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Radio Nowhere: Tax Risk Delists Emmis Communications

radiosMisinterpretation of the tax code led to the NASDAQ delisting of Emmis Communications after investors dumped the stock following a restatement announcement.  In an 8-K Filing Emmis announced that its previously filed public financial statements cannot be relied on for accuracy.  Emmis’s stock price has been trading  below $1.00 per share after investors negative reaction to the company’s restatement of earnings and financial condition.  The restatement was necessary after Emmis discovered it improperly accounted for the tax treatment of Federal Communication Commission  (FCC) licensing rights.

Emmis operates a number of radio stations in key metropolitan markets and was forced to restate its financial statements for the past fiscal year and for the first quarter of this year to adjustments it made in its provision for income taxes.   Last year the company wrote down the value of its FCC licenses.  This put Emmis into a loss position leading the company to overstate the benefit for income taxes and understated deferred tax liabilities by $25.3 million for its fiscal year ended February 28, 2009.

Emmis CEO Jeff Smulyan,  released a statement on the company website that read, “Certainly, ‘restating our earnings’ sounds ominous, but our restatement solely relates to a non cash technical tax issue that has no impact on our operations. While there might be big numbers involved and a lot of paperwork being filed, I don’t see anything to worry about.”

This is an interesting example of the consequences of tax risk.  Most tax risk events result in huge settlement amounts, damage to executive reputations and the company brand and sometimes prison terms for the persons and parties involved.  The delisting of the Emmis stock and the severe devaluation of shareholder equity is a more extreme result of the failure to mitigate tax risk factors.

Sum2’s  Corporate Audit Risk Program (CARP) guides corporate tax managers through a thorough risk assessment of exposures to IRS Industry Focus Issues (IFI).  CARP helps tax professionals score threats of IFI risk factors and implement mitigation actions.  The CARP lists Emmis tax problem as a Tier Three IFI risk factor.  It falls  under the communications  technology and media industry guidelines for amortization on intangibles, licensed programs and contract rights.  The CARP is an indispensable guideline and tool that may have provided insights into the tax risk that led to a costly delisting and evaporation of shareholder equity.

Emmis share price closed today at $1.32.  We wish the management, shareholders and employees a speedy remediation to the problems confronting the company and a recovery of the share price to reestablish its listing on the NASDAQ.

You Tube Music Radio: Bruce Springsteen, Radio Nowhere

Risk: tax, shareholder equity, reputation, regulatory

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October 15, 2009 Posted by | business, CARP, CPA, IARP, IRS, regulatory, reputation, Sum2, Tax | , , , , , , , , , , , , , , , , , , , , , | 3 Comments

Banking is Getting Expensive

screamThe severity of the banking crisis is evident in the 95 banks the FDIC has closed during 2009.  The inordinate amount of bank failures has placed a significant strain on the FDIC insurance fund.  The FDIC insurance fund protects bank customers from losing their deposits when the FDIC closes an insolvent bank.

The depletion of the FDIC Insurance fund is accelerating at an alarming rate.  At the close of the first quarter, the FDIC bank rescue fund had a balance of $13 billion.    Since that time three major bank failures, BankUnited Financial Corp, Colonial BancGroup and Guaranty Financial Group depleted the fund by almost $11 billion.   In addition to these three large failures over 50 banks have been closed during the past six months.   Total assets in the fund are at its lowest level since the close of the S&L Crisis in 1992.   Bank analysts research suggests that FDIC may require $100 billion from the insurance fund to cover the expense of an additional 150 to 200 bank failures they estimate will occur through 2013.  This will require massive capital infusions into the FDIC insurance fund.  The FDIC’s goal of maintaining confidence in functioning credit markets and a sound banking system may yet face its sternest test.

FDIC Chairwoman  Sheila Bair is considering a number of options to recapitalize the fund.  The US Treasury has a $100 billion line of credit available to the fund.    Ms. Bair is also considering a special assessment on bank capital and may ask banks to prepay FDIC premiums through 2012.  The prepay option would raise about $45 billion.  The FDIC is also exploring capital infusions from foreign banking institutions, Sovereign Wealth Funds and traditional private equity channels.

Requiring banks to prepay its FDIC insurance premiums will drain economic capital from the industry.  The removal of $45 billion dollars may not seem like a large amount but it is a considerable amount of capital that banks will need to withdraw from the credit markets with the prepay option.  Think of the impact a targeted lending program of $45 billion to SME’s could achieve to incubate and restore economic growth.  Sum2 advocates the establishment of an SME Development Bank to encourage capital formation for SMEs to achieve economic growth.

