The Changing Economics of Employment

This year will be remembered as the year the economics of employment changed greatly; and the following year will be the year the impact of these changes will be absorbed by businesses.  New regulations cover areas such as minimum wage, employment practices, overtime, background checks, and employee classification, i.e. independent contractor vs. employee.

With any regulation change there are three separate cost levels – cost of review – every entity assumes the cost of reviewing the requirements to understand if they apply to their situation; cost of planning – If the regulation applies, costs include developing an approach to implement, communicating the approach, and if required, training; and finally, cost of implementation – the actual financial impact of the change, which varies based on your organization.  New regulations are expensive.

To add to the complexity, labor laws are predominantly established at the state level.  If your entity transacts business in three states, three sets of rules will need to be considered.

For most organizations, employment costs are the greatest component of total expenses.  Unlike other inputs in the production process – salaries increase annually, but never decrease; when prices rise you cannot quickly reduce use of the resource or purchase the resource from an alternate provider; you pay for the resource, even if you do not fully utilize it; and unlike other inputs, emotion can play a part, i.e.  morale can be a great motivator or great hindrance to the entity.

Focusing specifically on the minimum wage.  A great number of states have increased the minimum wage, but not just for this year.  Several states have a schedule of increases, over time.  To put numbers around it, a $1 increase per hour equates to approximately $2,000 per year in increased employment costs per employee, i.e. $1 * (35 hours * 52 weeks) = $1,820.  The balance will come from employer paid taxes.  For a business that is people intensive, the added costs can be great.

“…the company’s program to raise hourly wages accounted for 75% of the lowered earnings target. He said the company expected to spend an additional $1.2 billion on wages this fiscal year and another $1.5 billion in fiscal 2017.”  (Wall Street Journal, 10.14.2015, Wal-Mart Lowers Sales, Earnings Outlook)

In the long-run, these additional employee expenses should benefit the entity through increased productivity.  A well-paid and well-trained employee works more efficiently, stays on the job longer, and provides better customer service, i.e. is more productive.  At the company level, when productivity improves, fewer resources are being used to produce the output.  Fewer resources equates to lower production costs, which translates to excess funds in the form of profits, for reinvestment into the business or distribution to investors.

However, in the short-run costs will be incurred prior to experiencing the benefits.

So when you raise wage, where does the money come from?  Options to pay the increased wage to your employees are as follows –

  1. Increase the price of your product/service and maintain your profit margin – if your industry is highly competitive, clients may not wish to pay the increased price and leave you to go to a cheaper alternative;
  2. Reduce the reward to investors, partners, owners through reduced dividends; or,
  3. Decrease the average annual raise to higher paid employees – this approach may work in the short-run, but until you can correct the issue, every employee that did not receive a fair increase that is representative of their contribution is a flight risk.

More than likely the increased expense will be absorbed through a combination of the strategies.

Now may be the time to examine your staffing to ensure that it is at the proper level –

Do you have more staff than you need to achieve your business goals?  More importantly, are you receiving the value from these employees that match or exceed the compensation you pay?   Do you still need the contract, temporary or part-time employees (if applicable)?

When costs increase, we are forced to address issues that may have been overlooked previously.

Finally, if your entity does not have any employees that are paid minimum wage, you may not be directly impacted by this change.  However, you will be impacted indirectly.  If your vendor’s costs increase due to these changes, they will attempt to pass the additional expense to your entity.

As such, once you complete your employee review, you may wish to also review your vendor spend.

Editor’s Note: Regis Quirin is a financial executive and author with 23 years of corporate experience.  In addition to writing articles for a few publications, in 2014, Regis published the book “Redesign to Turnaround Underperforming Small and Medium-Sized Businesses.”

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Pay versus Performance – A Comment Letter to the SEC

Following is a letter that was forwarded to the Securities and Exchange Commission, in response to a request for comment, regarding the Pay vs. Performance proposal.

June 24, 2015

 

Mr. Brent J. Fields

Secretary

U.S. Securities and Exchange Commission

100 F. Street, N.E.

Washington, D.C. 20549-1090

RE: File No. S7-07-15

Release No. 34-74835- Pay for Performance (the “Proposing Release”)

Dear Mr. Fields:

Thank you for allowing me to comment on this proposal.  Overall I agree with the desire for greater transparency into the compensation vs. performance relationship.  The values identified to be used to demonstrate the relationship, would serve this purpose.  However, I am not in favor of the reporting flexibility for registrants, being considered.  I do not believe the flexibility will improve the data.  Instead the flexibility may create confusion and make it very difficult to compare registrant-to-registrant information by interested parties.  The flexibility also leaves room for the potential to unintentionally mislead.

