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August 11, 2009

News Briefs

  1. NACM Survey Shows Adjustments Manageable, But Constant
  2. GE Announces $50 Million Civil Penalty in Settlement With SEC
  3. The Great American Heist: How Processors and ISOs Are Taking Your Hard-earned Profits
  4. Money Talks and a War of Words
  5. Senators Applaud DOC Efforts on Manufacturing Assistance Programs
  6. The Right Route to Cap and Trade
  7. Export Promotion Funds Available for Small Companies

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NACM Survey Shows Adjustments Manageable, But Constant

In an economic downturn, customers and buyers will often resort to whatever means necessary in order to either delay payment or reduce the amount they owe, and using disputes and corrections on invoices is a fairly common delay tactic. Still, according to NACM's most recent monthly survey, despite the grip of the economic downturn on the U.S. economy, the number of invoices that need to be adjusted due to disputes, corrections and other problems represents a rather small amount of most companies' total invoicing.

In response to the question "What percentage of your company's invoices need to be adjusted due to disputes, corrections or other issues?," 72% of respondents noted that only 0-10% of their companies invoices need to be adjusted. Another 17% said that 10-20% of their invoices required adjustments, and 7% said that 20-30% of their invoices needed changes. A very small minority noted that their percentage of adjusted invoices was higher, with 2% answering "30-40%," and 1% each saying "40-50%" and "more than 50%." The handful of respondents whose companies adjust 30% to over 50% of their invoices often cited industry practice as the reason for their high numbers. "Due to the nature of our business, we have numerous retro price changes made after invoicing. This accounts for the major portion of our invoice price adjustments," said one participant who answered "30-40%." "The differences are due to weight variances, which is normal for our industry," said another respondent, whose company adjusts 40-50% of their invoices.

Reasons for disputes were fairly diverse, with respondents citing freight, tax and contract issues. "The majority of disputes are over freight and tax; buyers don't seem to know if the product being purchased is exempt or taxable," said one participant. "Many of our mistakes are due to project managers not paying careful attention to the contract and billing according to the milestones," said another respondent. "Running a close second is not making sure that the order and invoice has the proper purchase order for the customer to process against. Many times, work authorization numbers or requisition numbers are used instead of the correct purchase order number." However, simple errors and mistakes were the most commonly cited causes for adjustments. "Our disputes are mainly for pricing and for invoices not signed," said one respondent. "Most adjustments seem to be self-inflicted: incorrect pricing or freight," said another. "We strive to tighten those processes where the errors occur."

While most participating credit professionals noted that the percentage of total invoices adjusted was, in many instances, lower than 10%—and in some instances even lower than 5% or 1%—the cost of dealing with these issues remained a source of frustration. "The actual amount is less than 1%; however, this still requires man hours for me to catch the error, man hours to process the credits to close the invoice and man hours to re-bill for the corrected billing," said one participant. "On average, it requires approximately 45 minutes of labor to recognize the error and process it for correction."

Additionally, while the percentage was still low, some respondents noticed a marked increase in adjustments over the last several months. "While our company aggressively strives for a very low percentage of disputed/corrected invoices, the ratio of disputes has undeniably increased over the last year," said one respondent, "mostly debits taken in error."

NACM's new monthly survey asks about how much economic indicators affect your company's processes and procedures. To participate today, click here.

Jacob Barron, NACM staff writer

NACM's August Monthly Survey is Now Live!

NACM's newest monthly survey is now live at www.nacm.org! This month's question asks about economic indicators such as NACM's Credit Managers' Index (CMI) and their effect on your company's policies and procedures. Participate today to earn .1 roadmap points toward an NACM certification and to be entered into a drawing to win a free teleconference registration! Click here today.

GE Announces $50 Million Civil Penalty in Settlement With SEC

Last week, the General Electric Company (GE) announced that it will pay a civil penalty of $50 million in a settlement with the Securities and Exchange Commission (SEC) over allegations of accounting improprieties. The agency alleges that GE misled investors "by reporting materially false and misleading results in its financial statements" in 2002 and 2003. These alleged distortions include increasing reported earnings or revenues and avoiding reporting negative financial results.