Adding stress to the industry, banks remain obligated to repay TARP funds they received when the program was enacted last year.  To date only a fraction of TARP funds have been repaid.  Banks also remain under enormous pressure to curtail overdraft, late payment fees and reduce usurious credit card interest rates.  All these factors will place added pressures on banks financial performance.  Though historic low interest rates and cost of capital will help to buttress bank profitability, high write offs for bad debt, lower fee income and decreased loan origination will test the patience of bank shareholders.   Management will surely respond with a new pallet of transaction and penalty fees to maintain a positive P&L  statement.  Its like a double taxation for citizens.  Consumers saddled with additional tax liabilities to maintain a solvent banking system will also incur higher fees by their banks so they can repay the loans extended by the US Treasury to assure a well functioning financial system for the republic’s citizenry.

Risk: bank failures, regulatory, profitability, political, recession, economic recovery, SME

September 29, 2009 Posted by | banking, commerce, compliance, credit crisis, economics, FDIC, government, regulatory, risk management, SME, sovereign wealth funds, TARP, Treasury | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 2 Comments

IRS Audit Risk Survey: Final Results

tax-returnSum2 is please to report the final results of the IRS Audit Risk Survey for Fund Managers. Sum2 has commissioned the survey to determine financial services industry awareness and readiness for IRS audit risk factors. The survey sought to determine industry awareness and readiness to address IRS Industry Focus Issue (IFI) risk exposures for hedge funds, private equity firms, RIAs, CTAs and corporations using offshore structures.

Survey Background

Due to the pressing revenue requirements of the United States Treasury and the need to raise funds by recognizing new sources of taxable revenue; 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.

Since 2007 the IRS began to transition its organizational posture from a benign customer service resource to a more activist posture that is intent on assuring compliance and enforcement of US tax laws. Specifically the IRS has invested in its Large and Mid-Size Business Division (LMSB) to enhance its expertise and resources to more effectively address the tax audit challenges that the complexity and sophistication of investment management complexes present. The IRS has developed its industry issue competencies within its LMSB Division. It has developed 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 and industry issue coordinators that lends administrative and agency management efficiency by ranking and coordinating responses to specific industry issues. IRS is building up its portfolio of skills and industry expertise to address the sophisticated agility of hedge fund industry tax professionals.

To better focus the resources of the agency the IRS has developed a Three Tiered Industry Focus Issues (IFI). Tier I issues are deemed most worthy of in depth examinations and any fund management company with exposure in these areas need to exercise more diligence in its preparation and response. Tier I issues are ranked by the IRS as being of high strategic importance when opening an audit examination. This is followed by Tier II and Tier III focus issues that include examination issues ranked according to strategic tax compliance risk and significance to the market vertical. Clearly the IRS is investing significant organizational and human capital to address complex tax issues of the industry. The IRS is making a significant institutional investment to discover potentially lucrative tax revenue streams that will help to address the massive budget deficits of the federal government.

Survey Results

The survey was open to fund management executives, corporate treasury, tax managers and industry service providers. CPAs, tax attorneys, compliance professionals, administrators, custodians and prime brokers were also invited to participate in the study. The survey was viewed by 478 people. The survey was completed by 43% of participants who began the survey.

Geographical breakdown of the survey participants were as follows:

  • North America 73%
  • Europe 21%
  • Asia 6%

The survey asked nine questions. The questions asked participants about their awareness of IFI that pertain to their fund or fund management practice and potential mitigation actions that they are considering to address audit risk.

The survey posed the following questions:

  • Are you aware of the Industry Focus Issues (IFI) the IRS has developed to determine a fund managers audit risk profile?
  • Are you aware of the organizational changes the IRS has made and how it may effect your firms response during an audit?
  • Are you aware of the Three IFI Tiers the IRS has developed to assess a funds audit risk profile?
  • Are you aware of how the Three IFI Tiers may affect your audit risk exposures?
  • Have you conducted any special planning sessions with internal staff to prepare for IFI audit risk exposures?
  • Has your outside auditor or tax attorney notified you of the potential impact of IFI risk?
  • Have you held any special planning meetings with your outside auditors or tax attorneys to mitigate IFI risk?
  • Have you had meetings with your prime brokers, custodians and administrators to address the information requirements of IFI risk?
  • Have you or do you plan to communicate the potential impact of IFI risk exposures to fund partners and investors?

