Kristen Hampshire

Risk management is the responsibility of everyone in an organization, not just that of the owner or senior executives. And savvy leaders take a holistic approach to managing risk, involving employees and thinking in a cause-and-effect manner about how actions in one business line can affect security in another area of the company.

Enterprise risk management is a way of capturing risk from every angle and managing it proactively with a comprehensive plan. And in today’s economy, thinking about risk in a broader sense is critical, says Rod Sloan, chief risk officer for Old Second National Bank, Aurora, Ill.

“Economic conditions expose companies to a variety of risks,” says Sloan, noting that businesses should approach their operations with a heightened awareness of the potential risks across all areas, as “the Internet and all of the electronic business we do today creates additional risk characteristics.”

But instead of being proactive, many organizations wait to implement an enterprise risk management plan until after an incident compromises the company’s security or reputation.

Smart Business spoke with Sloan about what is involved in enterprise risk management and how a business can design and implement an effective plan.

How has risk management evolved?

With all of the post-mortem occurring in the financial industry, businesses in all sectors are taking a serious look at the viability of their plan and what leaks exist in it. This leads to the concept of enterprise risk management — understanding risk on a cross-dimensional basis. Your definition of risk must extend beyond firewalls and financial security to address every single aspect of the business, down to a company’s social media presence.

What is the first step to implementing a holistic risk management plan?

First comes risk awareness within specific business units. Then, leaders at the company must get those business units to talk to each other. The typical business unit manager is focused on daily, departmental tasks. A sales manager concentrates on meeting sales objectives and networking with prospective clients. But it’s important for a sales manager to understand pertinent risks to his or her line of business, and the risks that affect other areas of the organization.

If commissioned salespeople use social networking opportunities to generate leads, how does that affect the entire company? To embrace the enterprise risk management philosophy, those business unit managers must connect with one another and start a dialogue on the cause-and-effect relationship between the risks that each department faces.

How does a business identify what type of risk to address in a plan?

A company may perform a formal risk assessment by bringing in a third-party expert to evaluate every aspect of the business for risk susceptibility. The comprehensive reports produced from rigorous assessments like this are extremely valuable to managers and serve as conversation starters.

But businesses can conduct a less rigid risk evaluation by asking key managers what top five issues worry them the most. From there, dig deeper and consider how someone might perpetrate fraud against the company in those five areas. Then, determine whether there are controls in place to stop fraud and/or minimize risk. Put numbers around those risks; will it cost the company a large dollar amount from a single, spontaneous event, or will it cost small dollar amounts but eventually result in a big event that could cost the company its reputation? Finally, discuss what else could be done to protect the company. This dialogue becomes the basis of an enterprise risk management plan.

Who should be involved in developing and executing the plan?

Some companies have a chief risk officer who can manage the planning/execution of a risk management policy. Larger companies have formal methods of risk assessment, but it isn’t necessary to go to that level of formality. Smaller companies can get the ball rolling by going to business unit managers to have them share their top five risk concerns and then drilling down from there.

For companies not familiar with risk management techniques, a consultant may help give structure and direction. But, if a small company is hesitant to hire a consultant, they can do a lot from a risk management perspective by instead using the top-five method to self-identify risks and then cross-organizationally consider ways they might reduce their exposures to those risks.

Commitment from key leaders is critical, but so is buy-in from managers and supervisors, and employees who are working on the ground level where a great deal of fraud opportunities may exist. Emphasize to managers that managing risk is a key component of their leadership responsibilities and that a sales manager is also a risk manager.

How do you create a risk management culture?

Don’t miss an opportunity to champion risk management whenever you can. Form a risk committee with members from all levels of the organization. Address a risk topic at regular company meetings. Reward people who do an excellent job of engagement — people who are not just managing risk in their own silo. Create a variety of policies and procedures around the key control areas identified in the risk assessment and involve the risk management committee on approving these processes.

Ultimately, enterprise risk management works a lot like quality control. You can generate widgets and hire someone to sit at the end of the production line and check to see if the widgets are up to par. Or, you can institute a process that ensures those widgets meet high standards before they go down the line. The objective is to build quality from the start and not to go about business and leave risk management as an afterthought.

Rod Sloan is chief risk officer of Old Second National Bank in Aurora, Ill. Reach him at (630) 906-5459 or

For very sound reasons, your business carries various types of insurance coverage to protect it from liabilities and reduce risks. But some insurance policies — such as cyber risk, environmental and pollution liability — are expensive or difficult to obtain.

As a result, many businesses forgo insuring for these risks through traditional insurance channels, essentially self-insuring, but not setting aside funds, for those critical liabilities.

“Businesses have a lot of self-insured risk, whether they realize it or not,” says Bill Goddard, CPCU and director of insurance consulting at Brown Smith Wallace LLC. “A company may go out and buy a policy to cover its building in case of a fire, but it may not buy insurance to cover the building in case of an earthquake. Most companies buy insurance policies with deductibles — another form of self insurance.”

Rather than exposing your business to risks that could drain profits, you might want to consider starting a captive insurance company, essentially an insurance company owned and operated by your business. It serves as a tool to cover those self-insured liabilities and can also provide your company with tax benefits.

