covid-19 – business interruption mitigating risk, managing liquidity...
TRANSCRIPT
COVID-19 – Business Interruption Mitigating Risk, Managing Liquidity, and Unlocking Economic Relief
March 27, 2020
Presented by:Elisabeth O. da Silva, CPA, CFFJackie Reinhard, CPA
A Whole New World for Partnership Audits: OverviewRegional firm with over 200 employees including 22 Partners, many with Big 4 experienceOffices in Boston and WoburnSignificant Partner and Principal involvement in engagementsService privately-held businesses, their owners, and high net worth individualsTax, Assurance, IT Risk and Business Advisory including forensic accounting, litigation support, valuation, arbitration, and transaction advisory servicesAccess to global network through membership in Moore Global Network Limited
DGC FIRM OVERVIEWAt DGC, our professional curiosity drives everything we do —how we work; how we advise; how we partner with and seek out value for our clients.
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OVERVIEW
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Key risks and vulnerabilities Fraud Liquidity constraints Supply chain disruption Contract disputes Financial reporting and disclosure
Economic relief SBA Economic Injury Disaster Loans (EIDL) Third coronavirus stimulus package Business interruption insurance claims
Resources
Objective: To identify key risks and vulnerabilities during these challenging times and to provide a roadmap to mitigating your risk and unlocking economic relief
KEY RISKS AND VULNERABILITIES
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FRAUD – CYBERCRIME
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Cyber scammers follow headlinesOld schemes taking advantage of COVID-19 news Phishing to plant malware and ransomware Government employee impersonation schemes Charitable donation solicitations
Remain vigilant – don’t let your guard down Avoid clicking on links Use trusted, legitimate sources for COVID-19 information Do not reveal personal information or respond to these requests Verify a charity before making a donation
OCCUPATIONAL FRAUD AND WHITE COLLAR
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Investment scams offer “opportunities” and are taking advantage of COVID-19 news – don’t fall for “get rich quick” or “cures” Beware of “research reports” with predictions of “target price”
SEC warns investors of the substantial potential for fraud at this time SEC warns investors to be particularly cautious about:
Microcap stocks Claims that a company’s product/services can cure or stop
coronavirusDo your due diligence before you investOccupational fraud increases during economic recession and financial distress Embezzlement Payroll schemes Ghost billing and vendor schemes Expense account fraud Financial statement fraud/accounting malfeasance
LIQUIDITY OR CASH CRUNCH
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The Cash Cycle
Shorten cash cycle to build your cash reserve and reduce borrowing to fund operations
Flow supplier payment terms through to customer
Up-front retainers, deposits
LIQUIDITY
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UnderstandCurrent State
Decreasing revenue
Aged/uncollectable A/R
Growing A/P
Debt
Liquidity AnalysisTools
Cash forecast – 13 weeks
Develop scenarios
Model and dashboard
Reverse engineer for “worst case”
Monitor dashboard
Strategies for Optimization
Centralize cash management and shorten cash cycle
Prioritize disbursements
Short-term expense reductions (payroll)
Debt restructuring
Asset disposals
Additional long-term cash conservation –restructuring, discontinued operations
Cash Crunch
SUPPLY CHAIN
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Check in with your vendors and suppliers
Learn from current events
Balance efficiency and resiliency
Define the extent and timing of exposure
Coordinate joint mitigation efforts
Include in financial modeling scenarios
Log pain points Revisit sourcing strategies
and product engineering Explore diversification in
vendors and geographical locations
Mitigate risk Implement changes
to safeguard in the future
CONTRACT DISPUTES
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Uncertainty about ability to perform Breach of contract Covenant violations
Communication with affected parties Amendments to contracts Other compromises
Relief for non-performance Invoking force majeure clauses Common law doctrine of frustration Consider mitigating efforts and alternatives
FINANCIAL REPORTING AND DISCLOSURE
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Accounting estimates Fair value estimates Asset impairment Loss contingencies
Disclosures Subsequent events Risks and uncertainties
Going concern Debt covenants and risk of default Cash flow shortfalls, reserves and insolvency
FINANCIAL REPORTING AND DISCLOSURE (cont.)
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Transactions Additional diligence procedures surrounding M&A deals Delay of closing Representations and warranties
Communication Quantify financial impact based on various scenarios Report change in results and expectations to your shareholders in a timely manner Discussions with auditors
ECONOMIC RELIEF
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SBA ECONOMIC INJURY DISASTER LOANS
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Mass Growth Capital Corporation’s Small Business Recovery Loan Program – discontinued with SBA EIDL in place SBA EIDL assistance available to qualifying businesses and most non-profit organizationsWorking capital loans up to $2,000,000 Interest fixed at rates of 3.75% for small businesses and 2.75%
for non-profits Loan application process No fee to apply Processing time 2-4 weeks Six months to amend a denied application Affiliated entities subject to $2,000,000 combined, maximum 500 employees
Terms of the loans Up to 30 year terms 12-month payment deferrals No prepayment penalties
SBA ECONOMIC INJURY DISASTER LOANS (cont.)
