded guilty in a massive credit card and identity theft scheme. He was one of 39 defendants listed in an indictment in the case. The charges allege that the man was a member of an online criminal organization involved in a large-scale trafficking of compromised credit card account data and counterfeit credit cards, as well as money laundering, narcotics trafficking and various types of computer crime. The organization operated an Internet web portal, called a forum, where members could purchase the illicitly obtained data and share knowledge of various fraud schemes. A second forum was created to vet incoming new members. The forums were generally hosted within the former Soviet Union where the upper echelon members of the organization resided. This case required the coordination from the governments in Austria, Rome and Croatia. "This operation demonstrates there is no such thing as anonymity in the cyber world. Our success in this operation and other similar investigations is the result of close work with our network of law enforcement partners," said Secret Service Assistant Director Paul Morrissey of the Office of Investigations.

International and domestic criminals try to hide from law enforcement behind the veil of the cyber world, but vigilance on the part of investigators will continue to pursue and prosecute those who insist on preying on businesses and consumers.

"Cyber criminals should be reminded today that they are unable to hide behind the anonymity of the Internet to avoid regulated financial systems," said Steven G. Hughes, Special Agent in Charge of the U. S. Secret Service New York Field Office.

So, what should the consumer do? What should the small business owner do? What should the executive in charge of cyber security for a large corporation do? Be vigilant. Be prepared. Have an action plan—not just a reaction plan!
Tax Extenders Legislation on the Horizon

Tax Extenders Legislation on the Horizon Several business tax provisions expired at the end of 2013. Some of these provisions expire periodically and have historically been automatically extended by Congress and some were originally intended as temporary stimulus measures.  Both houses of Congress are planning to address these provisions in the near future. Some of the more common business tax provisions that expired or had significant modifications and that Congress will likely address and either extend, make permanent, modify, or allow to stay expired include: the research and experimentation tax credit, the active finance exception under Subpart F, IRC §179 expensing, the renewable energy production tax credit, biodiesel blending credits, the 15-year cost recovery schedule for certain improvements to rental properties such as restaurants and other rental establishments, and bonus depreciation. In total there are approximately 55 tax provisions that need to be addressed.

Although these provisions have been expired for more than three months, Congress is likely to extend at least some of the measures retroactively to the beginning of 2014. The bill, the Expiring Provisions Improvement Reform and Efficiency (Expire) Act of 2014, was marked up and approved by the Senate Finance Committee on April 3, 2014. The bipartisan bill, renewing most of the tax extenders through December 31, 2015, is worth approximately $86 billion, according to an estimate from the Joint Committee on Taxation. It is a top priority of the Senate Finance Committee Chairman Ron Wyden (D-OR) and has strong bipartisan support in the Senate. The next step for this bill is for the full Senate to vote on it.

The House Ways and Means Committee, chaired by Dave Camp (R-MI), held a hearing on April 8th discussing the expired tax provisions that Chairman Camp had proposed making permanent or extending for the long term in his tax reform proposal, the "Tax Reform Act of 2014." The items discussed on April 8th included the research and experimentation tax credit, the active finance exception under Subpart F, IRC §179 expensing, S corporation basis adjustments for charitable contributions, reduction in the S corporation recognition period for built-in gains to five years, and 3-year cost recovery schedule for race horses. Camp stated, "The committee will go policy by policy to determine which extenders should be made permanent." Camp believes in having a stable, permanent tax policy and that "long standing tax provisions that help businesses grow the economy and create jobs should be made permanent once and for all." Camp so far has not been open to a temporary tax extensions package. Camp is expected to hold additional hearings, but an exact timeline has not been set. As a related side note, Camp has announced he will not seek reelection. His term ends at the end of 2014.

As our readers are aware, retroactive reinstatement in the second, third, or fourth quarter of 2014 of tax provisions that expired at the end of 2013 has the potential of causing fluctuations in quarterly deferred tax calculations. Quarterly tax calculations for the end of 2013 and the first quarter of 2014 were based on what the current law was. The remaining quarterly tax calculations will be based on current law at that time. E. Lynn Nichols, CPA, a tax consultant in Vero Beach, FL, and CPE Network Tax expert commentator, stated, "The uncertainty is really going to be reflected in the quarterly financial reporting of businesses that have transactions that would be affected by the fact that there is currently no credit for research activities and no bonus depreciation. I think the expiration of bonus depreciation and the research credit are probably the biggest areas that are going to affect many large, publicly reporting organizations."

Stay tuned, but it appears there is a possibility that both houses of Congress may actually pass bills this year that extend, modify, or make permanent expired tax provisions. However, the likelihood of major tax overhaul legislation passing in 2014 is presently seen by commentators as highly unlikely.
Capital Budget and Management

Capital Budget and ManagementCapital budgeting is the planning process in which investments and projects are analyzed and scrutinized in order to determine whether they are worth pursuing. Capital management deals with managing the financial assets of a company both in the short- and long-term. The strategy of effective and successful capital management is to maintain sufficient levels of working capital and cash flow to meet daily expense obligations and short-term financial decisions. In addition, managing capital deals with taking advantage of long-term investments and projects which will add value and profitability.

