Added Regulatory Burden is a Tax on Community Banks, Credit Unions and Small Business

This is the message from Financial Institutions (FIs) and Small Businesses burdened with Sarbanes-Oxley, Dodd-Frank and Obamacare.

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Although the Sarbanes Oxley has been in effect since 1992, bank regulators have turned up the heat on FIs and small businesses that support them in recent years.  Regulators have tasked FIs with obtaining extensive background on their 3rd party vendors, not the least of which is a Statement on Auditing Standards (SAS) 70 Type I or Type II.  Type II is much more comprehensive and is required if a 3rd party vendor has access to sensitive FI data.  Many small businesses have to deal with PCI compliance and regulatory uncertainties placed upon them by Dodd-Frank and Obamacare, as well.

The “short link” to this narrative is  community banks, credit unions and small businesses have to dedicate at least one full-time employees (FTE), plus high level management’s time to manage these regulatory requirements. 

FI’s are comprised mainly of community banks and credit unions with assets of 50 million to 10 Billion.  Many of them are small businesses too, employing 25-50 employees on the lower end to hundreds on the higher end.  Therefore FIs employ FTEs and/or outside consultants to manage the burden.  The SAS 70 requires a great deal of technical expertise.  In addition small businesses have had to hire their own 3rd party accounting, legal, security and compliance experts to test regs tied to intrusion detection, audited financial statements and site inspections.  Vendors have had to install and keep up-to-date hardware, including an array of security cameras and a “boat load” of security and encryption hardware and software, as well.

Consider these FIs manage 20-30 3rd party vendors .  Add to this the cost to each vendor, small community banks and credit unions, who have to manage the same regs.  Consider the changes vendors have needed to make to the software they provide to FIs.  The costs could be well into the billions. 

Add to this hundreds of businesses, call it a “cottage” industry, that have sprung up to aid  3rd party vendors and FIs who can’t afford to deal with all these new government regs and compliance.  Small business vendors can easily spend $10,000 or more per month to provide compliance to customers and the security they need under ever increasing government regulations.  Ironic isn’t it?  New businesses are spawned by increases in government regualtions.

Added regulatory burden is a tax on small business.  Businesses, especially small businesses have to pass that cost to our customers and so on to the end result, the consumer.

One final consideration.  Community banks, credit unions and small businesses are not going to get the media attention of Occupy Wall Street.  We are occupied with raising our families, growing our businesses and gainfully employing people who want to work for a living.  We generate over 60% of the new jobs in this country.  If our government continues to go down the path of increased regulatory burden and continues to place the burden on small business, legislators will have fewer laws to pass, fewer regulations to enforce and fewer job creators to tax.  You will put us and more of my fellow job creators out of work.

Here’s our  message to our representatives in government…

“If you continue to put small businesses,  the real job creators out of business, we will turn the full force of our entrepreneurial spirit into making those of you, who over-burden us with excessive regulatory burden, out of business, too!”

Background:  SAS 70 was issued in 1992 and there have been no changes in it until now. Now effective for accounting periods beginning on or after June 15, 2011 a new standard, Standards for Attestation Engagements (SSAE) 16 will be in effect. Do not expect any immediate changes. Most companies have fiscal years that correspond to the calendar year. For those the new standard will not be effective until January 1, 2012 and the reporting under the new standard will not be available until the company’s financial results for 2012 are published in 2013. Many people misinterpreted the SAS 70 report as a means to obtain assurance regarding a vendor’s controls over compliance and operations. It was not. It was only a report of the vendor’s controls over financial reporting matters. The new SSAE16 reports will be much more comprehensive.

Under the new reporting regime there will be three varieties of reports, SOC 1, 2 and 3. The SOC 1 report will be similar to the existing SAS 70 report in that it will report on the company’s controls relative to its financial reporting. A SOC 2 report may address one or more of the following five key system attributes:

* Security – The system is protected against unauthorized access (both physical and logical).

* Availability – The system is available for operation and use as committed or agreed.

* Processing integrity – System processing is complete, accurate, timely and authorized.

* Confidentiality – Information designated as confidential is protected as committed or agreed.

* Privacy- Personal information is collected, used, retained disclosed and disposed of in conformity with the commitments in the entity’s privacy notice, and with criteria set forth in Generally Accepted Privacy Principles (GAPP) issued by the AICPA.

