Clearing up misconceptions surrounding the WOTC

The Work Opportunity Tax Credit (WOTC) is a federal program that incentivizes employers to hire people from certain target groups who face barriers to employment.

“The credit is meant to change behavior and encourage companies to take a chance on those who have barriers to entry in the workforce. It’s designed to give these individuals an opportunity at landing a job,” says Terracina Maxwell, COO at Clarus Solutions.

There’s no limit on the number of qualified individuals a company can hire, which makes it a significant option for companies willing to add a screening phase to their hiring process. Still, companies balk, often because they’re concerned about being accused of discrimination, that the administrative requirement is too time-consuming, or because of the uncertainty that the credit will be renewed by Congress.

Smart Business spoke with Maxwell about the state of the credit and why employers should give it a second look.

What is the value of the WOTC to an employer? Is it worth it?

The tax credit, depending on the category of person to whom it applies, can allow a company to claim between $2,400 and $9,600 per person. Companies that do a lot of hiring — especially those that hire hourly workers — would benefit from adding a stage to their hiring process to determine if a candidate qualifies for the credit.

Employers are only given a tax credit, which is based on hours worked, for a qualifying employee in their first year of hire. This is because Congress is incentivizing hiring — staying on the job for more than a year is great, but this credit is an attempt to give people a chance at a job.

Companies of any size or type may participate, and the target groups defined by Congress include those on government assistance programs, veterans, the disabled, felons and the long-term unemployed.

How difficult is it to collect on WOTCs?

Although this is a federal tax credit, it is administered at the state level. And because there is a lot of back-office paperwork that must be completed to file for WOTCs, it’s often an outsourced function. It requires a lot of interaction with the state workforce administrator, and can be cumbersome for small companies or companies that operate in multiple states.

Many think applying for the credit is too much work. That’s justified, as historically all screening had to be done with pen and paper — and it was a lot of paperwork. After 2012, companies were allowed to administer it with electronic signatures and that has significantly decreased the amount of paperwork involved.

While the WOTC has existed since 1996, it would often expire at the end of each year, requiring Congress to re-enact it. This past year, however, Congress renewed it through 2019, allowing companies to confidently set up a process to screen for this credit as a part of their hiring process.

Is there a maximum amount of WOTCs an employer can collect?

There is no maximum WOTC an employer can collect. Congress wants many people in the designated groups to get hired.

It’s a nonrefundable credit, so a company in a net loss position with no tax liability will not be able to use the tax credit in the year it is earned. The credit will, however, carry forward for 20 years until a profitable position is reached.

Should employers be concerned that qualifying questions for WOTCs could be misconstrued as discrimination?

Individuals within the groups targeted for WOTCs can be hired without the risk of the employer facing allegations of discrimination if the employer uses IRS-approved forms or asks only the questions identified therein. Concerned employers can turn to the Department of Labor, which has created guidelines describing what an employer can ask and in what way.

Secondly, by law, applicants must voluntarily supply the required information. Tell candidates that there is no negative consequence for leaving it blank, and if they do answer it won’t affect their pay. Usually only a small percentage of applicants pass on completing the WOTC screening.

Insights Accounting is brought to you by Clarus Partners

Julie Boland and Ed Eliopoulos keep the EY legacy alive in Northeast Ohio


A company heritage that goes back to 1903 doesn’t weigh down Julie Boland and Ed Eliopoulos. In fact, Boland, managing partner of Ernst & Young LLP’s Cleveland office and Eliopoulos, managing partner of the Akron office, feel a lift knowing that they have hired, developed and invested in the people who protect the legacy of a professional services firm founded in Cleveland more than a century ago.

Established as Ernst & Ernst, EY has grown to a global presence of 190,000 employees, with 1,300 employed at the Cleveland and Akron offices.

“We take great pride that our roots are local, but our reach is global,” Eliopoulos says.  “We have benefitted from this community and have given a lot back. Our job is really to step into the firm at a certain point, and we are going to leave it, but we ought to leave it better than when we stepped in. That’s the legacy of the firm.

“We’re proud of our legacy, we are proud of our people. We are proud that if you think about some of the bold steps that you take as a leader in the community in particular, investing in this East Bank of the Flats, moving down here from the old Huntington Bank Building in 2013, was a huge step. Nobody was doing much of anything except developer Scott Wolstein had a vision to bulldoze everything and put up an office building, and Don Misheff, the EY office managing partner at the time, took a bold step by signing on to become a significant anchor tenant.”

Boland, who on July 1 became the first female managing partner of the Cleveland office of EY, stresses how crucial it is for an organization with a proud legacy to protect it — and perpetuate it.