When reviewing data (financial and statistical) there are several key elements that are required to provide confidence in the conclusions.  This situation is even more pronounced when you are comparing and contrasting the results across registrants – Is the definition of the data being reviewed consistent, for every registrant?  If I chose not to act today, when I review the information in a year or two, will the original definitions I used, be valid?  Is the data disclosed by the registrants trended over a consistent time period?

My overall recommendation is that every registrant should be asked to provide the same base information, in the same format, for the same time period.  Flexibility will be limited to a page or two of explanatory notes, subsequent to the tables.  I do not believe that these requirements create a burden in any way, as I would guess/hope that organizations perform a similar analysis currently when determining compensation levels.

Disclosure (Request for Comment #1 and #3) – Executive compensation and Financial Performance information should be included in all materials/filings that discuss compensation, including information to be distributed prior to an annual meeting or special meeting or written consent in lieu of a meeting.  There are multiple filings that a company may make to the Securities and Exchange Commission.  While an analyst may read several filing types, a shareholder or potential shareholder will most likely only read materials assembled for the purpose of the annual meeting.

Compensation Disclosure (#5, #22 and #24) – Executive compensation [as defined in (Item 402(c) of Regulation S-K [17 CFR 229.402(c)] assumes the completion of a Summary Compensation Table.  The table considers the multiple forms of compensation and should be required, with the values for each compensation component provided.  Interested parties can then see for example, what part of compensation is salary vs. bonus vs. equity….  Compensation information should be provided on an accrual basis, i.e. bonus paid in January for the prior year should be attributed to the proper year, to ensure executive compensation more closely tracks Total Shareholder Return.

Tabular Presentation (#6 and #12) – Reporting components should be defined and required, for both the Summary Compensation Table; and the Pay versus Performance table (page 19 of proposal).  The actual value of the components should be provided, not just summary or ratio information.

Graphic Presentation (#7) – A Line Graph should be included which shows for the five years under review the level of Total Shareholder Return (TSR).  Underneath the TSR line (broken vertical axis), would be a line to show the executive compensation, as a group.  You should expect to see the executive compensation line track closely with the Financial Performance.  The vertical axis can be broken again to show the median of annual total compensation (as defined by Section 953(b) of the Dodd-Frank Act), trended over five years, in relation to the annual total compensation of the CEO. In a perfect world, inclines, declines, and slopes will be similar.

Additional Information (#9) – Executives by nature will debate a financial calculation/statistic they feel does not positively represent their efforts, i.e. “But you can’t look at it that way.”  The difficult part is distinguishing the validity of that statement, i.e. perceived difference vs. actual difference.  As such, registrants must be allowed to append qualitative information to the quantitative data.  In a subsequent page, management can give an explanation of the information presented, i.e. why it is an accurate portrayal or not.  However, the goal is to have every registrant start from the same perspective, i.e. a level playing field.

Financial Performance (#34, #35 and #38) – Many ratios/statistics can be used to validate performance, which may include Total Shareholder Return, Free Cash Flow, Return on Investment, Shareholder Value Added…  Each statistic has its strengths and its weaknesses.  A claim that the statistic increases short-term approaches can be made for any measure that is used to gauge success.  Based on human nature, when a statistic is reported, managers will attempt to maximize the value.

Peer Group (#40 and #41) – The same peer group used for purposes of Item 201(e) or the Compensation Discussion and Analysis should be used.  A note should be included by the registrant that advises the interested party as to the components of the peer group.  If the registrant desires to make a change, the change must be made for both uses to ensure consistency.  However, if a decision is made to change the peer group, the data must be changed for all five years displayed.  This provision will avoid multiple peer groups in one filing.

Reporting Period (#42, #44 and #46) – All information should be provided for the most recent completed five fiscal years, without aggregation, consistently required by all registrants.  The time period is sufficient.  Additional years should not be allowed in the data page or in the subsequent notes.

In summary, there is a very real danger that the flexibility provided to registrants, which is being considered, will make the implementation of the Pay vs. Performance provisions confusing to investors.   In essence, if the rule was developed to assist investors, consistency, transparency and the ability to evaluate registrants is critical.

