SOURCE: Marks Paneth & Shron LLP

Marks Paneth & Shron LLP

February 06, 2012 10:00 ET

What Smart Business Owners Will Do in 2012: Prepare for the Worst as the Prolonged Downturn Leads to Fraud, Antitrust Challenges and Litigation

Political Uncertainty Over Tax Policy and the Risk of External Economic Shocks Add to Tensions During the Recovery, According to Partners at New York Accounting Firm Marks Paneth & Shron LLP

NEW YORK, NY--(Marketwire - Feb 6, 2012) - Economic headwinds and political uncertainty over tax policy will make 2012 a challenging year for U.S. businesses and nonprofit organizations of all sizes.

Questions confronting business and organizational leaders at the start of the year include how to manage through continued slow growth, how to respond to an external shock such as a Euro crisis that might derail the fragile recovery and how to plan for uncertainty as partisan disputes over federal tax policy threaten to block tax reform.

Business leaders also need to be aware of hidden risks -- the stresses that can emerge during a prolonged downturn, leading to an upsurge in fraud and litigation along with competitive challenges over mergers and intellectual property. Planning for worst cases will be the key to success in 2012, according to the partners at New York accounting firm Marks Paneth & Shron LLP (MP&S).

In other developments related to the downturn, protectionism will increase, blocking international expansion as overseas jurisdictions seek revenue and growth, and online businesses will need to confront demands for state and local taxation as states -- including New York State and Connecticut -- try to meet their own revenue challenges, the MP&S partners say.

"Smart leaders will need to be aware of the potential for stress, disputes and fraud that can derail an organization, and make specific plans to head them off," says Mark Levenfus, CPA, Managing Partner at MP&S.

"When planning for the year, businesses will also need to take into account specific challenges posed by slow economic growth. For example, there is likely to be an upsurge in taxation from state jurisdictions, such as New York, which are trying to raise revenue. Overseas jurisdictions will also complicate the picture as they attempt to erect competitive fences to doing business with them," Harry Moehringer, CPA, Managing Partner says. "To navigate this uncertainty, organizations need to be flexible by developing and executing contingency plans that take these challenges into account."

Smart Organizations Will Make These Moves in 2012:

  • Prepare for the worst and be ready for disputes. Economic stress leads to disagreement -- but most businesses aren't prepared for it. Too often, operating agreements are out of date or are missing key provisions. They don't include mechanisms for resolving disagreements, and the result is often litigation that can threaten the future of the business itself. Refreshing the operating agreement is always a good idea, but particularly now when stress and risks are high.

  • Be on high alert for fraud. The combination of economic desperation and ever more complex (and therefore more vulnerable) IT systems have created fertile ground for fraud. "'Hacking' is a thing of the past -- cybercriminals now infiltrate IT systems and divert funds in ways that are extremely difficult to detect and trace," says Steven L. Henning, Ph.D., CPA, partner in charge of the Litigation and Financial Advisory Services Group at MP&S. "Businesses of all sizes will want to tighten internal controls and be on the lookout for fraud and cybercrime before they happen. It's also a good idea to run background checks on employees -- including repeat background checks on longstanding employees, especially those who handle finances. Background checking should not be confined to new hires."

  • Watch for hidden traps if corporate tax rates are lowered. A lower corporate tax rate, if enacted, could help spark growth. But there are hidden traps. "Operating losses -- such as those incurred by the major banks -- are a tax asset," says James M. Robbins, JD, LLM, a principal at MP&S. "They can be deferred and applied to future income. But if corporate tax rates go down, then those assets are worthless, and the result could be write-downs."

  • Be ready to "move the fences outward" and defend intellectual property -- but be mindful of the costs and risks. "More and more companies are realizing that their patents and other intellectual property are significant assets -- perhaps the most valuable assets the company owns. At the same time, patents are becoming harder to get and harder to defend -- as the U.S. patent office becomes more restrictive, and as more companies are willing to litigate patents," Dr. Henning explains. "Companies should be prepared to 'move the fences outward' to protect more of their intellectual property and make sure their patent rights are as strongly defended as possible."