“In today’s marketplace, it makes sense for small and medium-sized businesses to at least consider starting their own captive insurance company,” says Alan Fine, CPA, JD, and a tax partner at Brown Smith Wallace LLC in the insurance services practice.

“A captive insurance company will allow you to smooth out the cost of insurance over a longer period of time,” Fine adds.

Smart Business spoke with Fine and Goddard about how starting a captive insurance company could make sense for your company, no matter what its size.

What is a captive insurance company?

A captive insurance company is an insurance company owned by a business. It allows a business to organize and formalize a program of self insurance and to buy insurance for risks that are very difficult or expensive to obtain in the traditional insurance market.

This arrangement is attractive for businesses of all sizes because, by owning a captive insurance company, you are, by definition, keeping the profit. On the other hand, when you pay a premium to a commercial insurer, part of what you pay is profit to the insurance company.

Also, if you buy insurance from an insurance company and your company is a better risk than others insured by that company, you will still pay a higher premium because the insurance company has to cover the losses of the other insureds.

If your company is a good risk, you can probably self insure your business for less by starting a captive.

How does a captive insurance company work for businesses of all sizes?

By setting up a captive insurance company, you are creating a rainy day fund in case your business confronts a risk that is not covered by the traditional insurance policies you buy from a commercial carrier. A captive insurance company is like a forced savings plan: You put money aside into the captive in case you need it to cover a risk.

What should a business consider before making the decision to start a captive insurance company?

A captive insurance company is a fit for businesses that can answer yes to the following questions. Do you have risks that you are presently self insuring? Does your company have positive cash flow? Is your business profitable? Many owners want to know how much money they can save annually by starting a captive.

While each situation is different, most small to mid-sized captives tend to save between $200,000 and $400,000 each year. You don’t have to wait for a renewal period to start a captive — and the sooner you start one, the faster you begin saving money on insurance costs over the long term.

Are there tax advantages businesses can realize by starting a captive?

Assuming your business is structured properly, you receive a tax deduction for your premium payment into the captive. Should you need to use the funds to cover a risk, the money is there.

Also, if insurance premiums paid to the captive are less than $1.2 million, your business might not have to pay tax on the underwriting profits. So, if you charge your business insurance premiums that are less than the $1.2 million cap, according to Section 831(b) of the Internal Revenue Code, and do not use the money to cover liabilities that year, those profits are tax-free.

Keep in mind that you must have a business reason for setting up a captive insurance company. An adviser who understands the tax and insurance aspects of captives can provide valuable insight to your specific situation.

What are the estate planning advantages?

One of the estate planning tools associated with a captive insurance company is the ability to have a captive insurance company owned by successors (e.g. grandchildren). For instance, a grandfather who started a captive might pay $1 million for earthquake insurance. If no earthquake occurs that year, those dollars are passed tax-free to a grandchild (who owns the captive). Experienced estate planners can assist businesses with such arrangements.

What are the first steps to establishing a captive insurance company?

The first step is to evaluate your risks and make an assessment of what your business is currently or should be self insuring. This is best done by hiring an adviser who is well versed in both the tax and insurance portions of captives. It’s not enough for a professional to just understand the tax angle, or only focus on insurance. From there, the adviser will help you structure a captive that will truly benefit your company and ensure that the captive qualifies as an insurance company for tax purposes.

Alan Fine, CPA, JD, and Bill Goddard, CPCU, specialize in advising businesses on captive insurance companies at Brown Smith Wallace LLC in St. Louis, Mo. Reach Fine at (314) 983-1292 or Reach Goddard at (314) 983-1253 or

It may seem that now is not a good time to purchase a building for your business. You’ve heard that financing is hard to come by and that banks aren’t looking to lend. Property prices are low, but so is available cash for a down payment on property. And what about money for build-outs, equipment, furniture and fixtures?

The good news is that businesses can take advantage of attractive real estate prices and move into a purchase with as little as 10 percent down and low fixed-rate financing with programs such as an SBA 504 loan.

And it’s not true that banks aren’t lending, says Roger Schnorr, senior vice president of business banking at Old Second National Bank.

“We are lending about $31 million in new money each month, and about one-third of that is commercial loans,” says Schnorr.

For businesses interested in purchasing owner-occupied real estate, in which the company occupies more than 50 percent of the space, there are financing programs available and the timing may be good for buyers.

“Every monthly loan payment a business makes is money toward building equity,” Schnorr says, suggesting that business owners sit down with their banker to discuss whether a property purchase makes sense for them.

Smart Business spoke with Schnorr about the strategies businesses can employ to purchase owner-occupied property rather than sinking dollars into lease payments each month.

What kinds of businesses are in the best position to purchase owner-occupied real estate?

Any business can consider a purchase today, but first it is recommended that you sit down with your trusted banker and/or accountant to review the numbers. If your business is planning to occupy the commercial space for quite a few years, it may be worthwhile to consider buying, no matter what type of business you operate.

The combination of lower property sales prices, attractive loan terms/interest rates and potentially reduced out-of-pocket expenses may prove to be an attractive opportunity to consider buying.

Tell me more about the SBA 504 program.

