Lisa Murton Beets
Conspiracies to raise prices are not new. More than 200 years ago, economist Adam Smith wrote of conversations between “people of the same trade” possibly ending in “conspiracy against the public, or in some contrivance to raise prices.”
“When cartel cases arise, the stakes are high,” says Edmund W. “Ned” Searby, chair of the White Collar Crime, Antitrust, and Securities Litigation Practice, McDonald Hopkins LLC. “For purchasers, the issue is recovering an overcharge that may be substantial; for sellers, the issue is potential criminal exposure and civil liability.”
Smart Business spoke to Searby about antitrust conspiracies, and what they mean.
How do you know if you have been the victim of a bid-rigging or a price-fixing conspiracy?
It’s not easily done. Most cartels operate secretly. In the context of bid-rigging, you can look at whether any companies decline to bid, whether the same group of companies generally bid, and whether the winner seems to rotate through the group. It may be suspicious if a new entrant or a company that has not bid frequently causes the usual bidders’ prices to drop. In the context of pricing, look at whether there have been price increases that are not justified by a rise in costs. Are prices higher in one region than another without economic justification? Have prices for all market participants been the same for a long period of time? Most purchasers first learn of a potential conspiracy from the disclosure of a criminal investigation.
If a conspiracy is suspected, what happens?
The U.S. Department of Justice Antitrust Division and, typically, the FBI conduct a criminal investigation. If convicted, defendants face potential fines and prison terms for their executives. Typically, civil damages actions follow the criminal cases. The alleged victims may recover up to three times the amount they were overcharged as a result of the conspiracy. This creates significant civil exposure for the alleged participants.
How can a company recover damages?
Most companies will recover through an antitrust class action lawsuit; those with significant losses may choose to pursue their own cases. For many, the first consideration comes when they receive a notice of a class settlement in the mail.
What are the options at the point a class settlement is announced?
First of all, don’t just throw the notice away. A company that receives notice of a class settlement can accept the result and file its claim at the appropriate time; object to the proposed settlement, either to the amount of the settlement and/or to the amount of the attorney fees for class counsel; or opt out of the class action and file its own lawsuit.
How can a class-action member file a claim?
Document your purchases so the claims administrator can calculate your share of the class action settlement. Anecdotally, however, a surprising number of companies never get their claim form in and leave big money lying on the ground. There are companies that will assist in filing your claim for a percentage of your recovery, but watch that you are not paying excessive fees. If you need help, you may give up far less engaging a company or a lawyer who understands the process and will file your claim on an hourly basis.
What are the considerations if a company wants to opt out and pursue its own case?
The benefits are the potential to increase your recovery from what you could obtain as a class member, you manage your own case, and you may be able to recover your losses sooner. A disadvantage is that, unlike a passive class member, you subject yourself to the obligations of discovery. But before you commit to filing your own suit, you should assess how strong the case is and whether it makes economic sense to pursue it alone. Publicly traded corporations and large private companies often choose to pursue their own cases where the losses are large and the indicia of guilt strong. If caught, suppliers may be under particular pressure to pay back their largest customers.
What if a company finds out it may be liable for its own activities?
Retain knowledgeable counsel that can quickly investigate potential exposure. For antitrust crimes, the U.S. Department of Justice has an amnesty program. If you’re first in with new information, you can potentially receive amnesty from prosecution, zero fines and immunity from criminal sanctions for executives. A relatively new statute also limits — but does not foreclose — civil liability for the amnesty applicant. Once you learn you are the subject of an investigation, don’t attempt to destroy evidence, provide false information, or convince others to do so. These acts will be interpreted as ‘consciousness of guilt,’ potentially tipping the balance towards indictment, and also potentially leading to additional obstruction of justice or perjury charges. If the FBI comes to your home at night, which they do, and you choose to be interviewed, be careful that any facts you relate are correct; even innocent errors of factual information can be interpreted as trying to mislead the investigation. Finally, your response should be coordinated with an understanding of how it may impact potential civil liability.
EDMUND W. “NED” SEARBY is a member of McDonald Hopkins LLC, Cleveland office, and is chair of its White Collar Crime, Antitrust and Securities Litigation Practice. Reach him at (216) 348-5400 or (800) 847-6424.
According to the American Health Information Management Association, keeping a personal health record (PHR) allows a person to provide doctors with valuable information that can help improve the quality of care he or she receives; can help reduce or eliminate duplicate tests and allow a person to receive faster, safer treatment and care in an emergency; and helps people play a more active role in their health care.
There are numerous ways consumers can compile PHRs; many resources are available in the marketplace. In addition, several plan providers offer tools for members through the plan’s Web site.
