Lisa Murton Beets
If your loan covenants specify that your lender has the right to verify assets and you have not yet been subject to a field audit, you could receive a call any day now. If you’re applying for new credit, be advised that many lenders are now requiring quarterly, semiannual or annual asset verifications.
“In light of the current recession and resulting restrictions on credit, lenders have become increasingly prudent in their lending decisions,” says R. Austin Marks, CPA, CFF, CFE, CFFA, senior associate at Cendrowski Corporate Advisors LLC. "There will be extra diligence on the front end and stricter terms throughout agreements, including more asset verification and increased transparency. Many businesses are facing the prospect of bankruptcy; without liquidity supplied by lenders, these businesses might become insolvent. The risk that borrowers might overstate their assets in order to stay afloat is one of the primary reasons why lenders are increasingly requiring asset verifications.”
Smart Business asked Marks how companies can better understand what it means to be subject to asset verification.
Please provide a general overview of theasset verification process.
Asset verification is the process for whichan asset-based lender, whether it is a bank, a finance company, etc., verifies a creditor’s reported assets. Asset verifications are typically defined in the terms of the loan. The lender is basically attempting to ensure compliance with various loan covenants and adequacy of collateral coverage of outstanding loans. Generally, the lender will send field auditors to the creditor’s facility and perform various procedures to verify the assets collateralizing the loan. The results of the asset verification can have a wide range of implications from changing the credit terms to calling the loan.
What can a company expect during a sitevisit?
Professional skepticism is one of the first rules of thumb for field auditors on asset verifications. Well-trained field auditors areaware of the potential vulnerable areas for misstatement and will look closely at those facets of the business. In general, field auditors are quite diligent and thorough in rooting out anomalies; if they pose questions that your management or personnel cannot answer or that you can only answer after along delay, there will most likely be follow up in those areas, with closer scrutiny. To the extent allowed in the loan agreement, field auditors often will arrive with as little notice as possible to prevent creditors from having time to ‘prepare’ for the asset verification. Field auditors also will be cautious not to over rely on information provided by software programs. If incorrect information is input into the software, incorrect results willbe reported. In determining balances or amounts, they will follow the flow of information to ensure the backup information supports the reported balances.
What more will lenders be requiring of creditors moving forward?
Many lenders will be working to ensure that there are no limits to their ‘right to audit’ clause. They do not want to be limited in their scope, their frequency, how much notice they need to give, etc. They also want to ensure that field auditors have complete access to creditors’ information as they see fit. Loan terms would spell out all of these lender rights to avoid problems down the road.
Does the lender have the right to request any type of real-time monitoring of the creditor’sactivities?
Some lenders may require as part of the loan agreement that the creditor allow an Open Database Connection (ODBC) interface between the lender and the creditor’s Enterprise Resource Planning (ERP) system. This would allow the lender real-time monitoring of the creditor’s transactions inorder to determine compliance. An ODBC interface can integrate an automated monitoring capability into the creditor’s system by providing real-time access to critical performance measures and indicators.
What steps can creditors take to ensure successful audits?
Having a sound system of internal control will help the creditor produce more reliable financial information. If you have poor internal controls, you will likely have unreliable reporting mechanisms, and thus unreliable (reported) results. If you know your information is reliable, there shouldn’t be any surprises during the audit. On the other hand, if your reporting is unreliable, the auditor might determine an entirely different value from transactions based on his or her own testing. Sound internal controls also help protect you from fraud and protect you from getting hit three ways. First, if fraud is occurring, you lose the value of what has been stolen. Second, if your borrowing level is based on a percentage of accounts receivables that never really existed, you may be over advanced and subject to the lender’s make-whole requirements. Third, if your lender determines through asset verification that it lent you money based on assets that were never really there, you may end up incurring higher-than-anticipated borrowing levels and consequently additional interest expense.
R. AUSTIN MARKS, CPA, CFF, CFE, CFFA, is a senior associate at Cendrowski Corporate Advisors LLC. Reach him at (866) 717-1607 or email@example.com or visit the company’s Web site at www.cca-advisors.com.
The recent Madoff scandal once again has put private investments in the negative spotlight. Are unregulated investments such as hedge funds, private equity funds, and real estate partnerships just too risky anymore?
“Madoff is the exception rather than the norm,” says John T. Alfonsi, CPA/ABV/CFF, CVA, CFE, partner, Cendrowski Corporate Advisors LLC. “There are still good managers and funds out there. If you go in knowing what you are investing in, and doing your own ongoing due diligence, they can still be lucrative.”
Smart Business asked Alfonsi what types of warning signs investors should look for and how they can ensure their investments remain safe.
How important is diligence?
