2014 Regulatory Changes Impact SMEs

Accounting Today lists nine key regulatory changes identified by Paychex that could have a significant impact on Small Mid-Sized Enterprises (SME). 

 Many SME’s hope to fly under the radar when it comes to regulatory compliance issues. With the drive toward greater transparency and governance practices required by regulators and corporate stakeholders, SMEs must adopt better engagement strategies to incorporate regulatory mandates into the enterprise. 

Regulatory compliance initiatives need not be a check the box exercise. SME’s dedicated to a best practices regimen incorporate regulatory compliance initiatives as an opportunity to implement improvements in operational and governance practices. SME’s committed to a culture of continuous improvement use regulatory mandates to integrate requirements into sound practices as central pillars of effective governance, risk, compliance (GRC) program.

Sound practices are a set of standards and controls that mitigate numerous risk factors in the corporate enterprise. Sound practices address corporate governance, operational and market risk factors, regulatory compliance, corporate citizenship, and stakeholder communications within a set of defined expense ratios. Market leading SME’s effectively ascertain emerging regulatory initiatives to optimize operations to enhance competitive position. 

The Paychex list notes the Affordable Healthcare Act, Defence of Marriage Act, Minimum Wage legislation, Immigration and E-Verify, IRS focus on Revenue Recognition, Retirement Programs, Employment Regulations, Privacy Rights and Data Security, Mobile Technology and Bank regulations. These emerging regulatory concerns need to be thoroughly assessed to determine how they can be incorporated into the company’s business model to create a new and improved value proposition for clients, employees and stakeholders.

A STEEPLE analysis is a useful tool to determine how these emerging issues will impact the SME business model. STEEPLE is an acronym for Social, Technological, Economic, Environmental, Political, Legal and Emerging Risk factors confronting the business. A STEEPLE analysis is fully incorporated into Sum2’s S3 app.

Sound practices require that regulatory compliance programs be embraced as a brand building exercise. Corporations that approach compliance by implementing best practice solutions will mitigate reputational and regulatory risk, attract high end clientele, and command premium product margins.

Sum2 believe this to be the case as well. Our clients engage risk as a daily cost of doing business. We design risk management products for small business managers that empower them to lower the odds and consequences of damaging risk events while positioning themselves to be the beneficiaries of opportunities changing market conditions produce. 

Get risk aware and protect your business with the S3 an SME Seismograph, a risk detector and an early warning and opportunity discovery app on Google Play. 

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Risk: regulatory, tax, emerging risk, GRC, S3, STEEPLE, AHCA, Defence of Marriage Act, Card Check, Immigration and E-Verify, Minimum Wage, Accounting Today, IRS, Paychex, STEEPLE

IPCC: No One Is Immune From Effects of Climate Change

The Intergovernmental Panel on Climate Change (IPCC) has issued the 32-volume, 2,610-page report on the changing global climate. The report sounds a clear alarm that global climate change is accelerating and its consequences are having immediate impact on the world’s ecosystems. 

Scientists warn that steps must be taken to mitigate the social impact of climate change and prepare communities to adapt to shifting environmental conditions.

This is the fifth report issued by the IPCC. The first report was published in 1990 with subsequent updates issued every 5 years. The report, prepared by teams of independent scientists noted two immediate consequences of global warming. Michael Oppenheimer, a lead scientist on the commission noted; “the first consequence is rising mortality rates due to heat waves. Last year over 35,000 people died as a result of prolonged heat waves. Another current impact of climate change is declining crop yields. The study reports that occurrences of declining crop yields dramatically rose while occurrences of increase yields steeply declined”.  

Earlier reports of the IPCC advocated for the need to slow the rate of growth of carbon emissions with Cap and Trade market mechanisms. Failing to do so, the world would begin to experience the adverse effects of climate change by the close of this century. Subsequent reports indicated that evidence of climate change was growing and shortened the time frames when the impact of global warming would occur. The report released today indicates that the effects of global climate change are presently occurring and immediate action is required to mitigate the risks and adapt to the inevitable changes in the global environment.

Examples of the effects of climate change cited in the report are numerous. Persistent drought conditions in the Western United States, Australia and Sub Saharan regions and its effect on crop failures, agricultural yields, massive wildfires and water shortages. Accelerated glacial melt in the Himalayas, North America, the Polar Regions and Greenland and its impact on ocean currents, sea rise levels and massive mega storms that are growing in intensity and frequency. The thawing of permafrost soils near the Arctic Circle is releasing massive amounts of methane gas accelerating the greenhouse effect. Deforestation and clear cutting of old growth forests, and the burning of the Amazon and Indonesian flora biomass produce massive carbon emissions into the atmosphere. Paris, Beijing, Mexico City, Dallas Fort Worth and Singapore routinely experience poor air quality conditions due to excessive burning of fossil fuels. 

