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NFIB Index: Small Business Optimism Improves

The National Federation of Independent Business (NFIB) has just released the Small Business Economic Trends Report for June 2010. The report published since 1973 measures small business sentiment on numerous economic and business factors that confront small businesses.

This months report indicates that small business optimism continues to improve.  The NFIB index rose 1.6 points to 92.2 recording the highest level of the index since September of 2008.

During the month seven of the 10 index components rose, with job creation and capital expenditure plans recording minuscule increases.  The Index rose above the 90 level for the first time in 21 months ending the longest period of negative sentiment in the four decade history of the index.

Though seven of the ten index components rose, small business job creation remains weak.  The  hemorrhaging  of job losses has abated employment opportunities with small businesses is not materializing.  Employment is a critical component of the Index and is understood as an important sign of economic recovery.  During the month small businesses continued to layoff workers registering a negative .5 per respondent.   This records the weakest reading for small business employment for the past three months.  The NFIB Index corroborates employment trends recently reported by ADP’s National Employment Report and the Department of Labor.  The small business sector is not contributing to private sector employment growth.  This is a troubling concern because it is widely understood that small businesses need to be a leading driver for job creation to sustain economic recovery.  As we stated last month, historically small businesses have been the major driver in job creation following recessions.  The poor job creation reading by the index  continues to be a  contra indicator of economic recovery. Small business owners are by nature and temperament optimistic and the report indicates that small businesses are still very cautious about allocation capital for jobs to meet improving business conditions.

Highlights of the Report:

  • Jobs:   9% percent of respondents reported unfilled job openings. Over the next three months, 7 % plan to reduce employment and 14 % plan to create new jobs.
  • Credit:  32% of respondents looking for financing report difficulties in arranging credit.  13% reported loans harder to get than in their last attempt. Overall, 92% of the owners reported all their credit needs met.
  • Profits: 17%of respondents reported higher earnings while 49% of respondents reported a decline in profits.
  • Prices:   14% reported raising average selling prices, and 28% reported average price reductions.
  • Capital Spending:  A net 20% of respondents planned to make a capital expenditure within the next three months, 5% planned a facilities expansion and a net 8% expect business conditions to improve over the next six months.
  • Sales: 23% of all owners reported higher sales while 38% reported lower sales.

Overview of the Report

The NFIB Optimism Index records that small business sentiment and business conditions are improving  but hint that small businesses are not fully participating in a vibrant economic recovery story.  The survey indicates that small businesses remain reluctant to create new jobs.  Until this improves, demand in the larger economy and stimulation drivers for small business growth will remain weak.

Earnings and capital expenditures tend to correlate in the absence of  subdued credit channels.  More businesses are required to self fund expansion initiatives and capital expenditures.  With earnings down small businesses spending will remain weak creating yet another headwind to market demand for goods and services.

As government stimulus programs come to a close it is crucial that small and mid-sized businesses (SME) become a lead driver in the recovery.   Though the NFIB index indicates that business conditions and sentiment is improving the financial health and overall psychology of the sector seems ambivalent to its critical role in economic recovery scenarios.

About the NFIB Index

Components of the Optimism Index include: Labor Markets, Capital Spending, Inventory and Sales, Inflation, Profits and Wages and Credit Markets.  This months survey recorded the responses of 823 NFIB members and concluded May 31.

The NFIB Research Foundation has collected Small Business Economic Trends Data with Quarterly surveys since 1973 and monthly surveys since1986. The sample is drawn from the membership files of the NFIB.

The NFIB Report can be downloaded from the Sum2 website. NFIB Optimism Index

Solutions from Sum2

Sum2 offers risk management and opportunity discovery tools to SME’s.  The Profit|Optimizer helps SME’s manage risk, devise recovery strategies and make better informed capital allocation decisions.

You Tube Video: Gillespie, Rollins Stitt, On the Sunnyside of the Street

Risk: SME, small business, economic recovery, NFIB

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June 9, 2010 Posted by | economics, NFIB, Profit|Optimizer, recession, risk management, small business, SME, unemployment | , , , , , , , , , , , , | 1 Comment

ADP Reports Weak Job Growth

ADP has released its National Employment Report for April.   Non-farm private employment increased 32,000 during  the month on a seasonally adjusted basis.   ADP also reported an upward revision of 19,000 jobs for March.  The two consecutive net employment gains reported by ADP indicates that job loss may have bottomed and the slim increase in employment confirms a positive trend is underway.     The massive governmental intervention to recapitalize the banking sector and initiate stimulus programs have stabilized the economy.  The abatement of extreme risk aversion in the credit markets, favorable interest rates, improving consumer sentiment, low inflation and the dramatic rebound in securities markets are all positive growth drivers for the economy.

