May Luck Be With You

It is said all the time.  May you have good luck in your new endeavor.  We realize its just an expression of goodwill but it does speak to the power and predominance of the notion of luck. Its as if the fates of chance and the charm of serendipity is the ultimate factor separating success from failure.  

This is absolutely the case for manufacturers of rabbit foot good luck charms, shaleigh wielding Leprechauns and other providers of magic elixirs and mojos that steer the gods of fate to your personal benefit.   But for the rest of us luck is a fickle thing whose appearance and consequence remains a riddle, wrapped in a mystery, inside an enigma.  

No question luck plays a big role in our lives.  The randomness of life can serve up pots of gold or oceans of despair due to minute measurements of time and space.  Consider missing a plane flight that crashed or consider the luck of someone who is shot in the chest and the bullet misses their heart by a few millimeters.  

These life altering random events are chalked up to the luck of the draw and we remain grateful that luck was on our side; yet remain a bit spooked had the circumstances gone the other way.

Though luck plays a factor in our lives and business careers, it is best to position oneself to be the beneficiary of luck when the angels of fortune flutter through the pathways of our life.

Alexander Hamilton said the spoils of fortune belong to the intrepid.  His sound advice counseling the need to engage calculated risk will more often than not result in some sort of achievement.

We at 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 opportunity when the angels of luck flutter on by.

Happy St. Patrick's Day to all and may the luck of the Irish always be with you.

Generate some good luck for yourself by downloading the S3 a risk management tool for SMEs.

Get risk aware with our just released S3: SME Risk Seismograph, an early warning and opportunity discovery app on Google Play.

Get S3 on Google Play

risk: sme, random event, Black Swans, risk management

Managing Macroeconomic Risks

Yesterday Ben Bernanke's statements about changing sentiment of the Federal Reserves' Quantitative Easing program touched off a mini stock market crash.  Though you took a solid hit in the value of your investment portfolio and retirement account the changing stance of the Fed will also impact the financial health and business conditions of small and mid-size businesses (SME). The days of near zero interest rates and the massive liquidity infusions by the Fed through Treasury purchase programs are coming to a close.  That will effect the availability and the cost of capital for SMEs. 

Macroeconomic risks are quickly becoming one of the greatest class of risk factors for SMEs. Credit availability, customer buying power, inflation, supply chain disruption, cyclical and market sector risks are growing in significance and threaten the profitability and financial health of all SMEs. Unfortunately, some businesses will not be able to surmount the acute challenges posed by these emerging economic risk factors and will find it difficult to continue as a going concern.

A difficult economy presents challenges for all businesses.  SME's require risk assessment tools to help better manage business threats and seize opportunities that fluctuating market conditions produce.  Many believe that mitigating macroeconomic risk factors are difficult if not impossible for SMEs to mitigate.  After all what can a small business do to immunize itself to inflation or spiking interest rates? Though it may seem to be an impossible task to shield a business from macroeconomic risks; executives that effectively engage to manage these type of threats Can profit from the opportunities severe market conditions produce.

Sum2's risk assessment products help SMEs deal with the problem of rising macroeconomic risk factors. Small business managers use our SPOT application to aggregate and score all enterprise risk factors.  This helps managers to focus on the most pressing risk factors that ironically have the potential to generate optimal returns on capital employed. 

Credit|Redi is a series of assessment applications that help SMEs improve the company's financial health.  As a company's credit rating improves, access to bank loans and other sources of capital become readily available at more favorable terms to the SME.  This is a particularly pressing problem as SME's have born the brunt of financial distress ignited by the Great Recession.  As interest rates rise SMEs borrowing costs will increase placing further stress on profitability and financial health.

It brings us great satisfaction to place world class risk management tools in the hands of small businesses to better manage business threats . The macroeconomic risk module is one of twenty risk assessment modules offered in SPOT.  

The effects of rising macroeconomic risk factors will begin to appear in an SME's operations and target markets potentially stressing the company's financial health.  SPOT potential problems and opportunities before they emerge.  SPOT and assess the current business conditions to make adjustments and initiate actions to overcome difficulties and seize opportunities the new business cycle is sure to present.

Sum2 Risk Assessment Applications

Risk: credit, inflation, market, buying power, customer risk, supply chain

SBA Lending Opens Up

 

Last year lending to small businesses evaporated with glaring exception of Wells Fargo which increased its lending through Small Business Administration (SBA) programs.  With bank lending to small businesses nearly frozen many small businesses are scrambling for the credit lines and loans they need to keep their companies alive.

The landscape of lenders willing to provide credit to small business is evolving.  Wells Fargo has emerged as the principal provider of credit to the small business market becoming the number-one lender through the SBA loan programs during 2009.

CIT Group, JPMorgan Chase, Banco Popular and Bank of America have cut their SBA lending by more than 70% this year.  While Wells Fargo buttressed by its acquisition of Wachovia, increased its loan volume 4%, from $583 million in 2008 to $605 million during 2009.

Wells Fargo acquisition of Wachovia closed three months into the 2009 fiscal year allowing Wells Fargo to book only nine months of Wachovia SBA lending which totaled $742 million a decrease of  24% from aggregate SBA loans extended during 2008.   During 2009 the number two lender to small businesses was U.S. Bank which made $250  million in loans through the SBA's lending program.

