Risk Rap

Rapping About a World at Risk

Economic Recovery Gathers Steam

Private-sector employment increased by 217,000 from January to February on a seasonally adjusted basis, according to the latest ADP National Employment Report released today. The estimated change of employment from December 2010 to January 2011 was revised up to 189,000 from the previously reported increase of 187,000. This month’s ADP National Employment Report suggests continued solid growth of nonfarm private employment early in 2011. The recent pattern of rising employment gains since the middle of last year was reinforced by today’s report, as the average gain from December through February (217,000) is well above the average gain over the prior six months (63,000).

The fears of a jobless recovery may be receding but the US economy has a long way to go before pre-recession employment levels are achieved. As we stated previously the economy needs to create over 200,000 jobs per month for 48 consecutive months to achieve pre-recession employment levels. The six month average of 63,000 is still well below the required rate of job creation for a robust recovery to occur. The Unemployment Rate still exceeds 9%.

The February report is encouraging because it points to an accelerating pace of job creation. The post Christmas season employment surge represents a 30,000 job gain over January’s strong report that triples the six month moving average. The service sector accounted for over 200,000 of the job gains. The manufacturing and goods producing sector combined to create 35,000 jobs. Construction continues to mirror the moribund housing market shedding an additional 9,000 jobs during the month. The construction industry has lost over 2.1 million jobs since its peak in 2008.

The robust recovery in the service sector is welcomed but sustainable economic growth can only be achieved by a robust turn around in the goods producing and manufacturing sectors. Service sector jobs offer lower wages, tend to be highly correlated to retail consumer spending and positions are often transient in nature. Small and Mid-Sized Enterprises (SME) is where the highest concentration of service jobs are created and the employment figures bear that out with SMEs accounting for over 204,000 jobs created during the month of February.

Large businesses added 13,000 jobs during the month of February. The balance sheets of large corporations are strong. The great recession provided large corporates an opportunity to rationalize their business franchise with layoffs, consolidations and prudent cost management. Benign inflation, global presence, outsourcing, low cost of capital and strong equity markets created ideal conditions for profitability and an improved capital structure. The balance sheets of large corporations are flush with $1 trillion in cash and it appears that the large corporates are deploying this capital resource into non-job creating initiatives.

The restructuring of the economy continues. The Federal stimulus program directed massive funds to support fiscally troubled state and local government budgets. The Federal Stimulus Program was a critical factor that help to stabilize local government workforce levels. The expiration of the Federal stimulus program is forcing state and local governments into draconian measures to balance budgets. Government employment levels are being dramatically pared back to maintain fiscal stability. Public service workers unions are under severe pressure to defend employment, compensation and benefits of workers in an increasingly conservative political climate that insists on fiscal conservatism and is highly adverse to any tax increase.

The elimination of government jobs, the expiration of unemployment funds coupled with rising interest rates, energy and commodity prices will drain significant buying power from the economy and create additional headwinds for the recovery.

Macroeconomic Factors

The principal macroeconomic factors confronting the economy are the continued high unemployment rate, weakness in the housing market, tax policy and deepening fiscal crisis of state, local and federal governments. The Tea Party tax rebellion has returned congress to Republican control and will encourage the federal government to pursue fiscally conservative policies that will dramatically cut federal spending and taxes for the small businesses and the middle class. In the short term, spending cuts in federal programs will result in layoffs, and cuts in entitlement programs will remove purchasing power from the demand side of the market. It is believed that the tax cuts to businesses will provide the necessary incentive for SME’s to invest capital surpluses back into the company to stimulate job creation.

The growing uncertainty in the Middle East and North Africa is a significant political risk factor. The expansion of political instability in the Gulf Region particularly Iran, Egypt and Saudi Arabia; a protracted civil war in Libya or a reignited regional conflict involving Israel would have a dramatic impact on oil markets; sparking a rise in commodity prices and interest rates placing additional stress on economic recovery.

Political uncertainty tends to heighten risk aversion in credit markets. The financial rescue of banks with generous capital infusions and accommodating monetary policies from sovereign governments has buttressed the profitability and capital position of banks. Regulatory uncertainty of Basel III, Dodd-Frank, and the continued rationalization of the commercial banking system and continued concern about the quality of credit portfolios continue to curtail availability of credit for SME lending. Governments are encouraging banks to lend more aggressively but banks continue to exercise extreme caution in making loans to financially stressed and capital starved SMEs.

Highlights of the ADP Report for February include:

Private sector employment increased by 217,000

Employment in the service-providing sector rose 202,000

Employment in the goods-producing sector declined 15,000

Employment in the manufacturing sector declined 20,000

Construction employment declined 9,000

Large businesses with 500 or more workers declined 2,000

Medium-size businesses, defined as those with between 50 and 499 workers increased 24,000

Employment among small-size businesses with fewer than 50 workers, increased 21,000

Overview of Numbers

The 202,000 jobs created by the SME sectors represents over 90% of new job creation. Large businesses comprise approximately 20% of the private sector employment and continues to underperform SMEs in post recession job creation. The strong growth of service sector though welcomed continues to mask the under performance of the manufacturing sector. The 11 million manufacturing jobs comprise approximately 10% of the private sector US workforce. The 20 thousand jobs created during February accounted for 10% of new jobs. Considering the severely distressed condition and capacity utilization of the sector and the favorable conditions for export markets and cost of capital the job growth of the sector appears extremely weak. The US economy is still in search of a driver. The automotive manufacturers have returned to profitability due to global sales in Latin America and China with a large portion of the manufacturing done in local oversea markets.

