Although many Americans are focused on the key points of the proposed health care reform legislation, health care providers are instead focusing on existing legislation that could negatively impact their cash flow.
As a result of the Medicare Prescription Drug Improvement and Modernization Act of 2003, Recovery Audit Contractors (RACs) will audit historical claims to identify improper payments previously paid by Medicare. RACs are paid on a contingency fee basis according to identified overpayments, which will be charged back to the provider in accordance with the legislation.
The RAC process places hospitals under an intense level of scrutiny that will force changes in the way services are documented for reimbursement purposes.
“The main issue is not that the hospitals are requesting reimbursement for services they did not provide,” says Sheldon P. Mandelbaum, MBA, senior manager at Cendrowski Corporate Advisors. “The increasing complexities of documenting and translating those services have created an environment ripe for clerical errors to occur.”
Smart Business learned more from Mandelbaum about how hospitals should respond to and manage the RAC process.
What should hospitals do to respond effectively to RACs?
Hospitals need to develop and empower a team of internal experts to oversee all aspects of the RAC audit process. This team will have to educate senior management and the board on the potential impact to the organization while applying continuous improvement methods to identify root causes of errors.
They will also have to manage the audit process, responding to audit requests and appealing adverse findings where appropriate. Finally, this team will serve as the catalyst to bring necessary refinements to existing processes across all hospital departments, increasing the level of compliance and reducing the potential financial impact.
What causes improper payments?
Many of the causes are directly related to the complex rules and regulations that health care providers must follow to document and explain the type of care that was given and why it was provided. For example, if the physician’s record is not detailed enough, written in a certain way or doesn’t contain the correct verbiage, the hospital could be asked to return the payment, even though there is no doubt the patient received good quality care with good outcomes.
Another area of complexity is the translation of the medical record into coding methodologies required to submit a claim form to Medicare. The claim form summarizes the services provided and is submitted to obtain reimbursement. This is ripe for clerical error because of the vast numerical configurations and the very detailed schemes required to describe the service and the medical necessity for the service with a high level of specificity.
How can hospitals better understand their risks?
Hospitals will have to estimate the potential magnitude of identified overpayments and plan for these in their cash budgeting and forecasting. They also need to modify their operating budgets for the additional costs required to properly respond to and manage the RAC audit activity.
To estimate exposure, hospitals can review the findings of previous audits, as well as the initial findings of the internal risk exposure audit, to identify areas needing improvement. Some hospitals perform in-depth data analysis against their own data files to seek out potential errors. They can create process maps to chart the flow of data to identify where breakdowns occur and why. Hospitals will then be able to determine if the improvement opportunity is related to technology, people or processes, and then prioritize accordingly.
How can hospitals leverage their existing compliance programs?
Although hospitals have compliance programs already in place, an even higher level of review will be required to blunt the impact of the RAC audits. The program should include increased awareness across the revenue cycle as well as advanced educational programs and aid for the medical staff.
The need to establish strong processes across the patient encounter will assure higher levels of data accuracy. Additional internal review methodologies can be initiated for known exposure areas so that if errors are present, they are corrected on a prospective basis. Finally, programs that will systematically and regularly monitor the process to mitigate future risk should be created.
What steps should a hospital take to manage the actual audit?
Managing the audit process will be very time-consuming and resource intensive. An audit management plan must be created to track each audit request to be able to effectively respond within the strict time frame protocols. Each request will have to be categorized, and a catalog of potential sources of documentation that may be required to properly respond and defend the audit should be established.
Hospitals will need to develop strategies and detailed action plans to determine what audit findings will be appealed and when identified overpayments will be repaid. Hospitals may consider engaging outside counsel and consultants to help clarify the process and the protocols of this lengthy and difficult process.
Sheldon P. Mandelbaum, MBA, is a senior manager at Cendrowski Corporate Advisors. Reach him at (866) 717-1607 or email@example.com.
Are you sick of hearing doom and gloom reports about the economy? Then have a chat with Dana Johnson, the chief economist with Comerica Bank.
“At long last the recession is over,” he says. “My point of view is that the economy has stopped contracting and is poised to begin growing.”
Johnson is optimistic about the economy since the healing that is currently occurring in the housing market will lead to improvements in the credit markets. He also points to declining inventories relative to sales as evidence that companies are making headway in getting rid of their unwanted inventories. Another reason to expect growth is the huge amount of pent-up demand in the marketplace.
“The economy has been given a huge amount of support and encouragement from both monetary and fiscal policies that have been put into place,” says Johnson. “There are widespread signs that the economy is stabilizing and is ready to grow again.”
One of the most reliable indicators that the economy is stabilizing is the decline in unemployment insurance claims.