"GE bent the accounting rules beyond the breaking point," said Robert Khuzami, director, Division of Enforcement, SEC. "Overly aggressive accounting can distort a company's true financial condition and mislead investors."

The SEC filed a complaint with the U.S. District Court for the District of Connecticut that alleges on four separate occasions, beginning in 2002 and continuing through 2003, top-level accounting or finance personnel approved the use of accounting practices that did not comply with U.S. generally accepted accounting principles (GAAP). In one alleged instance, GE improperly applied SFAS 133 to a since discontinued commercial paper funding program to avoid "unfavorable disclosures" and an estimated $200 million pre-tax charge to earnings. In another alleged instance in 2003, the company failed to correct a misapplication of financial accounting standards to interest rate swaps, and the SEC alleges that in 2002 and 2003, the company reported end-of-year sales to accelerate more than $370 million in revenue. In the final complaint, the SEC alleges that in 2002, GE improperly made accounting changes to increase the company's net earnings by $585 million.

The SEC alleges that the commercial paper and end-of-year revenue acceleration were intentional violations, while the other two errors were the result of negligence. The agency uncovered the alleged violations during a risk-based investigation of the company's accounting practices. "Every accounting decision at a company should be driven by a desire to get it right, not to achieve a particular business objective," said David Bergers, director, Boston Regional Office, SEC. "GE misapplied the accounting rules to cast its financial results in a better light."

GE reached settlement, though in a statement, neither admitted nor denied allegations of wrongdoing. "We have concluded that it is in the best interests of GE and its shareholders to resolve this matter and put it behind us on the basis announced today, pursuant to which and consistent with standard SEC practice." GE said that it reviewed and produced nearly three million pages of emails and other documents to the SEC, and suffered $200 million in external legal and accounting expenses."GE is committed to the highest standards of accounting. GE cooperated with the SEC over the course of its investigation, and GE and its audit committee conducted their own comprehensive review in conjunction with the investigation."

The company admitted that the errors that did take place fell short of its accounting standards and, in turn, has "implemented numerous remedial action and internal control enhancements to prevent such errors from recurring." GE has already made the corrections to the effects these accounting practices would have had in its financial statements and filings to the SEC between May 2005 and February 2008 and says no further corrections will be required.

Matthew Carr, NACM staff writer

Stay Late-breaking With NACM!

NACM recently launched several new online initiatives to keep credit professionals informed about the news affecting them and their companies. Follow NACM on Twitter for up-to-the-minute news, commentary and discussion on a number of issues relevant to the B2B credit profession. See more at http://twitter.com/NACM_National. Additionally, NACM's Blog, "Credit Real-Time: The Latest in Commercial Credit," is now live! Subscribe today to read about the latest news on a wide array of relevant subjects, from domestic and international stories to industry and legislative updates. Visitors to the blog can also voice their thoughts on news stories and coverage through each article's comment board. Click here to subscribe today!

Also, just a reminder to join NACM's group page on LinkedIn for a complete wrap-up of organization news coverage and events, as well as to network with fellow NACM members. Click here to join.

The Great American Heist: How Processors and ISOs Are Taking Your Hard-earned Profits

In rough times, both consumers and companies on the brink will often rely on credit to get them through to the next payday. In recent years, credit card use has risen among both parties and, in many ways, this offers advantages to both buyers and vendors. Buyers get some extra time to pay back what they owe and merchants get their money quicker and with a minimal amount of paper.

In the world of B2B transactions, however, the cost of credit card acceptance can be frustrating at best and downright vicious at worst. Interchange fees often can erase a percentage of the potential profit that a company has coming to it and the effect these fees have on a company's bottom line can be extremely prohibitive depending on a company's size and market share. For credit professionals looking for a way around the often confusing world of B2B credit card processing and interchange fees, Robert Day, vice president of commercial interchange at Fifth Third Bank, Inc., recently offered a crash course on the subject in the NACM Added Advantage teleconference "The Great American Heist: How Processors and ISOs Are Taking Your Hard-earned Profits."