“We need to hire great people and put them in challenging positions where they’re going to continue to grow because Ed and I are responsible for developing the next leaders of these offices and the next leaders of the community,” she says.

“Our view is how do you make people, regardless of whether they’re here for a couple of years or they’re here for their entire career, to feel like they’re part of something really special and that their experiences here have a long-term impact on them. We want to keep that connection because most likely they’ll end up at a client or have influence in the market, and we want them to think very fondly and positively on their experiences at EY.”

Here’s a look at how Boland and Eliopoulos protect and perpetuate the legacy of a 112-year old firm, and keep a small-town feel in a global economy.

Local, but global reach

Being a global firm is an important differentiator for a business. With the instant connectivity that technology provides today, it makes it easier to provide different perspectives on how to address the challenges that today’s economy often presents.

Of the Big Four firms, EY is the most globally integrated.


EY’s 28 regions are organized into one of four areas: EMEIA (Europe, Middle East, India and Africa), Americas, Asia-Pacific and Japan.

This structure is designed to effectively cater to an increasingly global clientele that has multinational interests.

EY makes diversity and inclusiveness a major part of its very fabric, and the ability to draw upon expert viewpoints is not overlooked by clients.

“They want to see our firm mirror their own people,” Eliopoulos says. “They’re demanding more and more diversity from us than ever before.”

Research has found that diverse, high-performing teams are more efficient, they’re more productive and they develop better answers, Boland says.

“A global firm brings different perspectives to the table, whether it’s gender, or race or whether it’s just different perspectives, it brings more diversity of thought,” she says.

Experts don’t always reside in the local community, so in today’s world a firm has to be able to tap into that subject matter expertise globally.

“Clients want to get access to the best and brightest minds,” Eliopoulos says. “So to do that, you really need to be connected internally, not just externally.”

Connection ranks high

Many companies will confirm that connection is the name of the game. The skills to develop a relationship that connects, however, aren’t usually inherent and therefore have to be developed.

Exterior“You need to connect with the person you’re sitting across from; especially in this business, that’s what’s important,” Boland says. “You have to take the technical information and translate it so it helps people solve issues and problems, and communicate that.”

To do so means spending a lot of time with one another, so you also have to appreciate whom you’re with and like the people you’re working with.

While the hard skills are a must among accountants, it doesn’t overshadow the importance of the soft skills.

“You can be the smartest person in the room, but if you can’t communicate, if you can’t express yourself, what good is that intellect?” Eliopoulos says

EY expects to hire about 100 new employees for its Cleveland and Akron offices this year. For new employees, EY runs what Eliopoulos calls the epitome of the ultimate apprentice shop.

“Our audit staff in particular receives quite a bit of oversight,” he says. “Your first two years on the audit staff mean somebody’s looking over your shoulder every day as you are being trained in methodologies and culture.”

An essential soft skill to cultivate is flexibility, if it’s not already in an employee’s toolbox, Boland says.

“We really value flexibility,” she says. “I’m not talking about flexibility solely in a flexible work arrangement but flexibility in the choices we all make. I think in a profession where things are moving fast, and we’re working hard, it’s important for people to understand and appreciate that.

“We want people to have hobbies, time for their family, time to travel, to do things outside so they’re very well-rounded people. I think that’s critically important as well.”

Every year, EY takes an employee engagement survey to give management an idea of how engaged employees are.

“The more engaged they are, the more productive they are, and our retention rate goes up,” Boland says.

“We ask are you proud to work at EY? Do you feel like you’re valued?  Do you get feedback? We take the pulse of how engaged are our people, and we look at the trend line, and if there are ever any challenges, we dive into it and see what we can do to make sure we keep our people engaged.”

Eliopoulos takes his apprentice shop analogy further, noting that another apprentice is always hoping to move up to journeyman.

“That’s continuous almost marching, if you will,” he says. “There’s that next person following in line behind you. You have to do that. It’s a business, and you have to get new people, and you have to give them appropriate experience so they can grow their careers.”

Building political capital

As the old adage goes, it takes a long time to build a relationship, and it can be lost in a second. But if a firm has built up political capital, it doesn’t just lose it when a challenge arises.

“I think we are very good at being transparent and authentic,” Boland says. “If there’s an issue, being transparent and authentic is part of a relationship. There’s no trick to it.

“It’s just going in and being honest, having integrity, doing the right thing, having courage to stand up to what you believe in and just being willing to have an open and honest conversation.”

How to reach: EY (216) 861-5000 (Cleveland), (330) 255-5800 (Akron) or



  • Think globally, but keep your feet on local ground.
  • Connect with the person sitting across from you.
  • Build political capital, and it will help in times of need.

