Author: Joseph Nacmias (CPA)
McGladrey & Pullen, LLP., Certified Public Accountants 
750 3rd Avenue, New York, NY 10017 

Telephone: (212) 297-4888 / Fax:  (212) 972-9088
E-Mail: Joseph_Nacmias@rsmi.com / http://www.mcgladrey.com

4.3 Risk zones: financial and tax

          FINANCIAL

         Unfilled sales and purchase commitments should be reviewed to ascertain that these are no “built in losses” (cases where goods are being sold below cost) or situations of product imbalance (commitment to deliver product which will not be available).

         Office and equipment leases should be reviewed to ascertain their functionality and reasonableness; leases with high future increases detract from future profits.

         Employment and other contracts should be reviewed for reasonableness and consistency with the buyer’s standards and the target’s current and future means.

         The existence of written or implied warranties should be ascertained and quantified.

TAX

Income Tax Returns for several recent years should be reviewed to ascertain

(i)                     General compliance with tax rules

(ii)                    Whether tax payments have been made

(iii)                  Whether tax returns have been filed in all jurisdictions and

(iv)                  Whether there are pending or likely disputes with taxing authorities.

Equipment purchased from out of state, sales to employees or samples used as promotional items are examples of transactions which can create non-compliance with sales and/or use taxes.  Sales, payroll, excise and other tax returns should be reviewed with similar objectives as with income taxes.