Smart Business spoke to Johnson about his positive economic outlook and where he sees the housing, credit and job markets going in the future.
What is the source of the economic uptick?
It’s very much a blend of the natural resilience of the economy and the important amount of support that’s been injected into the economy, both by the Fed and the fiscal programs put in place by President Obama.
There’s a natural dynamic in the economy that occurs when you have a long and deep recession. For one, you create the need to cut inventory, and when that process comes to a natural end, the economy gets a boost. Also, the longer a recession lasts and the deeper it gets, the more pent-up demand you create. But besides that, the stimulus package put money in the hands of consumers and created government spending that in turn created demand in the economy.
What does the future hold for the housing market?
We have seen the bottom of the housing market, and now we’re seeing a modest upturn in both home sales and in new building permits and starts. We’re currently operating at a construction pace that’s below what’s needed to match the demands of newly formed households and the demands created by houses that reached their natural usefulness and had to be torn down. Nevertheless, we’ve seen stabilization in home sales and building activity, and we’re beginning to see a much smaller decline in house prices. Over the next three to six months, we’ll see house prices stabilize and the housing price index will show moderate increases.
This is really positive news for the economy, in terms of ending huge declines in household net worth due to declining house prices. This will also create more confidence that financial institutions that have many of these mortgages on their books will be able handle and recoup these losses.
What’s the forecast for the credit market?
I think the credit market will continue to normalize. It’s already made enormous progress, particularly over the last several months. You can see the return of confidence in credit spreads, for example, the one between capital bond rates and similar treasury securities. These rate spreads are still wider than normal, but they’re much narrower than they were three, six or 10 months ago.
We’re also seeing a lot more private companies be able to issue new securities, whether they are common or preferred stocks or bonds. That’s a clear sign that the appetites of investors for private securities are growing again.
We’re not back to normal; credit is still more expensive and until there is a clear upturn lenders will be cautious in extending credit to both businesses and households. But, we’re making tremendous progress and it won’t be long before the credit market completely normalizes.
Do you see the job market getting any better any time soon?
I don’t think we’ll see the unemployment rate hit its peak until around the turn of the year. But, if you look more broadly ahead to the next 12 months, I think we’ll see a 4 percent growth in real GDP and an increase of 1 million jobs. That will still leave jobs well below where they were before the recession, but it will be easier to get a job and the unemployment rate will begin to stabilize. The stability in the labor market lies ahead in the next six months or so.
Are consumer and business capital spending expected to increase any time soon?
I feel that consumer spending will be reasonably strong, probably rising in parallel with incomes. I also think that the savings rate — which has risen by several percentage points over the last couple of quarters — has probably risen about as far as it’s going to.
Business capital spending has been contracting very rapidly and will continue to contract for a little while longer. Companies will be slow to commit to investment projects until they see signs of a pick up in demand. Therefore, capital spending isn’t likely to start growing until next year.
One final note: Even though the economy is going to be on the upswing, inflation will stay very low. The initial recovery still leaves the country with excess capacity and a large amount of slack. Inflation will likely stay low for all of 2009 and 2010.
Dana Johnson is the chief economist with Comerica Bank. Reach him at (214) 462-6839 or DJohnson@Comerica.com.
Everyone wants their money to work for them and to invest it in a way that prepares them for retirement, but fear of Ponzi-like schemes is leading money away from private equity (PE) investments into more mainstream securities.
However, PE investors can gain some comfort from the clarity that the IRS has provided for claiming tax losses resulting from Ponzi-type schemes. Thanks to recent IRS-issued guidance — Revenue Ruling 2009-09 and Revenue Procedure 2009-20 — investors have been provided a safe-harbor method (an IRS approved method) of computing and reporting losses.
“These pronouncements are very taxpayer-friendly,” says Walter M. McGrail, JD, CPA, a senior manager at Cendrowski Selecky PC. “The IRS wanted to clarify its position for claiming losses on Ponzi-like schemes and white-collar crimes while alleviating some of the pain of those victimized by these acts.”
Smart Business spoke with McGrail about what the new IRS pronouncements mean for investors and how to use the rules to your advantage if you become a victim of fraud.
How can investors protect themselves from becoming a victim of these schemes in the first place?
Look at whether there is transparency with the investment. It’s cliché, but if it sounds too good to be true, it probably is.
But, if you are a victim and you want to be safe when claiming deductions, follow procedures, fill out the proper forms and make sure you comply with all safe harbor laws. Being prepared and knowledgeable before, during and after you make an investment is your best protection.
If an investor does fall victim to an investment scheme, how can Revenue Ruling 2009-09 help?
The IRS concluded that investment theft losses are not subject to the limitations otherwise applicable to personal, casualty and theft losses; that such loss is deductible in the year of discovery; and that the loss includes unrecovered investments and income reported in prior tax years.