Highlights of the ADP  report include:

Estimates non-farm private employment in the service-providing sector increased by 50,000.

Employment in the goods-producing sector declined 18,000.

Employment in the manufacturing sector rose for the third consecutive month by 29,000 jobs.

Employment in the construction sector dropped by 49,000.

Large businesses with 500 or more workers  added 14,000 jobs

Medium-size businesses, defined as those with between 50 and 499 workers increased by 17,000.

Employment among small-size businesses with fewer than 50 workers, increased by 1,000 in April.

Employment in the financial services sector dropped 14,000, resulting in over three years of consecutive monthly
declines.

Overview of Numbers

The net gain of 32,000 jobs for the massive US economy is an admittedly weak gain for an economy that has shed 11 million jobs but it is an indication that the economy is stabilizing.

The correlation of the loss of jobs in construction and financial services is an indication of a US economy that continues to transition its dependency on residential and commercial real estate development.  The difficult conditions in the commercial and residential real estate market will continue as excess inventories brought on by high foreclosure rates continue to be worked off.   As the ADP report highlights construction employment has declined for thirty-nine consecutive months, bringing the total decline in construction jobs since the peak in January 2007 to 2,159,000.  Its clear that the US economy has lost two critical recovery drivers.

Soft conditions in the construction sector weighs heavily on small business job creation.  Most contractors are small businesses and with the anemic rate of new housing construction small business job creation will continue to be soft.

Specialty retail is another large component of the small business market.  Improving consumer sentiment will help this sector.  However small retailers have suffered massive business closures during the recession.  A robust recovery in this sector will not commence until commercial lending for start ups and business expansion becomes more readily available from the banks.

The report also indicates that the goods producing sector of small businesses shed 24,000 jobs during the month  to continue the trend in the deterioration of small manufactures.  This decline was offset by a 25,000 gain in service based jobs.  The  growth of the service sector of the US economy continues at the expense of the manufacturing sector.  The growth of small business service sector indicates that businesses continue to managed fixed costs of their business by outsourcing various services.

This ADP report is a positive indication that we may be at a bottom of the economic cycle.  Bottoms don’t mean that things are improving they indicate that conditions are not worsening.  The economic recovery is still confronted with headwinds.  The oil spill in the Gulf of Mexico, the economic and growing political instability of EU countries and the cooling off of the Chinese economy may present some challenges to a sustained and robust recovery in the United States.

Solutions from Sum2

Sum2 advocates the establishment of an SME Bank to sustain long term economic growth.  Sum2 offers SME’s the Profit|Optimizer to help them manage risk, devise recovery strategies and make better informed capital allocation decisions.

For information on the construction and use of the ADP Report, please visit the methodology section of the ADP National Employment Report website.

You Tube Video: Isley Brothers, Work To Do

Risk: unemployment, recession, recovery, SME

May 5, 2010 Posted by | ADP, banking, credit, manufacturing, real estate, recession, small business, SME, Uncategorized, unemployment | , , , , , , , , , , , , , , , | Leave a comment

Survey Says: Corporate Tax Audits on the Rise

An-Examination-at-the-Faculty-of-Medicine,-ParisA recent survey published by Sabrix indicates that corporate tax audits are on the rise.   Eighty-three percent of companies surveyed report an increased number of audits due to state and local tax revenue shortfalls.  Survey respondents comprised 140 tax executives from the Forbes Global 2000 Index.

Ninety-six percent of the attendees said that despite the recession, transaction taxes such as sales and use taxes will continue to be an area of focus. In response to the economic downturn, 45 percent of the attendees said their companies had reduced their employee headcount, but 45 percent also increased their investment in tax technologies.

Eighty-one percent of the respondents have made sales and use tax and value-added tax a more strategic focus of their company due to the economy. A similar proportion said they have implemented new programs and processes to remain compliant.

The IRS is under pressure to enforce compliance with federal tax statutes.  The US Treasury coffers are seriously depleted given all the stimulus and economic recovery expenditures.  The IRS is mandated to assure that corporations comply with all tax laws.  The IRS has developed an Industry Focus Issue, (IFI) audit strategy that  profiles high risk corporate tax compliance statutes.   IFI guides field audit personnel through a risk based assessment of corporate tax compliance.  The IFI aggregates and ranks  Three Tiers of high risk tax compliance issues.  Examiners will conduct rigorous reviews of these issue sensitive factors.  The factors concern revenue recognition, sales tax, partnership reporting, and the 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 helps corporate tax professionals score tax risk exposures, determine mitigation actions, estimate remediation expenses and manage tax controversy defense strategies.  The IARP is available for purchase on Amazon.com.