Smart Business asked John Higbee, vice president, CIO and CSSO, AvMed Health Plans, how employees can go about compiling a PHR and why they would be inclined to do so.
What is the difference between a personal health record and an electronic medical record (EMR)?
An EMR is the record you would find at a hospital or physician’s office. A PHR is a record compiled by the health care consumer. Some health plan providers offer a service where members can go to a Web site to create a PHR. Up to this point, adoption of EMRs by physicians has been spotty, perhaps around 20 to 30 percent. They are costly to implement and physicians’ offices are typically not fast to adapt to changes in office technology. The widespread use of EMRs will take quite some time. The Centers for Medicare and Medicaid Services (CMS) is offering seed money to practices to adopt EMRs. Hospitals are ahead of the curve. Many are already using or are preparing to use EMRs.
What type of information does a plan-sponsored PHR contain?
In addition to what a person would manually input about his or her history, the information present would generally be limited to claims information received by the providers. If there have been gaps in health care coverage, there will be gaps in the record, as well. For instance, if someone was between jobs and without coverage or had coverage with another plan before becoming covered under a new provider and during that time had lab work done, the results of the lab tests would be in the EMR, but rarely would show up in the PHR.
How does a person go about setting up his or her plan-sponsored PHR?
He or she would go online and fill out a health history answering basic questions and inputting information about any medications he or she is on, chronic conditions, etc. The system is secure and requires a user ID and password.
What are the benefits of PHRs to employers and their employees?
For employers, more responsibility shifts to employees for being engaged in their health care. With higher premiums and high-deductible plans a concern, employees become more conscious and have more incentive to live a healthier lifestyle. PHRs are designed to help members make better health decisions. Part of the premise is that the person can avoid filling out the same forms every time he or she seeks medical care. The goal is to provide convenience and a place to record details. Users are encouraged to print out a copy of their PHR, as well, so it is available in the event of an emergency.
How can employees be encouraged to compile a PHR at the health plan’s Web site?
After an employee has gone through the process of identifying his or her medical conditions online, the system can be set up so that the health plan sends the employee educational information about his or her specific condition. This provides a good way to get information flowing back and forth. The challenge is to keep the person engaged over time. Incentives may be offered. The content of the plan itself may encourage employees to take better care of themselves [e.g., high deductibles], but motivation comes highly from the individual. Employers have a vested interest in keeping employees healthy [less sick days, lower premiums, etc.], yet very few are willing to assign higher premiums to employees who do not adapt healthy lifestyles. We’re seeing some of this, but in general, health care is still wrapped up as an employee benefit in this country.
What does the future hold for PHRs?
There is a fast-growing market for health care information technology. With companies such as Intuit and Microsoft entering the business, we should see a great deal of acceleration. There is an increasing amount of money being invested in the technology, which is good for hospitals, physicians, health plans and employers because fast access to comprehensive information is in the best interests of all health care consumers.
JOHN HIGBEE is vice president, CIO and CSSO for AvMed Health Plans. Reach him at (305) 671-0109 or John.Higbee@avmed.org.
One of the primary functions of management is to understand what is actually going on in an organization as opposed to what is supposed to be happening. However, for monitoring to be truly effective, there must first be good communication, a culture that promotes ethical behavior and a solid understanding of the particular organization’s risk factors.
“Organizational monitoring is not just about protecting a company from fraud,” says James P. Martin, CMA, CIA, CFE, CPD, CFFA, a partner with Cendrowski Corporate Advisors LLC. “Monitoring systems can help ensure quality, that customer needs are being met and that the company is doing everything else that is necessary to achieve its goals.”
Smart Business asked Martin how companies can get the most from their monitoring systems.
How can monitoring help a company stay on track?
Monitoring systems are put in place so that management will know exactly what is going on in the company at all times. This will enable management to correct minor issues before they become bigger problems. There will be a lot less time reacting, so the company can focus on success.
What are the steps to an effective organizational monitoring plan?
First, the company must clearly define its goals. What is it trying to accomplish and how will it accomplish those goals? Second, what risks does it face what can get in the way of the company accomplishing those goals? Third, what type of early warning system does the company need? How will it know if and when a risk has actually occurred or if someone has not performed as expected?
What impacts are electronic monitoring systems having?
Electronic monitoring systems have been around for some time but are drawing more attention now that the penalties and potential outcomes for violations are more severe under Sarbanes-Oxley. Electronic monitoring systems are similar to a car’s dashboard. When trigger points, which are predefined events or hurdles, are detected, ‘warning lights’ appear on the manager’s desktop. While electronic monitoring systems are useful, they cannot nor should they replace human involvement. The most important thing managers can do is be involved with the company’s operations on a day-to-day basis. This includes walking around the company and talking with employees, holding regular meetings, receiving regular reports and phone calls, etc.