Also, theft losses that result in net operating losses can be carried back two years and forward 20 years.
How can Revenue Procedure 2009-20 assist victims of fraud?
Revenue Procedure 2009-20 states that the IRS will deem the loss to be the result of theft if the promoter was charged with fraud or embezzlement.
There must also be some evidence of an admission of guilt, or a trustee who has been appointed to freeze the assets of the scheme. In the past, the determination of whether a deductible loss had occurred as the result of a criminal act involved a subjective determination of whether the person perpetrating the fraud had criminal intent. That is no longer a requirement.
There is now a safe harbor that permits taxpayers to deduct these losses based on the filing of criminal charges against the perpetrator.
How do you determine the value of the loss?
You get to take a loss for all amounts you invested, minus the amount of any actual recovery through the year of discovery. If you invested $100 and got $30 in distributions, you have a $70 loss that you can get back.
Also, any income from the investment that was included on previous years’ tax returns will increase the amount of your loss. Take that same $70 in the previous example and say you picked up $10 worth of income over the years. Then, $80 would be the amount of your loss. The loss is also adjusted by 5 to 25 percent to the extent of any recovery expected from insurance and from lawsuits against the parties involved.
In addition, the new pronouncements have clarified that taxpayers can deduct the losses in the year of discovery, in the year that the perpetrator is accused. Even if you made investments 10 or 15 years ago, you can deduct the loss in the year the fraud was alleged. So, if [Bernie] Madoff burned you, you could deduct the losses in 2008.
How does a taxpayer classify losses for tax purposes?
Capital losses — which can only be deducted against capital gains — are subject to more stringent limitations, and they can’t be carried back. Revenue Procedure 2009-20 made it clear that these types of losses are ordinary losses; they are deductible as itemized deductions and without regard to any limitations.
The IRS even went one step further by stating that these losses are not subject to the limitations of itemized deductions.
Typically, an itemized deduction is subject to a limitation of 2 to 3 percent of gross income. These safe-harbor-determined losses are deductible in full.
The character of the losses is also important because if the loss incurred is large enough to either put an investor into a net operating loss position or, when coupled with other losses, gives the person a deduction greater than overall income, such loss is classified as a business loss, which avoids complications and limitations in claiming refunds for operating losses.
WALTER M. McGRAIL, JD, CPA, is a senior manager at Cendrowski Selecky PC. Reach him at (248) 540-5760 or firstname.lastname@example.org.
Whether you need new or expanded banking services, or you’re just banking as usual, building a relationship with your banker is always a good idea.
Holding regular meetings with your banker is beneficial to both the business owner and the bank. During this time, you will talk about your company and what you want to accomplish. In turn, your banker will discuss what the bank can do for you.
Even if you don’t need anything from the bank right now, these meetings can lead to new solutions or networking opportunities that you never would have known about without the bank’s assistance.
And if you are looking at expanding your business and anticipate needing the bank, these meetings are even more important. If you approach the bank with a plan to grow and expand, your banker can advise you how to do that while saving you time and money.
“Always keep your banker involved and engaged in your business,” says Darlene Nowak-Baker, executive vice president and lending manager with First Place Bank. “Do this in good times and bad, whether you need something or not. Your bank wants to work for you, but it can’t do it if it never sees or hears from you.”
Smart Business spoke with Nowak-Baker about how to build relationships with your banker, how to prepare for meetings and the benefits of doing so.
What makes a good banking relationship?
You should have a true partnership with your bank and bankers. Your banker should be someone you trust who is working for you and for the good of your business.
And the biggest part of this partnership is having regular meetings to discuss your financials, your needs, your concerns and your industry, to have your banker tour your facility and/or to learn how you conduct business on a daily basis.
But this goes both ways. You have to stay in contact with your banker as much as he or she does with you. Certainly, if you have a problem or need something, call your banker.
But share the good news, too, like when you get a new contract or make a big sale. Good, bad or indifferent, your bank needs to know what is going on with your business.
And even if you don’t need anything, a bank can help you partner with other companies that it services. Banks often bring their customers together to network, allowing local organizations to get to know each other while learning about the bank’s services. However, none of this can happen if you don’t stay in touch with your bank.
What does a business owner need to bring to a meeting with his or her banker?
You will want to have your last three years of tax returns, both personal and corporate, with all supporting schedules and K1s as well as a personal financial statement.
In addition, you should bring an interim financial statement and a 12-month income statement projection, as well as the last six months of receivable agings and payable agings.
It would be beneficial to put together a management scenario, a background of who owns your business, what they do and how long they’ve been in business — a who, what, where of your company.
