To organize and carry out your household financial plan, you need to ensure finances are checked regularly and action is taken as needed.
“It’s easier to do these things in small bites. You don’t want to try and do a year’s worth of financial planning in one sitting. It can be too daunting, and then it never gets implemented,” says Geoffrey M. Zimmerman, CFP®, senior client advisor at Mosaic Financial Partners Inc.
Smart Business spoke with Zimmerman about executing personal financial planning.
What should a year of financial planning include?
January — Prepare a household net worth calculation that looks at all your assets against debts and liabilities. Compare last year’s statement to this year’s to see if you increased your household net worth. Also review your spending plan for the year as year-end reports become available.
Adjust your payroll elections to maximize contributions to employer retirement plans and/or executive top hat plans. For corporate executives, implement any exercise and hold strategies with incentive stock options.
February — Review your property and casualty insurance, such as homeowners and auto, especially if you made a major purchase last year. Your excess liability coverage needs to be adequate relative to both your current net worth and earnings potential.
March — Pull out old statements and clear out the deadwood. You’ll need to keep certain documents for tax purposes, like your cost basis on securities, but your advisers can suggest how long to retain documents.
It’s also time to look at your portfolio, and rebalance it if needed. According to Gobind Daryanani, in a 2008 Journal of Financial Planning article, if you look frequently and rebalance when an asset class has deviated from its target by 20 percent or more, you can pick up some additional returns.
April —Increase your Individual Retirement Account (IRA) contributions for the prior year before the tax-filing deadline. By funding your IRA now with $5,500 annually, $6,500 if you’re older than 50, funds are less prone to leak out of the ATM.
May — Update estate plan documents. Have there been changes affecting the people you have in place to act on your behalf? Were there changes in the tax laws, exemption amounts, your net worth or state of residence?
June — Time for a midyear review. Evaluate your placement of assets for tax efficiency, rebalance your portfolio and consider midyear tax loss harvesting in your after-tax accounts. If your non-IRA account has a security at a loss, you can sell it, take the loss and buy something similar but not identical. The losses can be used throughout the year or carried into the future.
July — Think about the future with your significant other, spouse or partner. Kick back, dream about what you and your family want, and jot down a few notes.
August — Check your Section 529 savings accounts for the kids and grandkids. If they aren’t set up yet, don’t wait; college isn’t getting cheaper. These plans allow contributions to be made to pay for post-high school education at a qualified institution, tax-free.
September — Pull out the notes on your future plans from July. Use it to update the financial plan, looking for necessary changes. Also, rebalance your portfolio.
October — With open enrollment, review employee benefit elections for medical, life, disability, vision, dental, etc. Also look at your outside insurance such as life and long-term care against current needs. Corporate executives with nonqualified deferred compensation plans need to elect salary deferral for the following year.
November — Begin year-end tax reviews to manage tax liability. It’s also a good time to finalize remaining charitable donations, including appreciated stock.
December — Do an end of year wrapup, such as annual gifting, financial portfolio rebalancing or tax-loss harvesting. IRA to Roth conversions must be done before Dec. 31. Also, go back to exercised incentive stock options and decide whether to do a disqualified position and sell that stock, or to hold it into the following year.
Finally, take a look at this list and see how much you were able to complete this year. Were you able to do it all? Lift a cup of egg nog and celebrate. And, if you didn’t, then consider enlisting the help of a financial planner to help you stay on track. ●
Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.
After a couple of years sitting stagnant at 3.25 percent, the prime interest rate is expected to go up in 2014, making this a good time to secure a business loan.
“There’s not a lot of inflationary pressure yet. The Federal Reserve has been signaling a desire to come off of quantitative easing, and they’ve been trying to set the market up for rate increases. But every time it’s mentioned, the stock market drops 100 points,” says Michael Hengl, senior vice president and group manager of Corporate Banking at Bridge Bank.
Eventually the expectation of higher interest rates will be set to the extent that the impact to the stock market will not be that great, and the rates will go up, Hengl says.