The new auditing framework places additional demands on the management of the organization being audited. Management must make a representation of the controls in place and a criteria for the description of the system, design and operating effectiveness of the controls. It must also evaluate the risks that threaten the achievement of the control objectives and any changes that were made in the system during the period.

 

A Suggestion On How The Government Could Help The Housing Industry

The housing glut has the entire economy in handcuffs!

Here’s a great approach to get the folks who “deserve” the American Dream a chance!  This proposal from Blair Rugh at Trinovus is a government stimulus plan that will work! 

A Suggestion On How The Government Could Help The Housing Industry

by Blair Rugh

I have a suggestion on how government could help the housing industry. I am reasonably confident that neither President Obama, his economic advisors nor members of Congress read this weekly newsletter. But when you write something that has a reasonable circulation you never know where it will wind up, so here goes.

Three facts we know for sure. (1) The U.S. housing market is in the dumper. Some areas are worse than others, but no area has been unaffected. (2) The volume of foreclosures has harmed low- and middle-income borrowers, particularly African- Americans and Hispanics disproportionately. Many of the people foreclosed upon had no significant asset other than their home. (3) The provisions of the Dodd Frank Act relative to underwriting requirements and loans that can be sold in the secondary market, market conditions and enhanced regulator scrutiny and criticism of all lending will make it much more difficult for future borrowers to get a loan. For good, bad or indifferent the actions of the government and the regulators make it significantly more difficult for the housing industry to recover. Until it does, it will be difficult for the economy to recover.

There are a lot of qualified people who still have a job and can afford a reasonable payment on a home but cannot or will not be able to purchase one because they do not have the down payment. In today’s world, for a working class family, it is virtually impossible to save enough for a reasonable down payment. The husband and/or the wife may both have stable jobs and a stable income but saving the $20,000 or $30,000 required to make a down payment that will qualify them for a loan that they can afford is almost out of sight. Today’s housing prices are as low as they have been in the last 10 or 15 years. If we can just get qualified people into the system, it would be a great advantage for them and if we can deplete the nation’s housing inventory at the same time it would be a great boon to an economic recovery.

Let’s lend qualified borrowers a reasonable down payment on a home purchase, say a maximum of $20,000. Were it mine to do, I would make it available only to persons who do not presently own a home. The goal is to deplete the existing housing inventory, which is not accomplished if someone who owns a home is just moving up. Second, I would limit it to homes that were built before a specified date, say June of this year. The purpose of my plan is not to spur new construction directly. That will happen if the existing inventory of vacant housing is depleted. I would not have the federal government do it directly as I am not sure at this point if the federal government can do anything efficiently. I would have the federal government provide block grants to the various states depending on each state’s inventory of vacant homes.

I would grant the homebuyer a loan that would be secured by a junior mortgage on the home. The mortgage would not bear interest in the initial years and then after a reasonable period of time would require interest at some reduced rate. The loan would be payable upon the sale or transfer of the property or at some reasonable time in the future, say 10 years after it was granted. That should provide the homebuyer sufficient time for the housing market to recover its value and to reduce the first mortgage so that refinancing is achievable.

If 100,000 people qualified for the program, the government outlay at the maximum amount of $20,000 per loan would be $2 billion. While that is a lot of money to anyone I know, the federal government seems to treat it as you and I treat pocket change. And more to the point, it is not an expense of that amount as if properly handled the bulk of the money will be eventually repaid. What I suggest has to be refined and better thought out, but I think it is a viable solution to the housing mess. Moreover, it will put qualified people into housing that they can afford. I am generally pretty conservative and against any government assistance programs. I don’t like social security, Medicare, food stamps or anything similar to those programs. I think government should provide everyone an equal opportunity and then let the chips fall where they may. In this instance, however, the government created the problem so I think it takes a government program to hasten the recovery. The purpose of the program is not to provide relief to anyone but to rescue the housing industry. If it has a collateral result of helping people that is even better. I know you can improve on what I suggest. Add your improvements, and if you think it is a good idea make your representative or senator aware of it.