The stock market continues to perform well. The Fed is optimistic that the QE2 initiative will allay bankers credit risk concerns and ease lending restrictions to SMEs. A projected GDP growth rate of 3% appears to be an achievable goal. The danger of a double dip recession is receding but severe geopolitical risk factors continue to keep the possibility alive.

Interest rates have been at historic lows for two years and will begin to notch upward as central bankers continue to manage growth with a mix of inflation and higher costs of capital. The stability of the euro and the EU’s sovereign debt crisis will remain a concern and put upward pressure on interest rates and the dollar.

As the price of commodities and food spikes higher the potential of civil unrest and political instability in emerging markets of Southeast Asia, Africa and Latin America grows. Some even suggest this instability may touch China.

The balance sheets of large corporate entities remain flush with cash. The availability of distressed assets and volatile markets will encourage corporate treasurers to put that capital to work to capitalize on emerging opportunities. The day of the lazy corporate balance sheet is over.

Solutions from Sum2

Credit Redi offers SMEs tools to manage financial health and improve corporate credit rating to attract and minimize the cost of capital. Credit Redi helps SMEs improve credit standing and demonstrate to bankers that you are a good credit risk.

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: John Handy, Hard Work

Risk: unemployment, recession, recovery, SME, political

March 3, 2011 Posted by | commerce, credit, Credit Redi, economics, government, lending, manufacturing, recession, risk management, SME, taxation, Tea Party, unemployment, unions | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

We Deserve Better (2): The Damnation of the Democrats

A few days after President Obama took office I remember him emerging from a meeting at the Pentagon.  The summit was arranged to brief the Commander In Chief on the progress of the wars and to assure the nation that the new president was in-sync with his generals and admirals charged with running the war.  Emerging from the highly publicized meeting America’s new war time president stated “as long as the generals take care of what they have to do, we’ll take care of what we have to do.”  I found the statement to be unsettling.  It implied that  the new administration would not alter the course set by the previous administration insuring that the inertia of Bush’s policies and strategies would continue unabated.  On another level Obama’s statement also seemed to suggest an abdication.  I get nervous to think that the Commander in Chief  has ceded civilian control of the greatest military force the world has ever known.  The decision to pursue war or enjoy peace is too delicate a matter to be left to the decisions of an entrenched military-industrial bureaucracy.  The abdication of assertive control, weather its born from the desire to get along, build consensus or a deep seated need for acceptance has been a disturbing custom of Obama’s presidency and the prevailing characteristic of the Democratic Party.

Obama’s easy surrender to established protocols, processes, precedents has been a hallmark of his presidency.  It exemplifies the failure of the Democratic Party’s oppositional legacy to Republican rule during the two previous Bush Administrations.  At every turn, the Democrats gave in to the Republican conservative legislative agenda with little or no dissent.  The Patriot Act, the blind march to  two unnecessary wars, the dismantling of government oversight and regulatory controls on business, the slavish submission to Republican led expenditures or tax cuts in service to corporate welfare and the tepid lip service to the struggle for social justice made the democrats complicit accomplices in America’s dramatic conservative swing.

The democrats failure as an oppositional force to counter the reactionary juggernaut of neo-conservatism has emboldened the reactionary impulses of the ruthless power elites.  Threatened by economic distress and disintegration of our political institutions, Americas ruling  plutocracy has spawned a malevolent Tea Party movement to crush any progressive populism that may arise to counteract their social position, economic power and political sovereignty. The democrats adamant refusal to stand firmly against the destructive impulses of xenophobia and virulent nationalism has allowed an ugly chorus of fear to become our new national anthem.  The resentful voices of suspicion, intolerance and  exclusion grows ever louder each day as emboldened Falangists and neo-fascists take center stage on a surreal  commercial production of American political theater.

In defense of President Obama his presidential campaign and his administration have expressed a deep desire to pursue a political consensus.  This sentiment is admirable and the ability to form a consensus is an absolute and critical virtue to the health of a democratic society.  The freedom to express differing opinions, voice dissent, air grievances, petition, ability to listen, interest to hear, converse, change opinions and assimilate these competing impulses to form a consensus to express the common will are what makes democracies imperfect yet the fairest expression of governance.  Mr. Obama has sought to pursue and build consensus with an opposition Republican Party that has been nothing short of obstructionist since the democrats assumed control of the Executive office.  Rush “Country Firster” Limbaugh said it best “I hope he fails” set the tone and sealed the intractability of Republicans and any possibility of bipartisan cooperation to deal with the critical issues confronting the nation.