The file

Name: Julie Boland
Title: Cleveland managing partner
Company: Ernst & Young LLP

Education: Bachelor’s degree in accounting, University of Vermont; MBA, University of Chicago Booth School of Business.

Boland on being the first female Cleveland managing director:

I look at it as a privilege to have been asked to consider this position. EY has long offered leadership opportunities for all our people. Our diverse and inclusive workforce is one of our great strengths. I’m proud of this firm, I’m proud of the people we work with and how we serve our clients and the community. I look at that much more on what’s important than being a “first.”

Boland on the new EY tagline, adopted in 2013:

Our new purpose is ‘Building a better working world.’ It goes to how do we think globally but act locally, empower our people locally who know the market, who know the clients, but bring the global aspects of our organization to them. It’s also all aspects from how we serve our clients, how we develop our people and how we give back to the community. I think it’s a really powerful statement; it’s something that we’re getting a lot of positive feedback on.

Name: Ed Eliopoulos
Title: Akron managing partner
Company: Ernst & Young LLP
Education: Bachelor’s degree in accounting, University of Akron

Eliopoulos on the new EY building, on the East Bank of the Flats in Cleveland:

This obviously is a whole different feel from our old office in the Huntington building, which dates back to the 1920s. You just can’t retrofit a building of that vintage for today’s necessary use. This is much more conducive to how our teams work. After last year, we moved in and many people looking for space in downtown asked, ‘Do you mind if we come in and take a tour?’

Eliopoulos on the EY Entrepreneur Of The YearTM community:

Each year we recognize those high-growth companies that are really making a contribution in this local community, in this local economy through our EY Entrepreneur Of The YearTM program. Similar to how we want to stay connected to our firm’s alumni, we invite past winners, past judges and participants in the program to networking events to help build a community.

Suzanne Esber: Why corporate social responsibility can go a long way

Companies that make a commitment to social responsibility can do great things in their community while also yielding tremendous benefits for the business itself, including loyal customers and satisfied employees.

In The Civic 50, a study by Bloomberg Businessweek on the country’s most community-minded businesses, 96 percent of the ranked companies reported they were able to measure the impact of their social responsibility initiatives by increased sales and brand loyalty.

Employees also tend to be proud and energized to work for companies that give back.

Whether your company contributes directly, donates a percentage of annual earnings, provides products, establishes a foundation or gives one grant, your investment helps build sustainable communities. In fact, a well-directed grant can help address a societal challenge and bring about change and progress.


Encourage volunteerism

Employee volunteer programs are a relatively low-cost way to give back to the community, raise awareness of the company’s commitment and engage employees. Employees can be encouraged to volunteer as teams, as individuals providing pro bono services or as a member of the board of directors of a nonprofit organization.

Giving employees an avenue to support their community is important to morale and builds a collaborative and inspired team. Employees become excellent ambassadors for their company. Additionally, volunteering provides leadership opportunities to develop and expand their skill sets, resulting in increased staff performance and fulfillment.

Each year, the Orange County Register publishes a list of top workplaces in the county, polling employees from over 1,000 Orange County companies on a spectrum of different criteria. Last year, a new question made its debut on the survey, “How socially responsible is the company?”

Prominent Orange County-based businesses like Edwards Lifesciences and PIMCO have spearheaded social responsibility by creating employee volunteer programs and formal departments built around community involvement and philanthropy.

In 2013, employees from the global information services company, Experian, contributed over 18,000 hours of volunteer time valued at $6.1 million to the community. These companies understand that a strong correlation exists between social responsibility and a positive corporate culture, which in turn, adds to the bottom line.


Everyone can do his or her part

Large organizations may have the infrastructure to implement philanthropic initiatives, but smaller businesses might need assistance or advice on such issues as the complicated tax implications of giving and decisions on where to best direct your funds.

If you’re interested in increasing your company’s social responsibility efforts, but aren’t sure where to begin, organizations such as the Santa Ana-based nonprofit, OneOC, offer assistance and expertise. The organization has more than 50 years of experience working with community-based organizations and can help your company develop and advance its social responsibility programs.

Indeed, social responsibility is no longer an optional business practice. These days, the public has grown to expect businesses to give back to the community. Social responsibility has become an important part of a company’s brand, and the topic deserves its place at the table during corporate strategy sessions. The cost of giving is scalable, but the cost of not giving can be considerable.

How to choose a firm to handle IRS Form 5500 filings

Danielle B. Gisondo, CPA, partner, Skoda Minotti

Danielle B. Gisondo, CPA, partner, Skoda Minotti

The Internal Revenue Service (IRS) requires companies to file a Form 5500 to provide information about their benefit plans. If the company has 100 or more eligible participants that also means the benefit plan has to be audited.

