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Rick is an eclectic person, which is possibly the reason he’s a successful part of several different areas in the firm’s tax practice.

COSO Series Articles Part 2 of 6: The following article is part two of a six-part series exploring the high-level basics of the COSO Integrated Internal Control Framework1. In this installment, we will address the Control Environment, which is the foundation of an effective organizational internal control system.

COSO defines the Control Environment as the “set of standards, processes and structures that provide the basis for carrying out internal control across the organization.” This component comprises the tone at the top, communication about ethical behavior and internal control with all levels of staff, and the overall integrity and values of the organization. These components provide the overall basis for a successful system of internal control.

What is the Control Environment?

The Control Environment can be broken down into five distinct principles, or concepts, and each concept’s related risks. The concepts and risks are as follows:

  1. The organization demonstrates a commitment to integrity and ethical values. This principle ultimately starts with tone at the top, which begins with the board of directors and management communicating—through both directive and their own behavior—the importance of an ethical work environment and its role in achieving organizational goals. Specific standards of conduct should be understood throughout all levels of the organization, and processes should be in place to evaluate performance and quickly address deviations from expectations.

Related Risks: Employees unaware of internal control, lack of approved policies and procedures, lack of employee accountability, systemic ethical problems or fraud.

  1. The board of directors demonstrates independence from management and exercises oversight of the development and performance of internal control. Not only should the board of directors maintain independence—both in fact and in appearance—from management, but it should have the necessary expertise to fulfill individual roles. For example, it is critical to have someone in the Treasurer position who is familiar with financial statements and accounting. Otherwise, the controls around board-level financial analysis would be weak and thus a potential detriment to the organization’s objectives. The board of directors should also oversee the design and implementation of internal controls, which is carried out by management.

Related Risks: Perceived (or actual) conflicts of interest between the board and management, board members unable to perform assigned duties, lack of internal control design and oversight.

  1. With board oversight, management establishes structures, reporting lines, and appropriate authorities and responsibilities in the pursuit of objectives. It is critical that management appropriately delegate authority and define responsibilities at the various levels of the organization. Primarily, this is done by establishing reporting lines to enable authority, responsibility, and flow of information. The board of directors should retain authority over significant decisions. They should also review management’s assignments and limitations of authorities and responsibilities.

Related Risks: Employees unaware of reporting relationships, duplication of duties, unchecked management decision making and control.

  1. The organization demonstrates a commitment to attracting, developing, and retaining competent individuals in alignment with objectives. Monitoring staff competence is very important in maintaining a system of internal control, and evaluation should not be limited to the hiring process. Instead, competence is something that should be nurtured and reinforced through an ongoing plan to develop and train employees.

Related Risks: Lack of training, employees not qualified to perform assigned tasks.

  1. The organization holds individuals accountable for their internal control responsibilities in the pursuit of objectives. Accountability is reinforced by establishing clear expectations, performance measures, and incentives that consider the pressures of achieving the related goals. It is also reinforced by taking corrective action when appropriate.

Related Risks: Breakdown of internal control or cutting corners, unrealistic performance targets, lack of employee accountability, work environment conducive to fraud or waste.

As you evaluate your organization’s own control environment and unique risks, it is important that you consider all of these principles and whether they are all functioning successfully.

For complete and detailed information about the Framework, Components, and Principles, we encourage you to explore and learn more on COSO’s website.


Questions about this article? Please contact us at

1COSO is an acronym for Committee of Sponsoring Organizations of the Treadway Commission. It was formed in 1992 as a joint initiative of five organizations, including the American Institute of CPAs and the Institute of Internal Auditors, among others. Since that time, the committee has been developing and refining frameworks and guidance around enterprise risk management, internal control and fraud deterrence, with the most recent revisions of the Internal Control – Integrated Framework model in 2013.