How are trigger points identified?
An organizational assessment of risk will help management identify areas that have more robust monitoring needs than others. Examples might include finance everything related to potential issues arising with cash or vendor management, for example, notification every time a vendor’s address changes. Triggers can also be set up to monitor quality metrics, supply chain issues, personnel issues, etc. The system should be proactive so that management can address issues before they get out of control, preventing a crisis management situation.
It’s important to note that a monitoring system is more holistic than the definition of trigger points. The single biggest factor is people the behaviors of what people will do in a given situation. There needs to be an overall culture with good communication systems and a clear understanding of the expectations that management sets. Monitoring techniques need to continuously adapt to consider potential changes in behavior. There are a lot of examples of companies that had defined monitoring procedures, but creative people were able to identify and exploit areas that were not considered in those procedures.
How do private equity firms monitor the activities of the companies they invest in?
Private equity firms have to monitor the operations of the portfolio companies, not to the extent of detail that internal management does, but they do need to define risk. These companies have expectations, and if they identify certain events on the horizon, they can be prepared to take certain actions. Like the companies they monitor, private equity firms must also define their own particular trigger points.
Any tips for improving a system?
Make sure you’re monitoring the right areas. There may be areas you’ve historically monitored a certain way that have now changed. This is where the importance of the internal audit function comes in. The board’s audit committee must understand what is critical for the organization in the upcoming year. In examining the ‘audit universe’ the model that defines every auditable event within the organization areas of risk are identified, then are prioritized for audit. It is management’s responsibility to determine how many resources to invest in each given area of risk.
JAMES P. MARTIN, CMA, CIA, CFE, CPD, CFFA, is a senior manager with Cendrowski Corporate Advisors LLC, Bloomfield Hills. Reach him at (248) 540-5760 or email@example.com or go to the company’s Web site at www.frauddeterrence.com.
Is it time to pursue an MBA? Or have you identified candidates in your company whom you want to sponsor in obtaining their MBAs? Perhaps these ideas have been on your mind for a while, but because of career demands you’ve just never seemed to find the time to act.
Technology has advanced online learning options so that students who cannot commit to regularly scheduled classes on campus can still pursue their degrees. While a quality program is just as rigorous and complex as a campus-based program, online degrees afford a level of flexibility that prior to the Internet was just not possible.
Smart Business asked George Barnes, director of the Global MBA Online program, School of Management, the University of Texas at Dallas, about the benefits of obtaining an MBA online.
How do online options make it more convenient for an executive to obtain his or her MBA?
An online program dispels time and place as obstacles to earning a degree. Executives often have many meetings and travel requirements that prevent them from attending classes on fixed days at specific times. Those who do start a campus-based program may find themselves transferred to another city or country, so if they transition to the online program, they won’t have to forfeit any credits they’ve already earned. While there is flexibility with the online program, there are still some structured requirements. Our Global MBA Online program, for example, follows the same semester pattern as the campus-based program, with all courses beginning and ending at the same time. Online students in a course that requires a two-hour exam are given a two-day window during which they can choose the start time.
What qualities are required to be a successful distance learner?
You have to be disciplined, self-motivated and able to take responsibility for your education rather than have it ‘come at you’ while sitting in a classroom. You have to be comfortable with technology and have the necessary computer skills. Online learners should also have no particular need for the face-to-face socialization that takes place in the classroom. In the distance learning environment, socialization takes place in chat rooms, on discussion boards and, in some cases, in virtual classrooms, but the students unless enrolled in a hybrid program of some sort, which requires in-person attendance on some type of regular basis will never actually be together in person.
How is the distance learning environment structured?
Online degree programs require the student to participate in virtual teams, engage in self-directed learning and utilize time-management skills, all of which are required to function in today’s business environment. Students and faculty interact via streaming audio lectures, downloadable course files, online text-based conferences/threaded discussions, real-time text-based chatting, Web conferences and electronic submission of written assignments.
Is the quality of education any different than that which would be obtained on campus?
In a well-structured, accredited program the requirements for obtaining a degree online are just as rigorous as a campus-based program. At UT Dallas, our program is an extension of the campus program using the same faculty and curriculum. The word ‘online’ does not appear in the transcript or on the diploma.
What should prospective students look for in a program?
The program should be accredited and should have serious admission requirements. What is the quality of the structure, delivery and faculty? Is it the same curriculum offered on campus? Do you have access to the same faculty as the students on campus? Is the program user-friendly? The student needs to determine what degree of flexibility he or she is looking for, and then ensure that the program accommodates it. Is the program a hybrid? If so, would it be impossible for you to attend the regularly scheduled times in the classroom? Is there a lot of real-time interaction required? Can you commit to that?
