Disasters like the earthquake and tsunami in Japan prompt the examination of our own disaster preparation and recovery plans.  In this article, we outline the disaster and aftermath considerations to help you think about how to prepare, respond and recover. If you have questions about business continuity, disaster preparation and the financial implications of diaster recovery, contact us at (713)622-1120.

Don't Wait Until It's Too Late to Prepare for a Disaster

When it comes to disaster preparation for businesses, we usually think about electronic records, networks and our personal computers -- but there is much more to consider. Information should be backed up offsite, but getting to it with power and connectivity problems might be difficult.  Paper records may be lost entirely unless well-thought-out procedures are in place to protect them, in original form or copies.

Production facilities may be damaged.  Power may not be available to run or maintain the equipment.  Retailers may be unable to open their business even if their facility was not damaged because of energy problems and employees unable to get to work.   Setting up an evacuation plan is more than just knowing where the buildings emergency exits are.  Tested emergency tools and procedures should be readily available and employees should be familiar with their location and use.  Unless special strategies are in place, it may be difficult or impossible to communicate with employees anxious to know what to do after the initial crisis passes.

Supply and distribution channels may be disrupted.  Payment and payroll functions may be impossible.   Having pre-established alternative, backup work venues may help.  Secondary suppliers can be invaluable in getting ramped up.  The ability to transfer production to another facility is sometimes possible. 

What are you plans for business continuity?  David Ahola, an Internal Audit principal at MFR, stresses, “Adequately planning for these possibilities is an indication of good internal controls and they may be what help your business recover from a disaster.  It is more than just making sure everything is shut down and locked up.  The business risks associated with natural and manmade crises must be anticipated.  This decade has made us think about a number of possible disasters that we may have to confront – terrorist threats, hurricanes, earthquakes, disruptions from failed facilities and floods.”

Plans and response procedures must be created before a disaster occurs.  Everyone in a business should know their responsibilities and be prepared to comply with pre-established procedures.  The effects of a disaster can be much worse if disaster response consists of a series of haphazard reactions. No matter how large or small a business, advanced planning is essential.

Once the immediate threat of a disaster passes, a recovery strategy must be implemented.  Of course, the plan will depend on the conditions, but communications between leadership and employees is essential.  Often communication is the most difficult function to accomplish without a pre-crisis strategy.

From a business perspective, it’s important to understand that getting systems running again involves more than just restoring operations.  Impairment of assets must be evaluated and insurance claims filed.   Financial accounting systems must be fully functional as quickly as possible.  Supplies need to be normalized.  Receivables need to be closely monitored -- and this applies to those in disaster zones as well as to businesses providing goods and services to affected businesses.   Slower receipts are to be expected. 

Recent events have shown how some businesses in disaster areas need to provide emergency relief to employees, including offering housing and financial assistance to their employees to keep their businesses running.  “Recall the case of Weyerhaeuser, the international forest products company,” reminds Bill Leary, Tax Director at MFR, “Five thousand employees were affected when hurricane Katrina hit the Gulf Coast.  Weyerhaeuser provided all sorts of employee assistance, from providing financial support to organizing adopt-a-family programs.  These types of activities can help companies get up and running again – but the costs of such disruption must be carefully accounted for to ensure that insurance claims can be made and deductions filed.”

After the recent hurricane activity in the Gulf Region, Congress enacted a measure to permit affected businesses to claim a special deduction for business disruption associated with the hurricane.  Some businesses had insurance riders to cover these costs, but for many, the cost of disruption was difficult to quantify.  A mechanism to capture these costs should be built into companies’ accounting systems. 

Likewise, after the oil spill in the Gulf of Mexico, many businesses had difficulty documenting the losses incurred as they sought recovery.  As federal aid becomes available, access to documentation is essential to support claims.  Additionally, when tax returns are filed, business will also need to support their losses with comprehensive documentation.  Too often valuable records are lost. 

Are you ready to respond and recover from a disaster?  Don’t wait until it’s too late to prepare.