“The 5500 form is an informational return filed with the Department of Labor (DOL) on an annual basis. It includes not only plan-specific information but financial information, which is where the benefit audit comes in,” says Danielle B. Gisondo, CPA, a partner at Skoda Minotti.

Companies are required to have an independent accounting firm conduct the benefit plan audit. Smart Business spoke with Gisondo about the audit process and how to choose a firm for the work.

What should you look for in selecting an accounting firm?

Find a firm that has benefit plan experience. There are accounting firms that audit only one or two plans throughout the year, but you want someone with a wide variety of experience auditing plans. Some firms don’t have a specific department for these audits, doing them as part of the overall accounting and auditing practices. Firms that specialize in this arena have a separate department and dedicated professionals.

Ask how many plans the firm audits, and the size of those plans. Check for membership in the American Institute of Certified Public Accountants Employee Benefit Plan Audit Quality Center. This ensures they have the required education and access to benchmarking and industry data that can be helpful for the audit work and throughout the audit process.

There are specific continuing professional education requirements from a benefit plan industry perspective, and the accounting is unique and definitely different than for a regular audit of a financial statement.

What do accountants look for in the audit?

They’re testing for contributions coming into the plan, making sure participants have proper amounts withheld from paychecks and money is deposited in a timely manner into the plan. Investment elections are reviewed; if contributions are to be deposited into five different mutual funds, accountants ensure money goes into the right funds.

Distributions also are tested, whether it’s money rolled over into a new plan or making sure a loan is repaid over the proper time period.

It’s really about testing samples of transactions into and out of the plan. Then financial statements are prepared for filing along with Form 5500.

Where do problems usually arise?

Many times it’s on the contributions side — a participant wanted 3 percent withheld but the plan sponsor or third-party administrator (TPA) withheld 5 percent. Some employers do not deposit employee withholdings on a timely basis with the trustee or custodian that handles the funds.

On the distribution side, there are situations where participants took out more money than they had vested in the plan and it didn’t get approved by the proper party at the TPA or plan sponsor.

What manpower commitment is required for the audit?

Depending on the company’s size, the firm will work with the human resources director or accounting department. If the accounting firm has a specific audit process, it should only require a few hours of pulling information together on the company’s part, while having someone available for questions when the audit work is being performed. Depending on the size of the plan, field work runs from one day to a week.

The entire process, starting with the request for information and ending with a completed financial statement, takes about four to six weeks.

Does the firm you use make a difference?

Both the IRS and DOL conduct independent plan checks, and could randomly look at completed 5500 filings and audits. If an accounting firm missed something — maybe the plan wasn’t compliant or didn’t have the proper amendments — those plans could be disqualified. Then all contributions going to the plan could be taxable, even though the plan is tax-exempt.

You definitely want a reputable accounting firm with experience doing benefit plan audit work; any mistakes could be costly.

Danielle B. Gisondo, CPA, is a partner at Skoda Minotti. Reach her at (440) 605-7132 or [email protected]

For more information or to have a confidential conversation with Dani, please call (440) 605-7132.

Insights Accounting & Consulting is brought to you by Skoda Minotti

How the marketplace will respond to health care reform

DeVon Wiens, partner, Health Care Practice, Moss Adams LLP

DeVon Wiens, partner, Health Care Practice, Moss Adams LLP

California’s health care exchange may see a flood of customers when it opens in 2014 — not only from people who have been uninsured but also many previously covered under employer-sponsored plans.

“What the policymakers are saying is different from what we’re hearing from businesses,” says DeVon Wiens, a partner in the Health Care Practice at Moss Adams LLP. “Policymakers don’t anticipate a big shift among employers away from providing coverage and toward letting employees go to the exchanges to purchase their own insurance.”

That’s likely true for larger employers with 1,000 employees or more who have enough critical mass to self-insure, he says. But it’s not the case with smaller businesses.

“Many employers may be sending up the white flag,” Wiens says. “Instead of spending $8,000-plus a year per employee, they’ll give them an equivalent increase in compensation and let them buy their own health insurance through the exchange. Some studies show that there won’t be a huge shift, but we see it more often than not among our clients.”

Smart Business spoke to Wiens about the Affordable Care Act (ACA) provisions and how businesses are responding.

Why do you anticipate many people will buy insurance from the exchange?

Many small to midsize companies are waiting and watching — they don’t want to be the first to go to the exchange, but they’re not going to be last either. Once one or two companies in the same industry go to the exchange, the others will follow suit. This will only accelerate now that the employer mandate has been delayed a year. Essentially, it means businesses can drop coverage and send employees to the exchange without facing a penalty. This is more likely in industries that do not require a professional level workforce or for which current levels of available qualified candidates to fill open positions are hard to find.

