Bitcoin: The New Electronic Money?

Direct TV and Dish TV have just recently announced that they will begin accepting Bitcoins as payment for their TV subscriptions. So just exactly what is a Bitcoin?

Bitcoin is a relatively new electronic payments system described as a decentralized peer-to-peer system. Unlike other electronic payment systems, such as PayPal, it also has its own currency — a virtual denomination also known as Bitcoins. Bitcoins are known by various names including virtual currency, electronic money, or crypto-currency.

The Bitcoin system is driven by a concept called block chain, a public record of all transactions carried out within the Bitcoin network. The transactions are recorded in a public record that is collectively maintained by everyone who uses the currency.

Bitcoins are stored in a digital wallet when they are received. The wallet can be cloud-based or on a local system to maximize security.

For a more detailed discussion of Bitcoin go to: https://bitcoin.org/en/faq

Who created Bitcoin?  A person calling himself Satoshi Nakamoto, published the rules to the Bitcoin portal in 2008. The network was launched in 2009; however, no one really knows the true identity of Nakamoto.

How to create (earn) Bitcoins. According to Wikipedia, “Bitcoins are created as a reward for payment processing work in which users who offer their computing power, verify and record payments into a public ledger. Called mining, individuals engage in the activity in exchange for transaction fees and newly minted Bitcoins.

Mining is the process of adding transaction records to Bitcoin’s public ledger of past transactions. The ledger of past transactions is called the block chain as it is a chain of blocks. The block chain serves to confirm transactions to the rest of the network as having taken place. Mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady.”

Bitcoins can also be obtained in exchange for products, services, or other currencies.

Pros and Cons.

Pros

•         No charge when making payments in Bitcoins, either locally or internationally.
•         Eliminates credit card fees for processing transactions.
•         Difficult for anyone to make fraudulent payments using bitcoins.
•         Has its own currency and is not controlled by any central authority.

Cons

•         Has a volatile valuation. The price of a single Bitcoin has ranged from$13 to $1,000.
•         Exchanges are a tempting target for hackers.
•         Can be lost, or destroyed.
•         Lacks consumer protection.

Audit considerations. From an audit perspective, Bitcoins are basically the same as any other foreign currency. However, teams auditing clients with Bitcoins should include an IT specialist to verify the Bitcoin balances. Verification should include traditional confirmation letters to third-party wallet holders and verifying balances from the block chain.

Once the amount of Bitcoins at the balance sheet date has been determined, the auditor needs to verify that the amount is properly translated into the company’s reporting currency in accordance with FASB ASC-830-20-25. The currency translation from Bitcoins to dollars is accounted for through an adjusting entry that includes the gains and losses reflecting changes in the exchange rate between Bitcoins and dollars. The same translation calculation must be made for receivables and payables that the company expects to settle in bitcoins.

The future.  No one knows exactly what will come of the Bitcoin system but it is probably not going to disappear any time soon. However, there is no doubt that it will have a far-reaching impact on how money is dealt with online.

What do you think?

CRIMINAL ACCOUNTANTS

Embezzlement – The theft or misappropriation of funds placed in one’s trust or belonging to one’s employer.

It seems like all you have to do these days is pick up a newspaper and you will find an article about an embezzlement similar to the following one reported by WFAA.com: “Former Collin Street Bakery accountant accused of embezzling more than $16 million from the renowned fruitcake maker.” What concerns me most about this crime is that the embezzler was the accountant.

The accountant for Collin Street Bakery worked for the company for fifteen years and was a trusted employee. He allegedly spent the last eight of those years embezzling $16.65 million dollars from his employer. The money was used to support an extravagant lifestyle that included 43 luxury automobiles and a house in New Mexico. The person who committed the embezzlement was the employee who understood how the accounting system worked and used that knowledge to cause 888 fraudulent checks to be sent to his personal creditors, according to the FBI.