The large banking institutions that received TARP funds  used that infusion to prop up the capital ratios to improve weak balance sheets.  Little of these funds were used to fund credit programs for small businesses.  Wells Fargo's capital ratios were healthier then its larger competitors.  This allowed Wells Fargo to take advantage of their rivals distraction from the small business market.  Indeed the bankruptcy filing by CIT, the management tremors at Bank of America, Citibank's scramble for capital and JP Morgan Chase digestion of Bear Stearns allowed Wells Fargo to fill the large vacuum in the  neglected SBA lending market.

Wells Fargo also had the advantage of not being dependent on securitizing its SBA loans and selling them in the  secondary market.  As evidenced by CIT's bankruptcy filing,  funding for securitized loans disappeared as the risk aversion of institutional investors grew and liquidity evaporated from the market.  These market events led Wells Fargo to develop a focused discipline on the small business lending market.  The bank was committed to closing larger 7(a) SBA loans which are held and managed in the banks loan portfolio.  Wells Fargo's small business strategy discouraged originating SBA Express Loans that offer lower credit limits and tend to have much higher default rates.  Wells Fargo's SBA program and business model should be studied and replicated by community banks to energize small business lending.

Small business lending and capital formation in the sector is a critical component for sustainable economic growth.  Banks need to engage the small business market with a deeper understanding of the risks associated with the market.  Small business managers must demonstrate to bankers and shareholders that they are worthy stewards of credit and equity capital by implementing sound risk management and corporate governance practices.  This assures bankers that  small business managers are a good credit risk capable of building a mutually profitable business relationship for the many years to come.

Risk: SME, SBA, credit, small business, banking, community banks

The Profitability of Patriotism: SME Lending

What a difference a year makes. A year ago the banks came crawling to Washington begging for a massive capital infusion to avoid an Armageddon of the global financial system. They sent out an urgent SOS for a $750 billion life preserver of tax payers money to keep the banking system liquid. Our country's chief bursar Hank Paulson, designed a craft that would help the banks remain afloat. Into the market maelstrom Mr. Paulson launched the USS TARP as the vehicle to save our distressed ship of state. The TARP would prove itself to be our arc of national economic salvation. The success of the TARP has allowed the banks to generate profits in one of the most prolific turnarounds since Rocky Balboa's heartbreaking split decision loss to Apollo Creed. Some of the banks have repaid the TARP loans to the Fed. Now as Christmas approaches and this incredible year closes bankers have visions of sugar plum fairies dancing in their heads as they dream about how they will spend this years bonus payments based on record breaking profitability. President Obama wants the banks to show some love and return the favor by sharing more of their balance sheets by lending money to small and mid-size enterprises (SME).

Yesterday President Obama held a banking summit in Washington DC. Mr. Obama wanted to use the occasion to shame the "fat cat bankers" to expand their lending activities to SMEs. A few of the bigger cats were no shows. They got fogged in at Kennedy Airport. They called in to attend the summit by phone. Clearly shame was not the correct motivational devise to encourage the bankers to begin lending to SMEs. Perhaps the President should have appealed to the bankers sense of patriotism; because now is the time that all good bankers must come to the aid of their country. Failing that, perhaps Mr. Obama should make a business case that SME lending is good for profits. A vibrant SME sector is a powerful driver for wealth creation and economic recovery. A beneficial and perhaps unintended consequence of this endeavor is the economic security and political stability of the nation. These are the worthy concerns of all true patriots and form a common ground where bankers and government can engage the issues that undermine our national security.

The President had a full agenda to cover with the bank executives. Executive compensation, residential mortgage defaults, TARP repayment plans, bank capitalization and small business lending were some of the key topics. Mr. Obama was intent on chastising the reprobate bankers about their penny pinching credit policies toward small businesses. Mr. Obama conveyed to bankers that the country was still confronted with major economic problems. Now that the banks capital base has been stabilized with Treasury supplied funding they must get some skin into the game and belly up to the bar by making more loans to SMEs.

According to the FDIC, lending by U.S. banks fell by 2.8 percent in the third quarter. This is the largest drop since 1984 and the fifth consecutive quarter in which banks have reduced lending. The decline in lending is a serious barrier to economic recovery. Banks reduced the amount of money extended to their customers by $210.4 billion between July and September, cutting back in almost every category, from mortgage lending to funding for corporations. The TARP was intended to spur new lending and the FDIC observed that the largest recipients of aid were responsible for a disproportionate share of the decline in lending. FDIC Chairman Sheila C. Bair stated, "We need to see banks making more loans to their business customers."

The withdrawal of $210 billion in credit from the market is a major impediment for economic growth. The trend to delever credit exposures is a consequence of the credit bubble and is a sign of prudent management of credit risk. But the reduction of lending activity impedes economic activity and poses barriers to SME capital formation. If the third quarter reduction in credit withdrawal were annualized the amount of capital removed from the credit markets is about 7% of GDP. This coupled with the declining business revenues due to recession creates a huge headwind for SMEs. It is believed that 14% of SMEs are in distress and without expanded access to credit, defaults and bankruptcies will continue to rise. Massive business failures by SMEs shrinks market opportunities for banks and threatens their financial health and long term sustainability.

The number one reason why financial institutions turn down a SME for business loans is due to risk assessment. A bank will look at a number of factors to determine how likely a business will or will not be able to return the money it has borrowed.