You won’t always be able to detect and prevent fraud in an investment, but you can take steps to minimize any potential damage. Due diligence is not something you do only in the beginning. You have to periodically review the investments and their people — what drew you to the investment in the first place? Is this the same reason you should be, or should not be, invested today?
Who should be involved with monitoring the investments?
Depending on the size or number of investments/time required, you might need a specialist to help review documents, study the investments, asses risk, etc. Not everyone is astute enough or ,even if they are, might not have the time. You may need to involve your CPA, an attorney, maybe even an experienced investigator. You can’t rely solely on your broker or investment adviser.
What are some of the preliminary considerations?
First, request information. Review their marketing materials for investment strategies, target returns and principal bios. If it’s an established fund, it should have prior audited financial statements. Audited is the key word. And it should be audited by a firm with well-known experience in that industry or that type of investment.
If it’s a hedge fund, look at its monthly performance track record. Madoff never had a ‘bad/down’ year — it consistently delivered 10 to 11 percent returns. So if it seems too good to be true, it probably is. While positive returns are possible every year, market factors will always impact those returns such that an even, steady return year after year would seem improbable.
What about private equity investments?
These are even less regulated than hedge funds. But like hedge funds, you are not investing in a particular stock or company, but in the investment strategy of a person or group of people. Make sure they can handle your investments appropriately and that their strategy doesn’t change without you knowing about it. It should be viewed as an investment in the people rather than their underlying portfolio.
With private equity, money is usually tied up longer; maybe five to 10 years. Background checks by a private investigator or forensic accounting firm are important with a hedge fund, but even more so with private equity investments. You need to find out if the people holding and investing your money are who they say they are, so to speak. Do they have any prior legal convictions? Lawsuits? Are they heavily laden with debt and as a result might be tempted to use the money for their own needs? What companies are they investing in and how do they monitor those companies?
What are other considerations?
Go visit the offices. Meet the people. If they told you they have six people on staff doing full-time research, go meet them. Ask them questions.
How much of their own money do the principals and employees have invested in their own funds? If they’re not willing to invest in their own funds, that’s not a good sign.
Know your withdrawal rights. Some hedge funds require a two-year lockup period with 30 to 90 days notice to process a withdrawal. They are not very liquid investments so you need other sources of liquidity. Private equity funds may have no or limited withdrawal rights because of the nature of their investments.
Understand the terms of the fund with respect to management fees. Are they in line with industry standards? 2/20 (two percent with a 20 percent incentive) arrangements are common.
How does the firm value non- or less-frequently traded investments? We’ve seen cases where values have been inflated to keep rates of return up. It created a house of cards until numerous requests for withdrawals brought it down.
Lack of an audited statement and investment pricing/valuation issues are big problems. This goes back to questioning who is managing the back office. A third party should be doing the accounting and handling administrative functions.
Cendrowski Corporate Advisors LLC
In today’s turbulent economic times,most businesses are facing challengesregarding their ability to maintain the terms of their existing credit facilities.
“If you own or run a business, chances arethat the credit crunch has already affectedyou and your business,” says Jim Stief, amember of McDonald Hopkins LLC’s Cleveland office and chair of its commercial finance practice.
“Your lending institution very possiblymay have changed the way it looks at newand existing lending relationships. Perhapsyou’re concerned about your ability to keepafloat in the near future. Perhaps you’vealready violated one or more of the terms ofyour credit facility and are struggling just tokeep your head above water.”
Stief describes three types of callslawyers are currently receiving from commercial banking clients regarding theircredit facilities — the “what’s going to happen to my lender” call, the “we’re headedfor trouble” call, and the “we’re in deeptrouble” call.
Smart Business asked Stief how he advises clients in these scenarios.
Some business owners are worried about thefate of their lenders. How do you respond?
Above all, don’t panic. Despite stockprices that fluctuate dramatically on almosta daily basis along with constant rumors ofpending mergers and acquisitions, it’s notsurprising that many businesses worryabout their lenders. I won’t say that thisanxiety is completely unfounded; however,even if a bank is acquired or merged intoanother bank, the day-to-day managementof each company’s credit by its relationshipmanager usually won’t change.
I’ve seen many mergers and acquisitionsamong lenders, and, for the most part, therelationship manager and the team thatservices a company’s credit facility staysthe same. As any company that has anexisting relationship knows, the name onthe building is important, but the quality ofthe relationships with the individuals whowork for the lender is what really matters.To keep abreast of current developments,businesses should feel free to call their relationship managers. Relationship managers welcome the opportunity to provide guidance and reassurance to their borrowers.
What if a company knows it is headed fortrouble and may not be able to keep up withthe terms of existing credit agreements?