Smart Business spoke with Hengl about the state of the commercial banking industry and what’s in store for 2014.
How substantial will interest rate increases be in 2014?
Rates will start easing in the second half of 2014, but we’re not going to see big jumps.
Some sectors of the economy are doing very well. The Bay Area is dominated by technology companies that are going gangbusters right now. The energy industry is doing very well in places like Texas and North Dakota. However, there are still elements of the economy that are struggling.
That’s what makes it a good time for a small or midsize business to get a commercial loan. Right now, there is a lot of liquidity in the banking system, and banks want to make those loans. There just is not enough demand.
Is that because businesses are reluctant to increase debt?
Business managers are being very cautious. When it comes to hiring, they are taking it to the point where they’re maximizing the people they have on hand. Or if they’re buying equipment, it’s all replacement items. There’s been a decent amount of equipment financing, but it’s for capital expenditures that companies deferred in 2009, 2010 and 2011. They’re catching up with those needs.
Businesses are not buying equipment for expansion; when that happens, that’s when interest rates will start climbing.
Will anticipation of interest rate increases spur activity early in 2014?
Many commercial loans are variable-rate, so they’re much less rate sensitive. If you need a line of credit for inventory, you get the loan. However, equipment loans may have fixed rates, which you want to get at the lowest possible rate, and there have been more commercial real estate acquisitions.
One deal earlier this year was done solely because long-term rates were creeping up. Back in early summer, there was a big jump in mortgage rates.
Other than rate, are there advantages to getting a loan now?
Sure — when a company approaches a bank for a loan, they’re going to find the bank very receptive. Still, there were lessons learned from the financial crisis, and banks will exercise additional due diligence. That’s an advantage to business owners because it improves communication between the bank and the borrower, which is the cornerstone of a banking relationship.
A good example of how businesses can be helped by this process involved a company in the food industry, which had strong growth, but profits were lagging due to a manufacturing operation overseas. It couldn’t close the facility because of the impact on liquidity, and an operating line of credit was needed to fuel growth. By understanding this, a bank could cover the short-term need, knowing the company would recapture that over the long term.
That’s why it’s important for a company to sit down with its bank, go through the due diligence process and not be frustrated if it’s more work than it was five years ago.
In another case, a client bought a much larger company, a risky proposition. The company had a strong set of projections and acquisition plan, which was actually strengthened by the bank’s due diligence process. Now, the bank’s comfortable with the deal, and the company has a better business plan in place.
The bottom line is that it’s important to be proactive in communications with your banker, so the bank can react quickly when you need help. Ultimately that good relationship should help mitigate risk for both parties. ●
Insights Banking & Finance is brought to you by Bridge Bank
California State University, East Bay: How corporations use politics to improve social responsibility imagesWritten by Jayne Gest
Corporate social responsibility is the duty of a corporation to create wealth by using means that avoid harm to, protect or enhance societal assets.
“Since the U.S. is a developed country, people are more sensitive about not only the quality of products but also the actions of the corporation,” says Ekin Alakent, an assistant professor in the Department of Management, College of Business and Economics, at California State University, East Bay. “This is even true for companies that do not act responsibly in other countries where the public does not have the opportunity to voice an opinion.”
For example, the negative reaction to Apple, Inc., which was criticized for working conditions at the Foxconn factory in China a few years ago.
So how do corporations counteract a negative image?
One strategy is to get involved in public policy, by investing in lobbying, establishing political action committees or making soft money contributions, to offset negative corporate social responsibility records.
Smart Business spoke with Alakent, who researched this topic, about her findings.
How are corporate social and corporate political strategies interrelated?
Both corporate social and political strategies are considered nonmarket strategies, which deal with a company’s engagement with society. Therefore, both strategies have uncertain outcomes, and it’s very difficult to measure their effect on profitability.
To further cloud the causality, smaller companies can indirectly benefit from the investment of a larger company in the same industry. They may also belong to a chamber of commerce that has political action committees to lobby on their behalf.