SME business managers must conduct a thorough risk assessment if it wishes to attract loan capital from banks. Uncovering the risks and opportunities associated with products and markets, business functions, macroeconomic risks and understanding the critical success factors and measurements that create competitive advantage are cornerstones of effective risk management. Bankers need assurances that managers understand the market dynamics and risk factors present in their business and how they will be managed to repay credit providers. Bankers need confidence that managers have identified the key initiatives that maintain profitability. Bankers will gladly extend credit to SMEs that can validate that credit capital is being deployed effectively by astute managers. Bankers will approve loans when they are confident that SME managers are making prudent capital allocation decisions that are based on a diligent risk/reward assessment.

Sum2 offers products that combine qualitative risk assessment applications with Z-Score quantitative metrics to assess the risk profile and financial health of SMEs. The Profit|Optimizer calibrates qualitative and quantitative risk scoring tools; placing a powerful business management tool into the hands of SME managers. SME managers can demonstrate to bankers that their requests for credit capital is based on a thorough risk assessment and opportunity discovery exercise and will be effective stewards of loan capital.

On a macro level SME managers must vastly improve their risk management and corporate governance cultures to attract the credit capital of banks. Through programs like the Profit|Optimizer, SME's can position themselves to participate in credit markets with the full faith of friendly bankers. SME lending is a critical pillar to a sustained economic recovery and stability of our banking system. Now is the time for all bankers to come to the aid of their country by opening up credit channels to SMEs to restore economic growth and the wealth of our nation.

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Risk: banking, credit, SME

Sum2 Announces Business Alliance with CreditAides

Sum2, LLC is pleased to announce that they will begin to offer the corporate rating products of CreditAides. CreditAides is an independent corporate rating and research firm that provides financial health assessment reports and credit risk analysis ratings on companies using the Z-Score methodology. The CreditAides reporting system is a predictive tool that helps managers gain insights into the financial health of a company. The insights help managers identify a company's ability to remain competitive and financially sound while measuring the impact of business initiatives to achieve profitability and growth.

James McCallum, the President of Sum2 stated, "The CreditAides quantitative assessment tool is a wonderful compliment to the qualitative risk assessment applications offered in the Profit|Optimizer. Now our clients have a recognized standard to measure the financial impact and returns on capital allocation decisions they implemented as a result of a Profit|Optimizer review. The challenging business cycle requires that managers allocate capital to a few select initiatives. It is critical that managers fund initiatives that mitigate the greatest risk and provide the potential of optimal returns. The combination of CreditAides reports with the Profit|Optimizer will provide our clients with the ability to discern the optimal initiatives to fund and measure the effectiveness of their capital allocation decisions."

The Profit|Optimizer guides business managers through an thorough enterprise risk assessment. Uncovering the risks and opportunities associated with products and markets, business functions, numerous macro risks and critical success factors are key components of effective enterprise risk management (ERM). ERM requires the assessment and aggregation of hundreds of risk factors. The Profit|Optimizer helps managers identify the key initiatives that will help to maintain profitability and sustainable growth. The use of CreditAides provides an important measurement tool to affirm and validate that managers have made correct bets on capital allocation decisions.

Z-Score Financial Analysis Tool

The Z-Score formula for predicting bankruptcy was developed by Edward I. Altman a Professor of Finance at New York University. The Z-Score is used to assess the financial health of companies and the probability of bankruptcy. The Z-score uses multiple corporate income and balance sheet values to score the financial health of a company. The use of Z-scores is a strategic tool managers use to measure and validate the effectiveness of their business strategy.

Risk Assessment and Opportunity Discovery

The recession has created macroeconomic conditions that are causing widespread business failures. Small and mid-size business enterprises (SME) require effective risk management tools to effectively manage business threats to survive extreme business downturns. Assessing, measuring, aggregating, prioritizing, pricing and initiating actions are the tactical means risk managers use to support the business objectives of the enterprise. Sound risk management practices are central to a healthy corporate governance culture and are central to maintaining profitability and long term sustainable growth for the business enterprise.

The Profit|Optimizer

Profit|Optimizer helps managers assess risk factors and uncover opportunities that are always present in the business environment. The product is based on Basel II working group recommendations that outline optimal risk profiles of SMEs. The Profit|Optimizer incorporates four focus areas.

1.) product and market dynamics (products, clients, competition, supply chain, market segments)

2.) business functions (management, sales and marketing, operations, facilities, IT, HR, accounting)

3.) critical success factors (generic and specific)

4.) macro risk factors (macroeconomic, STEEPLE, SWOT, segment benchmarks, business plan optimization)

SME's lack of agility and reluctance to change has made it difficult for these businesses to survive severe market conditions. There are tremendous market forces at work in the current business environment that are creating dangers and opportunities for SMEs if they can effectively assess and adapt. Business managers must be astute and exacting how they allocate the precious capital resources required to achieve business objectives. The Profit|Optimizer helps managers make better capital allocation decisions. CreditAides provides fiscal metrics to validate or adjust business strategy and initiatives. Sum2's risk assessment products coupled with the measurement tools provided by CreditAides creates a leading edge solution for SME risk management. The ease of use and superior value proposition of the combined solution is unsurpassed in the market.