Sum2 also has developed the Corporate Audit Risk Program (CARP).  The CARP is IRS tax risk assessment tool for corporate tax managers.  A  single user license for CARP can be purchased on Amazon.com.

Risk: compliance, tax audit, reputation, litigation

You Tube video: Stevie Ray Vaughan, Taxman

October 23, 2009 Posted by | CARP, CPA, government, IARP, IRS, regulatory, risk management, Sum2, Tax, Treasury | , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

Regulators Shut Doors on Three More Banks

BankClosuresRegulators 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

October 3, 2009 Posted by | banking, credit crisis, FDIC, recession, risk management, SME, Treasury | , , , , , , , , | Leave a comment

G-20 Fallout: French Banks Exit Tax Havens

french bank tokenAn 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

October 1, 2009 Posted by | associations, banking, hedge funds, IARP, OECD, off shore, private equity, reputational risk, risk management, Tax, Treasury | , , , , , , , , , , , , , , , , , , , | 2 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

Day of Atonement: Al-Chet for Risk Managers

YomKippurTNToday is Yom Kippur.  It is the Day of Atonement.  The Jewish faith marks this day each year as a day to reflect on our sins and shortcomings we have committed during the past year.  It is a day of personal assessment.  Calling all to examine how we have failed to live a life in conformance to our highest aspirations and ideals.  It is customary to recite an Al-Chet confession prayer.  The Al-Chet is a confession of a persons past year sinful behavior. It is hoped that this admission of sin leads to  reconciliation with the aggrieved and an awareness that helps to establish a pattern of improved behavior in the future.

It is good that we commemorate such a day and use it to a constructive purpose.  After all, how many among us are without sin?  How many of us have achieved a level of perfection that obviates the need to reflect on how we can improve and make amends to those we may have hurt?   To be sure, even the best among us have fallen short of the glory of God.  A Higher Power surely keeps mere mortals rightsized and humble when our egos and perception of ourselves grows too large and burdensome.  The need to keep a strong self will from running riot is critical.  It is particularly dangerous when a person or corporation is unaware and ambivalent to the collateral damage its actions  spawn through the naked pursuit of self interest and ambition. In a sense, God is the ultimate celestial Chief Risk Officer that keeps wanton will in check.

The Day of Atonement is an important day because it is a day of transformation.  It calls for self examination and transformation.  Once we have learned the nature and extent of how our actions and inaction have negatively impacted ourselves and others,  we are called to make amends to set things right.  It is a day that requires considered action to improve ourselves so we can become a positive force for change in the world.

Considering the year that just transpired in the financial services industry, I wonder what an Al-Chet confession for risk managers would include.   We need a strong dose of atonement so we don’t repeat the egregious mistakes we committed last year.

An Al-Chet for Risk Managers:

I was not strong enough to stand up to my boss

I put selfish gain ahead of ethical considerations

I falsified or hid data to conceal results

I failed to be objective

My risk model was too subjective

I ignored warning signs

I was in over my head

I did not understand all the risk factors

I failed to get an outside opinion

I was beholden to monetary gain

I was victim to group think

I placed institutional interest ahead of ethical considerations

I  failed to admit I was wrong

I was not honest with regulators

I was not honest with shareholders

I looked the other way

I failed to act

I conveniently overlooked infractions / irregularities

I made exemptions

I did not understand the depth of the problem

I know there are many more.

Please help me to uncover, understand, make right and overcome.

Shalom

You Tube Music Video:  Aretha Franklin,  I Say a Little Prayer

Risk: compliance, reputation, catastrophic risk, moral hazards

September 28, 2009 Posted by | banking, corruption, credit crisis, regulatory, reputation, reputational risk, risk management, sustainability | , , , , , , , , , , , , , , , , , , | 6 Comments

UBS to Clients, “You’re on the List!”

 

tax evasionSwiss banking giant UBS, announced that it will inform American clients whether information about 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.

You Tube Video: O’Jays, For the Love of Money

Risk: tax evasion, compliance, reputation, prison

September 22, 2009 Posted by | Uncategorized | , , , , , , , , , , , , , , , , , , , , , , , , , | 4 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

The Black Knight

Sir Allen Stanford

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 Sanford 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) 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.

You Tube Video: Moody Blues: Nights in White Satin

Risk: money laundering, regulatory, operations, reputation

February 23, 2009 Posted by | AML, hedge funds, off shore, operations, regulatory, reputation | , , , , , , , , | Leave a comment