Last summers spectacle of town meetings designed to initiate a national conversation on Health Care Reform devolved into a partisan shouting match and an opportunity for the formation of the Tea Party galvanized by propaganda about a socialist takeover of the economy, death panels, and the idea that President Obama was a fascist dictator.  At this point President Obama still took the opportunity to sit down with the leadership of the GOP in a televised discussion to initiate a dialog.  The Consensus Builder in Chief was rebuffed again.  The democrats responded by killing single-payer and backing down on universal health coverage.  The watered down health care reform bill accomplished an extension of coverage for more, but not all Americans and eliminated preexisting conditions as a disqualification for coverage while also extending the power of insurance companies by making it mandatory that all tax payers purchase health insurance.

This reform is not a significant ground breaking legislative event.  President Obama and the democrats should have recognized early on the inability to work a compromise with the obstructionists in the Republican Party.  As is the case with Cap and Trade legislation, rescinding  Don’t Ask Don’t Tell, ending the Iraq and Afghanistan war, financial services reform, TARP and the economic stimulus bill;  the GOP, “Party of No” has done everything in its power to derail the efforts of the democratic party to address the deep problems confronting America.  The Democratic Party should have leveraged its control of the legislative and executive branch of the Federal Government to push through a program for a new America.  The pressing circumstances of history required decisive leadership and bold ideas to address the complex problems confronting America.  FDR’s “New Deal” or Johnson’s “Great Society” were ideas accompanied by innovative legislation to solve systemic problems.  The democrats tepid response acquiesced to the conservative demands of the GOP.   The Blue Dog Democrats yelped and barked louder then any rabid GOP hound subverting a robust game changing legislative response to the problems confronting America.

The democrats would again demonstrate their timidity in how they responded to the Gulf Oil Spill.  If the free falling economy was the equivalent of economic Armageddon the Horizon Deep Water catastrophic oil spill was its environmental equivalent.  In each case President Obama fashioned piece meal responses designed not to offend “free market evangelists” for fear of being accused of over reaching.  Both instances provided opportunities to mobilize the nation and its significant resources in these titanic tests of national resolve.  In both instances the cojones challenged donkeys failed to seize the reins of state to wield its power.  I am still shocked by images of Jamie Dimon and Lloyd Blankfein pulling the strings on Timothy Geithner like a marionette to exact concessions during the banking crisis.  Or consider the high profile of BP CEO,  Tony “I want my life back” Hayward mounting a $50 million PR campaign to quell any concerns that the benevolence of corporate capitalism will eventually “set things right.”    The Republicans turned this into President Obama’s Katrina with Bobby “don’t spend no stim in Louisiana” Jindal taking the EPA to court for declaring a moratorium on deep water drilling.  And the fattest of fat cats Republican Mississippi Governor Haley “rebuild the casinos first” Barbour shaming Obama to spend a portion of his non- Martha Vineyard family vacation swimming in the pristine waters of the Gulf of Mexico.  It was a PR disaster for President Obama because he failed to act with the resolve or manner of a strong decisive leader.

But now as the midterms approach the democrats must answer to a crumbling alliance of constituencies that they have taken for granted and failed to help.  They are unable to see  constituents as anything other then a demographic voting block devoid of a face, personality or soul.  The democrats see stereotypes not people.  Labor unions are blue collar voters that now approximate 7% of registered voters.  This year the democratic controlled legislature failed to act on Card Check legislation that would protect the right of labor unions to vote and organize non-union companies.  Another important constituency of the Democratic Party is the LGBT community.  The military said it would comply with the decision of a California District Court  that overturned Don’t Ask, Don’t Tell.  Incredibly, President Obama’s Attorney General appealed the decision and asked the court to reinstate Don’t Ask, Don’t Tell.  Teacher unions are also big supporters of the Democratic Party, but many democrats support school vouchers and Charter Schools and seem unconcerned that financial and institutional support of public schools continues to erode.  Working class families and woman  are under severe distress as unemployment rates approach 10%, home foreclosures rise , spiraling cost of living increases spike, the cost of sending kids to college slip out of reach and a marked erosion in quality of life and expectations for a secure future and comfortable retirement evaporate.    The democrats did little to solve these pressing problems save the offer of cheap lip service that they understand their pain.  Charlie Rangel secure in the refuge of his four rent controlled apartments will not feel the cold experienced by a homeless mother and her children this winter;  nor will Hillary Clinton lose any sleep worrying about  deploying Chelsea to fight an incomprehensible war in Afghanistan.

This mid term election democratic candidates are running away from their unpopular president.  They will run on a platform of tax cuts and appear as local election district manifestations of gun toting patriotic Christophanies.  The poverty of a party with no conviction of principle is made plain.  Having no principles, Democrats have not offered a true alternative to reactionary Republicanism.  Nearsightedness has robbed them of a vision for a new republic.  They offer no demarcation with the broken policies that preceded their rule.  The hallmark of their governance has been the complete compromise with an recalcitrant opposition; content to administer a broken and corrupt apparatus rather then chart a new path.  The democrats remain shining examples of self serving politicians retuning to office  on mythical inertia to secure rent controlled apartments while public housing remains an endangered and dear want for many.  They believe themselves to be righteously led by the presiding shame of a president made possible by an epic civil rights struggle who cannot muster the fortitude or conviction to extend the equal right of marriage for one of his liberal constituencies.

