cbiz risk alert: steps you can take to manage the risks

Risk Alert

STEPS YOU CAN TAKE TO MANAGE THE RISKS OF NATURAL DISASTERS AND THEIR AFTERSHOCKS


Last month, an earthquake and tsunami devastated the

villages on Japan’s north-eastern coast and triggered power

outages and nuclear threats in surrounding areas. These

events were a humanitarian tragedy, resulting in terrible losses

of lives and property. Today, we are still learning the full extent

of the aftershocks for the business and financial communities.

Manufacturers, retailers, construction companies, not-for-profit

organizations, hedge funds, high net worth individuals – all

are affected in myriad ways. The full effects of the crisis will

likely become clearer in the days and months to come, as more

information becomes available about the many implications for

today’s interconnected world, ranging from global distribution

and supply chains to relief funds and rebuilding plans.

Ten Areas to watch closely

Is your organization still sorting through the implications of the

disaster and its aftershocks? If so, you may find the following

list of areas to watch and questions to ask helpful as a way

to keep your efforts on track in identifying and mitigating the

business and financial risks.

n Suppliers. Have you weighed the risk of disruptions to your

company’s supply chain and identified back-up suppliers?

Keep in mind that it may be necessary to go beyond your

immediate suppliers and consider the impact on your

suppliers’ suppliers to avoid risks of shortages, production

stoppages, and higher prices.

n Distributors. Have you considered the need for alternative

methods of distribution after a natural disaster? In the

wake of Japan’s crisis, retailers, distributors, and relief

workers found they needed to look into emergency

distribution channels as regular shipping lines encountered

delays in shipments into Tokyo Bay and throughout Japan.

n Finance. Are you monitoring the effects on foreign

currencies and investment values? In the financial sector,

hedge funds and insurance companies may need to

calculate and communicate expected losses, while banks

and other companies may need to adapt to more volatile

exchange rates.


n Energy. Are you monitoring the reactions of governments

to the identification of nuclear threats? Resulting changes

in policies, laws and regulations at both state and federal

levels could affect long-term energy plans and decisions

about sites for office or manufacturing facilities.

n Travel. Are your business travel policies and procedures

sufficiently responsive to safety concerns, and are they

designed to help travelling employees in an emergency?

Japan’s crisis underscored the need for mobile travel

monitoring services, as well as contingency plans for

disruptions to business travel.

n Insurance. Has your company arranged for suitable

insurance for natural disasters that could happen in your

region? The answer may not be apparent from a review

of your own policies. You may need to consider coverage

provided under local laws and the liability policies of

nuclear plant operators. In some locations, governments

may provide relief for residential damage but not for

commercial property.

n Disaster Recovery Plans. Does your organization have

suitable business continuity plans and disaster recovery

plans? Reports of earthquakes, floods, and nuclear

accidents raise the questions, “Could it happen here?”

and “Are we prepared for the worst case scenarios?”

n Taxes. Have you checked with your tax advisor regarding

any tax implications and any steps you can take to

avoid unnecessary tax risks? Keep in mind that the

Internal Revenue Service has set parameters for the tax

deductibility of relief donations.

n Accounting. Are you carefully checking the accounting

and disclosure requirements related to natural disasters,

so as to avoid any unnecessary risks related to the

quality of your organization’s financial reporting?

n Compliance. Are you monitoring the reports of radiation

traces in food and other important commodities? Is your

company prepared to comply with regulations, such as

the US FDA’s ban on dairy products and some fruits and

vegetables from affected areas in Japan?


Timely Reminders

You may wish to check with your CBIZ MHM advisor regarding

the risk, tax and accounting implications of natural disasters.

While a complete discussion of these matters is beyond

the scope of this alert, we would like to remind you of the

following:

1. Enterprise risk management. In coping with natural

disasters, companies should have a clear idea of how

much risk is involved and how much risk the company

is willing to take, (i.e., the company’s risk appetite.) For

example, concerns about the risk of an unexpected supply

chain disruption might be mitigated through higher levels

of inventory or use of a larger number of suppliers. But

these actions will likely result in higher costs and lower

productivity. The question for management is whether the

risks justify the costs. CBIZ has a number of resources

available to help you manage these and other risks,

including special reports on ”The Emerging Frontiers of

Risk Management” available on our website at www.cbiz.

com/ras.

2. Tax deductibility of charitable contributions. Under

IRS rules, contributions to non-US organizations are not

tax-deductible. Donors can check the status of charities

by doing a search on the IRS’s website at www.irs.gov/

charities/article/O,,id=96136,00.html, though some

organizations, such as churches and governments, may

be qualified even though they are not listed on the site.

To get a tax benefit, individual taxpayers must itemize

their deductions on Schedule A for the year in which they

made the contribution. IRS Publications 526, “Charitable

Contributions,” and 3833 may be helpful. Publication

3833, “Disaster Relief - Providing Assistance through

Charitable Organizations,” explains how new organizations

can obtain tax exempt status. Both publications are

available on www.irs.gov.


3. Accounting and financial reporting implications.

Natural disasters raise difficult accounting and reporting

questions that may require considerable judgment to

resolve. Examples include the accounting for impairments

of assets and write-offs associated with environmental

exposures. In some cases, the results may be counter-

intuitive. For example, the events in Japan seem

“extraordinary” in every sense of the word, but the

resulting losses will not typically qualify as “extraordinary”

for purposes of income statement presentation.

Companies with international operations face special

challenges due to the tax-accounting implications,

particularly for valuation allowances on deferred tax

assets and any accounting assumptions about indefinite

reinvestment of foreign earnings. Additionally, the events

may trigger more disclosure requirements or have

significant internal control implications.

Questions about this alert should be directed to Brian

Gregory, President and Senior Managing Director, CBIZ

MHM Risk and Advisory Services, [email protected],

216.525.1954, or Michael S. Gallagher, Managing Director,

CBIZ MHM Enterprise Risk Management Services,

[email protected], 713.562.1154.

This publication provides general information and does not

constitute legal, accounting, tax or other professional advice.

Readers are advised to obtain professional advice that is

appropriately tailored to their individual circumstances.

CBIZ and Mayer Hoffman McCann P.C. are associated

through an alternative practice structure. Audit and attest

services are provided by Mayer Hoffman McCann P.C., an

independent CPA firm.

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cbiz risk alert: steps you can take to manage the risks

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