About CreditAides

CreditAides (www.creditaides.com) online business analysis and credit assessment portal provides business managers with important insights into the financial health of their company. Automated financial analysis improves efficiency of the business enterprise. CreditAides reports are used to assess the financial health of clients, supply chain and used to demonstrate financial health and credit worthiness to credit and equity providers.

True underlying financial health of companies has never been harder to identify and never been of greater importance. Across both equity and credit markets, understanding relative financial strengths of companies is paramount for effective business decisions. Good decisions cannot be made without good quality information generated by incisive tools.

About Sum2, LLC

Sum2 (www.sum2.com) was founded in 2002 to promote the commercial application of corporate sound practices. Sum2 manufactures, aggregates, packages and distributes innovative sound practice digital content products to select channels and market segments. Sum2's sound practice products address risk management, corporate governance, shareholder communications and regulatory compliance. Sum2's objective is to assist businesses and industries to implement sound practices to create value for company stakeholders and demonstrate corporate governance excellence to assure profitability and long term sustainable growth.

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Risk: bankruptcy, default, market, credit

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

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

Mom and Pop Go Chapter 11

The Wall Street Journal ran an interesting article about the devastating effect the recession is having on family owned businesses. The SBA estimates 90% of U.S. businesses are family-owned. During 2008 about 4.3 million businesses with 19 or fewer employees closed according to the Bureau of Labor Statistics. If 90% of those firms were family controlled businesses more then 3.8 million families have lost their livelihoods and most likely have also lost a considerable amount of personal wealth. This drastic dissipation of wealth and family control of assets is yet another blow to the middle class. Its impact of entrepreneurial activity and capital formation initiatives may create additional headwinds for the economy seeking to overcome the deep recession.

John Ward a professor at Northwestern University observed "that the economic downturn is really just the latest setback for family-run businesses. In the 1970s and '80s, exorbitant income taxes and estate taxes forced many to close. Before that, the anti-establishment movement during and after the Vietnam War made many children reluctant to take over the family business."

Beth Wood, a family business market development specialist at MassMutual observes that family businesses are "often steeped in tradition and not as flexible to change, tend not to have formal plans in place to respond to crisis. They've seen reductions in top line revenue that they just can't react fast enough to. Problems securing credit in this recession have also prevented some family businesses from getting the funding they need."

Ms. Wood makes an interesting observation about the importance of business agility. The need to assess the rapidly changing market dynamics is a critical exercise that SMEs must undertake. Business as usual will not get it done. SMEs must begin to transform itself to better align its business model to rapidly changing markets. Conducting a thorough risk assessment and opportunity discovery exercise is critical to creating a sustainable business enterprise. Sum2's Profit|Optimizer is a critical tool that helps SME managers assess risks, spot opportunities and initiate actions to achieve business growth and profitability.

Family owned enterprises must overcome the gravity of generational business cultures that inhibit and resist change. SMEs will survive and thrive if they can identify emerging opportunities the current business cycle is creating. SME's will survive and thrive if they have the will, resourcefulness and a supportive culture to change. These are the qualities required for long term sustainability and growth. Business as usual is giving way to a "New Normal," where adaptability to structural market changes are keys to asset preservation and wealth creation.

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Risk: family trusts, asset preservation, small business, bankruptcy

Get Ready for the IRS

Treasury Secretary Tim Geithner’s recent testimony on Capitol Hill is a clear warning to corporate America that the IRS is shifting gears. While the Secretary stated the IRS requires a modest amount of money to reform the tax code and the complicated super system of laws; he also stated that he is seeking a larger allotment for enforcement purposes. Clearly for the immediate future the focus of the agency will be to insure corporations are in full compliance of existing tax laws and statutes.

According to the article, Geithner wants $332 million to go to new IRS enforcement efforts, including $128.1 million to improve international tax compliance. The balance of the funds would be used to support 755 employees to increase examinations of tax returns for businesses and high-income individuals; 300 employees to expand the IRS document-matching program, which compares tax returns to other forms such as W-2s and 1099s; and an additional 491 employees to improve collection operations and build two new IRS automated collection center sites.

Corporate tax professionals need to be vigilant and begin to design a strategy to mitigate rising tax risk. Sum2’s Corporate Audit Risk Program (CARP) is a unique tool that helps corporate tax managers and professionals assess, manage and mitigate tax risk exposures.

You can manage this mounting risk factor with CARP here: manage tax risk.

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Risk: tax, audit, reputational

A Taxing Situation

President Obama announced his intention to curb the use of offshore tax havens for multinational corporations. The Treasury Department is looking to raise tax revenues and believes that by closing the use of offshore tax shelters it will be able to raise over $200 bn over the next ten years. According to the New York Times, firms like Citibank, Morgan Stanley, GE and Proctor and Gamble utilize hundreds of these type structures to shelter revenue from being taxed by the IRS. It has effectively driven down the tax rates these companies pay and has been a key driver in maintaining corporate profitability.

This move should come as a surprise to no one. The Treasury Department needs to find sources of tax revenues to cover the massive spending programs necessitated by the credit crisis and the global economic meltdown. The TARP program designed to revitalize banks has expenditures that amounted to $700 bn. Amounts pledged for economic recovery through EESA, PPIP and ARRA will push Treasury Department expenditures targeting economic stimulus projects and programs to approximately $2 tn. These amounts are over and above routine federal budget expenditures that is running significant deficits as well.