As the evidence of global climate change proliferates the divisive politics it engenders grows. Climate change deniers seem to represent industry segments tied to the use of fossil fuels. To solve the complex problem of global climate change the diverse interests of competing stakeholders must be moderated by leaders endowed with the political will to address this multifaceted social problem. 

Risk managers representing private industry, government agencies, community planners, disaster response and NGOs must fully engage the threats and opportunities presented by global climate change. Understanding the increasing velocity of this threat, its growing complexity and interconnectedness to other problems, its growing pervasiveness across regions and ecological topographies and how geophysical conditions aggregate multifaceted factors that compound the problem; make mitigation initiatives and adaptive strategies difficult to implement. Risk managers must transcend narrow parochial interests to engineer innovative solutions to these multidimensional social problems. 

Sum2 understands that humans cannot escape the geophysical conditions of our earth bound home. People and communities cannot escape the realities of geophysics. Citizens are called to engage the challenge of global climate change with courage, thought leadership and inspired innovation. 

Get risk aware with Macroeconomic Risk and Event App (MERA) on Google Play; a Mobile Office app that runs on MS Office and Android. MERA helps SME's assess emerging risk factors to mitigate and adapt to the challenges posed by global climate change.

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risk: IPCC, Report on Global Climate Change, agriculture, aquaculture, political stability, water rights, mega storms, greenhouse gases, wildfires, air pollution, smog, deforestation, regulatory, report, climate change

Singapore Sling: Basel III Amps SME Credit Risk

SME lending just got more expensive in Singapore. Basel III capital requirements has increased the risk weighting on SME loans. Banks are now required to set aside more capital to protect against SME loan defaults. This will drive up the cost of capital for SME’s as lenders pass on added costs to borrowers to maintain healthy margins on SME loans; Singapore’s Business Times reports.

SME’s are a critical driver of economic growth in Singapore. Bank loans to the segment grew more than 10% in 2013. At DBS Bank, SME lending produced a $1.8 billion increase in revenue. 

The Government of Singapore has long been friendly to SME's and remains committed to support the segment as a keystone to the economic recovery of this vibrant Asian Tiger. The government has maintained a risk sharing program to guarantee 50% of an SME loan. Due to the increase in the loan loss reserves mandated by Basel III; the government will now increase its risk share to 70%. It is hoped that this will protect the the flow of capital to SME's.  

This regulatory initiative is another example of the compounding macroeconomic risk factors confronting SME’s. Shifts in credit market conditions and healthy functioning credit channels are major risk factors for SME’s. Acute macro risk, forces market players to compete for capital during restrictive business cycles. SME’s must assess macroeconomic risk factors surrounding the capital funding landscape to maintain profitability.

Get risk aware with Macroeconomic Risk and Event App (MERA) on Google Play. Its an Mobile Office app that runs on MS Office and Android. MERA helps SME's  assess emerging risk factors to profit from the opportunities shifting markets present.

Get Risk Aware

risk: sme lending, regulatory, credit risk, Basel III, Singapore, DBS Bank, OCBC, UOB, macroeconomic risk, Strait Times, Singapore Business Times, government spending

UBS to Clients, "You're on the List!"

UBS, announced that it will inform American clients whether information out their bank accounts will be turned over to the US Justice Department in a tax evasion investigation. UBS is required to disclose information on over 4,300 American citizens who are clients of the firms private banking division. The US Justice Department believes that wealthy Americans are using these accounts to conceal assets and are using the bank to hide money under the protection of Switzerland's storied bank secrecy laws.

UBS has so far refused to name the individuals in public. U.S. authorities, meanwhile, have hoped that the identities of the individuals on the list would be kept secret for longer so that more Americans with undeclared assets abroad might come forward under a recently extended tax amnesty program.

According to a bank spokesperson, "UBS is currently examining which client relationships fulfill the government's criteria of 'tax fraud." The review may take some months but UBS is committed to informing clients that they are affected by the tax evasion investigation. UBS has already informed 500 clients that they are the subject of an investigation by the US Justice Department.

The IRS on Monday said it would extend its deadline for an amnesty program that has been flooded with applications from people who hid assets overseas. The program promises no jail time and reduced penalties for tax dodgers who come forward.

