Credit Policy and Procedures

The economic outlook for the year ahead is bleak. Some analysts have forecast that the second half of 2008 will stay mired in the doldrums with annualized growth not returning to near-normal levels until sometime in 2010. Federal
Reserve Board Chairman Ben Bernanke has said the U.S. inflationary picture is shrouded in uncertainty and the maelstrom that resulted in the housing market buckle and the credit freeze has yet to subside.

Nonetheless, business must press forward.

Most companies have set certain tolerance levels for their risk appetite based on factors such as position in the marketplace, margins, sales channels, as well as the creditworthiness of a particular customer. For most credit professionals, the stark reality is that there are simply accounts to which they must sell, no matter what. Credit reports are an aid, as are other tools, but there also must be a tangible set of credit policy and procedures in place.

“How many of us really decide which customers are sold to?” asked Susan Delloiacono, CCE, director of credit, Brother International Corporation, at the CMA-sponsored teleconference “Credit Policy & Procedures.”

“In my experience, some of my customers are not my choice by a long shot. Rather, I have to find a way to deal with everyone that’s presented to me.”

Delloiacono’s presentation focused on cobbling together the “bones” for attendees to develop their own credit policies, instead of merely creating a point-by-point template to which members could try and fit their businesses. She discussed that it’s difficult as a credit person to try and utilize a generic credit policy outline because factors like terms are typically dictated by the sales department and there are accounts that executives will press credit managers to accept. Furthermore, there are times when customer delinquencies are viewed differently.

“A policy that mandates and dictates certain behaviors always has to have an exception-based rule. At least that’s what I’ve found in my experience,” said Delloiacono. “We’re flooded with information from the Internet, from alerts we’ve set up in the credit world. It’s so much information that it’s hard to put that all into a funnel and have it come out and translate into a one-size-fits-all policy.”

She added, “Money is tightening up. And credit is really getting a spotlight at this point in time. I think we all agree that there’s tension within our own companies with the attention on being paid. Accounts receivable and credit extension practices are under scrutiny.”

For most credit professionals, she suggested that there has to be a sort of double-vision in place: one view that takes in the macro economic picture, and one view that examines the micro or localized picture, the structure within their own company.

“In the global marketplace, many things from wars to fuel are creating uncertainty,” said Delloiacono, who suggested credit managers ask themselves: how does that affect me? “Look at the global marketplace and be aware of what is around you. Sometimes as credit people we can be very binary—just looking at the ‘yes’ and ‘no’ of a credit decision without really considering all of these external factors.”

With consumer confidence waning, consumer spending has been reined in, with non-discretionary spending being severely impacted by surging energy costs and plummeting home prices. The overall implications are broadly felt as capital and cash flows of businesses in turn have continued to get tighter.

As to relationships within their own companies, Delloiacono cited that credit managers need to consider broadening their view.

“As credit people, there are some departments that we don’t interact with, but we should,” said Delloiacono. “Our sales department; that’s a no-brainer. We know we are dealing with sales; we know we are dealing with order management. Somehow or another, we don’t look at product development as something we need to concern ourselves with. And that’s a mistake for credit people to take that approach. It’s important for you to understand where your company fits and what solutions they have planned for in the future.”

For developing a credit policy she said this was paramount knowledge.

“My counsel to you is to know your business,” said Delloiacono. “Is your company sales- or top-line driven versus
profits, profits, profits? That dictates how you’re going to react in the credit granting area. If you are really bottom-line driven, you may be really tough on credit and softer on collections. If you’re soft on credit, typically you’re
working for a very marketing-driven company; a very sales-driven company that’s like ‘ship it, ship it, ship it.’ If you have that kind of attitude, you better be tough on the collections side.”

Another consideration for credit professionals is whether the company they work for is public or private. Do they
deal with Sarbanes-Oxley (SOX) issues? That will likely dictate how a lot of a credit policy is interpreted and what procedures the credit manager is going to have to have in place to support those overall SOX initiatives.

Delloiacono also said it was imperative that credit professionals know their industry and become a member of an industry credit group, and that credit managers incorporate their knowledge of how the current economic factors of
their company can be used to maximize sales, minimize carrying costs in accounts receivable, minimize bad debt and monitor costs.