A very attractive program for businesses is the Small Business Administration 504 loan. This requires as little as 10 percent of the total project cost as a down payment from the borrower. The loan can cover up to 90 percent of the total cost of real estate, furniture, fixtures and equipment.

For example, if a business purchases real estate that costs $800,000 and furniture/fixtures that cost $200,000 for a total project cost of $1 million, the buyer must provide a $100,000 down payment. Then, $400,000 is placed in a government debenture, and 50 percent of the project cost is financed by the bank.

The government stimulus package promotes reduced fees for the SBA 504 program.

What questions should a business owner ask the bank when considering a purchase?

Asking your banker and accountant to assist in determining the affordability of a purchase, along with measuring what is better — buying or leasing — is crucial.

Both the bank and the borrower want to be comfortable with the cash flow required to service the debt.

Your lender should address questions such as: What are the total costs to secure the loan? What are the projected monthly principal, interest, real estate taxes and insurance costs? What loan covenants will be in place? Is additional banking required to be established with the bank? Are there prepayment penalties to be aware of? What are the positives and negatives associated with this loan option?

Relationship banking is preferred by both the bank and the customer. The bank and the business owner benefit when they partner to build a long-term relationship based on mutual trust instead of approaching a loan as simply a business transaction.

Aside from the SBA program, what other financing options are available?

A relationship banker will help you explore various financing avenues based on your financial situation so you can decide which is most beneficial.

You can take out a conventional loan for commercial real estate, which may require a down payment of 20 to 30 percent, depending on the financial institution.

Another option is borrowing in your name personally, using personal assets such as your residence for collateral.

But an SBA 504 loan might be the best option, especially in cases where freeing up additional cash for a down payment is difficult for a business. Injecting 10 percent cash (504 loan program) versus 30 percent (conventional loan) will preserve cash for working capital needs for operating the company.

And the process has become easier. Previously, the amount of paperwork was intimidating to the borrower, but that is no longer a concern, as your relationship banker will walk you through the process and take on the majority of the paperwork involved.

Any final advice for a business owner considering purchasing property?

Don’t shy away from purchasing real estate because of what you hear about low market values or lack of financing. The fact is that now may be a good time to purchase if you partner with the right bank and take advantage of attractive financing options.

But it’s not a simple decision. Analyzing the costs, risks and rewards requires an investment of time and effort by both the business owner and the bank to determine whether buying or leasing is the right choice.

Roger Schnorr is SVP of business banking at Old Second National Bank, Aurora, Ill. Reach him at or (630) 330-2386.

It’s a dangerous time for businesses, and even those with decades of operating experience can find themselves facing bankruptcy or liquidation as flaws in their business plans become apparent.

“Most business owners and managers have not seen times like this before, and they are not sure how to manage through it,” says Barry Worth, director of mergers and acquisitions and turnaround consulting at Brown Smith Wallace LLC. “It’s a brand new world of change. Businesses that are not really looking at their business models and thinking ahead may not exist in the future.”

A weak business model that worked in good times may not hold up in more turbulent ones, and businesses must recognize their problems and seek help to get back on track before it’s too late.

“Essentially, that means a business owner or manager has to admit to failure,” Worth says. “Their emotions are wrapped up in their business, and seeing the situation clearly is nearly impossible. They just don’t know how to get out of the spot they’re in. They can meander on and eventually go out of business, or they can seek help from advisers who can see them through their situation.

“By seeking out valuable professional help, most can pull out of it, reorganize their business and retain their family wealth over time.”

Smart Business spoke with Worth about how to get a troubled business back on track.

What’s the first step that companies in trouble should take to get back on track?

First, they must recognize and admit that they are in trouble, and then seek help from a turnaround consultant or other trusted advisers who can provide guidance. Businesses should bring in a third party to assess the situation and help them design a plan for recovery — or for whatever the owner’s goals may be for the business.

While many business owners hesitate to discuss tough times with their bankers for fear of losing financing, bankers are well connected with turnaround consultants and can provide helpful referrals. Banks want to help the businesses they’ve entrusted their money with, so reach out in times of hardship and be honest with your banker about the situation.

Also, consider speaking to an attorney, who may also be able to suggest consultants who can help.

Once a company admits financial hardship and seeks help from a turnaround consultant, what is the next step?

A turnaround consultant’s role is to first come into the business and immediately stabilize the situation, improve the cash flow and get the company to the point where it is not bleeding. After that, the consultant will begin to conduct an in-depth analysis to determine what is creating problems in the business.

The consultant will look at the organization as a whole and determine what is generating the problems. There’s no one-size-fits-all plan, and finding a solution requires the involvement of ownership, managers, supervisors and, to some extent, staff.

The overall process can take 30 to 45 days, sometimes longer. That’s why it’s critical to seek help early on. Continuing to run the business ‘as usual’ could result in having a business that no longer exists down the road.

What solutions can businesses consider to help them deal with extreme financial hardship?

Businesses could file Chapter 7, which is liquidation, where assets are sold off. Another option is Chapter 11, which is reorganization, where consultants help the company get back on sound financial footing and the courts rule on the plan. Chapter 11 is designed to allow a company to continue operating into the future but leave behind certain debts, and the courts may dismiss various types of company liabilities, such as loans or accounts payable.

