by Brian C. Bernhardt
• Areva delays construction of new building
• Richmond-based Chesapeake Corp. may file for bankruptcy
• Deal to purchase Alpha Natural Resources falls through
• Sabra Dipping Co. to open manufacturing plant in Chesterfield
During the last 12 months, the IRS has decided to get into the corporate governance business because it believes that a well-governed business is a tax-compliant business. As a result, the IRS is often asking questions that are less tax-related and more business orientated. And although the IRS has limited its corporate governance review to nonprofits and charities so far, business owners should not ignore their own governance policies. Some of the areas to examine include:
Governing documents. When was the last time you reviewed your articles of incorporation or organization, bylaws, operating agreement, or partnership agreement? Do they accurately describe your business purpose and reflect how you operate your business? Businesses should review or, better yet, have an outside third-party review, their organizational documents at least once every five years. This review will help ensure that the documents continue to meet the needs of the business and comply with current laws.
Draft a code of ethics. What happens if one of your employees does something that you consider morally wrong, even if it does not violate the law? Can you fire the employee? Or are you stuck until the conduct becomes a pattern? A code of ethics requires a company’s employees to abide by stated ethical standards and enables these ethical requirements to permeate the business. By making compliance with a code of ethics a job requirement, businesses can make sure employees follow the law, as well as a higher ethical standard.
Draft a whistleblower policy. What happens if an employee wants to report a supervisor’s misconduct but fears retaliation? A whistleblower policy enables employees to address complaints, unethical conduct, suspected financial improprieties, misuse of business resources, and report potential violations of law. Properly drafted, it will prohibit retaliation, demotion, or other adverse action against a reporting employee. To accomplish these goals, however, the policy needs to maintain the confidentiality of the reporting employee. Businesses often include a whistleblower policy within their code of ethics.
Create a document retention policy. How long do you keep old records? Do you know why you are keeping those records, or why you are not keeping them? What are you doing with electronic documents, such as emails? A written document retention policy will establish standards for document integrity, retention and destruction, while also addressing electronic files, backup procedures and archiving. This type of policy will not only protect business records for the appropriate period of time, but will also prevent a business from keeping documents longer than necessary, both of which could cause problems.
The policy should specify the length of time specific types of documents must be retained; when it is permissible or required to destroy specific types of documents; and procedures for both paper and electronic records (such as emails). The policy should be circulated to all employees on regular basis, and someone in the business should be charged with overseeing its implementation and ensuring it is followed. It does bear mentioning — no matter what the document retention policy provides, in order to avoid charges of criminal obstruction, all document destruction should be halted immediately upon notification of a pending or ongoing investigation by a law enforcement agency.
Note on code of ethics, whistleblower policy, and document retention policy. Keep in mind that a code of ethics, a whistleblower policy and a document retention policy are only as good as their creation. Businesses should involve their employees in developing, drafting, adopting and implementing the code of ethics to ensure buy-in from all interested parties. Similarly, businesses should make sure the whistleblower policy and document retention policy meet their stated goals.
At the same time, these documents are only as good as their enforcement. Ignoring them or applying them haphazardly will set the business up for disputes, and possible litigation, by disgruntled current and former employees. And of course, unless businesses provide training to employees regarding the employees’ obligations under these policies, the policies are doomed to gather dust.
Financial examinations. Does your business have a budget? Does it have financial statements audited each year? Can you easily access your cash-flow information? Setting an annual budget may be time-consuming, especially when unexpected events cause the budget to fly out the window. But taking the time to create the budget will force the business to take a close look at its revenue, expenses and cash-flow, rather than flying by the seat of its pants. In addition, having an independent auditor conduct an annual audit in accordance with generally accepted accounting principles will help the business better understand where its revenues are coming from and where its expenses are going, find problem areas and better budget in future years.
Moreover, creating an audit committee separate from the business owners and directors to review the audit will help ensure negative financial implications are not swept under the rug. Lastly, although using the same auditors every year enables them to more easily and better understand the business, it also leads to complacency. Consider changing auditors, or at least the lead auditor, every three to five years.
In conclusion. Although it is not necessarily true that a well-governed business is a tax-compliant business, it is often true that a poorly governed business — one that does not keep track of its goals, does not operate using best practices, and fails to set and keep financial management goals — is often a tax problem waiting to happen. And while the list of issues described above is not an exclusive list of potential problems, it does focus on some of the more common areas businesses frequently ignore in their day-to-day operations. Addressing these long-term issues will help short-term business operations and help keep the IRS away.
Brian Bernhardt is a partner in the Richmond office of McGuireWoods LLP. He practices in the areas of Federal tax controversies, Federal tax litigation, and nonprofit and tax-exempt organizations, focusing on their administrative relationships with the Internal Revenue Service.
Please please please the correct term is records retention NOT document retention. Email is a means of transporting content. You determine its retention based upon its content and the applicable legal, regulatory or business requirements for the record.
The best thing to do is ensure that your organization has a records management professional on staff. If you want legal advice you seek out an attorney, if you need accounting advice you seek out an accountant and if you need help with managing your records you seek out a records management professional. To learn more about records management I suggest visiting the website of ARMA International (http://www.arma.org) which is the professional association for records manager as well as the Institute of Certified Records Managers (http://www.icrm.org)
while at the ARMA website be sure to visit their online bookstore where you can obtain a copy of the ANSI/ARMA standard Retention Management for Records and Information
This standard provides guidance for establishing and operating a retention and disposition program as a component of a complete records and information management program. It covers general principles, including the following:
·authority and responsibility
·identifying and classifying records for retention purposes
·principles for determining retention periods for all records on all media and in all formats
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Peterk of Richmond Va
Feb. 6, 2008 at 11:26 PM
I read the column by Brian C. Bernhardt regarding Focus on corporate governance and the IRS with great interest. It will be interesting to see of the IRS and the SEC wind up with similar policies, or whether they create complexities for organizations by issuing confusing or contradictory policies.
With regard to the reference to “records retention policies”, I have a particular interest, having worked in the field for more than 30 (thirty) years. Records and Information Management (R.I.M.) is a rapidly growing and maturing field, and the professionals involved in R.I.M. can assist organizations as they seek to ensure that their records are well managed, that they help minimize risk, and that they serve the information needs of businesses.
For those who are interested in learning more about Records and Information Management, I would recommend contacting ARMA International, the not for profit professional association at http://www.arma.org. Chapters exist throughout the United States, including chapters in Washington, D.C., Northern Virginia, Williamsburg, and Richmond.
Douglas P Allen, CRM, CDIA+
--Douglas P Allen, CRM, CDIA+ of Austin, Texas
Feb. 7, 2008 at 01:32 AM