Now, if you’re looking to buy a new building, you will also need to show what you’ve been paying in rent and other expenses.
If you’re looking to purchase new equipment, you’ll need to show projections of how the equipment will benefit your business. Will it increase sales? Lower costs? What will the net income be?
How many bank professionals should a business owner get to know?
Your loan officer will be your primary contact, but more often than not, you’ll become quite familiar with the branch managers and assistant branch managers. Good conversations usually start with branch managers and end with loan officers who provide winning solutions.
But really, it’s a good idea to know as many people at the bank as you can, particularly if they know your business and its industry. The more people you know at the bank, the better your banking relationships will be. If you’re a mid-sized business owner, it is important to involve your CFO or top accountants in your banking relationships.
They’ll likely understand the nuances of your company’s financials, and the bank will benefit from knowing several people within your organization.
How often should a business owner meet with his or her banker?
Ideally, even if it’s just a phone call or e-mail, you’ll want to contact your banker at least quarterly. Your banker will be reviewing and analyzing your financial statements to keep informed on how your business is progressing.
Keeping in contact with your bank can only help you.
Darlene Nowak-Baker is an executive vice president and lending manager with First Place Bank. Reach her at (248) 358-6403 or DNowak-Baker@fpfc.net.
The current economic situation has caused an upheaval of industries and driven long-standing organizations to the edge of bankruptcy, into bankruptcy or out of business.
It’s easy to assume the companies that found themselves in trouble hadn’t properly assessed their risks, but most of those organizations did have risk assessment procedures in place, says James P. Martin, CMA, CIA, CFE, CFD, CFFA, a senior manager at Cendrowski Corporate Advisors.
“They had analysts, auditors, very capable management staffs and risk management policies and procedures,” says Martin. “Regulators had increased the role of the board in risk assessment activities, mandated new audit procedures and defined many new compliance programs in the wake of the Sarbanes-Oxley Act. And still, these organizations were overtaken by factors that were not effectively addressed in their risk planning.”
Stories like these are leading shareholders, regulators, board members and management to ask how this could happen and what can be done to prevent it from happening to them.
Smart Business spoke with Martin about how to conduct risk assessments, how they should be structured and the pitfalls to avoid when performing them.
What does risk assessment involve?
The classic definition of risk assessment is identification of anything that is harmful to the organization’s objectives. The analysis should include both internal and external factors, and also cover financial and nonfinancial objectives. Risks are traditionally evaluated in terms of likelihood (What are the chances that this event could happen?) and impact (What would be the effects on the business’s objectives if it were to happen?). Turning these broad concepts into actions and responsibilities can create issues, most notably when defining how often the risk assessment activities should be performed and who should be involved.
Many organizations treat risk assessment as an annual task to involve senior management, internal audit or the risk and control department. This treatment, however, will miss the perceptions of employees involved in day-to-day operations, as well as eliminate the chance for refinements during the course of the year. In small and medium-sized organizations in particular, the risk management role is often bundled up with finance and becomes merely a ‘check box’ exercise.
What are some common mistakes businesses make when performing risk assessments?
Most risk assessment procedures are one-dimensional and do a poor job of identifying the impacts of cascading factors. For example, organizations might consider a power outage at a processing center as a risk and conclude that generators would power the center or employees would be able to work from home to process work.
Such plans were proved wrong by the Northeast Blackout of 2003, which left approximately 55 million people without power from New Jersey to Michigan, disabled most digital phone stations and caused a failure of water treatment plants. Additionally, some risk assessment procedures could fail to identify remote threats.
How could civil unrest in a remote country in Africa affect production of a product? If the country is a main producer of a rare element that is critical to a subcomponent of the product, such unrest could disrupt the supplier network.
How involved should a company’s board be with risk assessment?
The board sets the overall tone for the organization, and with risk assessment, it should primarily be driving and clearly defining the organization’s risk appetite. Risk appetite includes the long-term business strategy, the long-term and short-term expectations of the stakeholders of the organization, and the nature and characteristics of risks being considered.
The board needs to be involved to ensure that the organization considers the impacts of risk occurrence in a meaningful way. It also needs to champion risk management’s role in improving processes, integrating measurement and ensuring consistent application of best practices across the enterprise.
Most important, the board needs to be strong enough to stand up to management when it appears the organization is heading down a dangerous path without clearly defining the potential pitfalls that naturally come with any course of action.
Risk management cannot be viewed as an academic exercise, and board members must be serious about their duties. Board members must be well-versed in risk management techniques and be able to evaluate risk reports provided to them. Also, they must be independent and courageous enough to insist on an appropriate course of action, not just in bad times but in good times as well.
What other things need to be considered when conducting risk assessments?