"The title says it all," said Day. "It gives you my opinion of this industry and I imagine most people feel the same way. You work very hard for your profits and then all of the sudden, you turn around and you're paying as much as 5% [per transaction]." What's worse, Day noted, is that many companies may believe they're paying much less per transaction than 5%, but the truth is that they're being charged much more without knowing exactly why. "A lot of you are probably paying closer to that 5% than you realize," he said.

In his 90-minute presentation, between breaks for questions from attendees, Day led listeners through the ins and outs of the credit card acceptance process and gave them the tools they needed to better understand, and thereby get the most out of, the B2B processing industry. "There's not one thing that we do in this country that we all have in common other than Visa and MasterCard when you think about it. We all use a Visa or MasterCard product and more times than not we use both," he said. "That affects us all and there's no way to get away from this. You're going to have to get a good understanding of this industry to have a fighting chance."

The first step toward getting a handle on interchange charges is to ensure that the merchant has been set up properly by their processor or ISO (independent sales organization), either as a retail user or a MOTO user, which stands for mail order/telephone order and is a type of card-not-present (CNP) processing service. "You need to get with your processor or your ISO and you need to ask them how they are set up," said Day. "Are they set up as MOTO or as retail? There's a reason you need to ask, because the rules shift and it's really common for people to set you up on the wrong interchange category." Being set up incorrectly can lead to problems on interchange later down the road.

Day also discussed the different levels of data required to reduce interchange costs and also common mistakes made that increase expenses for credit card accepting companies. For more on NACM's teleconference series, or to register, click here.

Jacob Barron, NACM staff writer

Strengthening Your Credit and Sales Relationship

It's widely recognized that the credit and sales functions often butt heads. One department blames the other for failing to contribute to growth or for contributing to roadblocks to success. The problem is, an inharmonious relationship between the two functions is more than just interoffice ire; it can lead to slower collections, slower sales and can de-value both teams. Fortunately, credit professionals have Davy Tyburski, founder, CREDITandSALES.com, to help devise strategies to get into the mindset of sales staff members and to take the initiative to improve the cross-functional relationship. And it's more than just the "walk-a-mile" philosophy.

Credit professionals looking to build a stronger tie with the sales function and to maximize their team's productivity by forming better relationships can register for the August 19 teleconference, "Strengthening Your Credit and Sales Relationship," here.

Money Talks and a War of Words

The worldwide economic meltdown left few countries unmarred. The United States is currently becoming more confident that recovery has begun and that it can finally watch contraction recede into the background. The Dow Jones Industrial Average pierced the psychological veil of 9,000 and has seen tremendous momentum since the 6,600 point realm in March, when NACM's Credit Managers' Index (CMI) showed the country had finally hit bottom. For most of the globe, the past couple of years have been an unwanted lesson in resolve while waiting for rebound. Then there have been those countries like China and India—two of Asia's economic powerhouses—that have enjoyed more subdued growth, but growth nonetheless.

With estimated reserves in the ballpark of $2 trillion, China has quickly emerged as one of the most economically powerful countries in the world and there is little doubt that China, along with India, Brazil and Russia, will compete with the United States for the title of largest single country economy in the coming decades. China has worked to close the gap with the United States, the European Union and Japan. It has become the U.S.'s second largest trading partner behind Canada, and despite the fact that it is the third largest consumer of U.S. goods exports, China enjoys a trade surplus with the United States of more than $250 billion.