My recommendation is that every registrant should be asked to provide the same base information, in the same format, for the same period.  Flexibility will be limited to a page or two of explanatory footnotes.  I do not believe that these requirements create a burden in any way.

Please feel free to contact me if there are any questions with my recommendations.

 

Sincerely,

Regis Quirin

 

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

2014 Concerns to the CFO

The concern of all senior finance professionals in 2014 will continue to be the proper management of cash flow in an environment of shrinking margins and soft demand.  To foster revenues, companies will need to improve responsiveness and meet customer expectations through innovation.   Productivity advancements will come from the implementation of new technology.  To contain costs, the focus will include overall spending; technology spending; and the efficient use of marketing.   All of these actions are internal in nature, i.e. the CFO will be able to exert some amount of control.

However there are three very specific issues in 2014, which will consume the thoughts of CFO’s as they potentially have a direct impact on the cost structure of the business model.  All of these activities are external in nature.  The CFO will have little control, but will be responsible for integrating change within the organization.

Data Security – Gregg Steinhafel Chairman, President and CEO, Target announced on December 19, 2013 – “We wanted to make you aware of unauthorized access to Target payment card data. The unauthorized access may impact guests who made credit or debit card purchases in our U.S. stores from Nov. 27 to Dec. 15, 2013.”  As a result of the breach, up to 40 million credit- and debit-card accounts may be compromised.  The true impact of the theft to consumers will not be known for some time; but the impact to Target will be immediate and may include a loss of confidence by its consumers with a corresponding decline in business.  It will be important to watch this situation unfold to understand what Target does correctly vs. what Target does incorrectly.  What regulatory actions will evolve out of this issue?

Tax – On January 1, 2014, the IRS’s new requirements regarding when taxpayers capitalize vs. expense for acquiring, maintaining, repairing and replacing tangible property becomes effective (T.D. 9636).  The exact impact to your organization is based on your business model.  The regulation is complex and should be reviewed early on to maximize the benefit to your organization.

With respect to state tax, twenty-three states have either expanded or proposed sales tax nexus expansion laws, i.e. click-through nexus for internet sales.  A firm without physical presence within a state, but sells goods and services, may be required to pay sales tax to the state.  This trend is expected to continue to evolve.  Check with the tax body in the states where you operate to understand if you will be newly impacted.

Compensation – Various unrelated actions are occurring in the compensation space, which will result in this area as a main focal point in 2014 –

  • CEO Compensation Ratio – On October 1, 2013, the SEC Pay Ratio Disclosure proposal was published in the Federal Register for a 60 day comment period.  “As required by the Dodd-Frank Act, the proposal would amend existing executive compensation disclosure rules to require companies to disclose: the median of the annual total compensation of all its employees except the CEO; the annual total compensation of its CEO; and the ratio of the two amounts.  [SEC Proposes Rules for Pay Ratio Disclosure, Press Release 2013-186] From October 1 through December 2nd – 493 comments were received.  Expect the SEC to publish its analysis during 1Q2014 with a final rule published soon after.
  •  Minimum Wage Changes – Thirteen states will have minimum wage increases effective January 1, 2014 – Arizona;  Colorado; Connecticut; Florida; Missouri; Montana; New Jersey; New York; Ohio; Oregon; Rhode Island; Vermont; and Washington.  The smallest increase is $0.10/hour; with the largest increase $1.00/hour.
  • Cost of Healthcare Benefits – The cost of health insurance is evolving and should be closely watched.

The success of your business is directly related to your ability to execute on your plans, i.e. internal factors where you have some control.  However, it is important to understand external actions that may impact your business in the future, to allow for their future integration, if required.

What issues are of concern to you?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

What do you do with a whistleblower that is not satisfied?

As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Whistleblower program within the Securities and Exchange Commission was launched August 2011. Since that time, 3,335 complaints were received, from which four rewards have been granted, i.e. one Aug 21, 2012 and three June 12, 2013.

But the SEC is not the only program – In March 1867 the Treasury began a form of a Whistleblower Tax program.  The IRS program was modified in December 2006 as a result of the Tax Relief and Health Care Act. From 2006 through 2012, 40,110 cases were received, with 1,077 awards paid.

What is of concern is that even though people are reporting issues to the respective regulatory bodies, the conversion from claim to outcome is very low, i.e. 0.1% for SEC and 3% for IRS.  The low SEC rate is most likely attributed to the newness of the program.  So when the SEC program reaches the seven year mark of the IRS program under review, will the claim rate reach 3%?