The financial services industry can expect these types of investigations to become more commonplace. Institutions that offer hedge funds and investment products that cater to High Net Worth investors will increasingly become subject to greater scrutiny as the US Treasury Department and its enforcement arm the IRS moves to insure that compliance with tax laws and statutes are adhered too.

This resolution signifies that the IRS is serious about its intention to ramp up enforcement of the tax code. The IRS has enhanced its focus on US citizens and corporations utilizing foreign banks and offshore investment vehicles. The agency is concerned that investment products and financial services offered by foreign banks have enabled US citizens and corporations to avoid tax liabilities. Products such as credit cards, hedge funds and other investment partnerships are coming under the exacting microscope of the IRS.

The IRS is under pressure to enforce compliance with federal tax statutes. The US Treasury coffers are seriously depleted and the IRS is is looking to assure all taxable revenue streams are identified and taxpayers pay taxes on all capital gains and income. The IRS has developed an Industry Focus Issue, (IFI) audit strategy. IFI's provides IRS field auditors tax risk profiles of investment partnerships and other corporate entities that use offshore domiciles to harbor assets. IFI guides field audit personnel through a risk based assessment of investment partnerships. The IFI aggregates and ranks Three Tiers of high risk tax compliance issues. Examiners will conduct rigorous reviews of these issue sensitive factors. Many of the factors concern the recognition of income and assets in custody outside of the US and repatriation of revenue derived in foreign domiciles.

Sum2 has published a product, IRS Audit Risk Program (IARP) that guides corporate tax managers and tax professionals through a risk assessment of their exposure to IFI risk factors. The IARP is a strategic tool that corporate tax professionals utilize to score risk exposures, determine mitigation actions, estimate remediation expenses and manage tax controversy defense strategies. The IARP is available for purchase on Amazon.com.

Risk: tax evasion, compliance, reputation, prison

G-20 Fallout: French Banks Exit Tax Havens

An official at the French Banking Federation announced that French banks plan to close shut branches and subsidiaries in countries considered tax havens. France's banks intend to halt business activities in countries that remain on the OECD's so-called "gray list" at the end of March 2010.

The Organization for Economic Cooperation and Development advocates regulatory standards for global banking industry. It tracks countries that do not comply with the basic regulatory guidelines and publishes a "gray list" of countries that do not comply with international tax information exchange rules.

All French Banks will comply with this action. BNP Paribas earlier announced it will stop operating in countries considered tax havens after the bank indicated that it would close branches in Panama and the Bahamas.

Global hedge funds that operate in OECD non-compliant jurisdictions have an increased tax risk profile. Tax professionals need to assess the potential benefits derived from continued operations in these high risk domiciles with the rising compliance and tax risk factors these jurisdictions pose.

Sum2's IRS Audit Risk Program (IARP) helps tax professionals and compliance managers determine and score risk exposures of investment partnerships IRS Industry Focus Issues.

Click for more information on IARP.

Risk: compliance, regulatory, tax audit, reputation

Regulators Shut Doors on Three More Banks

Regulators have shut Warren Bank in Michigan and and two small banks in Colorado and Minnesota. These closures bring the total to 98 banks closed this year.

The FDIC took over Warren Bank with about $538 million in assets. The Huntington National Bank agreed to assume the deposits and some of the assets of the assets of the failed bank. The FDIC will retain the remaining assets for later disposition. The failure of Warren Bank is expected to cost the deposit insurance fund an estimated $275 million.

Regulators also moved to shut the much smaller Jennings State Bank, in Minnesota. Central Bank agreed to assume the bank's $52.4 million in deposits and essentially all the bank's assets. The FDIC estimates the closing of Jennings State Bank will cost the deposit insurance fund about $11.7 million. A third bank, the Southern Colorado National Bank in Colorado was also clsoed. Legacy Bank agreed to assume the deposits and essentially all the assets of Southern Colorado National Bank. The FDIC said the closing will cost the deposit insurance fund about $6.6 million.

Ninety-eight banks have failed so far this year due to mounting losses on mortgages, commercial real estate and small business loans. The failures have cost the FDIC Insurance fund about $25 billion and the fund needs to raise cash to remain solvent.

Risk: FDIC, banks, credit, SME

New American Keiretsus

As the current challenging conditions in the credit markets continue its impact is having a profound impact on the community banking sector.
 