Survey highlights included:

  • 21% of survey participants were aware of IFI
  • 7% of survey respondents planned to implement specific strategies to address IFI audit risk
  • 6% of survey respondents have received action alerts from CPA’s and tax attorney’s concerning IFI audit risk
  • 26% of survey respondents plan to alert fund investors to potential impact of IFI audit risk

Recommendations

Sum2 believes that survey results indicate extremely low awareness of IFI audit risk. Considering the recent trauma of the credit crisis, sensational fraud events and the devastating impact of last years adverse market conditions; fund managers and industry service providers must remain vigilant to mitigate this emerging risk factor.

These market developments and the prevailing political climate surrounding the financial services sector will bring the industry under heightened scrutiny by tax authorities and regulatory agencies. Unregulated hedge funds may be immune from some regulatory issues but added compliance and disclosure discipline may be imposed by significant counter-parties, such as prime brokers and custodians that are regulated institutions.

Market and regulatory developments has clearly raised the tax compliance and regulatory risk factors for hedge funds and other fund managers. Issues concerning FAS 157 security valuation, partnership domiciles and structure, fund liquidation and restructuring and complex transactions has increased the audit risk profile for the industry. Significant tax liabilities, penalties and expenses can be incurred if this risk factor is not met with a well considered risk management program.

In response to this industry threat, Sum2 has developed an IRS Audit Risk Program (IARP) that prepares fund management CFOs and industry service tax professionals to ascertain, manage and mitigate its IRS risk exposures within the Three IFI Tiers. The IARP provides a threat scoring methodology to ascertain risk levels for each IFI risk factor and aggregates overall IFI Tier exposures. The IARP uses a scoring methodology to determine level of preparedness to meet each of the 36 audit risk factors.

The IARP helps managers to outline mitigation actions required to address audit risk factors and determine potential exposures of each risk. The IARP calculates expenses associated with mitigation initiatives and assigns mitigation responsibility to staff members or service providers. The IARP links users to issue specific IRS resources, forms and documentation that will help you determine an IFI risk relevancy and the resources you need to address it.

The IARP will prove a valuable resource to help you manage your response to a tax audit. It will also prove itself to be a critical tool to coordinate and align internal and external resources to expeditiously manage and close protracted audit engagements, arbitration or litigation events. The IARP product 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.

The IARP product is available for down load on Amazon.com.

The product can also be purchased with a PayPal account: Sum2 e-commerce

Sum2 wishes to thank all who anonymously took part in the survey.

If you have any questions or would like to order an IARP please contact Sum2, LLC at 973.287.7535 or by email at customer.service@sum2.com.

April 20, 2009 Posted by | compliance, CPA, CTA, FASB, hedge funds, IARP, IRS, legal, NP, private equity, regulatory, risk management, Tax, Treasury | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 5 Comments

Profit|Optimizer Presentation 1108

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Profit|Optimizer Presentation 1108

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December 16, 2008 Posted by | Uncategorized | , , , , , , , , | Leave a comment

What Are Sound Practices?

What are Sound Practices?

Sound practices are a set of standards and controls that mitigate numerous risk factors in the corporate enterprise. Sound practices must address corporate governance, operational and market risk factors, regulatory compliance, corporate citizenship, and stakeholder communications within a set of defined expense ratios.

Corporate Governance

James Wolfensohn, former President of the World Bank stated, “Corporate governance is about promoting corporate fairness, transparency and accountability.” Sound practices are a necessary prerequisite for effective and ethical corporate governance. Businesses must accept its precepts and clients and investors must demand compliance, ethical trading principles, honest and timely disclosure, operational integrity and a full commitment to its implementation and adherence. Effective corporate governance practices maintains the faith of investors and provide clear measures of transparency, accountability and performance measurement of business managers and owners.

Financial Health

The implementation of a sound practices program is a powerful value creation tool. A sound practices program provides investors and creditors an enhanced level of confidence that operational risk factors are minimized and other classes of risk are being monitored and controlled. Corporate and transactional transparency and shareholder disclosure is assured. Investor confidence and a more thorough understanding of a corporations strategy and risk characteristics will be the result of a sound practices program.

Investor Communications

The sound practices program advocates the delivery of reports, analysis tools and management compliance statements to investors and corporate stakeholders through accessible media channels. All communications should support a stated level of transparency for investor disclosure. Investors should expect timely disclosure of corporate risk factors and other events pertinent to corporate performance, profitability and potential risk events and factors.

Brand Building, Regulatory Compliance and Best Practices

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.

April 2, 2008 Posted by | sound practices | , , , , , , , | Leave a comment