We deserve better.

You tube Music Video: Les McCann, Eddie Harris, Compared to What

Risk: democracy, two party political system, liberalism

 

October 28, 2010 Posted by | Bush, conservatism, culture, democracy, democrats, environment, labor, LGBT, Obama, politics, recession, republicans, social justice, TARP, taxation, Tea Party, unemployment | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 1 Comment

Profit Us Maximus

The deal is closed.  American democracy has been sold. The US Constitution, discovered in a discount bin at a cheap dollar store at the Mall of America will now be fully privatized to serve the greater corporate interests of America.  The deal will enable the global fraternity of capitalists to finally unlock and fully realize the hidden value of an unencumbered American dream.  Profit-Us-Maximus  will replace E Pluribus Unum as the national slogan.  Undoubtedly it will appear on our national currency for the freedom of commercial interests and the uninhibited power of capital has triumphed.  Commercial interests have trumped “we the people”.  American liberty, a political currency once recognized as the worlds leading example of representative democracy has been severely devalued.

The Supreme Courts decision overturning laws that restrict corporate freedom of speech now allows corporations the unrestricted right to financially support candidates for public office.  This paves the way for an installation of  a more corporate friendly oligarchy to rule over the citizens of the worlds first and now defunct representative democracy.  The courts ruling in the Citizens United vs. the US Federal Election Commission overturned existing laws that prohibited corporations from exercising free speech.  The ruling now sanctifies the corporate purchase of air time to fund media campaigns that support or attack candidates running for public office.  The wisdom behind the overturned law was to protect the interests of citizens from a corporations ability to use its considerable capital resources to finance and influence the election of  political candidates favorable to their corporate interests.  That law is yesterdays newspaper.

The decision opens the possibility that the governance of our nation, states and townships will be administered by elected officials financed and paid for by corporate largess proffered with the proviso to do their bidding.  America risks becoming one giant company store.  Once free citizens endowed with the protection and empowerment of a Constitution and a Bill of Rights will become beholden to the whims of corporate paternalism.

If your a shareholder in one of the corporations this is a bullish market event and your equity position has surely appreciated in value.  The special dividend of political power born from purchased access to legislators will accrue favorable returns to investors in The United Corporate States of America.  No longer will senators hail from the great state of Georgia or the Live Free or Die State of New Hampshire.  It’ll be the senator from “Do No Harm” Google or “Have It Your Way” Burger King.

There will be a million unintended consequences resulting from this decision.  How government administers and delivers services and how institutions fulfill their social mission will drastically alter.  Institutions and functions that serve and support education,  military, roads and infrastructure, health care, consumer and  environmental regulations, labor protection laws and provision of social services will be transformed.  The very nature of the liberal nation state will change.

This decision will create conditions for the privatization of governmental assets and institutional service structure  to accelerate at mind numbing speed.  The New Jersey Turnpike can now be sold to a private equity firm from China.  Drilling and the exploitation of resources found on National Parks will proceed without prohibition.  Public schools will be offered on a Dutch Auction hosted on e-bay; attracting the participation of a well capitalized confederation of publicly traded Charter Schools.  The mission to acquire the listless brick and mortar carcass of a once  venerated public school system will commence.  The promise of the systems renewal with the breath  of a new life fired by entrepreneurial zeal and taxpayer support will create a new Dow Jones Index constituent,  Education Inc.   Many functions of government will be downsized and outsourced to sophisticated data processing and business process companies.  Military units will also be privatized, becoming mercenary divisions of corporate security firms.   This will enlarge their market opportunities because they will no longer be beholden to exclusively serving the needs of a single client, the USA.

As Keith Olbermann pointed out in his Special Comment concerning the Supreme Court decision, the parallels with Dred Scott Decision are ironic.  The decision ruled that Dred Scott was not a man, but merely a commodity to create wealth for a person with full rights of citizenship.   Now corporations are blessed with all the rights and privileges of a person and the rising ascendancy of their power will soon supplant the interests of individuals.  In so doing, the Supreme Court has once again proven itself to be an activist  political tool to protect the interests of political and economic elites.

We can at least be thankful that the Supreme Courts decision allows us to dispense with the charade of participatory democracy.  Rampant cynicism about the unfair influence of money on the political process has always been understood as a problem.  This has undermined the people’s trust in the electoral process.  It has  eroded a collective sense of political enfranchisement.  It has contributed to creating a pervading  malaise of ambivalence within the electorate.  The monied interests with fathomless pockets can now come out into the open and make their presence plain for all to see.   It remains to be seen how this will alter the structure of K Street.

A new business model for how money is dispensed to politicians will need to be considered .   Perhaps a new derivative  called  a PIMP, (Politician In My Pocket) should be considered.  A PIMP Exchange could be set up in Washington DC.  This future exchange would surely prosper and would propel Washington DC as the fast rising global financial center on  the come.    PIMP trading would be recognized as a fast growing emerging market.  The trading in PIMPs would attract capital from all over the world and may even rise to supplant the future pits in Chicago as the place “where the world goes to manage risk.”