Insurance companies clearly expect more people to flock to the exchange because they’re purchasing providers. United Healthcare through its affiliate, Optum Heathcare, and Humana recently acquired large medical groups in the California market, as well as others around the nation. If groups opt to go into the exchange, their commercial insurance business shrinks and insurance profits drop dramatically. They want to offset the loss by having more control over physicians and other providers, with closed networks similar to Kaiser Permanente. This consolidation will likely lead to access-to-care problems later for those not covered by commercial insurance, employer-sponsored plans or Medicare.

Will the exchanges be ready by 2014?

In 1982, California counties responsible for indigent care established the County Medical Services Program. They basically set up their own HMOs, and the program struggled mightily at first. Today most are well-run organizations.

It will be the same with the health care exchanges. After a few years, the exchanges likely will learn how to operate and more effectively administer the insurance products offered. They’ll probably have to reduce the number of coverage options to be efficient.

Over time a switch to a single-payer system is likely. Approximately 20 percent of the cost of health care is because we don’t have one system, one way to pay a claim. The lack of centralized control drives up costs. However, a single-payer system also adds costs by taking competition out of the insurance market. Still, pure economics dictate a shift to a single-payer system eventually, especially with a slow economy.

Will the exchanges lower health care costs?

They may bend the cost curve, but they won’t reduce costs. If you look at health care spending, the freight train coming at us isn’t the uninsured; it’s our aging population.
Regulation and market forces drive the health care market, and right now market forces are moving faster. But the ACA is here to stay, and the market will adjust to it. The smartest thing the government can do is outsource the work of the exchanges, like it does with Medicare, one of the smaller federal government departments. Medicare outsources most claims processing and auditing to private industry. If they approach the exchanges in the same way — set the ground rules for how health plans play, and let the private sector participate — over time they’ll figure out how to make this work.

DeVon Wiens is a partner, Health Care Practice, at Moss Adams LLP. Reach him at [email protected]

Insights Accounting is brought to you by Moss Adams LLP

How to understand tax implications of doing business overseas

Richard J. Nelson, CPA, director, Tax Strategies, Kreischer Miller

Richard J. Nelson, CPA, director, Tax Strategies, Kreischer Miller

It used to be that only very large companies were doing business overseas. As more small and midsize companies enter the international marketplace, they must learn how to navigate tax laws related to conducting business in foreign countries.

“These tax laws are often broad and complex, and companies need to know how to minimize their combined taxes,” says Richard J. Nelson, CPA, director of Tax Strategies at Kreischer Miller.

Smart Business spoke with Nelson about what companies need to consider and how to manage the tax implications of doing business overseas.

What do companies need to consider in terms of taxes related to international business?

The first, and most important, decision is what to do regarding profits and cash from overseas operations. Are you planning to bring profits back to the United States right away or will you seek a deferral strategy that will leave cash and profits overseas for the time being? The answer to that question determines how overseas operations are structured.

A deferral structure is preferable when you want to keep profits offshore for a significant time and the foreign tax rate is lower than the U.S. tax rate. In order to defer U.S. tax, the foreign entity must be treated as a corporation for U.S. tax purposes. The goal is to move as much income as possible to this entity, and to defer U.S. tax until earnings are brought back here.

What problems do companies encounter with the deferral strategy?

Some pitfalls include matching of foreign tax credits, Subpart F rules and transfer pricing rules.

Proper planning is needed to ensure foreign taxes paid are credited to offset U.S. taxes. Subpart F rules, if applicable, make foreign profits taxable in the U.S., even if the earnings are not repatriated. Poor planning in these two areas could result in paying a higher overall effective tax rate on the same income.

Transfer pricing rules are designed to ensure that the transfer of goods from the U.S. company to the foreign company are priced fairly so the U.S. collects its fair share of taxes on the profit. If the Internal Revenue Service challenges your pricing, you could face significant penalties.

Does a non-deferral strategy pose pitfalls as well?

In a non-deferral strategy, the tax implications are not nearly as complicated. Generally, the foreign company is established as a ‘pass through’ entity, or you can check a box to have it treated as a disregarded entity or pass through entity. With this structure, the U.S. taxes the income of the foreign corporation and foreign tax credits are available to offset any U.S. tax on current profits. There are no additional U.S. taxes when the money is repatriated.

Under this scenario, you don’t need to be concerned about transfer pricing rules, at least from a U.S. perspective, or Subpart F rules. This structure provides the most flexibility and is well suited to U.S. companies that are S corporations with overseas operations.

Are there tax incentives for a U.S. company doing business overseas?