The planned move by the Treasury Department to rewrite the tax code may be an intentional effort to close budget deficits but it also represents a significant rise in tax audit risk. For the past two years the IRS has been developing a practice strategy and organizational assets to more effectively enforce existing tax laws. Private sector expertise, practices and resource has significantly out gunned the IRS’s ability to detect and develop a regulatory comprehension of the tax implications of the sophisticated multidomiciled structured transactions flowing through highly stratified and dispersed corporate structures. The IRS is looking to level the playing field by adding to its arsenal of resources required to engage the high powered legal and accounting expertise that corporate entities employ.

The IRS has hired hundreds of new agents and has developed risk based audit assessment guidelines for field agents when examining corporations with sophisticated structures and business models. As such investment partnerships, global multinational corporations and companies utilizing offshore structures can expect to receive more attention from IRS examiners.

The IRS had developed Industry Focus Issues (IFI) to be used as an examination framework to guide audit engagements for sophisticated investment partnerships and Large and Mid-size Businesses (LSMB). The IFI for LSMB has developed three tiers of examination risk. Each tier has comprises about 12 examination issues that will help examiners focus attention of audit resource on areas the agency considers as high probability for non-compliance. Clearly the audit risk factors risk

To respond to this challenge, Sum2 developed an audit risk assessment program to assist CFO’s, tax managers, accountants and attorneys conduct a through IFI risk assessment. The IRS Audit Risk Program (IARP) is a mitigation and management tool designed to temper the threat of tax audit risk. A recent survey commissioned by Sum2 to measure industry awareness of IFI risk awareness indicated extremely low awareness of tax audit risk factors.

Sum2’s IARP helps corporate management and tax planners score exposure to each IFI risk factor. It allows risk managers to score the severity of each exposure, mitigation capabilities, mitigation initiatives required to address risk factor, responsible parties and mitigation expenses. The IARP allows corporate boards and company management to make informed decisions on tax exposure risk, audit remediation strategies, arbitration preparation and tax controversy defense preparation.

The IARP links to all pertinent IRS documentation and information on each tax statute and IFI audit tier. The IARP links to pertinent forms and allows for easy information retrieval and search capabilities of the vast IRS document libraries. The IARP also has links to FASB to have instant access to latest information on accounting and valuation treatments for structured instruments.

The IARP is the newest risk application in the Profit|Optimizer product series. The Profit|Optimizer is a enterprise risk management tool used by SME’s and industry service providers.

The IARP is available in two versions.

The IRS Audit Risk Program for investment partnerships (IARP)

Buy it on Amazon here: IARP

The Corporate Audit Risk Program (CARP)

Buy it on Amazon here: CARP

Sum2’s Audit Risk Survey results are here: IFI Audit Risk Survey

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Sum2 Commissions IRS Audit Risk Study

Sum2 has commissioned a survey to determine financial services industry awareness and readiness for IRS audit risk factors. The survey seeks to determine industry awareness of IRS Industry Focus Issue risk exposures for hedge funds, private equity firms, RIAs, CTAs and corporations using offshore structures.

The survey is open to fund management executives, corporate treasury, tax managers and industry service providers. CPAs, tax attorneys, compliance professions, administrators, custodians and prime brokers are welcome to take the study.

The study's purpose is to determine the level of industry preparedness and steps fund managers are taking to mitigate potential exposures to IRS Industry Focus Issue risk.

The goal of the survey is to help Sum2 better respond to the critical needs of fund managers and the alternative investment management industry by improving our just released IRS Audit Risk Program (IARP) for fund managers.

To take the IRS Audit Risk Survey, click here.

IRS background information can be found here.

Sum2 alerts can be found here.

IARP product information is here.

This survey asks ten questions. The questions concern participants awareness about IFI that pertain to their fund or fund management practice. The survey seeks to determine overall industry risk awareness, awareness of potential risk exposure to IFI risk factors and any mitigation initiatives managers may plan to address IFI risk factors. It should take no more then 5 minutes to complete the questionnaire.

Participation in this study is completely voluntary. There are no foreseeable risks associated with this project. If participants feel uncomfortable answering any questions, they can withdraw from the survey at any point. It is very important for us to learn your opinions.

Survey responses will be strictly confidential and data from this research will be reported only in the aggregate. Respondent data will be coded and will remain confidential. If you have questions at any time about the survey or the procedures, you may contact Sum2, LLC at 973.287.7535 or by email at customer.service@sum2.com.

Thank you for your time and support.

IRS Audit Risk for Fund Managers

The earths axis seemed to have tilted way off course last year. The global capital and credit markets crashed. Venerated banking institutions moved dangerously close to insolvency forcing mergers with better capitalized banks. The bulge bracket investment banking institutions disappeared. Some were acquired by traditional banks, others converted to a bank holding company structure; while others declared bankruptcy. In response, the Federal Reserve, Treasury Department and SEC initiated unprecedented concerted interventionist actions. The passage of EESA legislation and the implementation of the $750bn TARP program are the first in many expected moves by the government to maintain the solvency of the banking system as a national economic security issue. In addition to these initiatives the government has also passed a massive $750bn economic stimulus bill to kick start the economy. All told over $1.5 trillion dollars has recently been appropriated by the federal government to address the economic crisis. This massive capital infusion has ratcheted up the federal budget deficit. It will be incumbent on the Treasury Department and the IRS to make a concerted effort to uncover new sources of revenue to finance these massive spending programs.