Organizations need to strive to better integrate senior management, operations, the finance function and the risk assessment function in a continuous evaluation of risk factors in the context of the ongoing business. Financial plans and reports should include comprehensive risk indicators. This should be coupled with an adaptive organizational structure that is ready not just to respond to risk occurrences but also to seize the opportunities that are presented.
Also, companies need to use their organizational data resources, both information technology-based as well as human capital-based, to be able to more rapidly identify early warning signs and formulate alternative courses of action. Most important, there needs to be a fundamental change in which communication of risk factors is encouraged throughout all levels of the organization.
Open communication generates an atmosphere of honesty, which will help the organization gather and evaluate critical risk factors known throughout the organization.
James P. Martin, CMA, CIA, CFE, CFD, CFFA, is a senior manager for Cendrowski Corporate Advisors. Reach him at (866) 717-1607 or email@example.com.
Like many other markets these days, the commercial real estate market is struggling. Plain and simple, there is a lack of financing for commercial real estate projects.
According to Jeffrey M. Bloom, executive vice president and national real estate manager for Comerica Bank, a big reason for this is that the commercial mortgage-backed securities (CMBS) market was a huge component of liquidity in the marketplace, and over the last 18 months, that liquidity has pretty much disappeared.
“There were somewhere between $400 and $500 billion of CMBS loans generated in 2007,” says Bloom. “There are essentially none being generated today.”
Due to the economic climate, commercial real estate loan portfolios are more stressed than they’ve been in a long time, so portfolio lenders aren’t in a position to fill the void created by the lack of CMBS offerings. Commercial banks and life insurance companies, in particular are somewhat reluctant to generate new commercial real estate loans unless they are very well structured.
“Now you have a double whammy,” says Bloom. “There’s no liquidity from Wall Street and portfolio lenders are reticent to make commercial real estate loans because of the instability in the marketplace.”
Smart Business spoke with Bloom about the state of commercial real estate finance and why now more than ever your current lender is your best lender.
What is the most important thing businesses should know about the current commercial real estate market?
Besides all the liquidity problems, the lenders that are lending are being very selective and they’re playing with a new set of rules. By a new set of rules, I mean that lenders want lower loan-to-values, they want to lend on better projects, and they want higher debt service coverages. Lenders are now able to cherry-pick the assets they want to finance. Therefore, if you have a loan that’s maturing, your best option is your existing lender. Your existing lender doesn’t want to own the real estate, so it will be willing to work with you. However, your lender might require an updated appraisal, a remargin of the loan, a principal pay down, an increased interest rate and/or an increased guarantee structure. That may seem like a lot to give up, but it’s better than having a default.
So if your loan is maturing, what should you do?
Borrowers should be very proactive. Go to your lender and propose something that will buy you the greatest amount of time for the least amount of cost. Negotiations like this need to be taking place right now. Work with your lender to determine how much of a pay down you’ll need, how much your pricing is going to increase and what kind of principal amortization will be required. Do what you can to get yourself a favorable outcome, but remember: the negotiation has to be somewhat of a win-win. Your existing lender certainly wants to be better off tomorrow than it is today.
How can a company prepare for this negotiation process?
You have to know what your lender will be willing to do and under what terms. Make sure you’ll be able to fulfill everything that is going to be requested. And, be sure you know what your lender is going to ask of you, what its criteria are and how your needs will fit into that.
First of all, go in knowing that you’re likely going to have to make a principal reduction to the loan amount. Expect to pay a higher rate and, if the loan was a construction loan that wasn’t amortized, expect to pay amortization. If you can do those things, your lender will likely be more than happy to extend your loan, giving you anywhere between two and five years, depending on what the concessions are.
And as we all know, time is money, especially in this situation. There’s no expectation that the credit markets will open up any time soon, so you can’t anticipate that six to 12 months will be enough time to turn things around. The more time you get, the safer you’ll be.
What are the consequences of not renegotiating with your current lender?
No one knows what the future will hold. Your lender could face any number of external circumstances in the future that could affect its willingness to work with you. You don’t know what your lender will be willing to do down the road, but you can determine what your lender is willing and able to do today, so you should take advantage of that. There is so much uncertainty out there that once you have an agreed upon deal you should get it closed as quickly as possible. The certainty of execution is really important these days. As stated before, your best lender is your current lender, and this has never been more true than it is today.
Technology is constantly changing and evolving, and if your business doesn’t keep up, your competitors could quickly leave you in the dust.
This is especially true with telecommunication services and equipment. If you think the phone hasn’t changed much in recent years, you need to revaluate and assess your telecom needs.
“Telecommunications technologies and services are constantly changing and businesses should periodically evaluate these new systems and services to help make their companies more productive and efficient,” says Monty Ferdowsi, the president of Broadcore.