The U.S. and China have realized that their economic futures are hinged upon one another and began holding economic summits under the Bush Administration, which are continuing under President Barack Obama as the Strategic and Economic Dialogue (SED). At the end of July, officials from China and the U.S. sat down to speak, again causing worldwide speculation as to whether the yuan will replace the dollar as the world's currency. The conversation started earlier this year as countries struggled with the blanket of global recession while China excelled with first half gross domestic product growth (GDP) of 7%. People's Bank of China Governor Zhou Xiaochuan made a speech on international monetary reform that called for a replacement to the world's reserve currency. Zhou called the current system "a rare and special occurrence" in the world's history and reiterated that the economic crisis that stymied global growth clearly demonstrated that, going forward, the current reserve currency—the U.S. dollar—would need to change. He offered suggestions such as the International Monetary Fund's (IMF) Special Drawing Rights (SDRs) and ultimately stated that any change that would take place would need to be gradual and a "win-win" for all stakeholders.

Of course, in years past, Japan's re-emergence sparked discussions of the yen replacing the dollar, as well as the European Union's formation that came along with claims that the euro would dethrone the dollar. Each was predicted to "eventually" unseat the greenback as the world's key currency. Currently, the yuan has an exchange rate of more than 6.8 to 1 with the dollar.

Will the U.S. be outpaced by China? There are those that certainly believe it's not only in the realm of possibility but is inevitable, particularly as investors remobilize in Asian markets. "Our long-term view is not only could China's market surpass the U.S., but that it will do so and within the next 20 to 30 years," said Jim Trippon, editor, China Stock Digest. "There is an old adage: when you're No. 2, you try harder. There is no doubt that China's economic engine is running hard, on all cylinders, unlike the U.S.'s economy." He added, "We have to remember that the U.S. has not always been the world's largest economy. This position the U.S. holds is really an outgrowth of the World War II victories over Japan and Nazi Germany."

As the two superpowers try to negotiate a bilateral investment treaty, the United States-China relationship continues to be peppered by a war of words. As Senate Finance Committee Chairman Max Baucus (D-MT) wrote Treasury Secretary Timothy Geithner, "The global financial system remains in crisis. And protectionist tendencies in both countries have strengthened." There are the ongoing poultry bans between the two—as well as the Chinese ban on U.S. beef and pork—and the accusations that the Chinese government is manipulating the value of the yuan. Geithner submitted in written testimony during his nomination hearings in January that China is purposefully devaluing the yuan to boost exports. Chinese exports have ramped up tremendously from $593 billion in 2004 and are expected to surpass a projected $1.7 trillion this year. At the end of July, the International Monetary Fund (IMF) reported that it feels that China's currency remains "substantially undervalued," tossing out the once-used verbiage of "fundamentally misaligned."

Matthew Carr, NACM staff writer

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Senators Applaud DOC Efforts on Manufacturing Assistance Programs

The Department of Commerce (DOC) recently received accolades from a high-ranking duo of senators for their work in improving the state of federal programs designed to aid smaller manufacturing companies. Senators Mary Landrieu (D-LA) and Olympia Snowe (R-ME), chair and ranking member of the Senate Committee on Small Business and Entrepreneurship, respectively, issued a joint statement voicing their enthusiasm for the DOC's efforts.

"With 33% of the jobs lost last year coming from the manufacturing industry, ensuring that small manufacturing companies have and know of the resources they need to survive and grow should be a top priority for our federal government," said the senators. "It's good to see the administration is taking this request for increased coordination seriously through a number of efforts. We look forward to working with Acting Assistant Secretary [Mary] Saunders in guaranteeing that small manufacturers have the help they require to prevent further job losses and keep their doors open in difficult economic times."

The move to improve federal programs began with a letter sent in early March 2009 by both Landrieu and Snowe to the DOC, the Department of Labor and the Small Business Administration (SBA) that requested a concerted effort on the part of all three agencies to enhance coordination in several of the country's hardest hit manufacturing communities. Acting Assistant Secretary Saunders, whose specific responsibilities focus on manufacturing and services, responded in another letter last week, outlining the steps taken to comply with the senators' demands. One notable change included adding an updated and expanded list of the programs available to assist small manufacturers on the DOC's website, which would increase visibility and make it easier for smaller firms to use them to their full advantage.