Keep your lenders informed! Keep theminformed of not only past results but also ofexpected results, both good and bad.Additionally, if you expect bad results, letyour lenders know in detail what causedthose results and what specific actionsyou’re taking to avoid future poor performance. In other words, be proactive. Lenders,like most people, don’t want to be the last toknow when something doesn’t go asplanned. Whether it’s poor financial results,the loss of a good customer or the loss of akey employee, lenders want to stay in theloop. If you try to hide information or delayinforming the lender about these types ofsituations, the lender will get frustrated andalmost certainly make life more difficult.
I find that lenders, even in this environment, still try to accommodate companiesthat do a good job of communicating, especially if that communication includes solutions to any existing or potential problems.
On the other end of the spectrum, lendersare very reluctant to extend any specialaccommodations to those companies thatdon’t communicate, because lenders fearwhat they don’t know.
What if the company has already defaultedon the credit agreement?
If you are like many companies out there,this has already happened. Depending onthe severity of the event that caused thedefault, and assuming that you have done agood job of communicating with yourlender, your lender, even in today’s market,may want to continue to work with you.But, there’s also a chance that it won’t.
In any event, there likely is a short windowof time from when a company defaults onits credit agreement until the lender mustmake a decision to keep the credit or pushit out. Any company that reaches the pointat which it has violated or is likely to violatethe terms of its credit facility, especially violations of financial covenants, should immediately consult with competent legal counsel that specializes in commercial lending.
What happens next for a company that isseriously in default?
Say you’ve violated a material term of yourcredit agreement and the lender has askedyou to exit. If you haven’t met with counselexperienced in commercial lending relationships, you should. These attorneys can helpyou manage and possibly maintain the current lending relationship, or help yousmoothly transition to a new, more suitablerelationship. If your relationship with yourlender has soured, this lawyer will work to‘mend fences’ with your lender to make thenext step less painful. When you do need tofind a new lender — and in some cases,depending on the complexity of the situation, this may involve locating an investmentbanker — legal counsel can help you find theright match. Unfortunately, I’ve seen distressed yet viable companies end up in fore-closures or bankruptcies because they didn’tseek professional help soon enough.
JIM STIEF is a member of McDonald Hopkins LLC Cleveland office and is the chair of its commercial finance practice. Reach him at(216) 430-2031 or firstname.lastname@example.org.
Online training provides an attractive option for today’s busy employees, many of whom travel and/or telecom-mute. Among the most compelling benefits of online training is that it dispels the barriers of time and place when it comes to “attending class.”
According to Amanda Mead, director of online programs at Fontbonne University, online training and education continues to grow at a rapid pace.
“It’s exploding,” Mead says. “I’ve been in the business for five years, and each year, I’m asked for growth predictions. I might predict 5 or 10 percent growth, and the actual growth after the fact hovers around 25 or 30 percent.” Mead attributes the growth to an amazing amount of technology that’s being developed at a dizzying pace.
“Today’s students want to be engaged,” Mead says. “Technology is making online training and education entertaining. In addition, it eliminates travel time and makes learning more accessible to more people.”
Smart Business asked Mead what companies considering online training programs for their employees should look for in a provider.
What are some of the most compelling reasons to use online training for employees?
The training goes with the employee. Employees can access training wherever they are. They also may be able to access programs that were out of reach otherwise, for example, they are on the East Coast and want to access a program that was designed on the West Coast. Students can participate very easily in online classes. Also, generally speaking, online education includes a lot of active training that can be applied right away.
When evaluating online training programs, what are some of the first things a company should consider?
Know what you are getting. This includes doing research on the accreditation of the organization supplying the training and knowing what specialty accreditations are used within your industry. Always look for both national and industry-specific accreditation. The program doesn’t have to be but should be affiliated with some larger body.
Review the training objectives and make sure they match your needs — beyond the bells and whistles, the information given has to be the information your employees need.
How can a company ensure that the provider’s offerings meet quality standards?
Don’t be afraid to ask about quality standards. All online programs should be utilizing some type of quality assurance process in the design and development of their courses. Look for objectives that are spelled out clearly. A quality assurance program should be in place for those designing the courses as well as a system of review for each course. There also should be internal instructions for the instructors to ensure they are complying with the guidelines set forth by the program provider. In addition, ask to see the set of standards the provider is working toward. Ask for documentation on how the provider designs its programs. Obviously, you want to get the biggest bang for your buck.
What types of learning activities should be offered?
Look for differentiated learning activities.
Many lesser training programs will have essentially one mode of learning: read. A quality program will provide students with many avenues for learning, including a variety of activities (reading, real-world observations, simulations/case studies, hands-on practice) and delivery methods (reading, PowerPoint style presentations, audio/video, podcasting). When students can start to discuss objectives, put theories in their own language and apply what they’re learning to real-life work experiences, that’s when real learning occurs. In addition, look for interaction between students and between students and instructors.
