Risk Alert

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

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

Last month, an earthquake and tsunami devastated the villages on Japans 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 todays 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 companys 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 Japans 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.

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

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? Japans 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 organizations 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 FDAs ban on dairy products and some fruits and vegetables from affected areas in Japan?

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

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 companys 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 IRSs 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.

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

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 counterintuitive. 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, bgregory@cbiz.com, 216.525.1954, or Michael S. Gallagher, Managing Director, CBIZ MHM Enterprise Risk Management Services, mgallagher@cbiz.com, 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 ser vices are provided by Mayer Hoffman McCann P.C., an independent CPA firm.

Copyright 2011. CBIZ, Inc. NYSE Listed: CBZ. All rights reserved.

www.cbiz.com