However, in most cases, companies use both strategies simultaneously.
Which companies are more likely to use political strategy to improve public opinion?
One consideration is what issues are relevant. If there’s an upcoming election and a proposed regulation that would increase business costs, that year a company might heavily invest in issue advocacy groups.
In addition, companies that have poor social responsibility records tend to spend more money on political strategies to offset their negative image in society, such as those in oil and tobacco. Other factors that increase political strategy spending are available resources, size, industry and the extent they depend on government subsidies or support. For example, sugar, energy and agriculture all spend a lot of money on political strategies because they are directly affected by public policy.
Businesses that are more visible, measured by their advertising, care more about their public image, and tend to spend more money on political strategies.
Are there negative side effects to using corporate political strategy?
There is that possibility. Companies that heavily invest in lobbying — and that data is available, who invests and how much, on the OpenSecrets.org database — can be perceived as buying politicians. But, overall, the effect of not investing in political strategy is much bigger.
Corporations tend to overwrite the possible negative image. In fact, businesses spend more money on lobbying than other political strategies.
What do you think business leaders can learn from your research?
An important implication is that political involvement can benefit organizations in many ways. It helps them pre-empt unwanted regulation that could significantly increase their operating costs and improve their public image.
Since both formal institutions, such as laws and regulations, and informal institutions, such as social groups and nonprofit organizations, influence companies, they need to engage with their social and political environment. Be active in shaping the rules of the game. Being proactive with nonmarket strategies can help companies have strong brand reputation and forestall costly legislation.
By using these strategies, businesses are actually investing in a safer, better-educated and healthier society. It shouldn’t only be about offsetting negative public image, greenwashing or having a window dressing. It’s in their best interest to invest in their communities and act responsibly. ●
Ekin Alakent is an assistant professor in the Department of Management, College of Business and Economics, at California State University, East Bay. Reach her at (510) 885-2076 or firstname.lastname@example.org.
Insights Executive Education is brought to you by California State University, East Bay
Ropers Majeski Kohn & Bentley PC: How to address common problems when purchasing, managing buildingsWritten by Roger Vozar
Just as you would when buying a house, it’s important to conduct a thorough review when considering a commercial property purchase.
“Next time I buy a house, I’ll be walking around with the inspector to make sure that they’re doing a thorough job. I’m going to be turning on the faucets and flushing the toilets just in case the home inspector misses it,” says Todd J. Wenzel, a partner at Ropers Majeski Kohn & Bentley PC. “It’s a little different with commercial properties in that the concerns aren’t the same, particularly if it’s an investment property. But you have to do your due diligence.”
Smart Business spoke with Wenzel about problems commercial property owners need to watch for, whether they occupy the space or serve as landlords.
What due diligence should be conducted before completing a purchase?
It depends on the age and size of the building, but for the most part it’s not as involved as with residential properties. With owner-occupied properties, it’s more about checking for any structural problems with the building. However, if it’s an investment property, look at occupancy certificates and rent rolls. Ensure leases are up to date with no outstanding renewals or rental payments.
With commercial properties, it’s important to have full disclosure. It’s expected that parties on both ends are sophisticated, so the law does not provide the same protections that residential purchasers receive.
Should you check on tenants as well?
There should be a file on each tenant, complete with financial background checks to confirm that tenants have the wherewithal to continue making payments. Be sure to look at whether a tenant has a history of late payments or nonpayment of rent.
In a recent situation, there was no credit report run on tenants. The client that purchased the property received a good purchase price, but the tenant files were very thin. It turned out that some tenants were in immediate default after the purchase. Ultimately, one tenant breached his or her lease, left and litigation ensued. Obviously, a buyer wants to avoid that; if you see tenant information missing, run your own credit check as part of your due diligence.
Considering the moist climate in Northern California, how big of a problem is mold?
It can be a real problem. You typically see mold claims in residential settings, but it can happen in commercial ones, too. Tenants must notify a landlord as soon as they suspect mold, because it becomes problematic once spores are airborne. Commercial leases should contain specific notice provisions required of the tenant to notify the owner of the first signs of mold.