If you are selling products overseas that are manufactured in the U.S., you may be able to take advantage of an Interest-Charge Domestic International Sales Corporation (IC-DISC). You set up a separate corporation that makes an IC-DISC election and is, by law, exempt from federal income tax. A commission agreement is entered into between the related exporter and the IC-DISC. The related exporter pays the commission to the IC-DISC, which gets a 35 percent tax deduction. The IC-DISC then pays the commission to its shareholders, who are individuals, as a qualified dividend, which is taxed at 20 percent. The overall savings is 15 percent.

Can companies manage the various tax scenarios internally?

Because of the many complexities involved in doing business internationally, there is a lot of expertise required in planning a strategy to minimize the company’s overall effective tax rate. Seeking competent advice is crucial to avoid the many pitfalls that you may encounter when venturing overseas.

Richard J. Nelson, CPA, is a director, Tax Strategies, at Kreischer Miller. Reach him at (215) 441-4600 or [email protected]

Learn more about tax strategies.

Insights Accounting & Consulting is brought to you by Kreischer Miller

How a new Missouri law provides incentives to self-insure with captives

Alan J. Fine, CPA, JD, member in charge, Captive Insurance Advisory Services, Brown Smith Wallace

Alan J. Fine, CPA, JD, member in charge, Captive Insurance Advisory Services, Brown Smith Wallace

William M. Goddard, CPCU, principal, Captive Insurance Advisory Services, Brown Smith Wallace

William M. Goddard, CPCU, principal, Captive Insurance Advisory Services, Brown Smith Wallace

Missouri Senate Bill 287, which becomes effective Aug. 28, puts the state on equal footing with others that have been popular domiciles for captive insurance companies.

“It changes certain capital requirements for pre-existing types of captives, as well as provides additional flexibility by allowing segregated cells, also known as shared captives or rent-a-captives,” says Alan J. Fine, CPA, JD, member in charge, Captive Insurance Advisory Services practice at Brown Smith Wallace.

Smart Business spoke with Fine and William M. Goddard, CPCU, principal, Captive Insurance Advisory Services practice at Brown Smith Wallace, about the new law and why companies should consider captive programs to address insurance needs.

Is a captive program the same as self-insurance?

It’s a formalized program for self-insurance. Captives generally provide incentive to the insured — the captive owner — to pay more attention to safety and other matters that improve the results.

Captives can be used with health insurance as well as property and casualty. Companies should consider captives if their risk profile is such that they’re a better risk than others in their industry. When you’re in the commercial marketplace, companies with good risk profiles are used to fund risks of those that are not so good. There’s also a built-in profit for the insurance company, so self-insuring through a captive allows you to keep those profits.

What are the benefits of captives?

In addition to savings, which can be $200,000 to $400,000 annually for most midsize captives, you may be able to get types of coverage that are not available in the commercial marketplace. If structured properly, there also are potential tax benefits.

What does the new law change?

It allows for new types of captives. Prior law allowed companies to start a captive for their own company, known as a single-parent captive. You put up the capital, you are responsible for the audit and you reap all of the benefits.

The new law adds the option of going with the concept known as shared captive, rent-a-captive or sponsored captive. Generally speaking, someone else puts the captive together and you own a piece. There are certain efficiencies created with sponsored captives. For example, you have regulatory filings due quarterly and annually. With 10 standalone captives, they would each file separately with the Department of Insurance and be audited independently. The sponsored captive concept allows those 10 to band together for efficiency, while still providing the same asset protection of having your own captive.

The bill’s passage also affirms Missouri’s continued commitment to the captive industry.

Will more companies form captives?

There are more than 6,000 captives worldwide, so those companies have figured out that this can be a good alternative to the traditional insurance market. You can save money on insurance, obtain coverage that’s not available elsewhere and formalize your self-insurance program.

Health care had not been a big subject for captives; however, companies looking to save money on health insurance are now throwing captives into the mix of things they are considering. Companies have been insuring workers’ compensation in captives for years, but with medical insurance it takes some innovative thinking to figure the best advantage to you in forming a captive. You need someone that understands health care, as well as a tax expert to understand regulations from the tax perspective because health care reform is really a tax law.

When it comes to captives, it’s not always readily apparent how they can be utilized. Answers are not easy to determine, and no two situations are alike. You have to examine your individual case and analyze how a captive could benefit you. Fortune 500 companies have studied captives; companies that fall below that — middle market to small companies — have few advisers out there spending time to educate them about potential benefits.

If you have a good risk profile, are profitable and have good cash flow, it is worth exploring the available options.