Dialogues have also opened up between the coordinators of the federal manufacturing assistance programs and the manufacturing community at large to foster greater public-private collaboration on policy. Saunders' letter also noted that the International Trade Administration has continued to work with the federal government to promote exports and overseas investment, work for fair trade and increase compliance with international trade agreements.

Jacob Barron, NACM staff writer

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Usually, the first step after the account is placed is to notify your debtor and make an immediate demand for full payment. The intensity of the phone calls increases if payment is not made. If direct personal contact is appropriate, NACM Affiliates have many resources, including the ability to draw on a nationwide network of Affiliates. When necessary, NACM Affiliates will forward an account to one of the bonded attorneys in its tried and proven network. NACM Affiliates exhaust all collection possibilities before recommending litigation to you. All funds collected are placed in separate trust accounts.

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The Right Route to Cap and Trade

The United States continues to try and shift toward greater energy efficiency and greenhouse gas reduction, both voluntarily and by tugging along those reticent to change. The high spike in energy costs over the last several years has sparked a boom for conservation and alternative-fuel-source movements, while at the same time forcing oil and energy companies to find a way to soften their public image as villains.

The major issues of the modern era have become global warming, the burden of foreign oil, the exploration of how to develop renewable energy sources and how to curb pollution. Even more important as the country trudges past the eye wall of the economic maelstrom is how to attack all of these issues profitably and without hamstringing industries with higher costs. At the end of June, the House passed Representatives Henry Waxman (D-CA) and Edward Markey's (D-MA) "American Clean Energy and Security Act of 2009" (ACESA), which has the principal focus of reducing and regulating greenhouse gas emissions through economic incentives and efficiency programs. The cap and trade centerpiece of the bill has received considerable attention for its potential impacts on international trade, while the U.S. Department of Agriculture (USDA) has praised the legislation for offering billions of dollars in additional revenue opportunities for farmers.

"Congress has an unprecedented opportunity right now—in these next few months—to put the American economy on a strong footing for the 21st century," said Nathaniel Keohane, Ph.D., director, Economic Policy and Analysis, Environmental Defense Fund (EDF). He added that last month the House took the first crucial step, and "now it's the Senate's turn."

A standard provision of any climate change legislation is a cap on greenhouse gas emissions, and the Waxman-Markey bill is no different. The bill requires a 17% reduction by 2020, striving for an 83% reduction by 2050. In the cap and trade system, caps are placed on carbon dioxide emissions and companies must have permits to emit greenhouse gases. These permits, or allowances, have emerged as the key debate because many see them as a new valuable commodity, worth tens of billions of dollars. The question then becomes, should the government freely give away the permits, should it auction them or should it be a combination of the two?

"Allowances will have significant value," said Senate Finance Committee Chairman Max Baucus (D-MT) during a recent committee hearing. "In 2012, the first year of the program in the House-passed bill, the Congressional Budget Office puts their value at $60 billion. For the period of 2010 to 2019, they amount to more than $870 billion."

As it stands, the Waxman-Markey bill would have the government freely allocate 85% of emission allowances, with 40% of that going to consumers via local power distribution companies and 15% to what are referred to as "trade-exposed" industries—those that would be hurt by trade with countries that did not have their own carbon programs. The remaining percentage would be split among states, refineries, energy research entities and others.

"The environmental effects of cap and trade with free allocations are similar to those of a carbon tax or a cap and trade program with auction of allowances," said Alan Viard, resident scholar, American Enterprise Institute (AEI). "Unfortunately, economic consequences are much less benign." According to Viard, if the market price of allowances under cap and trade is $20 per ton, every firm would have an incentive to reduce emissions at a cost less that amount, while providing no incentive to reduce emissions that would cost more. "The incentive is clear-cut for a firm that has no allocated allowance to cover the emission and must therefore pay $20 to buy an allowance from someone else," explained Viard. "Although it may be less obvious, a firm that was allocated more allowances than it needs faces the same incentive. If such a firm emits an additional ton, it must use an allowance that it otherwise would have sold to another firm for $20."