© Clark Nuber PS and Developing News, 2018. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

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Treasury Guidance Needed on the Gap Between Taxable and Tax-Free Employee Benefits

Employee benefits that were formerly tax-free benefits under IRC 132(f) (transportation, parking, and on-site exercise facilities) are now only tax free if:
  1. The employer is a for-profit business and forgoes the federal income tax deduction, or
  2. The employer is a tax-exempt organization and pays unrelated business income tax on the value of those benefits.
Otherwise, those benefits are now taxable wages to the employee. This change to the tax law is straightforward. The tax consequence to the employee depends upon the employer’s decision. Simple, right? Unfortunately, nothing in tax, and especially employment tax, is ever as simple as it seems on first blush. How Are the Benefits Funded? There are three possible ways these benefits are funded. Two are simple, but the third likely needs Treasury guidance. This is because the third option’s outcome depends upon who is paying for the benefit and whether the employee can “reasonably treat the benefit as non-taxable benefit under IRC section 132(f).” Funding Option #1: 100% Employer-Paid Benefits If the employer pays for the benefit and takes a deduction for the value of the benefit, the employer and the employee will both pay payroll tax on the value of the benefit, and the employee will pay income tax on the value of the benefit. In this funding option, the employer receives a federal tax deduction for both the benefit and payroll taxes they have paid. The employee still receives the benefit, they now receive the benefit as an after-tax benefit. If the employer is a tax-exempt entity, the employer avoids paying unrelated business income tax on the value of the benefit if the employer treats the benefit as a taxable benefit to the employee. Alternatively, the for-profit employer may decide not to take a tax deduction for the value of the benefit. If the employer does not take a deduction for the benefit, then the employee may treat the benefit as a non-taxable fringe benefit under IRC section 132(f). Because the benefit is a non-taxable fringe benefit, neither the employer nor employee pays payroll taxes on the benefit. If the employer is a tax-exempt entity, and does not treat the benefit as taxable income to the employee, the employer must pay unrelated business income tax on the value of the benefit. Funding Option #2: 100% Employee-Paid Benefits If the employer is not paying for the benefit, they can make the IRC section 132(f) benefits available to the employees by allowing employees under IRC section 3401(a)(19) to pay for benefits with pre-tax dollars. This IRC section states employees may use pre-tax dollars to pay for benefits if they have a reasonable belief the benefit would be a non-taxable fringe benefit. Because the employer is not paying for the benefits, there is no evidence to suggest the employer would not have treated the benefit as a non-taxable fringe benefit. It would therefore seem reasonable to allow employees to continue paying for transit passes and parking benefits offered under 132(f), with pre-tax payroll withholding. Funding Option #3 – Employee and Employer Co-Paid Benefits When the employee and employer split the cost of the benefit, it is not clear IRC section 3401(a)(19) will allow for payment of the employee portion with pre-tax dollars. With a plain-face reading of Code section 3401(a)(19), it would seem there’s only one way an employee could have a reasonable belief the employee’s half of the benefit was a non-taxable fringe benefit. This would only occur if the employer opted to forego the federal tax deduction, or paid unrelated business income tax on the value of the benefit, for the employer paid portion. Otherwise, the employee has no reason to believe the employee’s portion is a non-taxable fringe benefit under 132(f). However, because the employer is not paying the employee’s portion, there is a colorable argument the employee’s portion should be exempt. It is a transportation benefit covered under 132(f) paid for by the employee and the employer has no deduction available nor unrelated business income tax obligation on that portion. Therefore, the employee should be allowed to use pre-tax dollars. What Can Treasury Do? Treasury can solve this ambiguity by issuing guidance stating employees may pay for their portion of any bifurcated benefits with pre-tax dollars, which would be otherwise covered under 132(f)—regardless of the employer’s decision to treat as a non-taxable fringe benefit. This would be a reasonable approach, as the employer does not have the option to take a deduction on the portion of the payment made by the employee. The employee should be allowed to treat the portion paid for by the employee as a tax-free employee benefit under IRC section 132(f). Questions? If you would like assistance discerning how the change in the tax law may affect your organization, your employers, or your employees, please contact your Clark Nuber tax advisor or contact us at

Peace, Love, and Family Harmony: Safeguarding the Long-Term Interest of Your Family Business

As a family business advisor, I often provide consultations on maintaining family harmony as the family successfully transitions the business from one generation to the next. Various research has found that only 30% of family businesses transition successfully to the 2nd generation, 12% to the 3rd generation and 3% to the 4th generation. Further, 60% of transition failures were caused by a breakdown of communication and trust within the family unit. With these statistics in mind, how can you safeguard the long-term interest of your family business?