National Federation of Independent Business (NFIB)

I consider myself an entrepreneur.  My business, Integra Business Systems, was incorporated in March, 1988.  Our slogan is “advancing the paperless office.”  We develop enterprise content management (ECM) software also known as document imaging, or the electronic file cabinet.  Our customers include financial institutions and the financial services industry.  Our customers eliminate paper by digitizing documents by scanning paper or capture and archive “born digital” documents. Born digital documents include Adobe Acrobat (PDF) documents, Word, Excel, Google Docs, email, etc… We have 30 employees and growing.  We are a private, closely held, self-funded small business.

I believe the freedom and the success small business owners are blessed with and enjoy here in the USA, is based on the entrepreneurial spirit; individuals driven by God, family and freedom, the foundation America.  I believe my business and thousands of small businesses like Integra, make up the heart and soul of our great country.

I also believe you get out, what you put into something.  I discovered the National Federation of Independent Business (NFIB) several years ago while I was stumbling through some of our Human Resource (HR) issues.  The NFIB Employee Handbook available to members, opened the door to our long-term association.

The NFIB became a reliable source of content related to the needs of a small business in areas to include HR, finances, sales and marketing, legal and regulatory issues.  Like all small businesses, all these areas are costly and difficult to navigate alone.  While I cannot advocate the NFIB as a replacement for professional consultation and their services, the NFIB serves as an affordable surrogate source and Garmin-like resource for small business.

I realize this sounds like a “paid ” endorsement.  The only shameless promotion here is my own.  In fact, any involvement you have or partake upon with the NFIB is entirely up to you.  Like I said, “You get out, what you put into something.”

NFIB President Dan Danner

Towards that end I want to share with you what I think this is the best and most timely message to the public with regard to understanding the plight of small business and the economy that anyone could have delivered to this president and the rest of the politico in DC.

There is so much smoke and mirrors coming from the media and the Obama administration with regard to small business, I just wish more media outlets would have published this message (follow the link) from Dan Danner, NFIB president.

Note:  Please help us get the good word out.  Share us on your favorite social media site and Stumble Upon.  Thanks.

“The best way to predict the future is to invent it.” – Alan Kay

Business is improving, despite all the obstacles in this unpredictable economy that remain and those ahead of us.  This is largely self-fulfilling prophecy as our engine runs on premium personnel and our management team isn’t half-bad either.

We have invested a great deal in new products and new markets.  I’m a big fan of Alan Kay’s expression, “The best way to predict the future is to invent it.”

Klondike Bluffs mountain bike trail outside of Moab. In the background, Arches National Park and the La Sal snow-capped mountains (click on the photo for a better view)

This message comes somewhat diluted by events such as 9/11, and the BP oil spill.   Natural disasters are somewhat unpredictable but they are going to happen.  I have seen the raw and gut-wrenching affects as they unfold.  We are certainly not exempt from the fallout.

There’s little one can do in the moment but there is much that can be done to either prevent an occurrence or deal as effectively as possible with the results.  Unless of course, your government gets in the way.  That’s a whole other topic.

We believe we are as well prepared as we can be to limit the impact of most natural disasters.  Arguably we are and will be impacted on a financial and personal level as well.  To what extent will be born out by the actions, performance and lessons learned by others.  Certainly, we are far more fortunate.

There is still no consensus on when and where the economy will improve.  I spend a great deal of time measuring and evaluating circumstances as they may affect our business.

We can watch Fox News or CNN but our success or failure has little or nothing to do with the economy, politicians or other outside factors.  It has to do with you and me.  It has to do with the quality and functionality of our products and services.  It has to do with how we deliver our products and services!  It has to do with how we choose and treat our customers and our partners.

We are nothing to big business or big government in terms of our success or failure.  We are everything onto ourselves.  We will not succeed or fail due to outside influences.  We will only fail if we are cannot deliver excellence on all levels, products, customer service, implementation and ongoing support. 

Conversely, big business and big government need us to succeed, Their’s has become a global problem.  Because they have simply ignored the entrepreneur; unless, of course, the entrepreneur is holding the glass slipper.

Small businesses are mostly carriages of pumpkins and mice out there delivering the goods.

There are very few Cinderella stories.  Once delivered, the glass slipper still fits but we are working well past the ballroom festivities which has become just as intended, a fantasy.  We are soon  forgotten.  When the carriage and horses are stabled and the cats are away, the mice, small business people, you and I, will come out to play.  Small business can be very resourceful, if left alone.

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