Risk lessons from natural disasters

There were tornadoes, severe droughts and other disasters the world over in 2012. And let’s not forget Superstorm Sandy, which ravaged the northeastern United States. All told, economic losses from natural catastrophes and man-made disasters climbed to roughly $140 billion in 2012, according to insurance company Swiss Re. That’s up 17% from 2011, itself notable for costly flooding, earthquakes and the devastating Japanese tsunami.

Economists and businesses around the world are paying closer attention to risks related to extreme weather. In the World Economic Forum’s Global Risks 2013 report, 9.5% of respondents listed persistent extreme weather as the most important environmental risk. That’s up from 7% in 2011.

“Earth’s resilience is being tested by rising global temperatures and extreme weather events that are likely to become more frequent and severe,” the report said. Indeed, just this month, another massive storm system, Nemo, dumped more than half a metre of snow in parts of the northeastern US, knocking out power, forcing some towns to evacuate and raising the prospect of flooding.

The storms and statistics serve as a reminder for businesses: It’s a mistake to think that disasters only strike somewhere else, and it never hurts to plan for the worst.

Jim Hardy, CPA/ABV/CFF, founder of Hardy, Wrestler and Associates in Joplin, Missouri, knows this well. He draws from personal experience when he performs business interruption insurance reviews for clients.

Having a written disaster plan prepared Hardy and his employees for May 2011, when a tornado levelled his 18-employee accounting firm. He had written out a disaster plan for the firm after a busted pipe filled half of the firm’s office with an inch and a half of water 13 months earlier.

The tornado destroyed Hardy’s written disaster plan, which he had kept in a desk drawer at the office. But the process of writing it helped him be ready when the tornado struck. He advises clients to create disaster plans, and his tips for preparedness include:

• Be ready to check on the safety of employees. A phone tree, where employees call one another and report back to a supervisor, can aid in quick verification if a disaster occurs outside business hours.
• Back up your computer files off-site.
• Go paperless. Paper can be destroyed by wind, water or fire.
• Be ready to set up communications. Following the tornado, Hardy had a business phone line routed to his home. He sent a letter explaining the situation to all the firm’s clients just days after the storm.
• Conduct drills. Make sure employees know where to go and what to do in case of a fire or storm during business hours.

Plan, then adjust

More than 60% of US small businesses do not have a formal emergency-response plan and fail to back up their financial data off-site, leaving them vulnerable to catastrophic data loss in the event of a natural disaster, according to the Small Business Disaster Preparedness Study, conducted by software-maker Sage North America.

No matter how thoroughly a business prepares, some situations will require a deviation from those plans.

Les Nettleton is director of information technology for the accounting firm Bourgeois Bennett LLC outside New Orleans, Louisiana. Following Hurricane Katrina in 2005, employees at his firm were prevented from entering their office for 76 days as mould concerns closed the building where the firm has its headquarters.

He credits the flexibility of leaders at his firm for helping the business survive. Employees evacuated and scattered as the storm approached, and the lists of cell phone numbers they carried wound up being meaningless. Cell phones were rendered useless when cell towers were damaged or destroyed.

Eventually, though, text message platforms began to work. Employees of the firm eventually were reunited and found temporary work space in Houma, Louisiana, where a satellite office is located. Nettleton said there was no way for the firm to be ready for the devastation.

“The main thing you realise is that, how do you prepare for and subsequently recover from a disaster that destroys the entire city in which you do business?” Nettleton said.

One way to recover, Nettleton said, is to look out first for the wellbeing of your workers. Sixteen employees of the 100-member firm lost their homes and all their possessions in the flooding, and the firm’s client base was decimated.

Re-establishing the payroll system – so employees would be able to avoid further personal financial difficulties – was one of the most pressing technical duties for Nettleton. By focusing first on the employees – rather than on work that had become inconsequential for clients whose businesses literally were underwater – the firm managed to carry on, Nettleton said.

“The culture and the firm changed from, ‘What can we produce?’ to ‘What can we do for our people?’ ” Nettleton said.

Cloud may be a key

All 11 offices of New Jersey-based accounting firm WithumSmith+Brown lost power for some time after Hurricane Sandy.