A commercial tenant client recently suffered property loss and business interruption when a roof leak caused water to drip into the office space and storage room walls for months (possibly longer). When they opened the wall, they found mushrooms growing. Mold in a commercial setting is not as serious of a health risk as in a residence because no one is sleeping there, but you still can have people working around it eight hours or more a day.
If the problem is hidden in the walls, landlords have some defenses if they had no notice or reason to know. But if it’s indicative of a persistent water leak, the owner may be charged with constructive knowledge. The legal exposure is worse if the landlord knows and acts slowly to address the situation.
What key items need to be looked at when considering facility expansion?
The main concern is structural integrity and the foundation, making sure the soil will support an addition. Get engineers to check piers and other foundational measures.
If you’re doing an extensive renovation on an older building, you may need to bring it up to current codes. This cost estimate should be part of a preconstruction checklist.
Ask architects and engineers if they can incorporate green-building elements into the project. It may cost a little more, but it’ll speed up the permit process and can help in terms of public relations.
Although it’s difficult to get contractors to guarantee a maximum price because costs are based on time and materials, it’s a good idea to include a cap when bidding projects — a $50,000 job cannot exceed $15,000 in change orders. Otherwise, some contractors submit low bids, hoping to make up the difference in change orders. ●
Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC
It’s easy to forget about costs when you’re embroiled in a lawsuit, but you could end up winning the trial and losing the fiscal war if you let the litigation tab spiral out of control.
“Business owners can be bamboozled by a litigation attorney when they’re in the heat of battle,” says Kim Karelis, a partner and expert witness with Ropers Majeski Kohn & Bentley PC. “Avoid disputes by negotiating a reasonable fee schedule in advance.”
Smart Business spoke with Karelis about the best ways to avoid and resolve a legal fee dispute.
What is a legal fee dispute?
Attorneys usually charge a flat fee for routine tasks like reviewing a contract or setting up an LLC, so novice executives may experience sticker shock when they receive a bill from a litigation attorney if they don’t perform adequate due diligence. The lack of a formal fee schedule can sometimes lead to a dispute and additional litigation if the two parties can’t resolve the issue.
What should business owners know about hiring a litigation attorney?
Refuse block billing and question vague descriptions for services when negotiating a retainer agreement so you can compare and determine whether an attorney’s fees are reasonable and customary. Only the senior partner should bill for in-house strategy meetings involving several staff members and you shouldn’t pay bloated fees for photocopies, phone calls and secretary time.
Consider the cost for expert witnesses, court filling fees and depositions, and estimate your true ROI by comparing the total tab to what you may gain or lose by going to trial.
Finally, be wary of an attorney who seems unreasonable or wants to bill for every single second. Lawyers should be willing to negotiate, especially in this market.
What else can business owners do to prevent legal fee disputes?
Hiring a referral from a trusted colleague is probably your best bet, but you still need to get everything in writing and seek an outside opinion before signing an agreement if you’re unfamiliar with litigation costs.
Establish a budget and a goal for the action and consult several attorneys to see if they’re reasonable and attainable.
Lastly, nip potential problems in the bud by reviewing invoices and questioning any unreasonable charges you find in a timely basis.
What happens if a dispute arises?
Clients have the right to seek arbitration by a panel consisting of neutral attorneys and a layperson who will decide the appropriate amount of attorney’s fees through an informal, low-cost proceeding administered by the local bar association. The losing party has the right to pursue a court trial. However, they must act quickly and file the paperwork within 30 days of the loss.
What are the legal standards that apply to legal fee disputes?
A signed retainer agreement takes precedent when a fee dispute arises. If none exists, the court will attempt to determine a fair charge for the attorney’s services, in part by assessing whether the attorney’s fees are unreasonable or unconscionable.
While the courts tend to side with clients, especially when the attorney’s charges are vague, there’s little sense in taking chances when the problem is avoidable.
How are legal fee disputes usually resolved?