During the late '90s community banks control of the small mid-size enterprise (SME) market began to erode. The dynamics of the banking industry were rapidly changing. Larger banks leveraged operational and balance sheet scale and securitization to provide access to inexpensive credit products bundled with cash management tools. They were armed with huge marketing budgets and became adept at selling a growing array of transaction services that met the growing sophistication and business needs of the lucrative SME market. The current banking crisis forebodes yet another drastic alteration in the structure, regulatory and business practices of the industry. The current banking crisis will forever alter the face and scope of the community banking sector.

The challenge for the community bank will be to reinvent itself. A community bank must decide who its customers are and what its target market is. It must recognize its strength by leveraging its natural geographic advantages while selling products into markets that transcend geographic limitations. Community banks can accomplish this by selling products that address select segments.

What type of products will it take to be an effective SME bank? Products that help SME to manage cash flow and liquidity, make informed decisions on capital allocation initiatives, decrease the cost of capital, and facilitate transactions and new customer acquisition.

Community banks must begin to farm and align itself with new liquidity pools. Securing funding sources in a world of limited liquidity will be the greatest challenge for community banks. Overcoming regulatory hurdles notwithstanding, branding a community bank as a consistent, trusted and efficient delivery channel of credit products will be key to its survival. The community bank must recognize how it adds value in a complex and expanding delivery chain. The failure to secure funding sources will only accelerate balance sheet erosion resulting in merging with another institution or liquidation.As banking regulation evolves and private equity firms take larger stakes in the industry section interesting confederations of financial services firms will emerge.  Kind of like a new hybrid of horizontally integrated banking Keiretsus.

Neew regulations will require the community banking institution to communicate with funding sources, equity holders and regulators that it truly knows its customer. The KYC will need to go deeper then determining an acceptable FICO score, federal ID verification and passing an OFAC screen. Employing risk management and opportunity discovery exercises with SME prospects and clients are principal business drivers and provide critical disclosure information to funding sources that address risk aversion concerns.

Funding sources and other stakeholders must be secure in the knowledge that the community banker understands the peculiar risk characteristics of the SME's strategy and business model. The community banker then becomes an effective risk manager whose vigilance and considered business judgment provides a fair return to funding sources, assures regulators that capital ratios remain strong and rewards shareholders with appreciating equity valuations.

Community banks are just one of the many choices an SMEhas to provide banking and financing services. Community banks must create a compelling brand identity and articulate their story with focused product marketing to selected SMB market segments.

 

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Risk: banking, SME

The Black Knight

Sir Larceny-A-Lot

Sir Allen Stanford turns out to be no knight in shining armor. He's just another greedy creep who thought he was entitled to other peoples money. Sir Allen might just be another garden variety Ponzi Schemer; but compared to Madoff this guy is a piker. The theft of $8bn is petty larceny compared to Madoff's massive $50bn swindle.

It is becoming startling clear that we can no longer view these types of events as isolated incidents. Sir Allen may be this weeks poster child for capitalists gone wild; but the shock and awe of audacious financial crime is becoming a consistent lead story on the nightly news. Public trust in the financial markets is at stake. If people cannot trust their financial fiduciary the whole system goes down.

The SEC's reluctance to act on information concerning Madoff irregularities and the announcement that over 500 public firms are being reviewed for possible fraudulent business practices are raising a public outcry for more vigorous oversight and protection. The swirling rumors of bank insolvencies, nationalizations and news of their egregious failure to adhere to basic risk management precepts are turning the skeptical taxpayers into vocal opponents of the TARP program and any future bank bailouts.

The allegations that UBS marketed a tax evasion scheme to attract over 50,000 US clients to their private banking business with the promise that it would shield them from onerous tax liabilities may be the straw that breaks the camels back. US taxpayers are struggling from the burdensome pain of high taxes they dutifully pay. They are confused and frightened by the orgy of government spending and how the financial industry bailouts will effect them. The credit crisis and the stunning losses people incurred in their retirement and investment portfolios is casting widening doubt about the trustworthiness of the banking system. Citizens are urging their elected representatives that all financial service providers must come under a microscope of scrutiny and oversight. Consumers want assurances that all fiduciaries are sound. Taxpayers are demanding that regulators insist that financial institutions provide a level of transparency to assure consumers that they are in compliance with all regulatory mandates, have a program of risk management controls and offer proof of an ethical corporate governance program.

The US tax payer has made it clear that they can no longer shoulder an egregious tax burden that continues to finance insolvent financial institutions that failed miserably to manage risk or comply with the barest minimum standards of proper corporate governance.