Is online training expensive?
The cost of a quality online training program is similar to that of a quality face-to-face program. Cheap fly-by-night online programs exist, just as cheap in-person programs exist. To ensure that you get what you pay for, again, look for accredited programs, quality instructors and a variety of learning activities. An added bonus with online training is that there often is more access to the instructor via e-mail and discussion boards. A lot of instructors of online programs are in the ‘constant contact’ mindset. Keep in mind that you will also save dollars — in terms of travel, mileage and time away from the job. There are a lot of hidden savings.
How can the company gauge the success of the program?
You can do two things. First, observe. Watch to see if your employees are integrating the learning right away, either in specific work situations and/or by talking to/showing other employees what they’ve learned, thus ‘extending’ the training. Second, listen to the employees taking the training. They will tell you if the instructors are doing what was promised. Students generally are not concerned with the class being ‘easy.’ They really want to learn and have their education work for them. They’ll give you accurate feedback. Value their feedback and, if they are unhappy, shop for a new training program.
AMANDA MEAD is the director of online programs at Fontbonne University. Reach her at (314) 889-4514 or email@example.com.
Changes in current professional standards finally recognize the importance of entity-level, organizational controls rather than just detailed control procedures during the auditing process.
“When Section 404 audits first became mandated under Sarbanes-Oxley, the first go-rounds were extremely detail-oriented and expensive,” says James P. Martin, CMA, CIA, CFE, CPD, CFFA, senior manager with Cendrowski Corporate Advisors LLC. Realizing that the requirements were costly and burdensome, the Securities and Exchange Commission voted unanimously on July 25, 2007, for a new auditing standard, the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5, to increase the accuracy of financial reports while reducing audit costs, especially for smaller public companies.
According to the SEC Web site, the commission expects Standard No. 5, in combination with the commission’s new management guidance, to make Section 404 audits and management evaluations more risk-based and scalable to company size and complexity.
“In many cases, organizational failure is not due to details but because of management actions — management is not leading properly,” Martin says. “This new approach to auditing takes how well a company is managed into account.”
Smart Business asked Martin how organizational controls fit into the picture.
What are the keys to strong organizational control?
According to the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework, internal controls consist of five components: the control environment, risk assessment, control activities, information, and communication and monitoring. In the control environment, monitoring is very important at the top. That’s where organizational control comes into play. Organizational control is about how well a company is managed, not about policies and procedures. It has to do with management’s understanding of how everyone in the organization is doing. Recognizing where opportunities for error — either intentional or not — can occur while determining accounting policies is an art, not a science.
How can a company define its entity-level controls?
Identify the things that should be happening in the company. Organizational control just helps the leaders manage more conscientiously and with more rigor. Most managers try to lead by example but don’t realize the impact that their actions have on employee behavior. People are in tune much more greatly than management thinks. Keep in mind that organizational control is not always about written policies. Consider a company that has a code of ethics in writing. If what they do and believe is the complete opposite of what is put in writing, what’s the use?
How are entity-level controls assessed?
You can verify certain aspects of entity-level controls, such as the monthly closing process or monitoring controls, such as internal audit and the audit committee procedures. Others, such as management’s tone at the top or the ability of management or others to override control procedures are a little softer. For those controls, you will need to talk with people either in structured settings or informally. Often-times, companies will do surveys to gauge employee satisfaction. Surveys are OK, but they won’t necessarily tell you how employees really feel.
What are the consequences of not having organizational controls?
Organizational controls are in essence the moral code of the organization and define what people should do when no one is watching or a procedure is not specifically defined. Without strong organizational controls, you run the risk that because something is not explicitly defined, employees may think they can do whatever they want. The risk is that there will always be some case or situation that is not explicitly defined in the procedures. Documented policies and procedures are still essential, but by providing higher guidance, running a ‘concept-based’ versus a ‘rules-based’ organization and giving your employees the resources they need to do their jobs properly, you’re setting the stage for better operations that can be refined where necessary.
What type of ‘credit’ does a company earn for having organizational controls in place during the audit process?
According to the PCAOB, Standard No. 5 was designed to achieve four objectives: focus the internal control audit on the most important matters, eliminate procedures that are unnecessary to achieve the intended benefits, make the audit clearly scalable to fit the size and complexity of any company, and simplify the text of the standard. With Standard No. 5, if you can demonstrate to the auditor that you have high-level organizational controls in place, you can avoid detailed documentation of internal controls. This should save the organization tremendous time and audit fees.
JAMES P. MARTIN, CMA, CIA, CFE, CFFA, is a senior manager with Cendrowski Corporate Advisors LLC. Reach him at (800) 717-1607 or CS@cendsel.com or go to the company’s Web site at www.frauddeterrence.com.