Now as more and more companies launch whistleblower programs internally they should tread lightly and consider how they will address issues raised.  If a process is established to address a legal or ethical issue raised by an employee, and the process fails, dis-satisfaction will be created. As such, creating an internal program where companies can identify issues and resolve them, prior to them becoming public brand blemishes, may backfire.  When a company does not act on information provided, the whistleblower may become unhappy and seek resolution outside the organization in a public forum.

“Markopolos began contacting the SEC at the beginning of the decade to warn that Madoff was a fraud. He sent detailed memos, listing dozens of red flags, laying out a road map of instructions for SEC investigators to follow, even listing contacts and phone numbers of Wall Street experts whom he said would confirm his findings. But, Markopolos’ whistle-blowing effort got nowhere.” (Madoff whistleblower blasts SEC by By Allan Chernoff, Sr. Correspondent, CNN 02.04.2009 CNN Money)

“Interviews with university officials, former players and members of the board, as well as reviews of internal documents and legal records, show that when the most senior Rutgers officials were confronted with explicit details about Mr. Rice’s behavior toward his players and his staff, they ignored them or issued relatively light penalties.” (Rutgers Officials Long Knew of Coach’s Actions by Steve Eder 04.16.2013 New York Times)

The SEC and Rutgers will be attempting to repair their respective images for some time.

While not every report of unethical or illegal activity will be valid, every claim should be treated the same way, until the results of a qualified investigation are finalized.  When training employees on the existence of a program, where they may freely lodge complaints without fear of retaliation, let them know that there is an established process that will be followed to investigate each and every claim.

Prior to embarking on establishing an internal Whistleblower Program, engage a Labor Attorney.  Understand the Federal Laws, as well as the laws within the states you operate.  Note – the Department of Labor has their own Whistleblower program.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Patient Protection and Affordable Care Act “ObamaCare” Constitutionality

The Patient Protection and Affordable Care Act was signed into law March 23, 2010, by President Obama.  It is an extensive piece of legislation that will greatly alter the economics of healthcare.  The law impacts the four major industry constituents – providers of healthcare, providers of healthcare insurance, employers offering healthcare benefits and users of healthcare.

In March 2012, the Congressional Budget Office and the Joint Commission on Taxation estimated that the insurance coverage provision will have a net cost of about $1.1 trillion for the 2012 – 2021 period.  Excluding unauthorized immigrants, the insured share of the nonelderly population is projected to increase from 82% in 2012 to 93% in 2021.

Specifically for businesses, by 2014 – “Employers with more than 200 employees must automatically enroll new full-time employees in coverage.  Any employer with more than 50 full-time employees that does not offer coverage and has at least one full-time employee receiving the premium assistance tax credit will make a payment of $750 per full-time employee.”  (Summary Link – http://dpc.senate.gov/healthreformbill/healthbill04.pdf )

But, the future of this legislation is in question, in its current form.  Lawsuits have been brought by 27 states, questioning the constitutionality of some of the provisions of the law.  The Supreme Court of the United States heard three days of oral arguments at the end of May and is now deliberating.  A late June decision is expected.

At the heart of the issue are two elements, i.e. the “individual mandate” provision which requires all citizens to maintain health insurance by 2014 or be assessed a penalty on their tax returns; and the expansion of Medicaid which impacts states, that help fund the program.

So what is the likelihood that the Supreme Court declares aspects of the law unconstitutional?  It is hard to predict.  But if you are wondering how many times the Supreme Court has overturned Congress in the past, according to the General Printing Office database, the Supreme Court has declared acts of Congress unconstitutional 158 times in the past 213 years, from 1789 to 2002.

Please look for an update to this post within the next 30 days.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The SEC Whistleblower Program

As part of the Dodd-Frank Act, signed by President Obama on July 21, 2010, the Securities and Exchange Commission (SEC) was required to amend the Securities Exchange Act of 1934, to establish a separate office within the SEC to administer a whistleblower program.  On May 25, 2011, the amendment was finalized.  On August 12, 2011, the Office of the Whistleblower in the Division of Enforcement went live.

Even though we are approaching the first anniversary of the amendment this month, office activity only occurred for nine months.  As required by the Act, the SEC reports the results of the program to Congress annually.  The first full-year of data is expected to be released November 2012 and will include information for Fiscal Year 2012.

