Issues Affecting Today’s Corporate Finance Leaders

Even the weather can come into play, as evidenced by remarks of the conference’s opening speaker: Chad Moutray, chief economist for the National Association of Manufacturers.

“The year 2013 had two distinct halves,” Moutray told attendees. “First we had slow growth in sales, weak exports, public uncertainty,” exacerbated by the government shutdown. By August, however, the nation was seeing much forward momentum and by the time the nation was approaching year’s end, all the numbers were showing upticks.

“Then we hit the bad weather and saw a huge production downturn that went into the beginning of 2014,” Moutray said.

Still, by March 2014, the nation was again in rebound mode, and by the time of the seminar, figures were just being released that showed manufacturing coming up strong again.

In fact, one of the general trends he talked about was that almost all the economic numbers tracked by NAM and other manufacturing-related organizations have reached pre-recessionary levels of growth and a few have gone on to all-time highs. “In some ways it’s sad,” he said, because it took so long to get there. But as a nation “we’re moving in the right direction.”

Moutray said other trends he sees are:

• Although some economists have downgraded their numbers because of the rough winter, Moutray said he still expects about a 3% growth in the U.S. economy for 2014. If that happens, it will be the first such growth since 2005. Moutray predicted similar growth in industrial production and about a 3.3% increase in production for 2015.
• Exports of U.S. goods have grown “frustratingly slow” over the last year. Exports to South America, for example, actually fell by about 2% for the year and exports to Canada, one of the U.S.’ largest trade partners, were flat for the year. However, Asia, and in particular China, show great promise. Exports to China may see percentage growth in the double digits this year.
• Another indicator of moving in the right direction is the attitude of manufacturers. For the first quarter of 2014, 86% of NAM members had a somewhat or positive attitude, which is 8 percentage points higher than last year. Moutray said the least positive manufacturers are the ones that are small and the most optimistic are firms engaged in foreign trade.

Health Care Reform: What are the Costs?

After hearing about how the nation was doing in general, attendees heard about specific issues that financial leaders are facing. One of the top concerns: What is the true cost of Obamacare?

Gretchen Young, senior vice president, Health Policy for the ERISA Industry Committee, has been dealing with the Affordable Care Act (ACA) since its inception. She offered her expertise in four areas she sees as key to employers in the debate.

The first issue she addressed is the transitional risk reinsurance fee, which is being assessed on insured and self-funded group health plans to cover the fact people with pre-existing conditions cannot be excluded from major medical plans under ACA. The money will used to stabilize premiums in individual markets and the fee is expected to go down each year over the next three years.

During the first year, the fee will cost affected employers $63 per “life covered” (per person including family members, per year). The fees go down to about $44/life in 2015 and about $22/life for 2016. Young reported that the U.S. Health and Human Services (HHS) department will send a form to employers in November 2014 that will require reporting how many “lives” the company covers. Once the form is back at HHS, the department will send a bill for the reinsurance fee about 15 days after response.

“This fee took many employers by surprise,” Young said. “I think what happened is that, until it was broken down to a per-employee amount, we couldn’t see how much it will cost some employers, particularly the big guys.” Now those big guys are seeing they may have tens of millions of dollars to come up with, said Young.

The second concern is a penalty that applies to employers that, under ACA qualification, do not offer health coverage to enough people in their companies or that don’t offer insurance that is affordable enough that employees don’t have to go the new insurance exchanges to get health coverage.

Under the new law, companies that do not offer health insurance to at least 95% of full-time employees and their dependents will be fined $2,000 per full-time employee; companies that don’t offer insurance that is affordable will face $3,000 per employee covered by the law.

“There’s been a delay in implementing this provision so that larger employees (over 100) have to be offering coverage to 70% this first year [instead of the 95%] and small employees (59 to 99 employees) are exempt until about 2016,” but the full requirements are coming, Young said.

Both these penalties are triggered by having employees sign up for exchange programs. The difference is that the $2,000 penalty will be charged per full-time employee for every employee in the company while the $3,000 applies only to “each employee that goes to the exchange and is subsidized,” she explained.

“A big problem with these penalties is that the rules are amazingly complex,” Young said. For example, still to be determined is exactly who constitutes a full-time employee: Are independent consultants, temporary staff, seasonal employees considered full time under certain conditions? What happens when an employee goes on leave or becomes part time?