Spam, which in a broad sense is any unsolicited, unwanted electronic message, is a serious problem that continues to grow at an alarming rate. Not only does it slow down the passing through of legitimate mail over the Internet and therefore slow down the conducting of actual business but also dealing with spam has become an enormously time-consuming issue for IT departments.
“Spam has changed in nature over the last few years,” says Michael Lee Grissom, associate vice president for information technology at Fontbonne University. “In the early days of the Internet, it involved Internet hoaxes you’d hear about a hoax and pass it along to your friends. Then, marketers got hold of the idea and the rest is history. Because e-mail is free, spammers don’t care if they have to send out millions of messages to get one or two responses. And there really appears to be no end in sight.”
Smart Business spoke to Grissom about spam and what organizations can do about it.
How prevalent has spam become?
To give you an example, Fontbonne University has approximately 3,000 active users in e-mail at any given time. A few years ago, we were getting 20,000 messages from the outside every day. Today, we’re getting 350,000. Only 4 percent of that is legitimate e-mail. Everything else is spam. The volume is incredible. One day, we received 700,000 spam e-mails.
What special challenges does it present for the IT department and the organization as a whole?
Dealing with spam takes a tremendous amount of time. And spammers get cleverer all the time. As soon as the IT folks figure out a way to block the spam, the spammers come up with another way to get through. In addition, spam competes with legitimate e-mail, so when waves of spam hit your filter, everything slows down. This frustrates the users. Then there is the constant education that the IT department has to do with the employees about what they can and cannot do with the e-mail system.
What are the best lines of defense?
Three or four years ago, a spam filter was optional. Today, it’s an absolute must. You can filter your e-mail on site, but the downside is that all mail has to come through, which eats at your bandwidth. But the advantage is that you have more control with your settings, and you can go back into the log and retrieve messages that got caught in the filter but that were legitimate and should have made it through.
A second option is that you can out-source your e-mail service for a monthly fee, go to the provider’s browser and pick up your mail. This probably works best for smaller businesses with 20 employees or so.
A third option is a service that you route all your mail to; they filter it out and pass to you what appear to be legitimate e-mails. The downside is that while you can go back through the log, the service is expensive for a large organization. But, it will save you bandwidth. In addition to having a good filter, you can limit the types of attachments you’ll let go through.
Another thing you can do is educate users to be very selective about whom they give their e-mail address to. Educate them about phishing, as well. Phishing is where criminals try to collect personal identification about people under false pretenses. You would be amazed at how many people fall for phishing scams and give out their credit card, bank account and social security numbers just because the request looked ‘official.’ When employees do this on your watch, it’s your problem, too.
How flexible are filter rules?
There is a lot of tweaking you can do, adding your own blocked and suspect key words, etc. But you have to be careful with the words. For example, take the word ‘sex.’ What if you’re a university and you have a team of psychologists working on a project about human sexuality? Also, if the filters are catching legitimate e-mail from certain senders, you can put their names on ‘whitelists’ to allow them to come through.
What does the future hold? Will things get better?
It’s getting more and more difficult to decipher what’s legitimate and what is not, and the pace is picking up. Personally, I don’t think the outlook is good. And because it’s the ‘worldwide’ Web, it’s near impossible to try to regulate spam. If we had laws in the United States, the spammers would send their messages from Canada, India or Asia. A direct outcome of all this is that more people are having multiple e-mail addresses, segmenting by activity. And, in fact, some people are becoming less dependent on e-mail out of sheer frustration. It’s very difficult to get your arms around the entire issue. It’s just an ongoing battle with no real end in sight.
MICHAEL LEE GRISSOM is the associate vice president for information technology at Fontbonne University. Reach him at (314) 889-1488 or firstname.lastname@example.org.
Most taxpayers dread the thought of receiving a letter in the mail from the IRS or the state taxing authority. If it happens to you, the first thing not to do is throw it in a pile.
“Address the letter immediately,” advises Walter M. McGrail, JD, CPA, senior manager at Cendrowski Selecky PC. “Failure to respond before the given deadline can have serious consequences.”
There is a specific process to follow, and if you adhere to it, the matter should be able to be resolved in a reasonable amount of time. There are instances, however, when professionals are better suited to reply to and handle inquiries than the average taxpayer. The key is to know when you need help.
Smart Business asked McGrail to provide guidance on responding to such letters.
What should a recipient do first?
First, open the letter. Confirm that it is indeed meant for you. Does it state your name, taxpayer identification number, the tax year and type of tax in question? Does the matter look like something you can resolve quickly? Next, look at the deadline for responding. If you know you can’t comply with the deadline, call anyway to acknowledge the letter. In almost every instance, the taxing authority will place a hold on collection activity and grant you an extension if you ask for more time. At all times, don’t ever voluntary give more information than you are asked for. Taxing authorities can and will use anything they hear or see to expand the scope of the inquiry if they think it is warranted.