How Family Roles Affect Business

Why do communication and trust breakdowns often occur within a family that’s operating a business? The greatest challenge family businesses face is the multiple roles each individual plays: management, ownership, and family. Depending on which roles an individual plays, their viewpoint about the business may be different. For example, in the management role, an individual may be focused on achieving business growth. Those in an ownership role, however, may demand a certain level of return through dividends. Further, a family member who is not actively engaged in the business may value family harmony and fairness at all costs. These different—and sometimes overlapping—roles may contradict at times and add greater risk to the family business’s continued success—especially during leadership transition.

Governance Structure

Governance is the system of rules, practices, and processes by which a company is directed and controlled. Your family business should implement a governance structure for three reasons:
  1. To effectively balance the interests of the many stakeholders—owners, management, and family members;
  2. To ensure the continuity of the business; and
  3. To promote family harmony.
Many business owners understand governance as the board of director’s fiduciary responsibility to represent the interests of shareholders. In a family business, however, the family is a key stakeholder and should not be ignored. Good governance provides clarity on roles, rights, and responsibilities for all stakeholders; encourages family members, business management, and owners to act responsibly; and regulates appropriate family-and-owner inclusion in business discussions.

Who Should Implement a Governance System?

Businesses that rely on any of the three following business structures should implement a governance system. The structures include:

Board of Directors

The board of directors is a group of individuals with the fiduciary responsibility to protect the interests of the shareholders. They do this by working with management to set the strategic direction of the company and oversee the operations of the business. In a family-owned business, the board also has the important responsibility of ensuring that management is directed by values and principles the family deems important. The board’s duties include monitoring performance of the business, approving major acquisitions, approving the strategic plan and operating budgets, guiding succession planning, and advising the CEO. The board of directors is governed by the bylaws of the company. The bylaws include policies describing the size and composition of the board, term limits, addition of independent directors, and family versus non-family board members.


Stockholders hold one or more shares in the company and have a right to vote on certain company matters. They are invested in protecting their ownership interest and focus on a return on investment, liquidity needs of the company, risk management, business acquisitions, and company growth plans. The stockholders are governed by the stockholder’s agreement, which is an agreement amongst the stockholders of a company. The agreement should document restrictions on transferring shares and rights of first refusal in relation to shares issued by the company—often called a buy-sell agreement. The agreement should also include specific rights for control and management of the company. For example, it should designate certain individuals to the board. The agreement should also include provisions for managing dispute resolutions.

Family Constitution

The family doesn’t just include those active in the business as managers or owners; it includes others who are impacted by the family business operations, but who don’t own stock. Who is considered family? Does family include spouses, step-children, second cousins, estranged siblings? This answer is different for every family and should be defined in the family constitution. The family constitution is a valuable governance document that addresses the human and emotional side of operating a family business. The process of developing a family constitution can strengthen the family by helping them see a vision for the future. It also helps each family member understand their role in assuring family and business continuity. A family constitution should address policies such as employment and interpersonal relationships. Some questions to consider include:
  • What qualifications, if any, does a family member need to meet before they can work in the business?
  • What is the decision-making process and how are conflicts resolved?
  • What are the family values and what is the vision for the future?
The constitution is a living document and should be reviewed and revised as needed to meet the needs of the changing family, ownership group, and business.

Bottom Line

All businesses have challenges that need to be addressed to ensure continued growth and sustainability. When you add the complexity of family dynamics to the mix, however, the risks are higher. Anticipating these challenges before they arise and proactively developing written guidance, or procedures to resolve them, sets a family business up for success. As you navigate those challenges, we are here to operate as an experienced, trusted advisor. Could your family business benefit from assistance in safeguarding its assets while maintaining family harmony? Please contact our professionals at  to get the process started. © Clark Nuber PS, 2017. All Rights Reserved

Non-Profits are Employers Too! Certain Employee Benefits May be Subject to UBI After 2017

Therefore, employers must make an important business and economic choice in relation to the benefits described below. They must decide whether to treat the benefit as taxable compensation to employees, or continue to treat the benefit as a non-taxable benefit to employees, but receive no income tax deduction for providing the benefit. Because non-profit organizations do not pay income tax, loss of the tax deduction would not impact the decision to treat the benefits as taxable or non-taxable fringe benefits. Instead, the new tax law subjects the value of the benefits noted below to unrelated business income tax, assuming the employer continues to treat the benefits as non-taxable to employees.