The major concerns from AEI's and Viard's standpoint is that the costs of the cap and trade system will be shouldered by consumers, with some estimates indicating consumers could be stuck with 85% of the bill.

To better serve consumers, Dallas Burtraw, senior fellow, Resources for the Future, believes that the government should use a simple per-household rebate of allowance revenue raised through auction, known as a cap and dividend. That would also allow for some tweaking in allocation to correct for regional differences in costs.

"The allocation approach in H.R. 2454 is complex, but nonetheless, leaves the distributional outcome largely undetermined," said Burtraw. "State public utility commissions will play the determining role in how households are affected, not Congress, and this will be done in 50 different ways. In fact, there is great uncertainty about how the allowance value directed to local distribution companies will flow back to customers." He believes that free allocation of allowances will raise the costs for consumers, a matter widely agreed upon, while free allocation to local distribution companies on behalf of energy consumers would increase electricity producers' profits in competitive regions of the country by $2.5 billion per year during 2015-2020. The electricity sector is the primary target of the legislation and would be the most impacted, representing between 80-88% of total reduction in energy-related carbon dioxide emissions by 2030.

Whether the allowances are freely given away or auctioned, some take a broader view of the bill.
"Despite all the attention it has received, the split between auctioning permits and giving them away turns out to be a red herring," said Keohane. "Although it might seem counterintuitive at first, the bottom line is clear: whether the allowances are auctioned off or freely allocated doesn't affect the environmental efficacy or cost-effectiveness of the program."

According to the Energy Information Administration (EIA), though the ACESA legislation would raise energy prices, the cost effects to consumers in electricity and natural gas are mitigated through 2025 by free allowances to distribution companies. In 2020, the effect would be around 9.5 cents per kilowatt hour, while by 2030, the effect could be anywhere between 11.1 cents to 17.8 cents because of the planned phase-out of free allowances between 2025 and 2030.

There were many who felt the proposed legislation needs more tweaking before it can be successful.
"The House approach relies on a flawed distribution of free allowances that picks winners and losers as the nation transitions to low-carbon sources," said Jack Gerard, president, American Petroleum Institute (API). "The House plan would hold refiners responsible for 44% of emissions but only allocate to them 2.25% of allowances." Gerard recommended that the Senate should scrap the House approach and start over with a more equitable system.

Matthew Carr, NACM staff writer

Export Promotion Funds Available for Small Companies

With demand for southern U.S. food and agricultural products in overseas markets stronger than ever, U.S. agricultural exports are expected to reach $95.5 billion in 2009, despite the global downturn. Many small- and medium-sized agricultural businesses are turning to exporting as a way to increase sales, but find that marketing their products can be costly. However, the Market Access Program (MAP) Branded offers matching funds to small companies to help relieve some of the budget strain as these firms strive to increase sales in potentially lucrative foreign markets.

MAP Branded provides reimbursement for half the cost of many promotional activities in markets across the globe, including television commercials, in-store promotions, required package and label changes and other marketing efforts. The Southern United States Trade Association (SUSTA) provided MAP Branded funding to more than 70 small companies in 2008, with participants reporting $118 million in sales as a result of their promotions. SUSTA is now accepting applications for the 2010 Branded program, so companies may get a head start on planning their overseas promotional activities for next year. Firms based in the following states and commonwealths may apply for funding through SUSTA: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, Puerto Rico, South Carolina, Tennessee, Texas, Virginia and West Virginia.

MAP Branded is funded by the U.S. Department of Agriculture's Foreign Agricultural Service (FAS) and administered to southern U.S. companies by SUSTA. To be eligible for the Branded program, companies must be considered small according to U.S. Small Business Administration (SBA) standards, have yearly sales of at least $100,000 and promote a brand-name product that is at least 50% U.S. agricultural origin.

Companies applying for MAP Branded funds can download the Pre-Qualification Form on the SUSTA website at www.susta.org/services/map_application.html. For more information, contact your state's Department of Agriculture or the SUSTA office at 504-568-5986.

Source: Southern U.S. Trade Association

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