The PIMP Exchange will add that much needed transparency on how the political influence market is performing and what the going price is to buy and sell politicians.  We should be grateful to the Supreme Court  Decision  that laid the judicial foundation that will finally shine light on this aspect of our political process.  Now that its out in the open its all above board.  No more under the table deals will be necessary.  This ruling and the PIMP Exchange makes it very easy to follow the money.  Perhaps legislation should be considered that require senators and congressmen to wear the corporate logos of their three largest sponsors.  If a corporation wishes to remain anonymous feeling that the  interests of their shareholders are better served they can continue to operate under the radar.  A Generic Omnibus  Politician In My Pocket or a (GO PIMP) will be  designed specifically for this purpose.

The laissez faire approach to freedom of speech unfortunately confers all the power to those with the deepest pockets.  “Politicians will be bought and sold by the gross”, according to Alan Grayson a congressman from Florida.  Mr. Grayson is proposing legislation to protect citizens rights from being trampled by an avalanche of corporate money.  The first amendment guarantees citizens that no one shall abridge or prohibit the free and open expression of ideas.  Unfortunately money speaks the loudest and facilitates access to media channels and distribution. The free and open internet provides an individual little protection.  The tussle in China between Google and the government is an instructive warning of what we can expect to occur as corporate control of the internet grows.  It is an indication of a growing rift born from competitive postures of power capitalist institutions.

Our birthright of liberty was orphaned by a pervading cynicism and the seeming ambivalence of citizens who cared little for the rights democratic republics confer and understood less about the responsibilities required to guard them.  The decision by the Supreme Court is a watershed event.  Our political culture has changed.  The United States model for governance is moving closer to the Chinese model of governance.  The state capitalism of the United States is is a mirror image replication of the Chinese model.  A ruling oligarchy of economic interests acting in concert with its hand picked governmental representatives is common to them both.

Did we awaken this morning to the sober realization that American’s best hope is a trust in a benevolent corporate paternalism?  Can we believe that the rule of unencumbered enlightened capitalists is the way to realize the promises of a post scarce society? Can we still believe in the promise that innovation and social progress  and our democratic impulses will continue to inform America’s historical evolution?  Has America and the rest of the world arrived at a tipping point, a harbinger of a dystopian future where property right trumps human rights and the hard edges of economic deprivation, class marginalization and political disenfranchisement are ills that continue to infect society.  We need a doctor.  We need a strong antibiotic to cure this disease metastasizing in the body politic.

You Tube Music Video: Tennessee Ernie Ford: 16 Tons

January 22, 2010 Posted by | China, Civil Rights, corruption, culture, democracy, economics, elections, environment, Federalism, government, infrastructure, institutional, LGBT, military, politics, private equity, psychology, regulatory, taxation, war | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 1 Comment

A Taxing Situation

irs-and-capitol2President Obama announced his intention to curb the use of offshore tax havens for multinational corporations.  The Treasury Department is looking to raise tax revenues and believes that by closing the use of offshore tax shelters it will be able to raise over $200 bn over the next ten years.  According to the New York Times,  firms like Citibank, Morgan Stanley, GE and Proctor and Gamble utilize hundreds of these type structures to shelter revenue from being taxed by the IRS.  It has effectively driven down the tax rates these companies pay and has been a key driver in maintaining corporate profitability.

This move should come as a surprise to no one.  The Treasury Department needs to find sources of tax revenues to cover the massive spending programs necessitated by the credit crisis and the global economic meltdown.  The TARP program designed to revitalize banks has  expenditures that amounted to $700 bn.  Amounts pledged for economic recovery through EESA, PPIP and ARRA will push Treasury Department expenditures targeting economic stimulus projects and programs to approximately $2 tn.  These amounts are over and above routine federal budget expenditures that is running significant deficits as well.

The planned move by the Treasury Department to rewrite the tax code may be an intentional effort to close budget deficits but it also represents a significant rise in tax audit risk.   For the past two years the IRS has been developing a practice strategy and organizational assets to more effectively enforce existing tax laws.  Private sector expertise, practices and resource has significantly out gunned the IRS’s ability to detect and develop a regulatory comprehension of the tax implications of the sophisticated multidomiciled structured transactions flowing through highly stratified and dispersed corporate structures.  The IRS is looking to level the playing field by adding to its arsenal of resources required to engage the high powered legal and accounting expertise that corporate entities employ.

The IRS has hired hundreds of new agents  and has developed risk based audit assessment guidelines for field agents when examining corporations with sophisticated structures and business models.  As such investment partnerships, global multinational corporations and companies utilizing offshore structures can expect to receive more attention from IRS examiners.

The IRS had developed Industry Focus Issues (IFI) to be used as an examination framework to guide audit engagements for sophisticated investment partnerships and  Large and Mid-size Businesses (LSMB).  The IFI for LSMB has developed three tiers of examination risk.  Each tier has comprises about 12 examination issues that will help examiners focus attention of audit resource on areas the agency considers as high probability for non-compliance.  Clearly the audit risk factors risk

To respond to this challenge, Sum2 developed an audit risk assessment program to assist CFO’s, tax managers, accountants and attorneys conduct a through IFI risk assessment.  The IRS Audit Risk Program (IARP) is a mitigation and management tool designed to temper the threat of tax audit risk.   A recent survey commissioned by Sum2 to measure industry awareness of IFI risk awareness indicated extremely low awareness of tax audit risk factors.