  • Expect a decline in securities litigation filings -- but an upsurge in antitrust challenges. Tighter court rules and an increased number of business-friendly judges mean that it's become more difficult to bring and sustain securities class action litigation. On the other hand, mergers are under greater scrutiny for antitrust, both in the U.S. and overseas, as competitors become aggressive about challenging restraint of trade. "Long-term economic challenges will make these actions more common, and any management contemplating a sizeable merger needs to factor in the possibility of protracted litigation. Companies need to do their own due diligence and anticipate competitors' antitrust complaints," Dr. Henning says.

  • Rethink the advantages of "boots on the ground," as the "Amazon Tax" creates disadvantages for online businesses that sell goods locally. States are moving to tax online businesses that sell in their territory. The so-called "Amazon Tax" demands that online businesses collect state sales tax if they have affiliates or individuals that are paid a commission based on sales made by the seller in that state. The presence of such individuals or affiliates creates "click-through nexus," a legally defined level of taxable business activity accessible through the Internet; this in turn triggers a sales tax collection responsibility in many states that are acting to claim tax revenue. Legislators are concerned they are losing revenue to online sellers. "Online businesses may want to rethink their arrangements, withdrawing such affiliates or cancelling any commission agreements in states where the Amazon Tax applies," says Steven P. Bryde, JD, principal in the Tax Practice at MP&S.

  • Commercial real estate owners need to get ready to refinance, consider accelerating income, and claim funding for "green" projects while it's still available. Banks are reluctant to lend to businesses and individuals, but they are much more willing to finance real estate owners, whose projects involve the relative security of hard assets. "That means that commercial property owners with loans coming due in the next 12-24 months will want to explore refinancing," says Abe Schlisselfeld, CPA, EA, a partner at MP&S who specializes in commercial real estate. "Getting ready means making sure your property is in the best possible shape, with rent rolls as healthy as possible." The possibility of increases in the capital gains tax rates may make it advisable to consider selling properties in 2012 rather than later.

    Finally, owners who have prepared for New York City's new environmental benchmarks and audits may want to apply for grants. "Funding is available from state agencies and Con Ed that can cover as much as 50 percent of 'green' projects. But those funds may dry up in the future. It makes sense to apply now, even if your audit isn't due for several years," Mr. Schlisselfeld says.

  • Nonprofit organizations need to get businesslike -- tightening controls, reducing staff and considering mergers. Nonprofit organizations will be badly squeezed in 2012 -- demand for their services will increase, especially in the social services sector, where the ranks of unemployed and homeless will grow," says Michael L. McNee, CPA, partner in charge of the Nonprofit and Government Services Group at MP&S. "At the same time, state and local funding will be reduced, and the donor base will continue to focus on outcomes and efficiencies of the charities during this sluggish economy." The nonprofits that survive will be those that put their operations on a businesslike footing -- reducing their costs, including both capital and staff costs, and maximizing their return on investment, Mr. McNee says. According to Mr. McNee, mergers are worth considering -- a number of nonprofits with similar missions are merging in order to reduce costs and competition for scarce funds.

For more information or to arrange a conversation with a Marks Paneth & Shron advisor, please contact Katarina Wenk-Bodenmiller of Sommerfield Communications at +1 (212) 255-8386 or katarina@sommerfield.com.

About Marks Paneth & Shron LLP

Marks Paneth & Shron LLP is an accounting firm with nearly 475 people, of whom approximately 60 are partners and principals. The firm provides businesses with a full range of auditing, accounting, tax, consulting, bankruptcy and restructuring services as well as litigation and corporate financial advisory services to domestic and international clients. The firm also specializes in providing tax advisory and consulting for high-net-worth individuals and their families, as well as a wide range of services for international, real estate, media, entertainment, nonprofit, professional and financial services, and energy clients. The firm has a strong track record supporting emerging growth companies, entrepreneurs, business owners and investors as they navigate the business life cycle.

The firm's subsidiary, Tailored Technologies, LLC, provides information technology consulting services. In addition, its membership in Morison International, a leading international association for independent business advisers, financial consulting and accounting firms, facilitates service delivery to clients throughout the United States and around the world. Marks Paneth & Shron LLP, whose origins date back to 1907, is the 30th largest firm in the nation and the 13th largest in the New York area. In addition, readers of the New York Law Journal rank MP&S as one of the area's top forensic accounting firms.

Its headquarters are in Manhattan. Additional offices are in Westchester, Long Island and the Cayman Islands. For more information, please visit www.markspaneth.com.

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