Besides showing you how equipped (or not equipped) your telecommunications are for the future needs of business, a telecom assessment will show you where money can be saved — or gained.
Smart Business spoke with Ferdowsi about telecom assessments, the costs associated with them and how to conduct one at your organization.
When and how often should businesses assess their telecom situations?
There are two distinct areas in which businesses should assess their telecom needs — telecom services and telecom equipment. In general, telecom services are the services provided by the telephone companies, including voice lines, voice usage and Internet access lines. Traditionally, businesses would evaluate their telecom services every couple of years. The focus of evaluation has, for the most part, reduced the cost of telecom services. However, in the last five years, the costs associated with telecom services have reached such a low point that there is little room for service providers to further reduce their costs.
On the telecom equipment side, in the last 10 years, equipment technology has gone through a considerable change. Infusion of IP (Internet Protocol) communications in the telecom space has led to the revolutionary VoIP (Voice over IP) technology. This technology has provided many capabilities that can have major positive effects on businesses, so much so that every business should evaluate and implement them. With all these changes in telecom services and equipment, businesses should assess their needs more often. I recommend an annual assessment to ensure that every business takes advantage of new productivity tools and services.
Where should business owners begin when deciding to go forward with new telephony systems, processes or tools?
The best approach for businesses to assess their telecom needs is to not focus on cost savings alone. This approach will usually lead businesses to get the lowest-cost services, and that is not the most effective use of service and equipment technology. A comprehensive assessment of telecom services and equipment can lead to a sensible decision that leads to a total solution. Today, there is a completely new way of procuring all your telecom services and equipment called hosted telephony. Any company looking to assess its telecom situation should consider hosted telephony and compare it to the traditional methods of buying service and hardware from multiple sources. There are many benefits of acquiring full-service, business-class telecom services, including the fact that there will be one company providing all the services, thus eliminating multiple vendors and complex decision-making.
What areas of the business should be evaluated?
Businesses should consider productivity-enhancing capabilities for different parts of their businesses. Generally, businesses do not realize how some of the new features and functions of new systems can greatly enhance their work forces. There are many new features available today in the new telecom systems that can truly bring thousands of dollars of monthly productivity, providing very short-term ROI. New telecom systems provide advance mobility solutions that allow work forces to be away from the business, with associates and customers still available to be quickly and easily reached. VoIP technology also allows a business to maintain a skilled staff working from home, even if associates have to move far away from the office. There are many other features that can be equally effective, and each can potentially provide a business-changing effect to an organization. In assessing and evaluating your business’s telecom situation, it is important to review your business needs and perform a full evaluation as a part of a telecom assessment project.
How does cost factor in to the overall changes?
Cost should be one of the most important factors in an assessment; however, it should not be the only factor. The total cost of ownership is a good exercise to go through to evaluate what different solutions will ultimately cost the business the most. Considering a hosted telephony solution over the traditional way of acquiring telecom services and equipment presents a much lower initial capital expenditure as well as flat and predictable monthly costs that are usually 20 to 30 percent lower than the traditional model.
Monty Ferdowsi is the president of Broadcore. Reach him at (800) 942-4700 or firstname.lastname@example.org.
Companies have issued stock options to their employees to supplement compensation for years, but you need to be aware of the implications that come with these options.
New and updated accounting rules have complicated stock option reporting in recent years. For example, Financial Accounting Standards Board (FASB) FAS 123(r) stipulates that costs related to equity-based compensation be recognized in a company’s income statement. Internal Revenue Service 409(a) is a measure that requires companies to report compensation to their employees if stock options were granted to them at prices below fair market value.
“As you can imagine, valuing stock options for financial reporting purposes is not easy,” says Mike Rogers, CPA, CFE, a senior audit manager with Briggs & Veselka Co. “The valuation process must take into account the stock price at the grant date, the exercise price of the option, the expected life of the option, the volatility of the underlying stock, the expected dividends on it and the risk-free interest rate over the expected life of the option.”
Smart Business spoke with Rogers about stock options and what you need to consider from an accounting perspective when issuing them.
Why are stock options such a hot topic in the accounting world right now?
In tough economic times, companies must be creative with the way they reward employees, especially when cash is tight. Some companies issue equity awards like stock options as a reward that doesn’t require cash in the short-term. Stock options permit an employee to purchase shares of company stock at a future date and at a predetermined price. Options also serve as an incentive because employees want the company to do well, thereby increasing the value of the stock underlying the options.
There are different types of options, each having its own tax ramifications to the employee and the company. Some options allow an employee the choice of paying taxes on the option value now or waiting until the options are exercised. Both the company that grants options and the employee who receives them should consult with tax advisers because the rules can be difficult to follow.