In developing the Whistleblower program, the SEC’s intention was that whistleblowers would report their concerns/issues of abuse internally to their company first, prior to SEC external escalation.  As an incentive, the SEC offers a monetary award of 10% to 30% of collected penalties, to whistleblowers if the information provided is original; leads to a successful SEC action; and results in monetary penalties exceeding $1 million.

One can only assume that when internal reporting procedures fail a whistleblower has no recourse but to go external.  Public companies thus have a large incentive to ensure their internal procedures are optimal.  Following are Best Practices in the implementation of an internal company program —

  • Educate staff on proper policies & procedures and their responsibility to report abuses;
  • Establish an environment where whistleblowers can report confidentially and are protected against retaliation;
  • Develop a process for employees to escalate concerns internally to an impartial area responsible to investigate allegations;
  • Track tips reported and the investigations undertaken to prove or disprove the abuse; and,
  • Report program status periodically to the Board of Directors.

What’s your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Audit Transparency – Rating the Raters

On May 1, 2012, the Public Company Accounting Oversight Board (PCAOB) announced changes to its website (www.pcaobus.org) where site visitors can now review certain public information provided by audit firms, which includes registration, annual and special reporting, disciplinary proceedings and inspection reports.

The PCAOB was created in 2002 as a result of the Sarbanes-Oxley Act.  As required by the act, auditors of US public companies are subject to external and independent oversight, by the PCAOB.  The SEC maintains authority over the PCAOB, with respect to rules, standards and budgets.

As of April 25, 2012, there were 2,378 registered firms (foreign and domestic), as well as 42 pending applications.  As of May 7, 2012, information for 1,627 inspection reports was provided, including 118 “QC criticisms now public.”  A quick review of the Big 4 Audit firms showed –

Firm Entity Reports QC Criticisms
Deloitte & Touche 18 1
Ernst & Young 30 0
PriceWaterhouse 32 0
KPMG 35 0

This type of information can only benefit companies/issuers that are looking for a new auditor for their private or public concern.

Please let me know how useful this information was to you, by Commenting.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Complying with State Tax Requirements for Non-Residents, i.e. Nexus

Nexus is the way in which a connection can be established between the state and the taxpayer.  If a nexus exists, the taxpayer may be liable to the state for taxes, regardless if the taxpayer is a non-resident or only works within the state for part of the year.  You would think that the clearest nexus standard is “physical presence”, i.e. work performed within the state.  But treatment varies –

According to the Mobile Workforce Briefing Book by the Council on State Taxation (09.09.2009) –

  • In 25 states, nonresident employees are subject to Withholding Tax on first day they enter the state; vs.
  • In 16 states, nonresident employees are subject to Withholding Tax after reaching a threshold which varies among the 16 states involved.

In the age of the World Wide Web, Consultants can market their services and generate revenue from customers in a state without maintaining a physical presence.  In response, some states are developing the concept of “economic nexus.”

Based on a random review of state tax laws, I found the following citation interesting –

Source income “…Attributable to compensation for services performed in Connecticut or income from a business, trade, profession, or occupation carried on in Connecticut, including income derived directly or indirectly by athletes, entertainers, or  performing artists from closed-circuit and cable television transmissions of irregularly scheduled events if the transmissions are received or exhibited within Connecticut;”

For a Consultant that transacts business in multiple states, a compliance nightmare exists which is burdensome and expensive to manage, i.e. a non-value added expense associated with an administration burden.  Disparate laws established by states are causing nexus confusion –

  • Standards are inconsistent for employees, i.e. personal income tax filings;
  • Standards are inconsistent for employers, i.e. withholding tax administration; and,
  • Penalties for non-compliance may result.

Help may be coming with the passage of H.R. 1864 – “Mobile Workforce State Income Tax Simplification Act of 2011 – Prohibits the wages or other remuneration earned by an employee who performs employment duties in more than one state from being subject to income tax in any state other than: (1) the state of the employee’s residence, and (2) the state within which the employee is present and performing employment duties for more than 30 days during the calendar year.”  (http://thomas.loc.gov/cgi-bin/bdquery/z?d112:HR01864:@@@D&summ2=1&)

However, until this bill becomes law, best practices are few – maintain records of when you performed work for customers, in which state, for how long; and retain all receipts.  When you prepare your personal state taxes, check if tax code thresholds exist, i.e. wage/income, days within state, reciprocal agreements.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Corporate Sustainability – Risk or Opportunity?