When I began my accounting career, I pledged to adhere to a Professional Code of Conduct. I also pledged to adhere to my employer’s Code of Business Conduct and Ethics. I take both pledges seriously. Evidentially there are a growing number of accountants who do not feel that codes of conduct apply to them.

In the past few months, I have seen the term embezzlement used too often along with the title “Accountant.” The connection is usually in a newspaper article about an alleged embezzlement committed by an accountant.

Why Are Embezzlements Happening So Often?

According to a survey conducted by the Association of Certified Fraud Examiners (ACFE), instances of fraud are increasing nationwide, both in number of incidents and the dollar amount of the losses.   

Unfortunately this is nothing new. My first audit as a junior auditor forty-five years ago, uncovered an embezzlement of over $75,000 by the accountant. It was not the last audit assignment in which I encountered embezzlement. It may just be better media coverage that has brought this topic to our attention, but it seems to me that embezzlement is more common today than in the past. Maybe it is not just embezzlement. Maybe it is dishonesty in general.

Embezzlements by Accountants

The following examples of embezzlements by accountants in the last five years shows that everyone— Fortune 100 companies, public companies, governmental entities, and small private companies—is susceptible to this crime.

·       Citigroup                                            $19.20  million in losses                   2011

·       Collin Street Bakery                           $16.65  million in losses                   2013

·       South Carolina Education Lottery        $ 226.4 thousand in losses               2012

·       Kemp Construction                            $ 208.0 thousand in losses               2009

In each of these cases, the alleged fraud was perpetrated by a trusted accountant.

How Can these Crimes be Prevented?

Someone once said that “Trust is not an internal control it’s only a feeling.” In all of the examples listed above management or owners of the business trusted their accountant.

Our inherent desire to believe that all of our employees are trustworthy gives us a false sense of security. Add a lack of resources or desire to implement necessary controls and you have a recipe for embezzlement.

The solution to this problem is simple to identify, but often difficult to implement. Separation of duties and implementation or execution of a few internal controls could have prevented or at least reduced the losses in each of the embezzlements listed above. If a company does not have the resources to develop and maintain appropriate internal controls, it is virtually impossible to prevent embezzlement. However, with just a small amount of effort, a company can hold its losses to a minimum.

What do you think?


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RTRP Rules Challenged

The Arlington, Virginia-based Institute for Justice, on behalf of a couple of tax preparers, is challenging the Internal Revenue Service’s authority to regulate tax return preparers. The Institute plans to sue the IRS asking for an injunction against enforcement of the new Register Tax Return Preparer (RTRP) regulations. They claim that requiring tax preparers, who are not CPAs, Attorneys or Enrolled Agents, to pass a licensing examination (there is a fee of $116 to take the exam) and attend 15 hours of continuing education courses annually, will deprive them of their right to earn a living.

Well, I can tell you from personal experience: some of them need to be deprived.

When I was growing up, my dad was a struggling small business owner. He was one of those individuals who used an unregulated tax preparer. One year, the errors the preparer made on his return were so egregious that the IRS audited the return. Because of the nature of the errors, the agent went back and audited all open years. As a result my dad received a refund of over $1,000, which was a lot of money back in the 1960s, especially for someone like my dad who had struggled each year to pay those taxes.

There are three ways the group says these new regulations will negatively impact tax preparers and their clients:

1. It will put some tax return preparers out of business.

2. It could cause a financial hardship for their lower income clients resulting from the increased fees.

3. Their clients may have to find a new tax preparer.

My responses to the group’s allegations are as follows:

1. So be it. If they can’t pass a basic competency test they should not be preparing tax returns.

2. I don’t buy this. There are half a dozen or so entities that provide free tax return preparation, including the IRS’s Volunteer Income Tax Assistance (VITA) program. I realize that the free tax return preparation programs are primarily for the most basic tax returns, but if a return is more complex than a basic return you need the services of a qualified tax preparer. (See response 1 above.)

3. If they were using a qualified tax return preparer in the first place this would be a moot point, otherwise: See response 1 above.

What do you think?