When is professional assistance required?
Unless you’re dealing with a simple 1040 personal return, it’s generally recommended that you seek professional help. If you’re dealing with any type of business return (partnership, LLC, corporation), find an expert. First, contact the person who prepared the returns. If you aren’t comfortable with them or have disengaged them, find another expert the same way you’d seek any other service provider do an Internet search, go by word-of-mouth, contact your local accounting societies (e.g., Michigan Association of CPAs).
How do I designate a representative to assist me with the taxing authority?
Filing a Form 2848, Designation of a Representative, will give your CPA power of attorney and grant him or her the power to contact the tax authority and try to resolve the issue. When you first show your letter to a CPA, he or she can determine whether the matter can be responded to quickly or whether it is worth pursuing. If it needs to be pursued, the power of attorney will authorize the CPA to meet with the taxing authority and enter into agreements that may become binding.
What will the CPA do?
If it involves a quick response, the CPA will restate the issue as to how he or she sees it on the notice and provide some type of response, be it factual or in reference to a law, etc., and reply with a letter. The letter will ask for a remedy. For example, ‘We agree we owe the tax; can the penalty be eliminated?’ If the matter is more complicated, the CPA may ask the taxing authority to come to his or her office for an in-person meeting.
If the taxing authority is right, will I have to pay taxes, interest and penalties?
Again, this is where a professional can help. He or she will help define if the taxing authority is ‘wholly’ right or ‘partially’ right. This is where negotiation comes in. While there is very little anyone can do about interest, experienced professionals generally have a fairly high success rate of getting penalties eliminated if they can demonstrate that a taxpayer qualifies for penalty abatement.
How is the process finalized?
Make sure you’ve asked for a specific remedy and bring the process to a close. For example, if you go through an audit, make sure everyone signs off on the resolution. Get a letter stating ‘no change,’ or if some type of tax is owed, make sure it is specified.
If you can’t resolve issues with the IRS in more or less informal ways, there are certain administrative steps you have to move through, involving specific timing and procedures in more of a court and legal environment. Most of these cases are motivated to settle, not go to trial. If you do end up going to trial, CPAs can represent you, but more likely, you’ll want to seek counsel.
If you are doing business with a company that you suspect — or know — is in financial distress, or heading in that direction, there are numerous steps you should take to protect yourself. And if the company files bankruptcy, you have rights.
“If the signs are there that a company is in distress, start preparing right away by reviewing your current contractual relationship and learning what you can and cannot do under the Uniform Commercial Code to reduce your risk of loss,” says Sean D. Malloy, member of the business restructuring department of McDonald Hopkins LLC.
If a company is in distress, it does not mean you have to stop doing business with it.
“However, there are certain things you need to be aware of as you move forward,” adds Scott N. Opincar, also a member of the business restructuring department.
Smart Business asked Malloy and Opincar what owners can do to protect themselves while doing business with distressed companies in troubled economic times.
Will current economic difficulties continue?
In 2007 and the first half of 2008, we saw a significant increase in the number of companies filing for protection under Chapter 11. Some are looking to reorganize; others to sell their business. There is no reason to think the rate of filings will decline during the rest of 2008. We are not economists, but everything points to the business climate staying the same or perhaps getting a bit worse. Bankruptcy activity should remain fairly steady, if not increase. Many factors are causing concern: rising commodity and energy costs, tighter lending standards, increasing foreign competition and production, and consumer wariness. Thus, there is tightened discretionary spending across the board.
If you are selling goods to a company and it files bankruptcy, what do you do?
If you are an unsecured creditor, do not assume that you are out of luck the day the bankrupt company files. Act quickly to try to limit your losses. Obtain counsel to ensure your rights are protected. Unsecured creditors should calculate how much they are owed and file a claim with the bankruptcy court. In addition, you may be able to recover certain goods or the value of goods. Specifically, if you have delivered goods within 20 days of the bankruptcy filing, you will be given a higher ‘priority’ for those goods than other unsecured creditors. If you are one of the largest unsecured creditors, you may seek to serve on the creditors’ committee, which acts on behalf of all unsecured creditors to negotiate the best terms for all. Be sure to register to receive all notices in the case and read all related documents, especially if you do not have counsel. Be careful about litigation/collection actions due to the automatic stay. Certain creditors who are essential to the debtor’s business going forward have more leverage and might be able to receive payment under the ‘critical vendor’ doctrine. Other leverage includes possessory or tooling liens and whether or not contracts are in place (contract relationships can force assumption and payment if a long-term relationship is necessary to the debtor).
Can you plan for any of this in advance?