Simply stated, Sustainability relates to our impact on the environment, i.e. social responsibility.  Sustainability issues are on the minds of consumers; and continue to be a focus of the government and community groups.  How your company handles these issues could be a source of positive press or reputational risk.

At the end of 2011, Newsweek published its 2011 Green Rankings.  This piece identified, “America’s 15 Greenest Companies” and “America’s 20 Least Green Companies.”  Results can be viewed here – http://goo.gl/We91A.  Additionally, for a third consecutive year sustainability issues are expected to be a topic discussed at 2012 annual meetings (“Leading corporate sustainability issues in the 2012 proxy season” Ernst & Young).

Executive Order 13514, signed by President Obama in October 2009, could be considered a primary catalyst for the evolving Sustainability movement.  Based on this order, federal agencies are required to establish a strategy towards sustainability and make the reduction of greenhouse gas emissions a priority for federal agencies.  This requirement also extends to new contracts established, for goods and services purchased by these agencies.  If you service government agencies today, in your normal course of business, you have probably already felt the impact of this Order.

Are you prepared?  If not, following is an approach to get you started —

Immediate Approach

  • Identify an executive to be responsible for the Sustainability movement within your company;
  • Research your local trade group to understand their position.  If none exists, research the activities of your closest competitors in the area of Sustainability.
  • Plan to match the standard set.  Activities advocated by a trade group can become the minimum acceptable level, within the industry.  If a trade group does not exist, consider matching the actions of your most similar competitor, if it makes sense.  But doing nothing creates risk.

Long-Term Approach

  • Perform a Sustainability assessment to understand the applicability of Sustainability on your business;
  • Define the problem and develop a plan which may include re-engineering current products and processes;
  • Educate managers and employees on the company’s approach to sustainability;
  • Track issues within the community, i.e. listening to the concerns of employees, shareholders and community groups;
  • Establish a formal reporting process that provides a status of implementing plans and issues presented; and,
  • Discuss results at senior levels.

The growth in adoption by more and more companies makes the issue of Sustainability an important consideration for your company’s overall strategy and management.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

H.R. 3606, aka the Jumpstart Our Business Startups (JOBS) Act, is Law

The U.S. Senate granted approval March 22nd; while the House of Representatives approved March 27th.  The Act was signed into law by the President on April 5th.  This law creates a category of companies called “emerging growth companies” that stay under the radar of the Securities and Exchange Commission (SEC), for up to five years.  This class of companies includes entities with gross revenues of less than $1 billion in the most recent fiscal year.  Reportedly, this population includes 14% of companies.

The logic – relax rules that limit the ability of small businesses to garner capital, thereby assisting their growth.  As these businesses thrive, hiring increases.

Benefits afforded to emerging growth companies by this law include –

-Exempt from the requirement of separate shareholder approval of executive compensation;

-Need only to provide audited financial statements for two years, as part of their IPO registration;

-Exempts external auditors from attesting to the assessment of internal controls provided by management;

-Exempt from any firm rotation requirement  being considered by the Public Company Accounting Oversight Board;

-Raises the number of investors to 2,000 and investment value to $50 million, prior to SEC registration;

-Eases certain conflict-of-interest restrictions between the analysis and investment banking sides of a firm with respect to offerings; and,

-Exempt from soliciting investment from only sophisticated investors.  Reportedly, this provision will allow companies to seek funds over the internet, i.e. crowdfunding.

But don’t expect any sudden changes on Monday (4/9).  The SEC has 270 days to review the law and revise current regulations.  Items of this law alter elements of the following laws – Securities Act of 1933; Securities Exchange Act of 1934; Investor Protection and Securities Reform Act of 2010 (title IX of the Dodd-Frank Wall Street Reform and Consumer; Sarbanes-Oxley Act of 2002; Reg D; Rule 144A…

Detractors believe that loosening regulations will only lead to abuse and fraud.  According to the final version, the SEC will report to Congress every two years, tracking the incidence of fraud associated with these changes.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The International Financial Reporting Standard (IFRS) is coming. When and how should you prepare?

The adoption of IFRS standards is well underway globally.  PWC has a great map which provides integration details by country (http://www.pwc.com/us/en/issues/ifrs-reporting/country-adoption/index.jhtml).  How these changes will affect your company specifically is not obvious. The impact varies based on business complexity, industry and geographic presence.