Hedge funds, private equity firms, CTA's and other corporations that utilize elaborate corporate structures, engage in sophisticated transactions and recognize uncommon forms of revenue, losses and tax credits will increasingly fall under the considered focus of the IRS. Times have changed and so has the posture and practice of the IRS. The agency is transitioning its organizational posture by moving away from a benign customer service resource and assuming the form of an activist body that is intent on assuring compliance and enforcement of US tax laws. In particular it is building up its expertise and resource to more effectively address the audit challenges the complexity and sophistication hedge funds present.

The IRS has developed its industry issue competencies. It is creating a focused organizational structure that assigns issue ownership to specific executives and issue management teams. This vertical expertise is further enhanced with issue specialists to deepen the agencies competency capital. Industry issue coordinators have also been appointed to lend administrative and agency management efficiency by ranking and coordinating responses to specific industry issues. Clearly the IRS is building up its portfolio of skills, industry expertise and organizational capacity to address the sophisticated agility of the alternative investment management industries tax professionals.

To better focus the resources of the agency the IRS has grouped Industry Focus Issues (IFI) within three tiers. IFI are industry issues the IRS considers to be of strategic interest to the agency and are worthy of considerable attention by field audit teams. Corporations with exposures in these focus areas need to exercise more diligence in its preparation and response to potential audit threats. Each IFI tier comprise risk factors ranked by its strategic interest to the IRS . This helps IRS auditors to understand a funds risk profile when opening an examination of an investment company and other sophisticated corporate structures. The IRS has created the three IFI tiers to rank significant examination issues according to the strategic agency interest within the investment management market vertical. In all the IRS has identified 36 risk factors across the three IFI tiers.

Clearly the IRS is investing significant organizational and human capital to address an industry that will no longer fly beneath the agencies radar. The IRS is making a significant investment in its industry response capability and will be called upon to generate a considerable return on the investment in the hopes that the discovery of lucrative tax revenue streams will help to pay down the massive spending deficits of the federal government.

This development has clearly raised the tax compliance and regulatory risk factors for the investment management industry. Significant tax liabilities, penalties and expenses can be incurred if this risk factor is not met with well a well considered risk management program.

In response to this industry threat, Sum2 developed the IRS Audit Risk Program (IARP) as a tool for investment and corporate treasury managers to determine exposures to each IFI risk factor. The IARP helps managers determine aggregate risk by scoring audit threats for each risk factor.

The IARP helps managers to prioritize the threat of each of the 36 risk factors. Tax managers can outline mitigation actions, assign mitigation tasks and monitor task completion. The IARP is a valuable tool to help managers frame strategies to respond to tax audits.

The IARP allows managers to determine the extent of potential resolution expense associated with each risk factor. The IARP calculates aggregated mitigation and resolution expenses for all tiers.

The IARP assists managers to more effectively communicate with outside tax attorneys, CPA's, custodians, administrators, prime brokers and fund investors.

Sum2 is conducting a survey on IFI awareness and its impact on audit risk for fund managers. To date the results have indicated that industry awareness of IFI and the audit risk factors associated with IFI is low.

The IARP is a necessity for hedge funds, private equity firms, CTAs, RIAs, global multinationals and corporations utilizing offshore structures. The IARP is a critical resource for CFOs, CCOs, CROs and internal corporate counsel. Corporate treasury executives that engage in innovative transactions, recognize unusual revenue sources and employ sophisticated tax strategies will benefit from the use of this product. CPA firms and corporate tax attorneys with a focus on financial services industry will find the IARP an indispensable risk discovery and client engagement tool.

The IARP is a vertical application of Sum2's Profit|Optimizer product series. The Profit|Optimizer is a C Level risk management tool that assists managers to uncover and mitigate business threats and discover opportunities to assure profitability and growth. The IARP product is available in an industry standard MS Excel© application and is digitally delivered.

The IARP is a vertical application of Sum2's Profit|Optimizer product series. The Profit|Optimizer is a C Level risk management tool that assists managers to uncover and mitigate business threats and spot opportunities to maintain profitability and sustainable growth.

A single seat license for the IARP is $95.00.

It can be purchase on Amazon by clicking the below icon.




NB: The IARP product does not offer advice nor does it recommend compliance guidelines. Its purpose is to help fund managers assess risk levels and provide a tool to align corporate resources to mitigate risk factors. It is highly recommend that you consult with tax, legal and compliance professionals to address the risk exposures that the IARP uncovers.

PCA Goes To The Lonesome Valley

On Monday came the not surprising news that Peanut Corporation of America (PCA) has filed for bankruptcy.

The practice of selling food additives laced with salmonella bacteria makes it difficult to win back the trust of customers that had been so grievously violated.

PCA knowingly shipped contaminated products that has caused nine deaths and has sickened 637 people in 44 states. PCA's salmonella laced peanut paste has contaminated 2,226 processed food products. A full list of recalled products can be found on the FDA website. These potentially criminal acts by PCA's management has demolished the PCA corporate brand making it impossible to continue as a going concern.

The Chapter 7 bankruptcy filing will liquidate the company. This strategy will protect the PCA shareholders in the privately held firm from the significant legal liability that this event has created. It does not however protect PCA's company management and accomplices that knowingly shipped contaminated products from potential criminal prosecution. Criminal persecution of those involved should be pursued and if anyone is found guilty punishment must be severe.