Or, companies can seek additional equity to help sustain cash flow by bringing in private investors or equity groups. Refinancing is also a possibility for some businesses. This can be accomplished through private equity groups, asset-based lenders or banks.

Finally, an owner can sell the business to another owner.

How can a company determine the best direction for its current situation?

Owners should engage in heart-to-heart discussions with advisers while examining their goals for the business. Some owners become so emotionally burdened and worn out from running a financially crippled organization that they are ready to move on. They want to file bankruptcy, liquidate or sell.

Others want to preserve the jobs they created for so many employees. They see a future in the business, but they need a fresh start.

For many businesses, there is hope for turning around their situations. It’s just a matter of seeking professional help so they can pull out of the mess they’re in, retain their family wealth and jumpstart a company they’ve invested in emotionally and financially.

An outside adviser can bring in a clear perspective, fresh ideas and a plan for action. As a result, many of these troubled business stories can and do have happy endings.

Barry Worth, CPA/ABV, CVA, CM&AA, is director of mergers and acquisitions and turnaround consulting for Brown Smith Wallace LLC. Reach him at (314) 983-1202 or

As consumers rely more on debit and credit cards as opposed to cash, merchants are facing increased risk exposures if they don’t have proper security measures in place. Cyberthieves troll for information on merchant networks, which has resulted in significant security breaches that have made headlines.

In 2004, a consortium of credit card companies, including Visa, MasterCard, Discover and American Express, banded together to set Payment Card Industry (PCI) Data Security Standards. These standards direct merchants that process, store or transmit credit card information to maintain a secure environment. And if your business accepts credit or debit cards, the standards apply to you.

“Business owners have to comply with those security standards and implement safeguards to protect customer information,” says Ron Schmittling, security and privacy practice leader at Brown Smith Wallace LLC.

Smart Business spoke with Schmittling about how your company can meet PCI standards and protect against security breaches.

What is PCI compliance, and who must comply?

The three keywords for PCI compliance are process, store and transmit. If your organization processes, stores or transmits credit card information, you must maintain a secure environment as laid out by the PCI standards. So, if customers or vendors use debit or credit cards to make purchases from your business, you must be compliant. This includes meeting 12 standards, which can be broken down into six key areas: building and maintaining a secure network; implementing safeguards to protect cardholder data; maintaining a vulnerability management program; applying strong access control measures; regularly monitoring and testing network security; and enforcing an information security policy.

Your policy will ultimately drive the compliance process, so the first step is to take a security inventory of your business to determine how compliant it is, what security measures are in place and what weak spots must be addressed. An outside adviser with experience in security and privacy can provide feedback on how to structure a plan. This framework will set the tone for your internal compliance strategy and help protect your business.

PCI security standards are not laws; they are a method of self-imposed regulation by the consortium of credit card companies. There are no federal mandates in place, but there is a move in that direction since some states have started to pass laws or require organizations to comply with PCI Data Security Standards. This trend is expected to continue in association with the Data Breach Notification Laws movement.

What are the consequences of failing to comply with the standards?

At their discretion, payment brands such as Visa or MasterCard can fine acquiring banks $5,000 to $10,000 a month for PCI compliance violations. Banks are likely to pass these fees on to noncompliant merchants. Many banks have begun notifying noncompliant merchants of their need to comply or face fines.

You should review your merchant agreement and note any penalties and fees for noncompliance, which can include prohibiting merchants from processing credit card transactions, higher processing fees and other restrictions. Any fraud loss associated with a compromise in security may be borne by the merchant starting on the date of the security breach. Depending on the level of security negligence, the FTC could become involved and impose significant federal fines, up to $250,000 and/or up to five years in prison.

Not knowing is not a viable excuse for noncompliance and could cost you and your organization. It is your responsibility to understand your merchant agreement and what the PCI standards mean to your organization.

What steps can a company take to become PCI compliant?

Compliance responsibility depends on your merchant level, and there are four levels as defined by PCI Data Security Standards. Level 1 merchants are those that process more than 6 million transactions a year. It is important to note the annual transactions are measured in volume, not dollars. Level 2 includes merchants that process 1 to 6 million transactions per year. Level 3 covers merchants with 20,000 to 1 million e-commerce transactions per year. Level 4 includes any merchant with fewer than 20,000 e-commerce transactions per year, and all other merchants with fewer than 1 million transactions annually.

Companies in Levels 2, 3 and 4 follow the same compliance process that includes completion of an annual self-assessment questionnaire and having quarterly network scans performed by a PCI Approved Scanning Vendor (ASV). The results are submitted to the merchant’s bank. Level 1 merchants follow similar procedures, but also are required to have an annual on-site review completed by a Qualified Security Assessor (QSA), a PCI-certified provider and have an annual network penetration test performed. The QSA will submit the merchant’s Report on Compliance to its merchant bank. The PCI Council lists ASVs and QSAs at

Where should an organization start on its PCI compliance initiative?

The most important step is to set an internal policy of how you’ll address PCI compliance and information security. Too many times, organizations rush into identifying a new product they think will fix PCI compliance or information security problems instead of organizing their efforts around the organization’s overarching policies and processes.