The task of judging the capital requirements of an entity can be a formidable endeavor as is identifying and raising the necessary funds to accomplish the task. The major purpose of capital budgeting is to recognize and prioritize the capital investments on the basis of maximum returns to the entity. The capital budget is a tool used by financial managers to analyze and identify optimal investments in order to generate an acceptable level of rates of return.

Capital investment decisions are made through projected operating cash flows. Techniques and considerations applied to the investment decisions include (but are certainly not limited to):
  • Time value of money (TMV)
  • Net present value (NPV)
  • Payback period (PBP)
  • Internal rate of return (IRR)
  • Modified internal rate of return (MIRR)
  • Profitability index (PI)
Most entities use multiple techniques for capital budgeting decisions. Since each method looks at an investment from a different perspective, it is best to employ multiple analyses and take advantage of the opportunities with the best return according to all techniques.

A capital planning process should be predefined, documented, communicated and followed. An effective planning process will result in lowered risk for over-spending, frivolous spending and fraud. An overall capital plan will include a prioritized list of projects for the current fiscal year and the extended capital plan which spans across multiple fiscal periods. In general, the projects incorporated into the overall capital plan should reflect the strategic vision, master plan and management initiatives of the entity. A timeline built into the overall capital plan will keep budgets, reviews and approvals on track.

Internal sources of funding can include cash reserves, retained profits, working capital and the sale of fixed assets. Use of accumulated cash reserves should be carefully considered as a source of financing for capital projects. Should cash reserves be utilized, there should be a sufficient amount remaining for financial emergencies, unpredicted advantageous revenue options, strategic marketing initiatives or investment opportunities. Use of retained profits for capital projects is another valuable, no-cost source of funding.

In situations where there are excess or non-productive fixed assets, these can be sold (liquidated) to fund capital investment projects. This reclassification of assets can restructure the entity and position it financially to expand, grow and take advantage of alternate sources of new potential revenue.

External sources of funding can be either ownership capital or non-ownership capital. Ownership capital is the money invested in the entity by the owners themselves (owners, partners or shares bought by shareholders). Evaluation of repayment terms is important when considering external project funding options.

Non-ownership capital does not typically allow the lender to participate in the sharing of profits or to influence how the entity uses the funds. (Exceptions exist with some types of venture capital transactions.) The primary obligation of non-ownership capital is to pay back the borrowed sum of money with interest. Some sources of non-ownership capital include debentures, bank loans, grants and venture capital. Other, less common sources of non-ownership capital include hire-purchase agreements, factoring and invoice discounting.
Strategy in the Cloud

Strategy in the CloudSecurity risk is increasing exponentially as we move toward more cloud services, mobile devices, and the BYOD (bring your own device) environment. Corporate employees increasingly access company information on their tablets or smartphones, which are often owned by the employee rather than the organization for which they work. This makes it increasingly difficult for IT departments to manage the security across all devices. In addition, organizations store a significant amount of data that is highly sensitive and can cause financial damage to individuals or the organization in addition to the damage it can do to an organization's reputation. Such data might include social security numbers, credit card information, personal health data, intellectual property, or confidential business or financial information.

Oftentimes, it is accidental; at other times, it is intentional. Either way, employees may share too much information, ignore compliance or regulatory issues, or violate privacy rules and company policies. There is often an overlap or blending between work and personal devices, especially if an organization provides a company-owned device but allows the employee to use it for personal use, or if the organization has a BYOD policy that allows (or requires) the employee to use their personal device(s) for business.

IT departments simply do not have the manpower to monitor all the different devices that are in use across many organizations. Since each employee is likely to use a combination of work and personal devices to perform their everyday work duties, the IT staff generally has no idea how many devices are used in any given day. Therefore, it is imperative that policies be established so that personnel understand what they can and cannot do, or should and should not do with company documents, content, and information. These policies will vary from company to company because there are often industry-specific regulations or compliance issues. In addition, any interstate or intercontinental activities may be impacted by a different set of regulations.

There are a number of restrictions, regulations, and compliance policies that impact today's businesses, depending on the type of organization, industry, or physical location in which they operate, as well as the other states and/or countries with which they do business. Some of the more well-known compliance policies include the Sarbanes-Oxley Act (SOX), the Gramm-Leach-Bliley Act (GLBA), the Payment Card Industry Data Security Standard (PCI DSS), and the Health Insurance Portability and Accountability Act (HIPAA).

Organizations that are regulated by any of these policies, or others, must ensure that such regulations are thoroughly considered in any plans that affect their computing environment. Applications, storage, backup, file syncing, and file transfer must be safe and secure for the organization to comply with such regulations. There may be requirements for encryption, substantial auditing, or special handling of intellectual property. Each business is responsible for understanding the regulations with which it must comply, and they must ensure that any cloud vendor with which they do business meets the requirements established by the governing bodies.

Don't leave your business or your client's businesses to chance and simply hope that data is safe. There is no "one size fits all" when it comes to cloud-based applications, storage, backup, disaster recovery, or synchronization. Each individual, department, or organization must determine for itself (or its clients) which solution or solutions will best fit its needs and its environment.

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Heard about the latest tax developments? Managing Director Joe Harpaz is a regular contributor on Forbes. Explore his timely discussion around policy proposals and changes, breaking down complex issues. Find the blog hosted on Forbes at

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