Alan J. Fine, CPA, JD, is a member in charge, Captive Insurance Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1292 or [email protected]

William M. Goddard, CPCU, is a principal, Captive Insurance Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1253 or [email protected]

To learn about the benefits of starting a captive insurance company, watch our video at

Insights Accounting is brought to you by Brown Smith Wallace

Paul Hammes – Five tips for a successful divestment strategy

Paul Hammes, Divestiture Advisory Services Leader for Transaction Advisory Services, EY

Paul Hammes, Divestiture Advisory Services Leader for Transaction Advisory Services, EY

Companies taking a “wait-and-see” approach to deal-making as economic uncertainty persists may be missing out on growth and value opportunities.

Many companies have looked to divestments to offset cash and credit challenges and to free up capital to drive growth. But this short-term thinking is shifting as companies plan for the long term and take a more strategic approach to divesting.

In a recent EY divestment study that surveyed almost 600 executives, 77 percent said they planned to accelerate divestments within the next two years, and 46 percent are planning to divest in the same time frame. As companies signal an increased appetite for divestitures, it’s important they understand and implement the appropriate steps to achieve greater value for shareholders.

Evidence from our study, combined with our work with clients, has shown that there are five leading practices that companies should follow in order to execute a successful divestment:

Conduct rigorous and regular portfolio management

Review your portfolio regularly. Companies can assess whether assets are contributing to strategic goals or if capital can be better used for other purposes.

Companies that use divestments as a strategic tool to enhance shareholder value or focus on core business strategies, rather than considering them as a reactive move to free up cash or pay down debt, tend to improve their divestment results.

Consider the full range of potential buyers

There is an intense amount of competition from buyers today for good, high-quality assets and they’re ready to transact. Appealing to a broad group of buyers can garner a price that exceeds expectations.

Companies should think about the buyer universe for a potential asset sale differently than they might have in the past, considering potential foreign buyers, buyers within different sectors and private equity firms. Each buyer may have different information needs that require a different planning process.

Articulate a compelling value and growth story

Sellers should provide tailored information about how an asset fits with the buyer’s business to help achieve strategic objectives. Develop an M&A plan for the asset or provide a view of synergy opportunities to buyers.

Prepare rigorously

Effective ongoing preparation can instill buyer confidence. As a result, companies can better control the process and realize greater speed and value. Half of the executives surveyed admit that certain changes to the preparation process could have made a significant difference during divestment.

Understand the importance of separation planning

Probably the most crucial aspect of a divestment is separation planning, yet 56 percent of respondents identified a clear separation road map as the most complex part of the divestment.

Other separation challenges include decisions regarding the completion mechanism, tax planning, estimating stand-alone costs and negotiating transition services agreements.

Every day a company waits to evaluate its capital strategy, someone else is making a change and gaining an advantage.

In heeding these five key practices, companies can take a more strategic and ultimately successful approach to divestments to ensure they get the most value possible and grow the bottom line.

Paul Hammes is the Divestiture Advisory Services Leader for Transaction Advisory Services at EY. Reach him at

How enterprise risk management can impact a company’s value

John T. Alfonsi, Managing Director, Cendrowski Corporate Advisors LLC

John T. Alfonsi, Managing Director, Cendrowski Corporate Advisors LLC

Business operations are subject to a number of internal and external risks, as are ownership interests in businesses. How organizations and their owners address these risks can have a significant impact on the value of businesses and interests therein.

“An enterprise risk management process involves identifying risks relative to an organization’s objectives, assessing them for likelihood and impact, developing a response strategy and monitoring progress,” says John T. Alfonsi, managing director at Cendrowski Corporate Advisors.

A well-defined enterprise management process (ERM) framework can protect and create value for organizations and their owners, he says.

Smart Business spoke with Alfonsi about ERM to better understand its applications.

Where is risk addressed in a business valuation?

The most common method of valuing a business is the ‘income approach,’ which requires a valuation analyst to project a business’s future cash flows, then calculate the present value of the sum of these cash flows by employing an appropriate discount rate. The valuation analyst must address risk in two primary areas: projected future cash flows and the discount rate. Effective ERM processes can help businesses increase value by affecting the estimates for these quantities.

How does risk impact projected cash flow?

There exists a risk that an organization will not achieve its projected figures. As such, the process by which management projects future cash flows can impact a valuation analyst’s assessment of the business. A key risk in the process is information integrity, the quality of information generated through monitoring and data assimilation.

Information integrity allows management to make well-informed decisions and should provide a valuation analyst with greater confidence in a business’s projections.

Valuation analysts can analyze information integrity by examining historical projections and assessing elements of the internal control environment.

A valuation analyst also should examine the variance between historical projections and a business’s actual performance. If a strong correlation exists, a valuation analyst can be highly confident in current projections, if the process employed by the organization remains constant. If not, the analyst must examine the variance between the past projections and actual performance to discern whether bias existed in past estimates and current projections.

What about risks in the discount rate?