Once that policy has been defined and implemented, an organization can begin to enforce it and truly drive its compliance initiatives. But compliance starts with your information security policy and security controls. Many organizations struggle with where to start, as PCI compliance can be a daunting and complex task. Reaching out to a QSA to kick-start your PCI compliance efforts is a great first step.

Ron Schmittling, CPA/CITP, CISA, CIA, is the security and privacy practice leader at Brown Smith Wallace LLC in St. Louis, Mo. Reach him at (314) 983-1398 or

Tuesday, 23 February 2010 19:00

Conducting IT strategy

Technology is a fantastic tool that should enable you to run your business more effectively and efficiently. But if your technology isn’t helping you achieve your corporate goals, you may need a guest conductor.

You may have a good team that manages the network and provides good desktop support, but is what they are doing in sync with your business goals? You may or may not need better instruments, better players or new systems, but it’s difficult to know when you don’t have strategic IT management.

Many small to medium-sized businesses lack this critical aspect that enables IT to work in harmony with the business and enhance the top and bottom lines.

“IT advisory services act as a mentor to management to make sure they’re getting the best value,” says Tony Munns, who leads the IT advisory team at Brown Smith Wallace LLC. “These services help companies maximize the value associated with the use of technology and ensure that the technology provides the business with information to make decisions faster and more efficiently.”

An IT adviser can serve as a one-stop shop for executives who know their technology could be working smarter but don’t know how to achieve those gains. For instance, if you are not sure what technology you need for your business, an independent professional can help you figure out which IT systems work best with your business strategies.

“IT advisory services can help you formulate a strategic vision and put a plan in place so you can shift from tactical to strategic use of IT, making IT an investment rather than an expense,” says Munns.

Smart Business spoke with Munns about how an independent IT professional adviser can help a company operate more efficiently, decisively and competitively.

What are IT advisory services?

IT advisory services are more than tech support or a representative who sells software. IT advisory services link IT to business goals and help a company get the best value for its IT investment. For instance, an independent adviser might help a company better understand the cost of maintaining a legacy system versus investing in a more integrated system.

An adviser can serve as a system architect who can redesign the IT infrastructure to remove bottlenecks and improve security, functionality, efficiency and the results a company gets from its IT investment. Ultimately, IT is about having efficient access to information to make better, faster decisions. If IT isn’t helping your business do that, it may be time to change your approach.

This process is beyond the expertise of many executives, and it’s hard to justify the cost of adding that expertise to the management team. An independent adviser who can serve as a facilitator and educator is the most cost-effective solution.

Why is it important for a business to link its technology to its business plan?

It enables the company to execute its strategy, and it’s the infrastructure that holds the company together and leverages its personnel. Above all, it is about return on investment. In IT, it costs money just to stand still. So, it’s essential that IT investment dollars are well spent. IT systems can differentiate a company from its competition and provide vital information to help make decisions that can give a company a competitive edge.

How can you move beyond fighting IT fires to create a more strategic department?

Many companies are either underserved by their IT systems or what they’re using is purely tactical — the IT guys keep operations running but do nothing more. Companies tend to buy new software or other IT components only when something has to be replaced.

An IT adviser can give management the confidence to lift the business out of that day-to-day mentality and focus on an IT strategy. That may include migrating to a more efficient infrastructure, improving security or privacy, helping meet compliance requirements or assisting in upgrading or updating decisions.

The key is to be proactive, not act after something in the IT infrastructure breaks. An IT advisory team helps a company think beyond today and work toward a technology infrastructure that will last.

What should a business owner ask before entering into a relationship with an IT adviser?

To make sure you get the most out of an IT advisory relationship, ask yourself these questions: Are you concerned about the cost of IT and struggling to understand the value? Are your systems prohibiting you from doing your job effectively? Do you wish you could do more with your IT systems? Do you have information at your fingertips to make business decisions? How easy is it to get the information you need from your IT system? Are you aware of the IT systems available for your business?

An IT adviser will help you answer these questions and develop a plan so that your IT investment becomes aligned with your business goals.

How can a business measure the value of its IT investment?

When technology has the capability of measuring key performance indicators (KPI) such as sales and efficiency, then management can see the value of investing in an integrated system that does more than accomplish tasks. IT should ‘think’ for a business in the sense that it compiles the statistics, numbers and data necessary to make the right decisions.

That value is measured in those KPIs. When the IT systems are integrated and linked to the business strategy, those KPIs should improve — and you’ll like the score.

Tony Munns, CISA, FBCS, CITP, is the leader of the IT advisory team at Brown Smith Wallace LLC. Reach him at (314) 983-1297 or


Tuesday, 26 January 2010 19:00

EPLI: The new workers’ comp

Emotions run high when companies downsize and reorganize to meet the demands of a tough economy. Some employees will do whatever it takes to raise cash if their financial situation is desperate or if they are disgruntled with their employer. In this litigious society, no business can rest easy, especially with the steady increase in employment practices allegations. With attorney fees alone averaging $200,000 per claim, businesses can’t afford to ignore potential lawsuits that employees can instigate — and today, filing employment practices claims is more common than ever before.