Sum2’s IARP helps corporate management and tax planners score exposure to each IFI risk factor.  It allows risk managers to score the severity of each exposure, mitigation capabilities, mitigation initiatives required to address risk factor, responsible parties and mitigation expenses. The IARP allows corporate boards and company management to make informed decisions on tax exposure risk, audit remediation strategies, arbitration preparation and tax controversy defense preparation.

The IARP links to all pertinent IRS documentation and information on each tax statute and IFI audit tier.  The IARP links to pertinent forms and allows for easy information retrieval and search capabilities of the vast IRS document libraries.  The IARP also has links to FASB to have instant access to latest information on accounting and valuation treatments for structured instruments.

The IARP is the newest risk application in the Profit|Optimizer product series.  The Profit|Optimizer is a enterprise risk management tool used by SME’s and industry service providers.

The IARP is available in two versions.

The IRS Audit Risk Program for investment partnerships (IARP)

Buy it on Amazon here: IARP

The Corporate Audit Risk Program (CARP)

Buy it on Amazon here: CARP

Sum2’s Audit Risk Survey results are here: IFI Audit Risk Survey

You Tube Video: Chairman of the Board, Pay to the Piper

May 7, 2009 Posted by | business, commerce, economics, EESA, FASB, government, hedge funds, IRS, off shore, Profit|Optimizer, regulatory, SME, TARP, Tax, taxation, Treasury | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

Audit Risk Survey for Fund Managers: Final Results

tax-return1Sum2 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 indepth 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 professions, 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 well 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 CFO’s 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 | FASB, hedge funds, IRS, legal, off shore, private equity, Profit|Optimizer, regulatory, reputational risk, risk management, Sum2, Tax, taxation | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

IRS Audit Risk Survey for Hedge Funds (Interim Update 3)

irs-and-capitol21The IRS has developed a methodology to determine an audit risk profile for hedge funds, private equity firms, CTAs, RIAs and corporations using offshore structures. Sum2 has commissioned a survey to determine financial services industry awareness and readiness for IRS audit risk factors.

The survey seeks to determine industry awareness of IRS Industry Focus Issue (IFI) risk exposures for hedge funds, private equity firms, RIAs, CTAs and corporations using offshore structures. The survey is open to fund management executives, corporate treasury, tax managers and industry service providers.

CPAs, tax attorneys, compliance professions, administrators, custodians and prime brokers are also welcomed to participate in the study. The study’s purpose is to determine the level of industry preparedness and steps fund managers are taking to mitigate potential exposures to IFI audit risk.

Sum2 will share weekly interim results of the surveys findings. The survey will run for four weeks. This is the second weekly report.

Survey Highlights

  • 76% of survey respondents are from North America
  • 6% are from Great Brittan
  • 13% are from other EU countries
  • 5 % are from Asia
  • 85% of respondents indicate an unawareness of IFI
  • 11% of respondents indicate they plan to alert investors to IFI impact
  • 10% of respondents indicated that they initiated actions to address IFI
  • 8% of respondents indicated that they have received action alerts from industry service providers

    Take the Survey

    We invite you to participate in a survey to determine industry awareness of IRS Industry Focus Issue risk for hedge funds, private equity firms, RIAs, CTAs and offshore corporate structures.

    The survey can be accessed here: IRS Audit Risk Survey for Hedge Funds

    The survey is open to fund management executives and industry service providers to the industry. CPAs, tax attorneys, compliance professions, administrators, custodians, consultants and prime brokers are welcome to take the study. The study’s purpose is to determine the level of industry preparedness and steps fund managers are taking to mitigate potential exposures to IRS Industry Focus Issue risk.

    Sum2 is looking to use the survey to better respond to the critical needs of fund managers and the alternative investment management industry by improving our just released IRS Audit Risk Program (IARP).

    This survey asks ten questions. The questions concern your awareness of IFI and how it pertains to your fund or fund management practice.  The survey seeks to determine overall industry risk awareness, potential exposure to IFI risk factors and any mitigation initiatives you plan to address IFI risk factors.

    It should take no more then 5 minutes to complete the questionnaire. Your participation in this study is completely voluntary. There are no foreseeable risks associated with this project. However, if you feel uncomfortable answering any questions, you can withdraw from the survey at any point. It is very important for us to learn your opinions. Your survey responses will be strictly confidential and data from this research will be reported only in the aggregate. Your information will be coded and will remain confidential.

    If you have questions at any time about the survey or the procedures, you may contact Sum2 at 973.287.7535 or e-mail us at customer.service@sum2.com

    Thank you for your participation.

    March 29, 2009 Posted by | compliance, hedge funds, IRS, risk management, taxation | , , , , , , , , , , | Leave a comment

    IRS Audit Risk Survey for Hedge Funds Interim Results

    sum2logoThe IRS has developed a methodology to determine an audit risk profile for hedge funds, private equity firms, CTA’s RIAs and corporations using offshore structures.