Most executives and attorneys don’t want to air their dirty laundry in public, so they try to resolve their disputes through informal, private discussions and by consulting an outside expert.
While few disputes end up going to trial, the chances increase when emotions run high and business owners don’t do their homework. ●
Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC
Stradling Yocca Carlson & Rauth: How to assemble an employee handbook with essential policies and practicesWritten by Adam Burroughs
There are very few written policies that are required by law to be provided to employees, but there are certain policies companies can adopt to protect themselves and reduce their liability exposures. This can either be done though a company handbook or by distributing individual policies to employees.
“Courts have said that by advising employees of certain information, the burden shifts from the employer proving something didn’t happen to the employee proving something did. That can be a significant difference in an employer’s ability to defend itself both in terms of success and cost,” says Jeffrey Dinkin, a shareholder at Stradling Yocca Carlson & Rauth.
Smart Business spoke with Dinkin about key policies that should be included in employee handbooks and what other options exist.
What are some required policies suitable for an employee handbook?
All employers are required to have sexual harassment policies that clearly state to whom employees should report complaints. More than one person should be designated, but if that’s not possible, there are outside resources to which you could direct them.
For companies with five or more employees, if the company has leave policies, policies regarding pregnancy disability leave must be included. As a note, under recently enacted legislation there must be continued employer health insurance contributions during the period of pregnancy disability leave for up to four months. The California Family Rights Act also allows 12 weeks of baby bonding leave, with continued employer health insurance contributions now also being required.
Employers with 50 or more employees are covered by the Family and Medical Leave Act, which must be honored when you learn an employee is eligible for family medical leave, and requires a related employer policy.
Also, a new law dictates that employees paid commissions need to be provided a clearly written commission agreement that describes how commission is calculated, earned and paid. It needs to be signed by, and a copy given to, the employee.
What else should an employer include in an employee handbook?
Employers should have a policy that requires employees to accurately record all time worked (the start and stop times), as well as the start and stop time for meal periods. The policy should clearly prohibit off-the-clock work. It is important to also address meals and rest periods provided by the company.
Technology and communications policies are increasingly necessary. It’s important that an employer indicate that the materials stored and communicated on devices owned by the employer belong to the employer, and it has the right to review and monitor those communications at its discretion.
There’s a lot of attention on bring-your-own-device workplaces. Employers need to communicate that work-related mobile activity is not private and information can be retrieved from a personal device including when the employee exits the company.
Is an employee handbook required?
Companies don’t need to have a handbook, but having one allows them to set forth some essential policies and employee rights and obligations that should be observed. Handbooks enable everyone to have a reference to their rights and obligations.
What will suffice as notice in place of a handbook?
You can provide individual policies. Employers often provide new hires with the policy regarding sexual harassment, or there can be a separate meal and rest period policy. There is other information that must be provided to employees through permanent postings at the workplace or handouts.
Who should assemble the handbook?
An employment attorney is a good resource. He or she will typically have a model handbook that can provide a starting point that’s then customized to suit the employer’s needs. The chamber of commerce or an HR consultant have similar resources.
However, a big part of employers preparing a handbook is for them to become aware of their obligations and rights so they might better order their employment policies to protect themselves. It’s a good education tool and a chance for an employer to order its thoughts on how it wants to treat its workforce. ●
Insights Legal Affairs is brought to you by Stradling Yocca Carlson & Rauth
Halal is the rules that influence consumption in the Muslim world, directed by the values and beliefs defined in the Quran. It refers to anything considered permissible and lawful.
The global halal market — food and non-food — is estimated to be in excess of $2.3 trillion, with the food sector alone reaching $700 billion annually, says Angelo A. Camillo, Ph.D., associate professor of strategic management in the School of Business at Woodbury University.
In Muslim countries, the halal industry is vital to societal development and economic growth. Global marketers also are strategically promoting the halal industry by targeting geographic clusters with large Muslim populations like France and Italy.