Michael Finn, account executive, GMGS Insurance Services, has noticed a sharp incline in employment practices cases. Presently, he is handling 12 claims whereas his clients had two claims in the prior decade.

“No business is immune to employment practices lawsuits,” Finn says, noting that the state of California in 2004 cracked down on workers’ compensation claims with tighter regulations. “Employment-related practices claims seem to be the new workers’ comp,” he says. “And business owners don’t have to do anything wrong. No one has to actually discriminate against or harass the employee. An employee may simply allege that they were treated wrongfully and the court doors will fly open.”

Smart Business spoke to Finn about how businesses can protect themselves in this litigious environment.

What constitutes an employment practices claim?

Employment practices covers the human resources spectrum, including sexual harassment, wrongful termination and employee discrimination because of race, religion, age or any other reason. It also includes wage and hour claims, which allege that a company did not abide by the Fair Labor Standards Act (FLSA). Employees may claim overtime violations, saying that they were not paid for hours worked, or they can claim failure to pay wages for hours of work. Wage and hour claims may also allege that a company didn’t allow the legally allotted meal or rest time.

The problem with all employment practices claims is that a business does not have to be in the wrong for an employee to make a claim. A claim is as simple as an employee ‘saying so.’ Even frivolous, unsupported claims are not quickly dismissed. Aside from claims being litigated in court, the U.S. Equal Employment Opportunity Commission (EEOC) is required to investigate all claims.

Why are employment practices claims more common today?

We can blame it on our litigious society, the present economy and people’s desperation to find money any place they can. And the fact is, word-of-mouth travels very fast. Employees talk. When they learn how relatively easy it is to make an employment practices claim, it becomes an attractive option for almost anyone. Many employees do not automatically assume they are hurting their employer (or former employer). Often their legal counsel convinces the employee that the insurance company is picking up the tab at no cost to the employer. However, for businesses that do not have employment practices liability insurance (EPLI), the cost of litigation can cause serious financial harm — especially with repeated or class-action lawsuits.

What implications does a business suffer when facing an employment practices lawsuit?

Time, money and reputation are at stake for businesses that face these claims. No company wants to spend time in court, and these cases can go on for some time since they are also investigated by a government agency. Again, the average defense costs are presently $200,000 per EPL claim. For businesses without EPLI, these fees can hit the bottom line hard, especially in this economy. There are also additional costs if a business decides to bring in human resources specialists to ramp up policies and procedures and expand company training. Many insurance companies that offer EPLI will provide these services for free.

What can businesses do on the front end to protect themselves against these claims?

First and foremost, maintain proper documentation of all human resource activities, from hiring to termination. Scrutinize company policies and procedures and ensure that everything is properly documented, from hours worked to when and how long employees take breaks. Take proper steps when terminating employees. Make sure there is a plan in place so the termination complies with state and federal laws. That documentation will serve as a defense when a lawsuit arises. Ensure that managers and employees have proper training in the areas of sexual harassment and discrimination. Document all training. Consult with an HR professional if you do not have an individual in house who can verify that all policies are airtight. Finally, an EPLI policy is essential to protect your business just in case an employee files a claim. Paying a small premium as opposed to the total cost of litigation is the best safety net to protect a business.

How does an employer place proper coverage?

Premiums can range from $2,500 to $25,000 for companies with 200 employees or less. The premium really depends on the size of the business, number of employees and historical turnover. In reality, for the price of 10 to 15 hours with a lawyer you can place a $1 million policy to protect your business. To secure proper coverage, consult with a risk management broker who can provide the proper guidance.

Michael Finn, CIC, is an account executive at GMGS Insurance Services. Contact him at or (949) 559-3376.

Tuesday, 26 January 2010 19:00

Protecting your property

You don’t need to own a boat, transport goods across the ocean or be lost at sea to make good use of inland marine insurance. Do not be confused by the name of this coverage. Inland marine insurance actually protects property during transit (whether by common carrier or by company-owned vehicles), held by a bailee, stored at a temporary location, such as a trucking depot, or movable goods, such as tools or contractors’ equipment.

“The most important thing to know is once materials, supplies, equipment or products leave your premises, you need to secure the proper inland marine insurance to protect you from the perils of theft, fire and other damage while the items are in transport or storage,” says Calvin Sistrunk, a principal with GMGS Insurance Services.

Once you take goods off an insured property, those goods are generally no longer afforded protection — unless a form of inland marine insurance kicks in.

Because inland marine coverage is somewhat flexible, it can also be broadened to cover a variety of exposures and property that is not covered by traditional property insurance, Sistrunk adds. And whether or not you transport goods, you’ll want to know about this insurance, especially if you ever ship property — and that involves almost every business.

Smart Business spoke with Sistrunk about the purpose of inland marine insurance and how it can protect businesses.

Why inland marine insurance?

The origins of this insurance actually started with Lloyd’s of London, a provider of insurance dating back to the 17th century. Lloyd’s insured cargo ships, and eventually that coverage was expanded to include cargo after it had been offloaded. Today, inland marine insurance has grown to cover cargo in transit or while in storage, providing more complete coverage to policyholders. Most of the businesses that benefit from this coverage are nowhere near water and have little, if any intention of shipping goods by sea. The coverage is important for businesses in all industries to consider because it can extend a company’s protection beyond its place of business to highways, railways, or even across town. Think how often you utilize a shipping service or delivery truck, warehouse goods or hire a third-party cargo carrier to transport property. Any business that has moveable property should consider this coverage.