The allegations that surfaced suggesting that Stanford Financial may be linked to money laundering for Latin American drug cartels through The Bank of Antigua and related banking enterprises in Venezuela and Ecuador is sure to usher in a new era of aggressive enforcement initiatives by regulators. The practice of selling worthless CDs to retail investors that promised high rates of interest is the tip of the spear in a sophisticated money laundering scheme. This will create some added urgency for regulators to conduct an in depth reviews of financial institutions AML compliance programs. Examiners will aggressively pursue fund managers to determine that Know Your Customer (KYC), Customer Identification Procedures (CIP), Bank Secrecy Act (BSA) and Politically Exposed People (PEP) programs are meeting acceptable standards to detect and deter money laundering. Of particular concern will be hedge fund complexes with incorporated off shore structures. To be sure, examiners will liberally interpret and claim jurisdictional nexus on all offshore structures linked to US domiciled funds. The US Treasury coffers are bare and it will look to collect taxes on any revenue sources it deems as taxable.

Financial institutions need to demonstrate to counter parties, regulators, SROs and most importantly investors; that they have a sound risk management program in place that protects the funds investors against all classes of operational risk. Sum2 offers an AML audit program fund managers use to maintain compliance standards that demonstrate program excellence to regulators and investors.

You can believe the examiners are sharpening their spears. Looking to bag a kill and make an example of wayward managers with lax compliance controls. Be ready, be vigilant and be prepared.

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Risk: money laundering, regulatory, operations, reputation

Peanut Corporation of America

A salmonella breakout that has been traced to peanut products marketed by the Peanut Corporation of America (PCA) is an unfortunate and severe example of a company with poor risk management, weak corporate governance controls and questionable ethical business practices. In most instances poor risk management and corporate governance violations primarily victimizes the company that fails to institute them. In the case of the PCA, unsound business practices has unleashed a deadly viral bacteria into a vast consumer market. Since its outbreak in October the salmonella infection is believed to have claimed the lives of 8 people and has sickened over 500. PCA violations will also cast a long shadow on the vibrant US peanut growers and processing industry.

A brief examination of some of the public disclosures that have come to light concerning the PCA speaks of a telling breakdown in sound risk management practices. These disclosures also hints at potential instances of fraud to cover up lax controls and compliance violations cited by FDA and State of Georgia food safety examiners.

The PCA had been cited for violations and lax operational controls during past inspections by regulatory agencies. Inspectors found evidence of roach infestation and mold in the production and storage facilities. Inspections also revealed that product quality had been compromised due to a degraded manufacturing process and improper maintenance of the operating facility. After bringing this to the attention of company management PCA executives sought out food testing companies that would provide results to indicate that product quality met federal safety standards and were safe to ship.

Utilizing industry standard risk analysis tools like the Profit|Optimizer would have revealed several breaches in sound risk management practices at PCA. Lax operational controls, poor facilities and the evasion of corporate governance practices will likely put PCA out of business due to the damage its actions have done to company product brands and reputation.

Problems and risks associated with process manufacturers like PCA add layers of complexity to determine product risk due to its role as a supplier in an intricate and expanded supply chain for processed consumer food products. The melamine contamination of Chinese milk products and the mortgage backed securities market crisis provide examples of how product liability and consumer risk is leveraged due supply chain complexity. The pervasiveness of products that use the peanut paste manufactured by PCA is very similar in many respects. Cookies, ice cream, crackers and other products are subject to recall. Some of the companies affected by PCA's contaminated products include premium consumer product and brand marketing companies like Kellogg, General Mills, Jenny Craig, Nuti-System and Trader Joes.

Severe product liability events like this unfortunately also cast aspersions on an entire industry. Associations like the American Peanut Council are most concerned that the poor manufacturing practices and product quality standards exhibited by PCA will reflect on how consumers view the industry as a whole. It is a valid concern for the industry association and it must demonstrate to the regulators and consumers that its membership is committed to sound manufacturing practices, product quality and corporate governance excellence. This is not a PR problem. Nor is it a problem born from an industries anathema to regulatory control or a problem unleashed by some renegade industry member. Industries and their representative associations must also help address sound risk management and corporate governance excellence as a cultural issue that is endemic to its membership. Then industry excellence becomes synonymous with product quality and consumer satisfaction.

In all the FDA uncovered 10 violations and has published its report and carries a full listing of recalled products and other resources on the FDA website.

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Risk: product, operations, regulatory, reputation