“The primary factor for the rapid expansion of halal is health related,” Camillo says. “Halal industries are emphasizing the sustainability, cleanliness and healthiness of their products.”
Smart Business spoke with Camillo about where this globalization is heading, and how business owners might get involved.
What kinds of products must be halal?
Halal impacts many products and services, although those that impact daily life most are food and beverage. In the Islamic religion, these products must be clean, pure and contaminant-free. For example, Muslims don’t consume pork byproducts, animals contaminated by intoxicants or killed prior to slaughter, or carnivorous animals or birds of prey. Many Muslims cannot take pain relievers manufactured with gelatin made from pigs’ feet and ears.
Some industries directly affected by halal guidelines are agricultural products (plants, animals and derivatives), chemical, health care, cosmetics, personal care, pharmaceutical and medical devices, and financial activities and business transactions.
How are halal products being globalized?
Halal food products produced and consumed locally may have a higher nutritional value, so halal businesses are emphasizing this over culture or religion. However, Islam is the main expansion driver — by 2030, the global Muslim population is expected to grow by 2.19 billion.
Halal producers often make their products on location, leaving insignificant carbon footprints without pesticides, fertilizers or genetically modified organisms. Despite this appeal, non-Muslim consumers may be reluctant to buy halal food products due to the religious implications — a halal-certified Muslim blesses slaughtered animals in the name of Allah.
Who are the industry players?
It’s difficult to obtain true data, as this industry is extremely fragmented. Malaysia appears to be developing as the major halal player, followed by Indonesia and Pakistan. Competition between businesses in these areas, as well as Singapore, New Zealand and Australia, is fierce.
In 2010, the size of the industry in the U.S. was approximately $13.1 billion, compared with Europe at $67 billion, and Asia at $416 billion, according to the Islamic Food and Nutrition Council of America. Many Muslims may be willing to buy strictly kosher meat products, processed according to kosher dietary laws, because that’s the closest thing they can find.
Halal is likely to grow as marketing raises awareness and links halal to sustainability and healthy choices. In the past two years Italy has exploded with halal food products. With a large Muslim population already supplying most of Europe’s organic food, it was a natural fit for companies in every sector to become halal-certified. But the road ahead is bumpy in the U.S. business landscape for halal industries. In addition to non-Muslims’ discomfort with religious implications, there is a lack of trust by Muslims regarding the safe production and distribution of U.S.-made halal products.
What’s the best market entry for U.S. companies?
There are opportunities for profit — as a case in point, Brazil has started producing halal food. Aside from product production, businesses along the supply chain can tap into this market in areas such as research and development, finance, marketing, support service, hospitality, life sciences, agro-based industries or food additives/enhancers manufacturing. However, the best entry for a U.S. company is overseas halal markets that produce products and services locally. ●
Insights Executive Education is brought to you by Woodbury University
Momentous Insurance Brokerage: How to understand what is — and isn’t — covered by your property insuranceWritten by Jayne Gest
To manage the risk of loss to commercial property, business owners can self-insure (absorbing any losses), transfer the risk to someone else or buy insurance. But not everyone is insurance savvy, understanding exactly how property is covered and what triggers coverage.
“When it comes to business building and personal property coverage, it’s important to have an insurance broker who takes you through the what ifs,” says David Oliver, senior vice president at Momentous Insurance Brokerage, Inc. “If the broker understands exactly what assets you have, what you do, how you do it and where you do it, you should have the proper coverage, insured for the right values.”
Smart Business spoke with Oliver about insuring for the correct perils, before it’s time to make a claim.
What types of business property insurance are available?
A named peril policy covers only specified perils; a basic or broad form policy will cover a longer list of specified perils; and special form covers anything that is not specifically limited or excluded. Most businesses start with a special form policy. Then, if it excludes something you want to cover, you can buy off the exclusion or have it added for an additional premium. Other times, you’ll need to buy a separate policy, such as a difference in conditions or builders risk policy, to cover that risk.