“If we look at what our job is as credit people, it’s just those four things,” said Delloiacono. “Those four components are key to setting credit policy.”

What Every Credit Manager Needs to Know About Escheatment

In lean economic times, states are often hard pressed to secure revenues. Regulations, fees and fines that may not have been as strictly enforced in more robust environments make their way to the surface to become key enforcements.

“When budgets are tight and states are looking to increase revenue, we have seen unclaimed property enforcement step up,” said Valerie Jundt, senior manager, Deloitte & Touche, LLP, during the CMA-sponsored teleconference
“Escheatment: What Every Credit Manager Needs to Know.”

Like many U.S. laws, escheatment and unclaimed property laws have roots that go back several centuries to British common law. Under the regulations, after a certain period of time, companies are required to turn over all unclaimed or unapplied customer credit balances, rebates, dividends, un-cashed paychecks, commissions, discounts and a host of other properties to the state. Escheatment is actually the physical transfer of property to the state that has the effect of making the state legal owner, rather than merely the custodian, of the transferred property. More often than not, states are interested in cash or cash equivalent property that can be liquidated quite easily.

Companies that are acting as holders for unclaimed property are required each year to submit reports to the government outlining their unclaimed property activities and to remit funds as necessary. The problem is that oftentimes, companies are simply unaware of their unclaimed property responsibilities or are culpable of some sort of infraction as laws and statutes vary widely from state to state.

“What we’ve found is that oftentimes many companies who feel that they’ve been filing reports for years are not in compliance; and that tends to be a mess,” explained Jundt. “The reality is that all holders are likely to have some
unreported unclaimed property liability. And the larger you are, the more complex you are, the more dispersement accounts, the more merger and acquisition activities that you have, the greater the risk that you have. So, if you are a
very large company and have somewhat of a complex organization structure, the likelihood that you are going to have unclaimed property issues is high.”

Unclaimed property fines are not a tax, though they are often perceived as one. Both civil and criminal penalties can be applied for unclaimed property violations. Fines can be assessed for not reporting unclaimed property, for not
performing due diligence or complying with state statutes or for not handing over the property to the state. Knowingly filing a fraudulent report can have devastating financial impacts. Fines up to $25,000 and interest up to 75% can be tacked on to the property. Plus, failure to properly account for unclaimed property liability can be viewed as a violation of Generally Accepted Accounting Principles (GAAP) or Sarbanes-Oxley Act internal control and reporting requirements. States are also vigilant for any warning signs from companies that could trigger an audit on a company, resulting in unclaimed property laws violations.

“The likelihood of you being audited is greater than it used to be,” said Jundt. “Though from my experience most states are very reasonable.”

SOX 404 Requirements Delayed for Small Businesses

The Securities and Exchange Commission recently approved a one-year extension of
the compliance date for smaller public companies to meet the auditor attestation
requirement of Section 404(b) of the Sarbanes-Oxley Act (SOX), meaning that
smaller companies will be required to start providing an attestation report in
their annual reports in fiscal years ending on or after December 19, 2009.
Additionally, the commission also announced that it had secured approval from
the Office of Management and Budget (OMB) to begin collecting data for an
analysis of the costs and benefits of the implementation of Section 404 and the
consequences that compliance may have for smaller companies.

An extension in the compliance date has been championed by congressional
small business leaders and regulators alike, with SEC Chairman Christopher Cox
first discussing the one-year delay in late 2007 and formally proposing it
before the House Small Business Committee in early 2008. The cost-benefit study
was first announced in February and is being led by the SEC’s office of economic
analysis with assistance from the office of the chief accountant and the
division of corporate finance. The study will include interviews and a web-based
survey in an effort to collect real-world data from a number of smaller
companies to determine what about Section 404’s requirements drive compliance
costs upward.

"Over the past few years, the commission and Public Company Accounting
Oversight Board (PCAOB) have committed extensive resources to improving the
efficiency and cost-effectiveness of the implementation of Section 404’s
requirements, particularly for smaller companies," said John White, director of
the SEC’s division of corporate finance. "I am optimistic that this study of
real-world data will help further inform our efforts to improve the
implementation of SOX 404."

Results of the survey are expected to be available before the new delayed
compliance date.