What solutions does an online program offer to companies that want to further the education of senior-level managers?
For a company, access to one high-quality online MBA program can be the solution to upgrading the business skills of senior-level managers, no matter where they are located. It’s a particularly attractive option for multinational companies. For example, a company might send 10 people it has identified as future leaders through the program, knowing that all 10 will receive the same instruction. Those 10 can live anywhere in the world.
GEORGE BARNES is director of the Global MBA Online program, School of Management, the University of Texas at Dallas. Reach him at (972) 883-2783 or firstname.lastname@example.org. For more information, go to www.som.utdallas.edu/globalmba.
Are you in touch with your company’s culture? If you’re considering a career move, are you taking into account that organization’s culture?
“Organizational culture is comprised of the assumptions, attitudes, experiences, beliefs, values, norms and tangible signs of the organization’s members and their behaviors,” says Dana Gibson, Ph.D., CPA, president of National University. “From organizational values develop organizational norms or guidelines that prescribe appropriate behavior by employees.”
During the interview process and upon joining an organization, a person will quickly sense the particular culture.
Smart Business asked Gibson how important it is to identify and fit in with an existing corporate culture.
Do executives place enough emphasis on corporate culture?
Most high-level executives understand corporate culture, but many are not convinced of its impact on their job. Studies indicate, however, that culture does indeed have a huge impact on an organization. Popular business books reinforce this. In his book ‘Good to Great: Why Some Companies Make the Leap … and Others Don’t,’ Jim Collins identifies one of the qualities of a great company as a strong culture. In their book ‘In Search of Excellence,’ Peters and Waterman note that a key to high performance is culture. In a study of some 200 companies over 11 years, Kotter and Heskett found that a strong sense of corporate culture is an indicator of stronger financial performance. The research is highlighted in their book, ‘Corporate Culture and Performance.’ Executives who don’t recognize the importance of culture will undermine their own effectiveness and that of the entire organization.
If preparing to transition, how can an executive evaluate the culture in the organization he or she is considering?
There are many listening and observation tactics that can help you determine the dynamics of an organization. During the interview process, look around. Look at the clothing, the types of furniture and how it is arranged, the facilities the cafeteria, the boardroom. Listen to the stories the people tell and the experiences they brag about. What are their rituals? What types of symbols e.g., the Mary Kay Pink Cadillac do they value? Review the reward systems, the employee orientation and training documents. Is there a formal or informal hierarchy? Is it in line with your personality and style?
How can the executive determine if he or she fits in?
If you’re a hierarchical person trying to blend into an entrepreneurial type of company, it’s probably a mismatch. Understand your leadership style and organizational personality. What type of organizational dynamics are you comfortable with? On the other hand, there are situations where a board wants to bring in someone with a different style to move the organization to a different place. Senior leadership is responsible for strategy, and it’s almost impossible to achieve strategic goals without a culture that is aligned. If an executive is being brought in to lead the company in a new direction, it will require deliberate effort to change the culture.
What happens when it’s not a good fit?
We’ve seen several high-profile media stories of CEOs who have had to step down. It happened with Carly Fiorina at HP and Bob Nordelli at The Home Depot. In certain scenarios, the culture is so firmly entrenched that it would be near impossible to change direction. For example, if the Ritz-Carlton, which has been focused on the customer for many years, were to try to shift its focus to cutting costs, the employees might not budge. When culture is good, the organization stays on track. If it has to change, top management must clearly understand what needs to be done.
Do corporate cultures change?
Cultures develop over time. In most cases, organizational culture ‘grows up’ over the years without a plan; other times, the direction is very deliberate. Often, the culture is a reflection of the original founders and is very ingrained. Can it change? Absolutely. However, be cautious. There are numerous examples of failures. The most successful changes have resulted from long, deliberate efforts on the part of the senior staff. Some organizations try a revolutionary approach rather than an evolutionary approach. It can happen that way, but that scenario usually involves a lot of turnover although, in some cases, that is the intention.
Obviously there is no one key to success. The advice would be to 1) set the mission and values and determine how they target culture, and 2) identify/build in symbols, training and rewards and communicate what is important to the organization.
Culture doesn’t change overnight, but it doesn’t have to take years. It depends on how strong the culture is and what type of shift you want to achieve.
DANA GIBSON, Ph.D., CPA, is president of National University, La Jolla, Calif. Reach her at (858) 642-8802 or email@example.com.