Usually a property policy covers direct physical loss or damage to the building and/or personal property at a certain named location(s). However, if you have a business where you’re moving around, touring or traveling, you can get an inland marine floater to cover property. This can be added as an endorsement to a business property policy or bought separately, and isn’t designated to one premises. It’s essentially floating, so you have coverage no matter where it goes. It also might have broader coverage, such as earthquake and flood.
What’s typically covered on property policies?
Sometimes, when you go to court, if a policy is silent on a particular peril, it may be deemed covered. Judges tend to lean in favor of the insured, especially in California.
It is critical to understand what your policy excludes. The policies are usually definitive when they tell you what’s not covered; they want you to know what the exclusions are. Where they may tend to be vague is in the area of what is covered. Basically, the policy covers actual, unintentional physical loss to the asset, such as if there’s a fire or something gets broken, vandalized or stolen.
How can business owners make sure they have the right coverage?
Read your policy carefully to understand what’s excluded, covered and not covered. Policies are complicated, so this is where a good broker helps. Make sure that whatever you think you’re buying the insurance for is actually covered. Usually, you can get a business personal property policy endorsed to cover excluded perils like earthquake sprinkler leakage, even though you can’t get full earthquake coverage.
When it comes to triggering coverage, insurers look for the proximate cause. If what directly caused the damage is covered, then you have a claim. You may not have earthquake insurance, but if an earthquake broke a gas main, which caused a fire, you’d have coverage for fire-damaged equipment. The policy needs to insure for the cost to repair, rebuild or replace something.
Many policies have a coinsurance clause. For example, if you have $1 million worth of property with an 80 percent coinsurance, that policy requires you have at least $800,000 in insurance. If you’re not insured to that percentage, your claim is reduced proportionally.
Another mistake may be not insuring for replacement cost, but actual cash value. So, if you bought something 10 years ago with an eight-year useful life, you may get next to nothing in actual cash value. Replacement cost allows you to replace it with like kind and quality, even if that’s more than what you originally paid. For example, a five-year-old specialty lighting fixture might be replaced with a newer model, costing more than the originally damaged, obsolete and no longer manufactured fixture.
These details are why having the right broker helping you take care of your property exposures will save you money in the long run. ●
Insights Business Insurance is brought to you by Momentous Insurance Brokerage, Inc.
The communication between independent auditors and audit committee members of public companies will change in 2014 with Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 16.
The PCAOB’s standard is effective for audits of fiscal years beginning after Dec. 15, 2012.
“There’s an emphasis on two-way communication and the timeliness of communication,” says Dale Jensen, partner-in-charge of the Public Company Audit Practice at Weaver. “These requirements should only help the audit committee better understand the audit process and the results.”
Smart Business spoke with Jensen about PCAOB Auditing Standard No. 16’s implementation and how it changes auditor responsibilities.
How will communication between auditors and audit committees change?
Generally, the standard seeks to create more effective and timely two-way communication between the auditor and audit committee, including sharing what discussions have occurred between the auditor and management during the audit. It standardizes what is communicated and when.
Part of the standard addresses the appointment and retention of auditors — general information relevant to the planning of the audit. Committee members need to understand what auditors will discuss with management prior to the auditor retention. Many public companies won’t see a change here if they are following best practices. But some concepts have been expanded, such as requiring auditors to ask the committee if they are aware of any matters relevant to the audit, including knowledge of possible law violations.
The standard also discusses the audit’s results. Auditors already were disclosing many of the required items, such as significant and critical accounting estimates, and significant and unusual transactions. Now, the auditor must also communicate:
- Difficult or contentious matters about which they consulted with management.
- Matters that resulted in a going concern consideration, how the matter was alleviated, and the effects on the financial statements and audit opinion.
- Any departures from the standard report.
The auditor also must share the results with the audit committee before issuing an opinion on the financial statements. This provides committee members with the opportunity to gain an understanding and address questions with the auditors prior to the issuance of the opinion and Form 10-K filings with the Securities and Exchange Commission.
Does the standard specify what type of communication is required?
Some things must be in writing, such as engaging an auditor, but, overall, communication can be written or verbal.