PCA released its contaminated product into a large and extensive supply chain. Many leading brand food processing manufacturers that use PCA's peanut paste as an ingredient in their packaged goods products have suffered severe reputational damage to their product and company brands. Though PCA's corporate liability may be mitigated with the bankruptcy filing, aggrieved consumers will continue to have have legal recource by filing suits against the major consumer product companies that are still in business. This could make for a record breaking class action product liability suit.

Unfortunately this tragic occurrence could have been prevented. PCA's actions demonstrate a disturbing ambivalence toward effective sound corporate governance practices. Companies that willingly sacrifice risk management and ethical business practices for the sake of short term profits consistently undermine corporate sustainability. All may not result in a dramatic corporate implosion like PCA. But ultimately the song of corporate liquidations remains the same. Unemployment for workers, aggrieved consumers, community desertion, tortured consciences and and in some instances criminal prosecution.

RIP PCA.

You Tube Video: Fairfield Four, Lonesome Valley

Risk: corporate goverance, ethics, risk management, legal

A Borrower and Lender Be: SME Lending

Shylock

Bankers are catching some major heat. Senators are screaming at the money lenders in an effort to have them explain what the banks did with the $350bn they gave them in the first round of TARP funding. Now that the second $350bn tranche of TARP funds is about to be dispersed, the politicians want assurances that a good portion of the money will find its way into the economy in loans to small & mid-sized enterprises (SME). All believe that this is critical to halt the specter of the deepening recession.

If it wasn't so serious it would be funny. Banks are getting yelled at by the politicians for not lending. Angry constituents are beating up the politicians for giving the banks the bailout money in the the first place. They complain that the Treasury Department is giving banks taxpayer funds at a 1% interest rate that banks in turn lend back to taxpayers at interests rates that are considerably higher. To close this circle of pain, consumers are getting nasty calls from their bankers and debt collection agencies, threatening them with punitive actions if they don't pay their mortgages and outstanding credit card balances. Everyone is a debtor in this comedic cycle of pain.

Now that banks are flush with cash from the second round of TARP funding they must start lending and SMEs need to start borrowing. Its that simple. What is not simple is breaking the stalemate of confidence that exists between lenders and borrowers. Risk aversion is extremely high. Banks are very concerned about adding credit risk exposures to commercial loan portfolios. A recession creates enormous market challenges for SMEs. Bankers need to develop an enhanced sense of confidence in the management and business prospects of an SME before it will extend credit.

Both lenders and borrowers can come together in a shared understanding if they are willing to engage in the deeper work that is required by the new business realities. SME managers must be aware of the business and risk management practices that bankers generally look for when assessing credit worthiness. SMEs must be able to demonstrate to lenders that they are committed to sound risk management and corporate governance practices. SMEs must also be prepared to meet transparency requirements of banks with honest and timely disclosures.

Bankers actively seek SMEs that are run by focused and capable managers. SMEs that can demonstrate effective risk management skills and an awareness of the challenges and opportunities present in their market will find that bankers are more then willing to extend new credit facilities to them. Bankers will have greater confidence in these SMEs if they understand and believe in the SME business model. Bankers lend with confidence when they understand how businesses can generate sufficient cash flow and profits to pay back loans. Bankers need confidence that credit risk is being mitigated. SMEs enhance banker confidence that they are credit worthy by demonstrating a strong risk management and corporate governance culture.

Fortunately there is tool that bankers and SMEs use to build mutual understanding and trust. The Profit|Optimizer helps to generate the confidence needed to help banks lend capital and SME to effectively deploy it.

Get the Profit|Optimizer and confidently be a lender, be a borrower and break the cycle of pain to get our economy going again.

You Tube Video: Liza Minnelli, Joel Grey Cabaret, Money

Risk: credit, market, small business

Kashi's Kismet

Salmonella

Last night as I was researching the Peanut Corporation of America's (PCA) peanut paste recall, my wife received an urgent telephone call from our local supermarket. The caller informed us that the Kashi products we purchased were subject to recall. I was a bit astonished by the call for several reasons. The first being notified of the unhappy news that a premium brand product that I so enjoy has the potential to kill me or make me very ill due to Salmonella bacteria. It goes without saying that it was a most bracing experience. I was also a bit bemused about the ability of my local supermarket to track me down to inform me that my favorite breakfast cereal might endanger me. At the very least letting me know that this is no breakfast for champions.

Though this is a positive example of how consumer product data mining and customer tracking business intelligence is employed; the realization that your breakfast eating habits are tucked away in some giant relational database remains a bit unnerving. But that is a different subject for another day.

After checking with the Kashi website the cereal products I purchased were not listed on the recall list. Kashi website lists granola bars and cookies as its only products that are subject to recall. As a committed consumer of the brand I remember when I purchased the cereal a free granola bar was included in the package for product promotional purposes. When I returned home I eagerly consumed the free granola bars. I am happy to report that I have not fallen ill. I'll have to go back to the supermarket and ask if the non contaminated cereal I still have in my cupboard remains subject to the recall. An interesting product bundling dilemma.

The mechanics and execution of the product recall seems to be effective. The sophisticated use of data mining technologies and the ability of the manufacturer to contact a retail consumer through a digital trail that includes customer loyalty cards, credit card, and product bar codes is pretty impressive.

