Sandy’s sobering reminder: Prepare for the worst

As business owners affected by Hurricane Sandy attempt to pick up the pieces and get back to work, their plight serves as a reminder to others that it makes sense to prepare for the worst in business.

Jim Hardy, CPA/ABV/CFF, said it’s a mistake for business owners to think that disasters only strike somewhere else. Hardy, founder of Hardy, Wrestler and Associates in Joplin, Mo., draws from personal experience when he performs business interruption insurance reviews for clients.

Hardy said having a written disaster plan prepared him and his employees for May 2011, when a tornado tore through Joplin and leveled his 18-employee accounting firm. Hardy 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 U.S. 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. Following Hurricane Katrina in 2005, employees at his firm were prevented from entering their office for 76 days as mold 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 cellphone numbers they carried wound up being meaningless. Cellphones 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 realize 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 well-being 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, N.J., where many of his neighbors 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 AICPA 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 digitization can be a significant help for firms 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 paralyze 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.

CPAs 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.
• Make sure to 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, N.Y., 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 their CPAs.

“That’s something we as CPAs should be doing with our clients on a regular basis anyhow,” Hardy said. “But we tend not to do that. But after a disaster, they tend to want you to do that.”

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.”

Rate your readiness

The American Red Cross provides a number of disaster readiness resources for business owners, including a free online “Ready Rating” tool to help managers assess whether they are properly prepared for a disaster.

In a brochure titled Preparing Your Business for the Unthinkable, the Red Cross lists steps that business owners might want to consider in building their own disaster plan. These include:

• Installing emergency lights that turn on when the power goes out.
• Keeping emergency supplies available. These could include a first-aid kit, a flashlight with extra batteries, and enough food and water on hand to last employees and customers for a while if, say, a tanker truck carrying hazardous materials overturns nearby and confines everyone to the work site.
• Purchasing an NOAA (National Oceanic and Atmospheric Administration) Weather Radio receiver to listen to information about possible severe weather.
• Stocking a minimum supply of the goods, materials, and equipment you would need for business continuity.
• Consulting with your insurance agent about business continuity insurance. Most policies do not cover earthquake or flood damage, and special riders may be needed to protect valuable property and equipment.
• Training employees on how to respond in various disaster scenarios, and keeping up-to-date contact information for them.
• Designating one employee per shift to be in charge of safety, evacuation, and disaster preparedness for that shift.

“Those individuals can work together in tandem to keep up with the safety plans and the emergency preparedness plans and make sure that the contact information for each shift is kept up to date, working with the human resources department,” said James Judge, an emergency management expert and member of the scientific advisory council for the American Red Cross. “And then they can have safety meetings with each shift to determine, what has your family done to prepare?”

It’s important for businesses to make sure their employees have appropriate personal and family disaster plans in place, Judge said. Employees who are prepared to evacuate their families to safe locations and have insurance documents in secure locations often are able to return to work faster than those who are scrambling in the event of a disaster.

While families’ safety is the initial concern in case of a disaster, the new, popular phrase in emergency management is “community continuity.” Judge said statistics show that 15% to 40% of businesses fail when struck by a manmade or natural disaster. But for long-term success to be possible for a population that is struck by disaster, businesses, schools, and hospitals must be resilient, Judge said.

He said that, where possible, business owners should explore what their temporary relocation options might be in the event of a disaster. CPA firms, for example, might have agreements to help out one another with office space in times of need. Bourke’s firm, WSB, was offering other firms such an opportunity after Sandy hit.

Preparation can help make resilience possible. And the destruction caused by Sandy can serve as a reminder to business owners to prepare for the disaster that they might think could never happen to them.

“Now is the time to prepare,” Judge said. “…When you’re knee-deep in the flood water, it’s pretty much too late.”

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