Are you satisfied with your current health care plan provider? When your employees call for assistance, are they being well-served?
It is hoped that you answered yes. However, if you’re having a lot of problems and your employees are constantly complaining to human resources it may be time to consider other alternatives.
The first consideration for most employers is how much coverage they can get for their money. But it’s equally as important to factor in the level of customer service.
“Whether you are seeking a plan for the first time or are thinking about changing providers, keep in mind that you want your employees to be able to get a knowledgeable, empathetic person on the line quickly when they call for assistance,” says Joyce Krajnovich, director of service, Member Services at AvMed.
Smart Business asked Krajnovich about customer service and other qualities employers should look for in a health care provider.
What is the first thing a company should consider when selecting a health plan?
To begin, the employer should consider the overall needs of its entire population. It’s important to review the limitations and exclusions, as well as the formulary guidelines to identify any specific coverage deficits. Make sure the plan works for you. Are the services you need covered? At what cost share? How is the customer service? What value-added benefits does it offer? Does it have a solid network of providers? Bigger isn’t always better. What about longevity? How long has the company been in business? How long do its customers stay?
What should an employer look for in customer service?
The days of customer service representatives (CSRs) who just ordered ID cards are long gone. Today’s CSRs need to be fully capable of guiding members through the process in order to obtain 100 percent of the benefits to which they are entitled. Is the company local? If so, the CSRs will have that fundamental commonality with members. What about phone response? Does the company offer 24-7 access to a CSR, nurse, clinician? How long are the hold times? Can the customer get through to a live person quickly and painlessly?
Are the CSRs well-trained and knowledgeable? Do they work closely with the clinical staff, placing member health as the first priority? Do they work with primary care physicians to find specialists when need be? Do they exhibit the important qualities of patience, integrity and empathy? If they cannot help the member, are they able to quickly escalate the issue to a supervisor?
What are some additional considerations when evaluating a provider?
Based on my experience, employers make decisions based on the broadest level of benefits at the most cost-effective price. That’s what draws them to a plan. What keeps them with a plan is the level of service received from the plan. Without quality customer service, the company is going to get constant complaints from employees, administrative costs will rise, and oftentimes, the HR staff will get caught up in the middle.
Changing plans takes a great deal of time and resources in terms of the bid process, enrollment, etc. So companies should do everything they can upfront to ensure that they’re going to be satisfied with the plan they select.
What other value-added services might be important to a company?
As I mentioned earlier, working with a provider whose employees are local is a benefit because those employees know the area and understand the logistics when working with the list of network providers. They can also help members find other local resources to assist with services that may not be covered or are only covered to a partial extent in their policy. Another important consideration involves the wellness component. Does the plan cover annual wellness visits? Does it offer special care management programs, for example, for those with asthma, diabetes? Does it cover flu shots and immunizations. Does the plan offer value-added services, such as weight loss and smoking cessation programs?
With all the controversy about health insurance and HMOs, what is the most important piece of information you want to share?
Customers need to know that plan providers are closely regulated and monitored by both federal and state regulatory agencies. They cannot make arbitrary decisions but must make coverage decisions based on the members’ individual plan benefits. There is oftentimes a misperception that providers want to withhold care, rather than manage care. Providers should help consumers manage their benefits and their care, so they can get the most out of what’s available in regard to both.
JOYCE KRAJNOVICH is director of service, Member Services, AvMed. Reach her at (352) 337-8617 or firstname.lastname@example.org.
“Due diligence is a transaction verification step when you’re considering investing in an organization, whether through a merger, acquisition or an infusion of significant capital,” says James P. Martin, CMA, CIA, CFD, CFFA, a senior manager with Cendrowski Corporate Advisors LLC, Bloomfield Hills, Mich.
Traditionally, the primary focus has been on the numbers, says Martin. “Yet when you also look closely at operations and internal controls, you can obtain better results from due diligence and achieve greater long-term success. Analyzing the people, processes and systems are steps that are often overlooked, but doing so will give you deeper insight into the company and its prospects for the future.”
Smart Business asked Martin to provide guidance for buyers preparing to enter into due diligence.
Many mergers and acquisitions fail. How can due diligence help?
The problem with focusing primarily on the financials during due diligence, as we’ve seen with capital markets in the last few years, is an opportunity for the numbers to be skewed. The numbers primarily reflect historical performance; due diligence should also focus on the people, processes and systems that generated those numbers. What are their procedures? Do they have good internal controls? What is the state of the IT systems?
An extremely important consideration is company culture. During due diligence, the acquirer should consider the target’s human capital. What do the people believe? How will they respond to the merger?