What are the financial implications of granting stock options?
Although options do not require an immediate cash outlay, there are financial implications. Current accounting rules require a company that grants options to record expenses based on the value of the options, typically at the time when the company grants the options.
Again, determining the option’s value is a complex process. The primary factor is determining the value of a share of company stock. The stock value establishes the option’s exercise price. This could mean that privately held companies need to obtain a formal appraisal. Alternatively, a company might set the price using a formula or base it on historical transactions.
Accounting rules also require a company to determine the volatility of its stock price. Companies could state zero percent volatility in the past, but this is no longer allowed in the accounting rules. Because volatility is difficult to establish, privately held companies might consider looking to a peer group of publicly held companies in the same industry or to an industry index. In any case, from an accounting standpoint, the volatility must be reasonable and supported.
Finally, the current rules require a company to consider the rate at which employees forfeit the options prior to exercise. This forfeiture rate is ideally based on past employee behavior but can also be formula-driven.
So, how do you determine option value?
The factors we just discussed serve as some of the major inputs into establishing the option’s value. There are two primary models companies use to arrive at the value, the most common being the Black-Scholes-Merton model. The second type is a lattice-based model. There are numerous free online option calculators that use the Black-Scholes-Merton model.
Bottom line, what does a company need to know when issuing stock options?
It is important to remember that granting options or any equity-based compensation has financial reporting implications. Determining the financial impact is a complex process. It is best to communicate with auditors and tax advisers early in the process to gain consensus on the option value and the underlying factors. It is not something that should be considered at the last minute.
MIKE ROGERS, CPA, CFE, is a senior audit manager with Briggs & Veselka Co. Reach him at mrogers@BVCCPA.com or (713) 667-9147.
In the U.S., there is no longer any doubt about it: we’re in a recession. Because of the economic uncertainty, companies are reassessing processes, slashing superfluous expenses and looking for ways to run leaner and more efficiently.
And, like it or not, every budget expense and line item is vulnerable. Still, some things can’t be cut completely, such as your company’s telecommunications. Your telephone system is vital to day-to-day business. Without it, you’re not in business.
So, while it’s obvious that you need your telephony infrastructure, that doesn’t mean you need the exact infrastructure that’s in place. A great way to capitalize on the current environment, and cut costs while doing so, is by implementing a virtual telephony infrastructure.
According to Monty Ferdowsi, the president of Broadcore, those companies on the cutting edge of technology are the ones who will survive this economic downturn, not those who continue to conduct business as usual.
“When the economy slows down, many companies quickly recover by cutting costs across the board, and then they simply wait for the economy to pick up again,” says Ferdowsi. “In contrast, there are always a few companies that look at an economic downturn as an opportunity to position the company to take advantage of the market when the economy turns around.”
Smart Business spoke with Ferdowsi about virtual telephony infrastructures, how they can save your company money, and how they benefit your staff and your customers.
How can a telephony infrastructure help businesses during the recession?
Today, next generation communications systems offer unique opportunities for companies to capitalize on the slow economy, while retaining their work forces and attracting new talent. For example, a company can retain the services of certain employees at 50 percent capacity by allowing them to work remotely via a business class hosted telephone system. Having part of your staff working from home can offer major cost savings and help you weather this tough economy.
Another example is recruiting new sales associates who are willing to sell your products and services, provided that they are not required to travel. A sales staff that doesn’t come into the office and doesn’t travel across the country on sales calls can save you thousands of dollars a year.
There are many features and capabilities that will allow you to think outside the box. That way, you’re flourishing in this slowed-down economy, while your competitors are floundering.
What virtual communications capabilities are available to companies?
In some extreme cases, companies are being forced to downsize to the bare minimum just to survive. Many of these companies might have to close down their offices, as the office is one of the largest monthly expenses a company has. By working with a hosted communications company, these companies can close down the physical office and implement virtual communications capabilities that allow customers to reach associates working from their home offices. This capability, combined with reducing employees’ hours of work, can truly make the difference between a company closing its doors completely and continuing to move forward until the economy picks up again.
How realistic is it for companies to operate without a physical office?
While some companies must maintain an office space (i.e. retail) to conduct business, there are many professional services (i.e. legal and accounting) that can easily operate in a fully virtualized mode. Today’s advanced communications systems can provide the telephony systems to make this possible. The ability to have virtual telephony infrastructures has only recently become available and accessible to companies. Hosted communications companies are now providing these services with little upfront capital expenditure, so it’s cost effective and offers a great ROI.
How does telecommuting benefit employees and businesses?