Look for warning signs. Is there an increase in the number of days it is taking the company to pay accounts receivable? Quality control issues? Employee discontent? Rumors? The Uniform Commercial Code (UCC) provides some safeguards. If you are unsure of a company’s solvency, you may be able to change your terms (absent a long-term sup-
plier agreement) by significantly reducing the number of days it has to pay or by changing to COD terms; suspend or retain performance; ask for adequate assurance of due performance; assert possessory liens; and/or stop goods in transit, etc. Taking these actions might get you threatened, but it is a high-stakes game, and you have rights.
Do bankrupt companies sue their vendors?
Yes. Section 547, known as the ‘preference law,’ gives the bankrupt company the right to try to get back what it paid 90 days prior to filing, in certain circumstances. Even with the 2005 amendments to the Bankruptcy Code, which strengthened vendor defenses, there is significant exposure for preference payments. The best way to protect yourself is to consistently enforce terms and not let customers slide, with all of your relationships, not just troubled ones. The threat of preference exposure may lead a company to ponder whether it should accept a payment from a troubled company in the first place. The answer is yes. There are defenses in the Bankruptcy Code. At a minimum, you will never have to give back more than 100 percent of it, and even if it is technically a preference, you can negotiate some settlement.
What about doing business with a company already in bankruptcy?
There are certain protections (e.g., administrative priority claims), but there are not guarantees. Chapter 11 debtors have significant cash and liquidity issues, so you need to look at the prospects for repayment carefully. You can receive information from the creditors’ committee or sit on the committee yourself. You can negotiate terms and/or use leverage of necessary supply. But there are litigation risks when you have a long-term contract, so it is important to get good advice. A lot of creditors do not have the luxury of just cutting off business. If you decide to keep doing business with the company, understand your rights and take appropriate actions to limit your credit risk and exposure. Watch carefully as the case unfolds.
SEAN D. MALLOY and SCOTT N. OPINCAR are members of the business restructuring department of McDonald Hopkins LLC. Reach Malloy at (216) 348-5436 or email@example.com. Reach Opincar at (216) 348-5753 or firstname.lastname@example.org.
Throughout the last few years, the use of e-mail to deliver information, market products or services, and foster relationships with customers has exploded. This flexible and useful medium can take many forms, from simple text to HTML-based to interactive formats that might include video, flash and other Web-based elements.
“The advantages are readily apparent,” says Mark E. Johnson, director of communications and marketing at Fontbonne University. “For starters, it’s cost-effective, usually costing less than a penny per e-mail. The other big factor is timeliness. E-mail enables you to respond quickly to a developing marketing opportunity versus print where you have to factor in the production and mailing time.”
But, Johnson adds, you have to differentiate your message from spam. One of the best ways to do that is to make sure your target audience is an opt-in group. In other words, you’ve already had some interaction with these prospects, and they’ve either given you approval to send them messages or have at least provided their e-mail address to you in some form. In either of those cases, the recipient should not be surprised to receive something from you by e-mail down the road.
Smart Business spoke to Johnson about e-mail marketing practices and what makes an effective e-marketing campaign.
Of what elements does an e-marketing campaign consist?
The short answer is that the elements can vary widely, and that’s the beauty of e-marketing. You have a lot of flexibility. For example, a university could use very simple, but highly visual, e-cards to promote college open houses, scholarship deadlines, etc. These are designed with a relevant graphic image and minimal copy, which, in my opinion, is best. Keep your message short and punchy because, ultimately, you’re trying to get them to click on the e-card, which then takes them to a particular page on your Web site for more information, registration to an event, etc. The other common e-marketing medium is the newsletter. This differs from the e-card in that it includes more copy and visuals, depending on what you’re trying to promote. It’s not that different from a printed newsletter in that you’ll have a name for it, along with stories or topics, probably some pictures and maybe even ads items you want to draw special attention to. The content is usually just ‘teaser’ copy, and then the reader can click through to your Web site to finish the story. This can work for a variety of businesses if you have one important factor in place the prospect needs to have some level of affinity for your product or service. In order for someone to take the added time to peruse the newsletter, he or she would generally have to be interested in some aspect of what you’re offering.
How do you decide which type of e-marketing works best?
It depends on not only the product or service being offered but also the specific offer within that product or service. For example, if a university is targeting prospects who have applied to the school but have not yet visited the campus, they should send a very specific ‘campus visit’ e-card. It’s a one-message piece with a specific call to action. However, if you’re targeting a broader audience let’s say students who haven’t applied to a school but have asked for a brochure you might send an e-newsletter containing many topics they might be interested in.
How can you increase your chances of success with an e-marketing campaign?