More often than not, it’s the unsuccessful meshing of two different cultures that results in failure. And even if the cultures are compatible, there is still a lot of distraction. Workers become disenchanted, begin looking for new jobs, get lured away by the competition, etc.
Considering the myriad issues on a holistic basis is what we refer to as ‘business intelligence.’ This involves understanding the value proposition of the business much more deeply than a mere analysis of the numbers, to understand how the organization operates, what can be expected for future performance, and what events, uncertainties, conditions or contingencies could disrupt the achievement of business objectives.
What areas receive special attention during due diligence?
During due diligence, you want to ensure that the numbers are fairly represented, that sales are repeatable and that growth will continue to be achievable. There is a difference between looking at transactions, versus analyzing processes and procedures. A number is just a number. How much did the company have to do to achieve that number?
Some companies are good at achieving results while always operating in a crisis mode. In other companies, everything is planned, and processes and procedures are in place. It’s crucial for the buyer to know how the company actually works, what it is actually acquiring.
Much of what will receive closer examination during due diligence depends on the buyer’s strategy. Why does the buyer want to acquire the company? Is it trying to obtain clients? Add human capital? Obtain a patent? Penetrate a certain market? When you acquire a business, you are acquiring everything that goes with it.
How has Sarbanes-Oxley affected due diligence?
If the acquiring entity is a public company and the target is a private company, the private company must be SOX compliant from the minute the merger takes place. Due diligence can quantify how compliant the company is. It will require a significant investment to bring a company that does not have written policies and procedures in place into compliance.
If two public companies were to merge, during the process of combining operations department by department, they would have to determine what the new official procedures were going to be, then document everything. Again, an expensive proposition.
It is important to remember that even though Sarbanes-Oxley was written as a regulation covering large public companies, it has increasingly been applied to private companies, and even not-for-profit entities as a best-practice standard. Many of the governance and oversight requirements of SOX are applicable and valuable when applied in a private company setting. Also, since many features of Sarbanes-Oxley are derived from the Committee of Sponsoring Organizations of the Treadway Commission’s internal control framework, they are certainly applicable to most organizations.
On another note, in the private equity world, for example, the buyer would have to consider its exit strategy. If an IPO is down the road, the buyer would have to build in the additional costs required to develop and document SOX compliant processes and procedures.
JAMES P. MARTIN, CMA, CIA, CFD, CFFA, is a senior manager with Cendrowski Corporate Advisors LLC in Bloomfield Hills, Mich. Reach him at (248) 540-5760 or JPM@cendsel.com.
What type of tax-planning opportunities can companies take advantage of as 2006 comes to a close? What does 2007 hold?
“There are numerous issues that companies should be aware of,” says David H. Benz, partner and director at Sommer Barnard PC. “For instance, the Pension Protection Act (PPA) passed this year includes new rules and several important tax measures. Also, while not part of the PPA, the Dec. 31, 2006 plan compliance deadline previously set for non-qualified deferred-compensation plans has been extended to Dec. 31, 2007.”
Taxation may arguably be one of the most complex areas of law, and Benz notes that it’s important to keep up with changes on an ongoing basis. “Clear communication with internal accounting teams and good relationships with outside advisers are crucial to success,” he says.
Smart Business recently asked Benz to discuss some major considerations for 2007.
How can businesses take advantage of year-end planning opportunities?
Year-end planning is basically a combination of deferring income and/or accelerating deductions. For instance, cash-basis companies can accelerate deductions into the current tax year by pre-paying certain expenses, such as utility costs, employee benefits, and in some cases, rent. On the other hand, if the expense is for a benefit lasting longer than 12 months, pre-payment will not create a current deduction. As for accrual-basis companies, bonuses paid within the first 2 1/2 months of the next tax year and certain other recurring items can be deducted in the current year.
What last-minute items should a business consider?
Year-end planning involves looking back to the previous 11 months. For example, this year’s deduction for domestic production activities is equal to 3 percent of the lesser of a business’s total taxable income or the business’s qualified production activities income for the year. However, the deduction is further limited to 50 percent of the business’s W-2 wages paid during the year. If a business engages in some year-end planning, an otherwise available deduction that is limited by the W-2 wages paid year-to-date can be increased by making additional bonuses before year end.
What do businesses need to know about the Pension Protection Act (PPA) passed this year?
Primarily a reform effort aimed at defined-benefit plans, the PPA also includes several important tax measures. For instance, there are new rules affecting charitable donations, recordkeeping and corporate-owned life insurance. The PPA also makes permanent some of the tax benefits enacted in 2001 that were originally set to expire in 2011, such as qualified tuition programs and Roth 401(k) plans.