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Items to consider Risk of default and ability to repay Resources available to collateralize the loan Time to process the application Not obligated to accept the loan if you’re approved Apply as soon as possible
THIRD CORONAVIRUS STIMULUS PACKAGE
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Paycheck Protection Program - Small Business Administration 7(a) Loans Terms
Public – private partnership Loans through private banks, up to $10 million Guaranteed by SBA Maximum interest rate 4%
Who can borrow Businesses and nonprofits with fewer than 500 employees, also includes gig
workers and sole proprietors, in business as of February 15, 2020 Waiver of affiliation rules for NAICS code 72 (accommodation and food services),
franchises and businesses that already have a SBIC loan in place
How do you apply Apply through private lenders Contact your financial institution
When will you get the money Waiting for clarification on logistics Treasury Secretary expects process will be streamlined by the end of next week
with same-day approval and disbursement
THIRD CORONAVIRUS STIMULUS PACKAGE (cont.)
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Other highlights of the Paycheck Protection Program Loan forgiveness
Eligible for forgiveness of certain payments including payroll, mortgage interest obligations, rent and utilities incurred during an eight-week time period after loan origination through June 30, 2020
Computation of forgiveness based on retention and/or rehiring employees
Other terms No application fee No personal guarantee No collateral Payment deferral of between 6 to 12 months Maximum maturity of 10 years following application for forgiveness Amounts forgiven will not be considered taxable income
BUSINESS INTERRUPTION INSURANCE CLAIMS
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Every policy is different. Past events have shaped coverage surrounding virus exclusion policy language Guidance is evolving at the federal, state and local levelMassachusetts has introduced a bill that, if passed, would force insurers to pay for COVID-19-related business interruption losses Even with unambiguous policy language and exclusions and without physical
loss/property damage Applies to insureds with 150 or fewer full-time equivalent employees in
MassachusettsFirst coverage suit filed in Louisiana Review policy coverageConsult with counsel and insurance agentPut insurer on notice and preserve right to recovery
BUSINESS INTERRUPTION INSURANCE CLAIMS (cont.)
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Prepare your business in the event you make a claim Assemble a team Collect, analyze and organize financial data Consider utilizing independent experts
Compile a robust, well-organized package, and consider the following documents Narrative describing the business and loss event triggering the claim,
including a timeline Insurance policy, including interpretations Profit and loss statements and other relevant financial reports Production and pipeline reports Invoices and purchase orders Payroll registers Major contracts
RESOURCES
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Fraud https://www.us-cert.gov/ncas/current-activity/2020/03/06/defending-against-
covid-19-cyber-scams https://www.investor.gov/introduction-investing/getting-started/five-questions-
ask-you-invest https://www.sec.gov/reportspubs/investor-
publications/investorpubsfivequestionshtm.html https://www.justice.gov/usao-wdnc/pr/us-attorney-andrew-murray-issues-
warning-covid-19-scams https://www.justice.gov/usao-ma/pr/us-attorney-andrew-e-lelling-issues-stern-
warning-regarding-scams-and-other-crimes https://www.justice.gov/usao-ndil/pr/us-attorney-announces-appointment-
federal-prosecutor-lead-fight-against-covid-19-fraud https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_coronavirus
RESOURCES (cont.)
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DGC Updates and Resources dgccpa.com/coronavirus
Cybersecurity and Infrastructure Security Agency https://www.cisa.gov/coronavirus
Federal Trade Commission https://www.consumer.ftc.gov/features/coronavirus-scams-what-ftc-doing
Charity Organization Research https://www.give.org https://www.charitynavigator.org https://www.charitywatch.org https://www.guidestar.org
RESOURCES (cont.)
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Financial Reporting and Disclosure https://www.sec.gov/news/press-release/2020-53 https://www.mscpaonline.org/news_and_resources/news/2640/view
SBA Disaster Loans SBA Economic Injury Disaster Loans may be applied for online at
https://disasterloan.sba.gov/ela Go to http://www.sba.gov/size with NAICS code to determine eligibility
Federal Reserve Actions https://www.federalreserve.gov/covid-19.htm
National Association of Insurance Commissioners https://content.naic.org/naic_coronavirus_info.htm
QUESTIONS?
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BIOS
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Elisabeth O. da Silva, CPA, CFF - Beth is a Partner in our Business Advisory practice and has over 26 years of experience conducting white collar investigations and providing litigation consulting and expert witness services in the context of complex commercial litigation for a wide variety of companies, ranging from small, privately-owned businesses to large, multi-national publicly-traded entities. She also serves as an arbitrator in commercial disputes and is an active member of the American Arbitration Association’s roster of arbitrators.Beth has testified as an accounting or damages expert at trial, arbitration, and deposition for privately-owned and publicly-traded entities, as well as on behalf of the Securities and Exchange Commission. She has also served on complex commercial arbitration panels.Beth advises legal counsel, management, shareholders, and boards of directors on accounting and auditing, financial, valuation and internal control matters in the context of internal investigations, shareholder disputes, post-acquisition and net working capital disputes, business and contract disputes, accountants' liability, and enforcement or regulatory issues.Prior to joining DGC, Beth co-founded and operated a boutique litigation consulting firm after starting her career at EY. Beth is a graduate of the University of Massachusetts at Amherst with a Bachelor’s Degree in Business Administration.
BIOS
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Jackie Reinhard, CPA - Jackie is a Principal in the firm’s Business Advisory practice, and she has over 12 years of experience in public accounting and financial reporting. She works with clients on a variety of matters such as fraud and forensic investigation, breach of contract, economic damages, lost profits, business valuations, business interruption, and other complex accounting matters.Jackie also has experience providing audit and advisory services to private businesses with an emphasis on real estate, private investment companies and employee benefit plans. Her clients have spanned various facets of the financial services and real estate industries, including investment funds, development, hotels, commercial/retail and multi-family.Jackie is a graduate of the University of Northern Iowa with a Bachelor of Arts in Accounting.