The discount rate is the yield necessary to attract capital to a particular investment, given the risks associated with that investment. A project with relatively high risk will require a relatively high yield to compensate an investor for bearing these risks.

In determining the discount rate, there are two sources of risk that need to be quantified: systematic and unsystematic.

Systematic risk is the risk one must bear for taking on a risky investment in the market. However, systematic risk is estimated by calculating the return to public equities due to availability of data. The ERM process has little impact on systematic risks unless the business’s performance is heavily tied to market performance.

Unsystematic risk is sometimes broken down into two components, industry risk and company-specific risk. Industry risk reflects the risks identified with the industry in which a business operates. Company-specific risks encompass all other risks, including size, depth of management, geography of operations, customer and/or vendor concentration, competition and financial health.

How can ERM processes mitigate company-specific risks and increase value?

An ERM process should quickly gather and assimilate high-quality information for use in the organization’s decision-making process, allowing the organization to rapidly assess the impact and likelihood of risks associated with changes in its internal and external environments. Early assessment and mitigation can help preserve value and capitalize on risky events when competitors do not react as swiftly to environmental changes

John T. Alfonsi is managing director at Cendrowski Corporate Advisors. Reach him at (866) 717-1607 or [email protected]

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

How to successfully set up performance-based compensation

Brian Berning, managing director, Cincinnati, SS&G

Brian Berning, managing director, Cincinnati, SS&G

Performance-based compensation is the variable component of total compensation that may be paid to an individual, team or even companywide upon achieving some defined performance metric. For instance, when a salesperson is paid a commission for achieving a sales target, or an annual bonus is distributed after meeting a companywide goal.

“You need some form of performance-based compensation to keep top performers motivated and happy,” says Brian Berning, managing director at SS&G’s Cincinnati office. “They want to believe that they can make as much as they possibly can if they are able to achieve goals. And with a variable component, there’s rarely a ceiling on it.”

Smart Business spoke with Berning about using incentives to benefit both the employee and the company.

How do companies typically pick incentives for performance-based compensation plans?

It’s largely based on defining goals and setting performance benchmarks around them, which can be for an individual, team, companywide or any combination of the three. It’s important to understand that without consequences, positive and negative, it’s not a goal — it’s a wish. The best companies develop incentives with clear, objective and measurable goals, stating exactly how to successfully get to the target.

You also want to target the right people. A shop foreman of a manufacturing company can influence on-time delivery but shouldn’t be tied to goals for meeting sales initiatives.

Which incentives can be problematic?

Those that are difficult to explain, to measure or achieve are prime for failure. Remember you’re trying to reward results that are largely influenced by behaviors in connection with the company’s goals. So, if the incentive is tied to a behavior that the responsible party has no control over, or the performance measurement isn’t in alignment with meeting the desired goals, it simply won’t work. Employees must be able to understand it, measure it and achieve it.

Why is it important to avoid rushing in?

Look at various scenarios and test to make sure that they mathematically work — that they’re achieving your desired goals. There’s nothing more embarrassing than implementing a performance-based incentive structure that doesn’t work.

On a commission-based structure, for example, be careful when trying to reward certain behavior. If you sell two products, product A and product B, and you want to encourage additional product B sales, you may increase B’s commission. But if everyone is focused on selling product B, there could be a loss of sales in product A. It’s better to use minor awards or only change the commission structure minimally, enough to keep people conscious of it, but not enough for them to ignore product A.

So, talk to your staff and others, and make sure the plan is designed properly.

How can awarding equity in a private company be problematic?

There seems to be two situations that prompt a company to look at a plan like this.

1. Senior management thinks that by giving employees ownership, it is going to motivate results. But by giving stock, you haven’t tied that to goals. The award isn’t instantaneous; employees don’t have more cash. As an owner, how is an employee going to behave any differently?

2. The business uses this as a tool to recruit talent when cash flow is tight. It may work, but it can have consequences later if it doesn’t work out with that employee.
There are other options that look and feel like equity, such as contractual arrangements that don’t necessarily result in the award of true stock or units in a partnership.

What should management be doing to measure, review and adjust these plans?

Measure it frequently and pay promptly. Otherwise, people will lose interest in it.

When reviewing or adjusting the plan, that should be far less frequent. If you’re continuously tweaking your plan, you’re going to create confusion. If there’s some anomaly, fix it immediately, but if you’re making wholesale changes right away, you made a mistake and didn’t do your due diligence. A well-defined performance-based compensation plan provides employees with an upside they feel they can achieve that ultimately helps the company.

Brian Berning is managing director at the Cincinnati office of SS&G. Reach him at (513) 587-3270 or [email protected]

Website: SS&G was named a top workplace in Northeast Ohio.

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