The PPA made favorable additions to ‘safe-harbor’ plan design for 401(k) plans. Specifically, it added a new auto-enrollment/safe-harbor alternative. If a company opts for auto enrollment and also complies with certain requirements under the PPA’s new safe-harbor rules, it will be guaranteed to pass the nondiscrimination tests that have burdened some plan sponsors. Neither auto-enrollment nor safe-harbor plan design are new. Rather, I think the real importance of these provisions is two-fold. First, automatic enrollment should result in increased participation by rank-and-file employees. And second, the new provisions should make safe-harbor plan designs more palatable to a wider group of employers.
While some commentators are dubious that these new provisions will be of much use to large employers, I think all plan sponsors should engage in some type of cost-benefit analysis to determine whether auto-enrollment/safe-harbor makes more sense than the traditional nondiscrimination testing.
How can businesses prepare for 2007?
Arguably, one of the biggest changes coming in 2007 is a financial accounting interpretation. In preparing for tax planning in 2007, businesses should be familiar with and prepared for this new interpretation that is certain to have a profound and far-reaching impact on any taxpayer issuing GAAP financial statements.
By examining tax return positions, FIN 48 will govern the way in which a taxpayer books income tax expenses and balance sheet tax assets/liabilities. FIN 48 abandons a ‘probable’ standard in favor of a two-step approach. First, the taxpayer’s return position must be ‘more likely than not’ correct, arguably a lower standard than ‘probable.’ However, in the second step, the taxpayer must handicap its likelihood of ultimate success, considering not only the technical merits of a position but also its willingness to settle for less than 100 percent. It is the result of this second step that is then booked on the taxpayer’s financial statements.
DAVID H. BENZ is partner/director, Tax Group chair and a member of the Business Practice Group at Sommer Barnard PC. Reach him at (317) 713-3500 or email@example.com.
The changes to IRS Form 990, Return of Organization Exempt from Income Tax, beginning with tax year 2008, are the most significant in the last 30 years. Driven by Congressional concerns over nonprofits being used as illegal tax shelters and as fund-raising vehicles for terrorist groups — as well as the Pension Protection Act of 2006 — these changes will require more transparency and disclosure.
“These changes are important to all of us — nonprofit employees, board members and donors alike,” says Harry Cendrowski, CPA/ABV, CFE, CVA, CFD, CFFA, managing member of Cendrowski Corporate Advisors LLC. “In addition, if you’re involved with a small, community-based nonprofit, such as your child’s soccer league, you’ll want to know about the changes required of these organizations, as well.”
Smart Business asked Cendrowski how nonprofit reporting will be different from this point forward.
What are some of the major changes?
The new governance section, Part VI, requires information about the organization’s governing body, its governance and management policies, and its disclosure practices. Governance policies and practices are not required by law, but the IRS recognizes that a nonprofit is more likely to report its activities correctly if it has policies and practices in place.
How detailed does the information in the governance section have to be?
The organization will now have to make declarations regarding officers and board members who receive salary or payments. In the past, only salary had to be disclosed. Now, information on consulting and other relationships must be disclosed, as well. Before, the organization was only required to disclose the officers. Now, it has to disclose the number of board members and how many of those members are independent (the standard of independence is that you can’t receive more than $10,000 per year, nor can you or any member of your family be involved in a transaction worth more than $10,000 per year). This is significant in that it will reveal how many, if any, board members are personally benefiting from being involved with the organization. Form 990 is a public document. Most charities post it on their Web site or list it on www.guidestar.org, which maintains information on charities. This is where the transparency comes in. If you have a board of 20, but only three are independent, how does that look? As you can see, the new requirements aren’t just for the government but also for people choosing where to donate.
What do nonprofits need to watch out for?
Be aware of the new compensation reporting requirements. The new form requires you to report on a calendar year basis for officers, employees, trustees. You will have to list base compensation and bonuses, deferred compensation, nontaxable benefits and other compensation, and report on compensation practices.
Be aware of any nondirect relationships with officers and board members. For example, board members who receive endowments or who have additional business relationships with the charity will cause additional scrutiny by the IRS and donors.
Do you have any advice for preparing for the transition?
Meet with your internal staff and accountant now to identify what new information will be needed and to determine who will collect it and how. You’ll need to gather information from officers and governing body board members — maybe obtain declarations. Have a workshop or webinar with your employees and governing body so they’re clear on the changes. The changes may result in you realizing you need to make adjustments in your record-keeping system. If you’re not documenting all board meetings, make sure this is one of the first things you begin to do.
The IRS realizes the changes will take time to adapt to. There is a three-year transition period in place, and you may be able to file Form 990-EZ in lieu of Form 990. A phase-in chart is available in the charities and nonprofits section of www.irs.gov.