Auditors can communicate the required items solely in writing. However, verbal communication can help committee members truly understand the nuances of what’s being reported. For example, auditors may share audit results over a conference call or at an in-person meeting. This opens up the dialog and creates an opportunity for the audit committee to ask questions to gain a better understanding of the audit process, specific findings, etc. The key here is to allow adequate time for the auditors and audit committee members to have these discussions and to work through any issues or questions that arise.
How much impact will the standard have?
Overall, the impact of this standard will be positive because it’s enhancing two-way communication between auditors and audit committees about matters of importance to the audit and the financial statements. How much impact it has will really depend on the company, what its issues are and how information has typically been communicated to the audit committee in the past. ●
Insights Accounting is brought to you by Weaver
There’s a lot of opportunity for investors in Cleveland to fund up-and-coming technology companies.
“There’s a growing sense of entrepreneurship and innovation,” says Steve Haynes, managing partner at Glengary LLC. “It has become the norm for colleges, universities, hospitals and other institutions to think about monetizing the technology developed in their facilities. They’re getting research dollars and they’re trying to convert science into something commercial. In addition to institutional technology transfer, incubators, accelerators, etc., are being formed to drive economic development.”
Patrick R. Roche, a partner at Fay Sharpe LLP, adds that there are many companies in the area looking to assist the right companies with capitalization.
“It’s very competitive — there are a lot of deals to be looked at,” he says.
While the market is fertile with both investors and entrepreneurs, Roche and Haynes say there are many things entrepreneurs fail to account for when seeking funding, including the viability and strength of their intellectual property (IP).
Smart Business spoke with Roche and Haynes about what investors look for in entrepreneurs’ IP before a deal can be done.
What does an investor look for in the IP of an entrepreneur seeking funding?
From an investor’s perspective, when an entrepreneur approaches with an idea the investor has to ask, ‘Will this idea have value in the marketplace?’ If yes, then one of the next questions is whether it can be protected, from an IP perspective. Otherwise, releasing it into the public creates a marketplace for anyone who can reproduce it. Then it becomes a marketing game, and early-stage companies don’t have the money to compete with well-capitalized competitors.
From an IP attorney’s perspective, basic due diligence dictates that a business owner or entrepreneur should present to the attorney what he or she thinks is the IP, so it can be analyzed.
It’s important to know when a patent application was filed and whether foreign rights have been preserved. The IP attorney, working on behalf of the investor, will examine in detail what the U.S. Patent and Trademark Office has done with the application and conduct his or her own research to try and predict what the patent office might do with it, called a patentability study. If it’s determined the patent application has little chance of being granted, that will likely kill the deal.
Patent attorneys also are looking at whether the invention can be designed around. Can noninfringing copycat products be created that could hurt the market?
What commonly turns an investor away from a fund applicant?
At an early stage, many of the potential obstacles for investors relate to whether or not there’s IP protection, both legal and otherwise. The strength of that protection is determined by identifying the difference between the applicant’s invention and prior art — the new invention has to be a nonobvious improvement over the state of the art.
Another part of the due diligence analysis is to determine if there’s an obstruction to the right to practice or use the invention freely in the market. It’s dangerous if it’s necessary to get a license from another party to sell a product in order to avoid infringing.
How can entrepreneurs best prepare before pursuing funders?
Entrepreneurs should check their IP ahead of time. Patent applications need to be filed, research should have been conducted, and their novelty and any likely obstructions identified and clearly understood. Investors need to see a thoughtful canvassing of the principal issues that an investor needs cleared. If the efforts of the entrepreneur are consistent with the IP attorney’s findings, and the entrepreneur is honest and truthful with the potential investor, the momentum carries through to a deal.
There’s not much worse than when an entrepreneur says they have a patent and it’s just a provisional application; the person hasn’t done any research and is just hoping everything works out.
It’s understood that every nickel is precious when a company is in the early stages, but it’s important that a company conducts thorough research on its IP before seeking funding. •
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