Following is a recommended approach on how to integrate the standard within your US Company.  The approach is broken down between pre-approval and post approval –

Pre-Approval, i.e. now

  • Collect available information and analysis from AICPA, SEC, and the Big 4.
  • Determine the appropriate form of IFRS to adopt, based on your company, i.e. IFRS for Small and Medium Size Entities (entities without public accountability) vs. full IFRS.
  • Identify the standards that represent a change in the way you track the financial success of your business, i.e. revenue recognition, expense recognition, assets, liabilities, financial liabilities and equity, derivatives and hedging, Consolidation, business combinations…
  • Choose a team of experts within your company that will integrate the new standard, once approved.

These four activities can be completed internally, with little or no budgetary impact.

Within the US, the SEC reaffirmed its commitment to a global standard, but has yet to establish a timetable.  The plan is expected in the next couple of months.

Post Approval, i.e. 2012

  • Consider potential IFRS integration issues –
    • Data gaps, i.e. new standards may require the tracking of data not previously collected;
    • Entity consolidation not previously required; and,
    • Accounting policy choices.
  • Test the impact of these changes within your company.
  • Develop a project plan and budget, with appropriate deliverable dates.
  • Present the plan to your company Board of Directors to gain approval.
  • Integrate the standards into your business through plan implementation.
  • Issue IFRS 1 – established approach to issuing the first IFRS financial statements for your company.

In conclusion, with the time remaining prior to the SEC accepting the IFRS standard, a CFO should be studying the issue and increasing his/her knowledge base.

How are you preparing?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The Evolution of the Audit Process

By this time, your annual audit is either complete or winding down.  You have documented the auditor’s requests and considered how you could make the process easier next year.  You may have had your exit discussion and are in the process of considering how and when to implement any suggested process improvements.  In year’s past, that was it, until you received your engagement letter next November/December.

But this year may be different.  One change being discussed may alter the process, in the next twelve months –

In August 2011, the Public Company Accounting Oversight Board (http://pcaobus.org) released for comment PCAOB Release No. 2011-006, which proposed an audit FIRM rotation.  PCAOB questions how objective an auditing firm could be if the audit firm and the client have had a long-standing relationship.

As of March 24, 636 letters were received, i.e. some for the proposal and some against.  The comment period will stay open until April 22, 2012.

This proposal represents a more stringent requirement than the one imposed by the Sarbanes-Oxley Act (2002).  As a way to ensure independence and objectivity of audit firms, Sarbox requires senior managing audit PARTNER rotation every five years.

The primary objection, for those that oppose the PCAOB proposal, are that as you shorten the time of engagement, you lose the expected efficiencies and cost savings associated with a long-standing relationship.

According to a study entitled “Audit Partner Rotation: An Analysis of Benefits and Costs” audit partners reported that it required two-to-three years before client familiarity was established.  Based on this research, audit clients only receive the benefits of an established audit relationship for two years, prior to a partner rotation.  At this early stage, Firm Rotation research is spotty.

Even though these actions technically are imposed only on public companies, it would be prudent for a CFO to take note.  Quickly when business methods are adopted and accepted by key stakeholders, they have a way of becoming a “Best Practice,” i.e. a business requirement that is expected, but not legally based.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Rules are Changing

The market turmoil of 2008 changed the business landscape dramatically.  In addition to integrating new rules into the business, today’s CFO, must keep up to date on rules still yet to be implemented.

Following are some of the federal rules affecting Human Resources, Finance, Accounting and Financial Management.  This list is in no way exhaustive.  There may be additional rules specific to your industry or at the state/local level that require your attention.

2012 Regulation Table

Note – it is not unusual for implementation dates to be delayed for various reasons.

It is true, currently, that depending on the size of your company, implementation of these rules may be delayed, if even required at all.  But keeping up to date on the latest regulations can only benefit you and your company.

If these rules must be integrated, my suggested implementation approach is as follows –

  • Review the requirements with your General Counsel;
  • Identify the items that will impact your company;
  • Collect data from your industry affinity organization i.e. how are competitors integrating these rules; and,
  • Develop a plan to implement the rules within your company – implementation, monitoring effectiveness, altering policies & procedures…

Caution – new rules have the immediate impact of increasing your expense base either through new processes, requiring additional headcount and/or training staff on the new requirements.