    Sum2 has commissioned a survey to determine financial services industry awareness and readiness for IRS audit risk factors.  The survey seeks to determine industry awareness of IRS Industry Focus Issue (IFI) risk exposures for hedge funds, private equity firms, RIAs, CTAs and corporations using offshore structures.

    The survey is open to fund management executives, corporate treasury, tax managers and industry service providers. CPAs, tax attorneys, compliance professions, administrators, custodians and prime brokers are also welcomed to participate in the study.

    The study’s purpose is to determine the level of industry preparedness and steps fund managers are taking to mitigate potential exposures to IFI audit risk.

    Sum2 will share weekly interim results of the surveys findings.  The survey will run for four weeks.  This is the first weekly report.

    Survey Highlights

    • 62% of survey respondents are from North America
    • 18% are from Great Brittan
    • 16% are from other EU countries
    • 4% are from Asia
    • 50% of respondents who viewed survey begin survey
    • 20% of respondents indicate an awareness of IFI
    • 9% of respondents indicated that they initiated actions to address IFI
    • 7% of respondents indicated that they have received action alerts from industry service providers concerning IFI
    • 2% of respondents indicated that they plan to communicate impact of IFI to fund investors

    We invite you to participate in a survey to determine industry awareness of IRS Industry Focus Issue risk for hedge funds, private equity firms, RIAs, CTAs and offshore corporate structures.

    The survey can be accessed here:  IRS Audit Risk Survey for Hedge Funds

    More information and alerts can be found here:  Credit Redi

    The survey is open to fund management executives and industry service providers to the industry. CPAs, tax attorneys, compliance professions, administrators, custodians, consultants and prime brokers are welcome to take the study.

    The study’s purpose is to determine the level of industry preparedness and steps fund managers are taking to mitigate potential exposures to IRS Industry Focus Issue risk.  The goal of the survey is to help Sum2 better respond to the critical needs of fund managers and the alternative investment management industry by improving our just released IRS Audit Risk Program (IARP).

    This survey asks ten questions.  The questions concern your awareness of IFI and how it pertains to your fund or fund management practice. The survey seeks to determine overall industry risk awareness, potential exposure to IFI risk factors and any mitigation initiatives you plan to address IFI risk factors. It should take no more then 5 minutes to complete the questionnaire.

    Your participation in this study is completely voluntary. There are no foreseeable risks associated with this project. However, if you feel uncomfortable answering any questions, you can withdraw from the survey at any point. It is very important for us to learn your opinions.

    Your survey responses will be strictly confidential and data from this research will be reported only in the aggregate. Your information will be coded and will remain confidential.

    If you have questions at any time about the survey or the procedures, you may contact Sum2 at 973.287.7535 or e-mail us at customer.service@sum2.com

    Thank you for your participation.

    March 16, 2009 Posted by | IRS, risk management, Tax, taxation | , , , , , , , | Leave a comment

    Sum2 Commissions IRS Audit Risk Study

    IRS Audit Risk

    IRS Audit Risk

    Sum2 has commissioned a survey to determine financial services industry awareness and readiness for IRS audit risk factors.  The survey seeks to determine industry awareness of IRS Industry Focus Issue risk exposures for hedge funds, private equity firms, RIAs, CTAs and corporations using offshore structures.

    The survey is open to fund management executives, corporate treasury, tax managers and industry service providers.  CPAs, tax attorneys, compliance professions, administrators, custodians and prime brokers are welcome to take the study.

    The study’s purpose is to determine the level of industry preparedness and steps fund managers are taking to mitigate potential exposures to IRS Industry Focus Issue risk.

    The goal of the survey is to help Sum2 better respond to the critical needs of fund managers and the alternative investment management industry by improving our just released IRS Audit Risk Program (IARP) for fund managers.

    Product information on IARP can be accessed here.

    If you are unaware of the issues raised in this study, IRS background information can be found here.

    Sum2 has also posted a series of alerts on the subject on our Credit Redi blog which can be found here.

    This survey asks ten questions. The questions concern participants awareness about IFI that pertain to their fund or fund management practice. The survey seeks to determine overall industry risk awareness, awareness of potential risk exposure to IFI risk factors and any mitigation initiatives managers may plan to address IFI risk factors.   It should take no more then 5 minutes to complete the questionnaire.

    Participation in this study is completely voluntary. There are no foreseeable risks associated with this project.   If  participants feel uncomfortable answering any questions, they can withdraw from the survey at any point.   It is very important for us to learn your opinions.

    Survey responses will be strictly confidential and data from this research will be reported only in the aggregate.   Respondent data will be coded and will remain confidential.   If you have questions at any time about the survey or the procedures, you may contact Sum2, LLC at 973.287.7535 or by email at customer.service@sum2.com.

    Thank you for your time and support.