What is of concern about Kashi and other processed food manufacturers that are dependent on an expanded and complex supply chain is their failure to uncover the risk associated with the supplier. In this case PCA. It is alleged that PCA had a leaky roof that played a role in contaminating the peanut paste. A simple walk through of the facility may have uncovered this risk factor. Certainly if a company fails to perform the most basic facilities maintenance functions (like a leaky roof) odds are that the company has other issues and businesses functions that it is not addressing. This is the cockroach theory. Where you see one there are usually many others. A simple walk through may have revealed that all was not kosher at PCA.

Supply chain risk is becoming more prominent as manufacturers and service providers aggregate components and ingredients from numerous providers to deliver a finished product or service to end user consumers. The implementation of a sound practice program that addresses risk associated with supply chains is a key ingredient for a sustainable business enterprise.

The Profit|Optimizer devotes a section to supply chain risk. All process manufacturers must require suppliers to conduct a thorough risk assessment of processes and functions as outlined in the Profit|Optimizer. The Profit|Optimizer also includes a section on facilities risk. The risk assessment tools offered by the Profit|Optimizer would have uncovered the dangerous risk factors at PCA and may have prevented the fatal and costly release of contaminated products.

The kismet of commercial enterprises like Kashi will continue to be bright so long as the mantra of sound risk management is practiced with more vigilance. In doing so the health and well being of its loyal customers will flower as will the value of its product brands and the sustainability of the business.

You Tube Video: Vince Guaraldi, The Peanuts Theme

Risk: reputation, brand, product liability

Honda Motors Practices Enlightened Capitalism

Amidst all the layoffs, business closures and shutdowns the hard edge of capitalism is a painful experience far too many people are forced to endure. During times of plenty, the relationship of labor and capital is harmonious and symbiotic. Both parties recognize the value that each bring to the corporate community and each parties enrichment and well being is served by the degree of harmony present in that relationship. During down business cycles management may resort to layoffs to preserve the enterprise. Unfortunately this often causes resentments and hard feelings on the part of workers who have lost the means of earning a living. When workers return to their jobs this can cause problems and hurt an affirmative corporate culture that is critical to maintaining a sustainable business enterprise.

In the face of the meltdown in the automobile manufacturing sector, Honda Motors is one of a very select few that is not resorting to layoffs. Honda Motors known for product quality and leadership in product innovation and business processes is also highly respected for its treatment of employees. Honda Motors places great emphasis on the creation and maintenance of an affirmative corporate culture to sustain profitability and market leadership.

Honda Motors decision to restructure the work force, and give workers a period of paid leave until business conditions improve speaks volumes about how management respects and values the contribution labor makes to the long term sustainability of the enterprise. Any remuneration workers receive during the leave will be paid back to the company with unpaid overtime when the workers return to the production line.

The value of good will on the Honda Motor balance sheet has increased exponentially. The sustainability of an affirmative corporate culture will drive profitability, product innovation and market leadership for the many years to come.

We applaud Honda Motors for this innovative and enlightened response to the current market challenges.

You Tube Video: June Carter Cash & Johnny Cash, One Piece At A Time

Risk: sustainability, labor relations, corporate culture

Lousiville Business Community Iced Over

The massive ice storm that raged across the US this week has left a path of devastation in its wake. Particularly hard hit was the jewel of the Ohio River, Louisville Kentucky.

Damaging ice covers the entire region and the three largest electric utilities estimate that over 700,000 people are without power. This type of disaster has an immediate impact on small and mid-size businesses. Many small businesses are shuttered due to an inability to access power. Service oriented and home based businesses are also particularly hard hit by the power outages due to their dependency on digital technologies.

Business closure means that cash registers are not ringing. During these lean times of a deepening recession weaker businesses are particularly susceptible to the negative impact of these events. A single day of lost revenue can be the difference in a small businesses ability to maintain itself as a going concern.

The importance of having a set of contingency plans to accommodate these types of business interruptions is critical even more so due to the difficult business cycle we are now confronting.

The implementation of a sound practice program as advocated by Sum2 helps businesses to address these types of risks. The Profit|Optimizer helps managers craft an effective sound practice program. Sound practices incorporates plans to mitigate the negative effects of business interruption events and initiate actions that maintains profitability during the most adverse market conditions.

You Tube Video: James Taylor and Natalie Cole, Baby It's Cold Outside

Risk; business continuity, sustainability, disaster planning

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.

You Tube Video: Dizzy Gillespie's Big Band, Salt Peanuts

Risk: product, operations, regulatory, reputation

Credit Redi Blog

Credit Redi is a company sponsored blog of Sum2. The purpose of Credit Redi is to help small and mid-size enterprises (SMEs) protect and improve their ability to access credit and equity financing from banks , shareholders and other funding sources.

Sum2 is dedicated to the commercial application of sound practices. Our sound practices program and products address:

• corporate governance
• risk management
• stakeholder communications
• regulatory compliance

Sum2 believes that all enterprises enhance their equity value by implementing a sound practice program. Sound practices are principal value drivers for corporate and product brands. Practitioners are awarded with healthy profit margins, attraction of high end clientele, enterprise risk mitigation and premium equity valuation.

Sum2 looks forward to helping you address the pressing challenges of the current business cycle.

You Tube Video: Herb Alpert and the Tijuana Brass, Work Song

Risk: abundance