What has worked for your company?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Bad Debt Strategies

If you extend credit to your customers, which is required for almost all businesses, a certain amount of bad debt will result.  Resolving this bad debt efficiently and quickly, while not disrupting the possibility of future business from the customer takes tact and experience.

Following are a few strategies that will help with this situation:

30 days Past Due

  • Analyze the customer history.  Fully understand the relationship to date.
  • Contact the client, as soon as the bill becomes past due.  Do not leave a voice mail message.  The first call should always be administrative in nature to understand if there are any issues with billing or the service provided, i.e. missing or lost invoice; waiting for approval…  During this call, ask directly when you should expect to receive the past due payment.
  • Send a letter to the client with the agreed upon new terms.

60 days Past DueIf the issue is not resolved, follow-up will be required.

  • Contact the client, as soon as the newly established commitment date lapses.  Do not leave a voice mail message.  This call should be considered the initial Collections Call.  If not discussed in the first call, try to understand the reason for the bad debt, i.e. cash flow problems; default due to being out of business, bankruptcy; or other serious problem.  During this call, ask directly when you should expect to receive the past due payment.
  • Discontinue service until the outstanding debt is satisfied.
  • Send a letter to the client with the agreed upon new terms.

90 days Past Due – If the issue is not resolved, follow-up will be required.

  • Prior to this call the Collections Manager should speak with the responsible Executive to discuss options that include legal actions.
  • Contact the client, as soon as the second established commitment date lapses.  Do not leave a voice mail message.  Try to understand what new situation occurred that justifies the missing of this second day.  Advise the client of the actions you will be taking to try and collect the debt.
  • Send a letter to the client with the agreed upon resolutions discussed.

Every customer interaction should be documented and maintained in the client file, as part of their history.

Bad debt should be tracked via a Scorecard that includes dollars delinquent, for each of the following time periods – 30, 60, 90, 120, 180 days.

Prior to a bad debt situation –

  • Document your collections policy, to ensure the customer experience is consistent.
  • Make sure your credit application and policies are compliant based on state guidelines.  Engaging a Collections Attorney to review your application and approach is a worthwhile expense.
  • Audit your client files to make sure that you have a current credit application, signed by an individual with the authority to enter agreements; as well as the contact information for your customer’s Accounts Payable contact.

Please let me know your experiences.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Employment Status Determines Tax Liability

According to the IRS –

“Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.”

Originally the IRS determined if an individual was an employee or an independent contractor, based on a “Twenty Factor” test.  But in January 2006 the process was simplified.  Factors considered now fall into one of three categories, i.e. behavioral control, financial control, type of relationship.

IRS Test Category Employee (W-2) Independent Contractor (1099)
Behavior Control Location On premises Off premises
Behavior Control Work Time Co determined – standard Contractor determined – non-standard
Behavior Control Staffing Resources Co determined Contractor determined
Behavior Control Direction Provided Direct work process and output Direct work output only
Behavior Control Training Co provided Contractor responsibility
Behavior Control Supplies and Equipment Company provided Contractor provided
Financial Control Business Expenses Generally  Reimbursed Generally Unreimbursed
Financial Control Investment in Process Insignificant Significant
Financial Control Degree of Availability Co is sole customer Multiple Co customers
Financial Control Pay Consistent Not consistent
Financial Control Profit or Loss No p&l outcome p&l outcome
Type of Relationship Contract Describing Relationship What parties call it What parties call it
Type of Relationship Benefits Eligible Yes No
Type of Relationship Degree of Permanence Permanent work Temporary work
Type of Relationship Importance of Services Performed Business critical Non-business critical

If after reviewing the IRS established testing you cannot determine the employment  status, you have the option of completing and filing a form SS-8, requesting an IRS ruling on the status.

As you can see, in some circumstances employees fall clearly in one or the other camp.  However, there can be a very large grey area.

In 2000, the Department of Labor investigated the degree at which mis-classifications occurred.  At that time it was determined that 30% of firms mis-classified employees and independent contractors.

In response, federal and state authorities are beefing up auditing to investigate these situations and levying fines against law breakers.  Please note the federal government’s newly re-introduced H.R. 3178; and California’s newly enacted SB459.

If it is determined that an employee was misclassified, the employing company will be assessed back taxes, penalties, interest, unpaid personal incomes taxes of the misclassified worker, overtime, benefits, leave entitlement, and other rights and protections due to employees.

If your company has any independent contractors, it may make sense to review the arrangements based on the criteria above.

Please let me know your experiences.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.