But partner Jim Bourke, CPA/CITP/CFF, CGMA, said moving its operations to the cloud helped WSB continue operating with barely an interruption in business. Although he lives just a half-mile from the shore in Manasquan, New Jersey, where many of his neighbours saw their homes destroyed, Bourke said the firm’s 500 or so employees were able to work as long as they had power and could connect to the internet.

The cloud technology also helped the firm thrive in the wake of Hurricane Irene last year.

“All I have to say to CPAs who are not in the cloud, who are not advising their clients to the cloud, this has to be an eye-opener,” said Bourke, a member of the American Institute of CPAs board of directors. “I’m grateful that we embraced that model a long time ago. I would just encourage any practitioner out there to look at doing it for themselves as well as advising their clients the same way.”

Nettleton agrees with Bourke’s assertion that digitisation can be a significant help for businesses in case of disaster. But he also said there is no perfect answer that would render any business immune to problems.

Should an act of terrorism paralyse internet-based technology, Nettleton said, firms that are relying on it could face problems. “That would be as catastrophic as a hurricane coming through,” he said.

Insurance matters

Business interruption insurance, which is structured to compensate businesses for periods when they are unable to operate because of disaster, can help companies recover.

Individuals interviewed for this story offered the following tips related to business interruption insurance:

• Keep a record of your office contents. This will make it easier to substantiate your claim for items such as office supplies whose costs quickly escalate when an office is destroyed.
• Carry insurance on any materials at your work site that belong to customers or are on consignment from customers or suppliers.
• If disaster does strike, do what you can to get back to work quickly when it’s safe to do so. “Your insurance company is going to be looking for you to do that if you have business interruption insurance,” said Theodore Sarenski, CPA/PFS, a financial planner in Syracuse, New York, and a member of the National CPA Financial Literacy Commission. “They’re going to want you to get back up on your feet as soon as you can.”
• Hardy said it’s a good idea for business owners to thoroughly review their insurance with financial professionals.

Safety in concrete

Rebuilding after the tornado gave Hardy’s firm a chance to take its disaster preparation to a higher level.

The firm’s rebuilt office is equipped with a concrete-walled “safe room” that is 31 feet long, 15 feet wide and 10 feet tall. Emergency supplies such as water, flashlights and a first-aid kit are kept inside.

The firm has gone paperless aside from the documents for jobs that are in progress. Those documents are stored overnight in airtight, watertight plastic containers in the safe room.

Finished jobs are stored on a cart located a few feet outside the safe room during business hours. The disaster plan assigns an employee to pull the cart into the safe room while entering. The building’s alarm system has different sounds to indicate a fire or a tornado, so that employees are not confused about whether they should exit the building or enter the safe room when the alarm sounds.

And firm policy requires employees to have paperwork from just one job on their desk at any one time, so they can immediately hustle to the safe room or out of the building without feeling pressure to save their work.

These are aggressive measures, but after seeing his office reduced to rubble, Hardy wants to be thoroughly prepared.

“The biggest thing I can’t stress enough,” Hardy said, “and I have done it with a number of our clients, is to have a disaster plan so you know what your steps are immediately following the disaster, so you can start putting those steps in place.”

Related CGMA resources:

Risk and Innovation Spotlight: Browse the latest tools, reports and articles offering tips and best practices for the successful management of risk and innovation.

“Companies Revamp Risk Management After Tsunami, Euro-Zone Turmoil, Arab Uprisings”: Feeling increasingly exposed to unpredictable events, companies worldwide updated their risk-management strategy in 2011. The changes frequently aim to challenge conventional thinking.

“Five Emerging Strategies for Coping With Unknown Risks”: Unknown, complex risks that often are outside the executive team’s control increasingly threaten companies. Here are five strategies for battling those unknown risks.
 
“Corporate Professionals’ List of Risk Factors Is Expanding”: A survey of North American corporate financial professionals pinpointed financial risks as the primary driver of earnings uncertainty. Regulatory changes, natural catastrophes and the ups and downs of the economy were also troubling.

“Most US Small Businesses Lack Disaster-Recovery Plans”: More than 60% of US small businesses do not have a formal emergency-response plan and fail to back up their financial data off-site, leaving them vulnerable to catastrophic data loss in the event of a natural disaster.

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.