“These are threshold questions that have to be addressed,” she said. “You may think if you don’t give a person a W-2 they are not your ‘employee’, but an IRS auditor may not agree,” she said. “Be careful, and know who your employees are,” she cautioned.

The other two issues of most concern are the amount of reporting that may need to occur and how employee wellness fits into the picture, she said.

The reporting requirements are “where the penalty hits the road,” Young said, because the new reports will determine when and how much an employer may owe.

The two forms created for ACA implementation are IRS forms 6055, which determines applicability of ACA provisions, and 6056, which addresses whether an employer falls under the penalty categories and whether employees are eligible for subsidized coverage on the exchange. Both reports are first due in 2016, “but like with W2s you file the year after” so they cover 2015, Young said. Employers have pushed for these forms to be part of the W-2 process, but so far, that hasn’t occurred, Young said.

Besides the concerns of expense to file these reports and the administrative challenges of putting them into place, many of the nation’s employers feel the reporting leaves too much room for inadvertent error, Young commented.

The main argument against the reporting has been that “this will only benefit 4% of the nation’s employees [those whose companies do not cover them],” Young says. “At some point, does it push employers out of providing health care benefits to avoid the reporting?” she said.

The wellness program provisions of ACA increase the amount an employer can offer as an incentive to employees for participation in a wellness program to 30% (up from 20%) of the cost of premiums for general health and 50% for a smoking program.

The concern here is that adversaries fear the programs are something to replace pre-existing condition exclusions, Young says.

Corporate Investigations: SEC’s Concerns

Another specific issue of concern to today’s financial leaders is how the nation’s regulators see their companies, including the Securities and Exchange Commission (SEC) and its enforcement staff. Martin S. Wilczynski, senior managing director, Forensic Account and Advisory Services for FTI Consulting, brought attendees up to date on the latest SEC actions.

Even though financial fraud enforcement cases have dropped significantly the last five years (from 154 in 2008 to 73 last year), other activity by SEC staff has ramped up, which can affect not only the bottom line, but much more, Wilczynski explained.

“Investigations at all levels are extraordinarily costly, disruptive to operations, bad for morale, staff retention and company reputation, and difficult to manage,” he pointed out.

A few specific areas of concern he brought up are:

• SEC is considering using algorithms to look for anomalies on company accounting figures. These algorithms use key words and phrases that might suggest certain pressures or challenges a company faces. “Although this development is not as far along as what’s been out in the press, the commission has embraced this concept,” Wilczynski said.
• Commission staff has created a number of accounting initiatives on which to focus, including: looking at the difference between what a company presents to the general public and what it shows to its investor base; the difference between what companies report on their books and what they show for tax purposes; any areas where risk figures appear to be taken off the balance sheet; and whether a company makes multiple “revisions” after initial financial results go out. “The commission will be looking at any red flags to see if they are just one-off situations or indications of intentional misleading,” he said.
• SEC is increasingly focused on individuals in its investigations, not just companies. “In your role as a financial profession, the commission sees you as gatekeepers of financial information,” Wilczynski warned financial leaders. The auditors and legal counsel that used to get all the attention are being joined by people at all levels, he added.
• Whistleblowers are front and center right now, “and you’ll see a lot more of this,” Wilscynski said, because of new rules that went into effect in 2011. These rules are “incentivizing people” through cash rewards, including some well-publicized cases that netted substantial amounts, he said. “SEC has to look at those who are well-intentioned [in their whistleblowing] and those who are disgruntled in the same way,” he pointed out.
• The Foreign Corrupt Practices Act, which forbids certain actions that can be seen as foreign bribes, is getting increased SEC attention. “This is problematic because some of the transactions [that received attention] have been tiny,” such as slipping an export official a thousand dollars or a few electronic components, two cases that brought great outrage, he explains. There seems to be “no connectivity between the action that prompted the matter and the amount of the fine,” he said.

As far as what SEC staff wants to see, Wilczynski said they are looking for “lots of employee training, and they will want to know that transactions are tested rigorously and regularly and that you have done some vetting with the people with which you do business.”

Genilee Parente is managing editor of VALVE magazine. Reach her at gparente@vma.org.