    Please start with the survey by clicking here: IRS Audit Risk Study

    March 8, 2009 Posted by | hedge funds, IRS, off shore, risk management, Sum2, Tax, taxation, Uncategorized | , , , , , , , , , , | Leave a comment

    Sum2 Product Announcement: IRS Audit Risk Tool for Hedge Funds

    Sum2 IRS Audit Risk

    Sum2 Sound Practice Thought Leader

    Sum2, a recognized leader in sound practice solutions for the financial services industry is pleased to announce a new addition to its product portfolio; IRS Audit Risk Program for Hedge Funds (IARB).

    IRS Audit Risk Program (IARP) for Hedge Funds helps managers to determine IRS risk exposure to Tier I, II and III; IRS Industry Focus Issues (IFI).

    The IARP is a threat management and scoring tool that helps managers ascertain level of audit risk for each IFI Tier risk factor. The IARP aggregates and groups overall IFI Tier risk exposures. Managers and fund advisers can then take considered action to mitigate tax exposure risk factors, prepare for tax audits and organize defensive responses for potential mediation, arbitration or litigation of tax audit disputes.

    The IARP uses a scoring methodology to determine a funds exposure and level of preparedness to meet IFI audit risk factors. The IARP guides managers through a thorough IFI risk assessment. It helps managers formulate and initiate actions required to mitigate the threat of IFI risk exposures.

    The IARP helps to identify and calculate expenses associated with mitigation initiatives. The IARP helps managers to assign mitigation responsibilities to staff members or service providers and tracks any open risk issues.

    The IARP links to issue specific IRS resources and documentation that clearly outlines the risk factor, documentation and agency engagement guidance pertaining to the specific IFI risk factor. These critical tax compliance resources enable managers to determine the severity an IFI risk factor represents and helps to align corporate resources needed to address it.

    The IARP is a necessity for hedge funds, private equity firms, CTAs, RIAs, global multinationals and corporations utilizing offshore structures. The IARP is a critical resource for CFOs, CCOs, CROs and internal corporate counsel. Corporate treasury executives that engage in innovative transactions, recognize unusual revenue sources and employ sophisticated tax strategies will benefit from the use of this product. CPA firms and corporate tax attorneys with a focus on financial services industry will find the IARP an indispensable risk discovery and client engagement tool.

    The IARP 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 discover opportunities to assure profitability and growth. The IARP product is available as an industry standard MS Excel© application and is delivered by digital download.

    More information on our sound practice product suits can be found on our Sum2 website or by phone 973.287.7535.

    Please visit our bog Credit Redi.

    We can always be reached by e-mail at customer.service@sum2.com

    The IARP is available for purchase on Amazon.com.

    A single user license can be purchased for $395.00.

    The link can be found here: IARP for Hedge Funds.

    March 5, 2009 Posted by | IRS, private equity, regulatory, Tax, taxation | , , , , , , | Leave a comment

    New York City Shakedown

    NYC Sunset 1932

    There are a number of sobering assessments surfacing concerning the economic crisis and its impact on regional economy of New York City and the Tristate area.

    One estimate is that the reconfiguration of the banking industry will result in 100,000 high paying job losses in the Tristate area. That includes NYC, Northern New Jersey and Southwestern Connecticut. I originally thought that figure was a bit high but when you consider that a bloated Citibank can lob off 10 to 20 thousand jobs at the drop of a pink slip it might not seem too drastic a prognostication. I’m not sure if this figure includes ancillary businesses that are sustained by relationships with banks and their employees but whatever the composition of the number it will have a major impact on the regional economy of the Tristate area.

    Job losses will remove significant buying power from the local economy. It will place added strain on the housing market, erode usage fees of buses, trains and road tolls and will curtail sales and property tax receipts. This will put enormous pressure on state and local governments and public school districts to deliver vital services like education, police, ambulance, road maintenance and other public services.

    Another labor market statistic I learned was that the economic crisis will result in the loss of 30,000 construction jobs. This number according to some economists is an optimistic “soft landing” prediction for the industry. The construction industry is a major driver of jobs and economic activity in the Tristate area. As personal income, business revenue and tax receipts abate demand for new housing construction and renovations, commercial buildings and public works construction and infrastructure improvement and maintenance will decelerate.

    The financial services industry shepherded America’s economic transformation to a services based economy. This transformation strengthened the banking industry by creating an economy that became increasingly dependent on the manufacturing of collateral such as housing construction and real estate development projects. This development allowed banks to finance more leverage in the credit markets and created the credit marketing frenzy of the last decade. America’s banking system exponentially expanded to accommodate the Titanic growth of the credit marketing industry. But like the Titanic after it hit the unforeseen sub-prime iceberg the industry has way too much capacity and needs to downsize as lending activity sinks into the black depths of recession.

    New York City has long been considered the center of the worlds financial system. The downsizing of the banking industry is the equivalent of the shut down of steel mills in Pittsburgh and the closing of car manufacturing plants in Detroit. Citibank and Merrill Lynch are the General Motors and US Steel of NYC.

    Music Video: Gene Kelly & Frank Sinatra, New York, New York

    Risk: public services, banking, regional recession, cities

    October 15, 2008 Posted by | cities, credit crisis, economics, pop, recession, taxation | , , , , , , , , , , | Leave a comment