What misconceptions do business owners have about inland marine insurance?

First, the name is confusing and leads people to believe the insurance involves the ocean or boat transport. Also, many business owners don’t realize that their present property and general liability insurance does not protect their goods in transport. As a result, once your property leaves your fixed location, the exposure to loss is great. If a serious accident or disaster like fire or theft were to occur, it could potentially cause irreparable harm to your business. Also, business owners do not realize that inland marine insurance does more than protect goods in transport. Its many coverages represent everything from accounts receivable, contractors equipment and leased property to valuable papers, motor truck cargo, guns, jewelry, fine art, communication towers and equipment — the list goes on. To understand the full picture of inland marine insurance, a business owner really should consult with an experienced risk manager or insurance broker.

What type of businesses can benefit from this coverage?

In order to determine if a company has need for inland marine coverage, certain questions need to be answered: Do you use delivery trucks to transport goods? Do you rent equipment for construction job sites? Do you contract with third-party cargo carriers to transport goods of any kind? Does your company transport goods? Do you transfer materials or supplies in any way?

Why will businesses that do not ship or transport their own goods appreciate the coverage?

It’s important to understand what type of coverage a third-party cargo carrier has and whether it is enough to cover your goods they are transporting. Even if you ship via UPS or Federal Express, you might find that their coverage is limited if your goods are damaged or stolen during transit. You may even need to carry some of your own inland marine coverage to properly protect your assets. Discuss this with your risk manager or broker, and always ask a third-party carrier for copies of its policy.

Will a commercial automobile policy cover transit claims?

No, though some business owners assume that the goods they transport are covered because they secure commercial auto insurance. It’s not like a homeowner’s policy that will generally cover property that is stolen from an owner’s automobile. Even goods transported in a company’s vehicles are not covered under commercial auto insurance. However, inland marine insurance does extend coverage to protect those goods during transit. Remember, as soon as goods leave your premises — the second you pull out of your driveway — those goods may not be protected without proper inland marine insurance.

What steps should a business take to obtain inland marine insurance?

You need to discuss with your risk manager the various transport activities your business engages in to protect your goods in transit. Inland marine insurance is a specialty area, so be sure your broker has experience with this coverage. Finally, it’s a good idea to ask your broker to explain all areas of inland marine coverage — the exposures and coverages are vast and, as you can see, extend to areas that surprise many business owners.

Calvin Sistrunk, CIC, is a principal with Garrett/Mosier/Griffith/Sistrunk Insurance Services. Contact him at (949) 559-3373 or

Saturday, 25 April 2009 20:00

Audit alert

Just as businesses today are looking for ways to generate revenue, states are also considering how to fill budget deficit “cavities” and raise dollars in this down economy. The fastest-growing source of revenue for states is not income tax or sales tax. It’s unclaimed property, and every company has it.

States are currently in possession of approximately $20 billion in unclaimed property dollars. Auditors will actively seek out businesses that did not report and turn over this property to the state. Unclaimed property is a compliance issue that all businesses should understand and address this year and going forward.

“Businesses don’t often hear about unclaimed property policy because it falls under property law, not under tax law,” says Tim Dudek, a director in the tax strategies group at Kreischer Miller, Horsham, Pa. “Unclaimed property is important to businesses today because the end result is typically a cash outlay to the state.”

Smart Business spoke to Dudek about what constitutes unclaimed property and how noncompliant businesses can mitigate penalties and interest by taking action before an audit occurs.

What is unclaimed property?

Also called abandoned property, unclaimed property is any type of tangible financial asset held for a party that cannot be found. Unclaimed property is not real estate or ‘lost and found’ items. It represents the debt of one party and the asset of another. For instance, a company mails a paycheck to an employee who leaves the company. The company cannot locate the former employee so the check is never cashed by its rightful owner. After several failed attempts to find the individual, the uncashed paycheck is considered ‘abandoned property.’ The business then cancels the check and that money goes back into the company bank account. The problem: That money now belongs to the state as ‘unclaimed property.’ The cash should have been turned over to the state, but instead has been infused back into the business.

Other examples of unclaimed property include uncashed checks to vendors, accounts receivable credit balances, expense reimbursement checks, ‘expired’ gift cards (which should never expire, actually) and safe deposit boxes. The list of what qualifies as unclaimed property is pages long and includes industry-specific property.

How much unclaimed property do companies identify? What sort of revenue do states expect to collect by enforcing this tax law?

States believe that only 10 to 15 percent of companies comply and turn unclaimed property dollars over to them. Delaware (the second-smallest state) expects to collect $400 million this year just from companies remitting payment for reported unclaimed property. Assuming that less than 15 percent of companies are compliant, auditors who exercise this property law will, more often than not, turn up dollars for the state.

How will states collect unclaimed property dollars?

The states will search for unclaimed property through compliance efforts and audit proceedings. Every company must be registered with a state in order to conduct business, and because all registered businesses must file tax returns it’s very easy for the unclaimed property bureau to match these returns to abandoned property reports.