E-marketing is most effective when used as part of an integrated campaign or marketing approach that uses other media, as well. For instance, you can send e-cards in addition to printed postcards when you’re promoting an open house. Not everyone’s going to open the e-cards and not everyone’s going to look at the postcard. In essence, you’re just trying to cover all bases. You might also have ads on your Web site or print ads that share the visual of the e-card. In this way, you’re trying to create recognition of your message across many platforms. And, e-cards can be personalized if that’s something you think is important to your target market.
How can you measure the effectiveness of e-marketing?
The ability to measure effectiveness is an area where e-marketing is head-and-shoulders above traditional direct mail marketing. With e-mails, if you’re using a particular system or vendor, you can track how many prospects opened the e-mail, when they opened it and if they clicked through to your Web site. Additionally, you can see, by name and e-mail, who clicked on what. In some cases, you may want to follow up with prospects that clicked through but took no action. You already know they’ve shown enough interest to open your e-mail and even click through. E-mail can be a powerful tool in your marketing arsenal if used responsibly, skillfully and sparingly.
MARK E. JOHNSON is director of communications and marketing at Fontbonne University. Reach him at email@example.com or (314) 889-1467.
Various corporations spend a great deal of time and money on their employees’ corporate training programs. At the same time, many employers offer their employees college tuition reimbursement.
When employees enrolls in both their company training program as well as a college program, the content may be duplicated. As a result, the company may pay for the educational training twice. To avoid this duplication, companies can have their training programs evaluated to see if the courses qualify for college credit. If the courses do qualify, the company saves money and the employees save time by not repeating subject matter. In addition, the company receives validation that its training programs are of high quality.
Smart Business spoke to Arthur Hunborg, director of prior learning assessment and off-campus sites at Fontbonne University, about how colleges evaluate prior learning.
How can a company tell if its training programs qualify for college credit?
Corporate human resource departments can request to have the American Council on Education (ACE), a college credit recommendation service, review their corporate training. Recommendations by ACE are intended to guide colleges and universities as they consider awarding college credit to given students. Corporations can contact the national or state ACE offices to have their corporate training evaluated.
Will universities grant credit to employees for certain learning already obtained?
Yes. Most colleges and universities throughout the United States have a Prior Learning Assessment Center to review educational experiences outside the traditional classroom. A prior learning assessment is a concept based on accepted principles of adult learning and serves to validate the professional competence achieved by adults outside the classroom.
For what types of prior learning do colleges and universities grant credit?
In addition to possibly granting college credit for corporate/educational training that has already been reviewed by ACE, colleges and universities may also award credit hours for successful performance on College-Level Examination Program (CLEP) standardized tests, which provide students the opportunity to demonstrate their college-level outcomes through a program of competency exams in undergraduate college courses. ACE also conducts evaluations of the outcomes of military service educational training and, once completed, it recommends, if warranted, college credits for the respective military educational and occupational (MOS) training. Many colleges and universities also have internal, standardized departmental proficiency exams to award their students with college-level education experiences gained outside the traditional classroom. Lastly, students may verifying their educational learning outcomes by completing a Documented Learning Portfolio, which offers students another avenue to attain college credit in a nontraditional format.
How can an individual’s ACE recommendation help a company?
First, it validates that the company’s training programs are of high quality. Second, once they are cognizant of the fact that their corporation’s educational training programs have been approved by ACE and are transferable college credits, employees will possibly be more likely to actively seek out corporate educational opportunities offered by their employer. Third, the educational posting fees for ACE-recommended credit hours are usually fairly minimal usually around $35 to $50 per credit hour. Given the tuition cost of private and public colleges and universities throughout the U.S., this can be an additional cost benefit to corporations that offer tuition reimbursement.
How many ACE-recommended credit hours will a college or university accept?
This varies depending on the institution and the ACE recommendation. Colleges and universities may have a multitude of stipulations on the acceptance and posting of prior learning credits. Many colleges and universities will not accept ACE vocational recommendation credit hours. Most colleges and universities accept up to 48 to 60 prior learning credit hours to be posted to their official college transcripts at the undergraduate level. A small number of earned prior learning credit hours may be used to fulfill the university’s general educational requirements, but most corporate learning/training evaluated by ACE will be utilized to fulfill elective hours.
Why is prior learning assessment attractive for employees?
Most college students, adult learners in particular, are very consumer-oriented and like to be rewarded for college-level learning outcomes attained outside the traditional classroom. It helps students attain additional credit hours in a practical manner, and it usually saves the student money. We’ve found that business professionals seek out ACE-recommended corporate training, so employers that offer it are generally viewed positively as having a strong commitment to high-quality, ongoing education.
ARTHUR HUNBORG is the director of prior learning assessment and off-campus sites at Fontbonne University. Reach him at (314) 719-8009 or firstname.lastname@example.org.