Benefit Changes as of 2018

Which benefits are losing status as deductible to the employer, or non-taxable fringe benefits to the employee, depending on the employer’s decision?
  • Qualified transportation and commuting fringe benefits associated under Internal Revenue Code section 132(f), including:
    • Any transit pass;
    • Any qualified bicycle commuting reimbursement; and
    • Transportation in a commuter highway transportation vehicle between the employee’s residence and workplace paid by the employer.
  • Qualified parking as defined in IRC section 132(f)(5)(C).
  • On-premises athletic facility as defined in IRC section 132(j)(4)(B).
Note the change in the tax law does not automatically result in these benefits being taxable to employees. Rather, a nonprofit employer must make a choice either to treat the benefits as taxable compensation to employees, thereby avoiding unrelated business income tax treatment of the benefits, or continue to treat the benefit as non-taxable to its employees, but subject value of the benefit to unrelated business income tax. The decision is a tax, business, economic and employee-relations decision. Some factors to consider in making this decision include:
  • Under the new law, the corporate tax rate decreased from a maximum 35% to a flat 21% rate, while individual tax rates shifted only slightly.
  • Also, newly taxable benefits should be assumed to be the last dollars taxed at the highest rate to which the employee is subject.
  • Because the benefit is now taxable wages, both the employer and employee must pay employment taxes on the benefits at 7.65%, assuming the employee is not over the FICA limit.
  • Also, non-profit employers’ unrelated business income is now subject to segregation by trade or business. We do not know if the expense of paying unrelated business income tax on non-taxable employee benefits may offset any other unrelated business income tax to which the non-profit organization may be subject.

What Should Employers Do?

The following is an illustration of the financial impact of the decision, and an explanation of the choice employers must make before the first payroll of 2018: Facts: The value of the applicable benefits is $100,000. The employer does not have any deductions to offset the value of the benefits. The employer is a corporate non-profit with no other unrelated business income. The average employee is in the 25% marginal tax rate and employer/employee payroll taxes are each 7.65%. Option 1: The nonprofit employer may continue to treat the benefits as non-taxable to its employees and pay unrelated business income tax on the value of the tax-free fringe benefits.
  • Cost to employer: $100,000 cash for benefits and $21,000 in additional unrelated business income taxes; total paid $121,000
  • Benefit to U.S. Treasury: $21,000
  • Benefit to employees: $100,000
  • Cost to employees: $0
Option 2: The nonprofit employer may treat the benefit as taxable wages, withhold income tax on the value of the benefit from the employees’ other wages, and pay the employer payroll taxes.
  • Cost to employer: $100,000 + $7,650 = $107,650 Benefit + employer share of payroll taxes
  • Benefit to U.S. Treasury: $25,000 + $7,650 + $7,650 = $40,300 (employee income tax plus total payroll taxes)
  • Benefit to employees: $100,000
  • Cost to employees: $25,000 + $7,650 = $32,650 Income tax + employee share of payroll taxes
  • Net benefit to employee: $67,350
On a combined basis, the cost of paying the tax at the non-profit level at a tax rate of 21% with no employment taxes (option 1), as compared to transferring the tax burden to the employees at a tax rate of 25% with a combined payroll tax rate of over 15% (option 2), reflects a total tax differential of nearly 20%. The employee receives the same benefit but there is an overall tax cost to receiving the benefit of nearly twenty percent to the nonprofit employer and employee on a combined basis. The non-profit employer may be better off economically paying the unrelated income tax rather than subjecting the benefits to tax by the employees and paying the employer payroll taxes. Questions? Each organization must decide which option is best based upon its facts and circumstances. Please contact Jane Searing at if you have questions about how tax reform might affect your employee benefit plan, or visit our Tax Cuts and Jobs Act page for additional resources. © Clark Nuber PS, 2017. All Rights Reserved

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