The concept of telecommuting has been around for about twenty years, but not too many companies implemented it prior to the year 2000, as it was too complex and expensive. Today, computer and telephony technologies have advanced to the point that telecommuting can be implemented effortlessly.
There are many advantages for both employees and businesses in telecommuting. A company can save money by eliminating the costs associated with office space, furniture, utilities and insurance. Companies can also recruit talent from all over the country by having them work remotely from a home office.
From the employees’ viewpoint, telecommuting allows them to reduce travel to the office. This means no more wasted time spent sitting in traffic, less wear and tear on their vehicles, and the ability to eliminate the cost of child care. Not only that, think of how much more money your employees will save on fuel costs. With a huge emphasis on green initiatives all over the world, telecommuting will certainly help the environment by reducing the usage of gas and the undesired pollution that comes with it.
Monty Ferdowsi is the president of Broadcore. For more information, call (800) 942-4700 or e-mail email@example.com.
The very first bill signed into law by President Obama was the Lilly Ledbetter Fair Pay Act, which was in response to a U.S. Supreme Court decision that found, essentially, that pay discrimination claims could only look back to decisions made within 300 days of the claim being filed. The new law removes that limitation, allowing an employee to pursue a pay discrimination claim even if the decision resulting in the discriminatory pay was many years or even decades earlier.
Although the ink is still wet on the Ledbetter Act, the flurry of pay discrimination claims is already starting to hit the courthouses. Making matters worse, the perilous state of the economy is bringing an increased focus on all aspects of businesses’ pay practices, with employees less willing to let their employers and particularly former employers slide on even the most technical wage and hour violations.
For these reasons, it is critical that businesses at least consider undertaking an internal wage audit to ensure their practices are in conformity with the labyrinth of wage and hour laws, says Peter B. Maretz, a shareholder with Shea Stokes Roberts & Wagner.
“There are myriad ways to perform an internal wage audit, but an overarching concern should be to select a process so that you establish and maintain confidentiality over the audit, which generally means involving your attorney at some level,” he says.
Smart Business spoke with Maretz about conducting internal wage audits within your business.
What is an internal wage audit?
A comprehensive wage and hour audit scrutinizes all aspects of your compensation practices. It is rare that a wage and hour audit does not turn up some issue, so be sure to consult with your counsel to either have them perform the audit directly, or, at a minimum, work directly with your HR or finance people to gather the data to analyze. This way, you will have a strong argument that the entire process is protected by the attorney-client privilege.
What should be the focus of an internal wage audit?
Of course, make sure basic laws, such as minimum wage and overtime, are being followed. On the heels of the Ledbetter Act, examine your compensation decisions to make sure that they are balanced and supported by nondiscriminatory bases, and examine the processes that are used to make decisions on compensation, be they starting pay, promotional pay or merit increases. The decision-making should be transparent, nondiscriminatory and well-documented. If there is a committee making these decisions, endeavor to make the committee diverse.
The audit should examine lower- and middle-management positions to make sure those people are properly classified as overtime-exempt or nonexempt based upon their work duties. There has been significant attention paid to this issue over the last several years, and a full discussion is beyond the scope of this article, but keep in mind that whether a person is properly classified depends upon the work that person is actually doing, not what their job description says he or she should be doing.
What other wage and hour issues should companies be aware of?
Also receiving significant attention lately have been the timing and administration of meal and rest breaks. The California Supreme Court will likely clarify many issues concerning meal breaks within the year. Until then, key issues remain in flux. You should make certain you have a comprehensive, regular audit mechanism in place to check for meal-break violations and pay the one-hour meal premium where indicated.
Also, if you require employees to change into uniforms or safety equipment on site, examine this ‘donning’ and ‘doffing’ process. If it takes more than a minute or two, it should be compensated time. Similarly, if there is significant time spent by an outgoing shift transitioning information to an incoming shift, that time is compensable.
If employees earn bonuses based on purely objective criteria (e.g., manufacturing employees make so many parts in a day and earn a set bonus amount or reservation agents earn bonuses for upsells), these additional amounts should be added to the regular rate before the overtime rate is calculated.
This outline is by no means exhaustive but should provide the foundation for a worthwhile audit.
What should a company do if violations are found?
How you implement a change in the practice and whether you issue back pay, depends upon scores of factors, not the least of which is the amount of back pay. Keep in mind, however, that there is value in presenting this information to your employees on your own terms. And do this proactively — don’t wait for your employees to bring it to you through their lawyers. If it does get to that, any resolution will likely involve you paying that lawyer, and you will have lost the opportunity to build employee loyalty.
PETER B. MARETZ is a shareholder with Shea Stokes Roberts & Wagner. He regularly advises businesses on all aspects of employment law. Reach him at firstname.lastname@example.org or (619) 237-0909.