What penalties and interest could noncompliant companies face?

The state has discretion to look back an unlimited number of years for unclaimed property and charge penalties and interest for each year that unclaimed property was not remitted to the state. Some states set no penalty limits, but in Pennsylvania, the cap is $10,000.

What can companies do if they recognize they have unclaimed property recorded on their books?

The good news is that opportunities exist for companies that recognize their own noncompliance. Businesses that perform their own due diligence and determine the dollar magnitude of property they should have remitted to the state should contact their tax accountant, who can begin negotiations with the state and help the company enter into a Voluntary Disclosure Program. This program involves a contract between the company and the state. The company admits to deficiency and asks for ‘forgiveness.’ As a result, companies can save dollars and reduce administrative look-back periods. In other words, the state may agree to limit the reporting period to 10 years or less, with minimal interest and no penalties. This scenario is far better than risking the possibility of an unclaimed property audit by the state. If no reports were ever filed, a state may go back and audit for an unlimited number of years, imposing full interest and penalties on any deficiency with no chance of abatement.

The key is to understand what qualifies as unclaimed property and discuss the rules and opportunities with your accountant. Determine if your company owes money to the state, and do not assume your company will go unnoticed. The state is always looking for untapped revenue sources. Every business that is noncompliant is a target.

Tim Dudek is director of the tax strategies group at Kreischer Miller, Horsham, Pa. Contact him at (216) 441-4600 or

Thursday, 26 March 2009 20:00

Going green at the bank

More businesses are recognizing the ecological and economical benefits of adopting green practices, whether that means instituting an office recycling program or integrating sustainability practices into the company’s strategic plan. Going green is not a fad; it’s here to stay.

“Even small steps a company makes to reduce its footprint can pay off, starting with reducing wasteful paper trails in every part of the business,” says Craig Johnson, president and CEO, Franklin Bank, Southfield, Mich. “Many businesses are making an effort to go paperless, and bank transactions are an easy first step toward that goal if your bank offers the right tools.”

Consider your company’s banking transactions. Beyond online banking and bill pay, there are technologies available to decrease paper flow, reduce your carbon footprint, save time and avert additional fees if your financial institution charges a premium for hard-copy statements.

Smart Business spoke with Johnson to discuss ways that banks are making it easier for businesses to operate in a leaner, greener way.

Aside from online banking, what other paperless banking technology is available?

Electing to receive statements online saves a monthly mailing and creates an electronic footprint, which is a good thing. You can easily access information online, saving trips (and, therefore, gas) to the branch. Beyond that, companies can process checks at their place of business through remote capture. This technology requires obtaining a check machine, which is used to digitally file checks. The machine converts paper checks into electronic files, which are transmitted to the bank. Funds are available immediately, and canceled checks are readily accessible online. The ease of service alone is reason to incorporate remote capture into your business practices. The efficiency created on the business and banking sides of every check transaction is significant. Remote capture is the wave of the future in banking — it’s ‘green’ and incredibly convenient for business owners.

What is the payoff for adopting paperless banking practices?

Rather than counting dollars and cents, consider other important factors that indirectly affect your company’s bottom line and are just as important: productivity, efficiency and accessibility. How can going paperless improve these areas of your business, and what will that save your business? For example, remote capture saves a trip to the bank (carbon emissions and time) and makes checks more accessible by storing them online.

As more financial institutions adopt internal paperless strategies, they will encourage customers to embrace electronic banking. Banks may begin charging fees for getting paper statements or opting for the paper version of a service that is offered digitally. Already, most banks truncate cashed checks and store images on film rather than mailing the canceled paper checks back to your place of business. We can assume that as consumer demand for ‘green’ infuses the business world and flows into the mainstream, service providers across all industries will continue efforts to be more sustainable.

What are bank branches doing to become more green?

As businesses begin to embrace a more sustainable culture, they may elect to do business with vendors that are equally committed to the cause. If this describes your business, you should talk to your bank about technologies in place that show an effort toward being a good corporate citizen. One example in the banking world is branch capture, which is essentially remote check capture at a bank level. Rather than banks couriering checks to a processing center, where personnel run checks through energy-intensive machines, branch staff ‘copies’ checks digitally, using a check machine. Those images are stored electronically and transmitted to the processing center. Branch capture benefits both the bank and business customer. First, the customer gets immediate credit for the deposited check. Second, the paper trail ends at the branch, saving time and energy.

For businesses concerned about whether moving to completely electronic banking is safe, can you address the security issue?

There is actually more control and security with online banking because electronic statements are password protected. Identity theft can occur through snail-mail if banking statements and bills are intercepted. Meanwhile, by managing accounts online, you likely monitor them on a daily basis and will immediately detect fraud, should it occur. Most consumers and businesses are comfortable logging in to online accounts by now to reconcile accounts. Receiving statements and depositing checks this way is just as safe. Paper is essentially one more step in the financial transaction that can get lost, intercepted, misplaced and abused. Talk to your banker about online security and find out what systems are in place to assure that transactions are private.

CRAIG JOHNSON is president and CEO of Franklin Bank, Southfield, Mich. Reach him at or (248) 358-6459.