Will anything new be required of small nonprofits that never had to file in the past?
Small organizations whose gross receipts are normally $25,000 or less are now required to electronically submit Form 990-N, also known as the e-Postcard. The IRS sends reminder notices but often has outdated contact information on file. An organization that fails to file the required e-Postcard for three consecutive years will automatically lose its tax-exempt status. If you’re involved with any small, nonprofit community groups, make sure the main contact person is aware of this new requirement. Form 990-N can easily be filed at www.epostcard.form990.org.
HARRY CENDROWSKI, CPA/ABV, CFE, CVA, CFD, CFFA, is a managing member of Cendrowski Corporate Advisors LLC. Reach him at (866) 717-1607 or firstname.lastname@example.org or go to the company’s Web site at www.cca-advisors.com.
While it is certainly unpleasant to receive a letter requesting monetary compensation for an incident involving one of your employees or your company, it is best to act swiftly and handle your response professionally.
“During economic times like these, we see an increase in the number of people seeking monetary damages for all kinds of things,” says Lucy K. O’Shaughnessy, member in the litigation department at McDonald Hopkins LLC. “Even if you think the claim is frivolous, you cannot ignore it. Unfortunately, I see many situations where owners fail to report incidents to their insurance carriers and litigation follows. Litigation is a time-consuming and costly process.”
Smart Business asked O’Shaughnessy for guidance on how to respond promptly to these letters to avoid paying a great deal down the road.
What are the first steps to take if your business receives a letter?
Acknowledge the letter right away. Read it carefully. Call your lawyer and your insurance broker. Many types of commercial insurance policies specifically require notification of any claim or potential claim. Perhaps you are worried that your rates will go up if you submit the claim. Your broker can advise you on this matter. He or she will consider factors such as the size of the claim and your prior loss history to determine how the claim will affect underwriting and the ramifications of reporting it. You and the agent can then decide together if you must submit the claim.
Will your rates go up if you file a claim?
This depends on many factors. Again, talk to your agent or broker. Communication is the key quality of a good agent. An agent is not helpful if he or she is not responsive and does not return your phone calls. Try to develop and maintain a good relationship with your agent so that when things go wrong, you can feel confident knowing he or she will be there for you.
Why is it so important to act promptly?
There are two types of policies:
- An occurrence policy. Coverage triggers the date the loss occurs. This type usually has a requirement that the incident be
reported promptly or as soon as practical
- A claims made policy. This coverage
triggers when the claim is actually reported
to the insurer. If you know there is a claim
out there, you should report it right away. If
you wait, and during that time your policy
renews, you may not be covered because it
was not reported in time. If you delay, you
are jeopardizing coverage.
What if the claim is filed and coverage is denied?
There are many different reasons an insurer can deny coverage, but each should be based upon the specific facts of the loss and the carrier’s interpretation of the policy. In the context of our discussion here, we are hoping to avoid a situation where the carrier takes the position that the insured failed to provide a timely notice of the claim. If that is the case, the insured could file a declaratory judgment action (lawsuit) asking the court to determine each party’s rights and obligations under the insurance contract. In a case where the insurer contends notice was late and, as a result, there is no coverage, it will be up to the insured to show that the delay in notifying the insurer did not prejudice the rights of the insurer. Generally, the longer the delay, the better the insurer’s chances are of prevailing in this type of lawsuit.
For instance, if the insured does not notify the carrier of the claim until after a trial, the insurer has lost its rights to manage the defense of the case, to participate in the trial and/or to settle the case.
What happens if the business is served with a lawsuit instead of a letter?
Plaintiffs’ lawyers often put language in the complaint that will trigger insurance coverage. If you are served with a lawsuit, notify your lawyer and insurance agent immediately. It is also very important to retain any documents related to the subject matter of the litigation. In Ohio, there is a separate cause of action called spoliation of evidence. This arises if one party willfully destroys evidence after it has knowledge that litigation may ensue and the other party would have relied on that evidence.
It is usually advised at the beginning of litigation, or when a claim is filed, to take the proper steps to ensure that no information that has anything to do with the matter is destroyed, such as all of the information in computer systems, including metadata and deleted information.
Any final words of advice?
Make sure you have complete copies of your policies with endorsements and keep copies of your old policies indefinitely. You also should have a basic understanding of what types of claims are covered and what types are not and a good grasp of the amount of your deductable. Above all, if you receive a letter or are served with a lawsuit, act right away.
LUCY K. O’SHAUGHNESSY is a member in the litigation department at McDonald Hopkins LLC. Reach her at (216) 348-5837 or email@example.com.