IRS Stimulus Rebate

I heard on the TV that the IRS will be giving out extra rebates in October. How do I qualify? (Anonymous, West Pittston, PA).

I am not certain where you received the information, but there is no second stimulus rebate payment. Qualifying taxpayers only receive one rebate check. What you may have heard is that taxpayers must file their 2007 income tax returns by October 15, 2008 in order to qualify for the economic stimulus rebate.

What to do if you haven't filed your return in years

Question: I just received a letter from the IRS informing me that my husband never filed our tax returns from 2004. When I asked my husband about it he said he forgot to file the last 4 years. What do I do? (Anonymous)

First, I would gather up all your tax documentation from the previous four years and file the returns ASAP. If you cannot locate your documents (i.e., 1099s, W-2s, etc.), you can call the IRS on the number provided on the letter. If you misplaced the letter, you can call toll free at 1-800-829-1040 to speak to an agent (NOTE: don't call on Mondays or Fridays - these are the busiest days for the IRS and you will most likely become frustrated trying to get a hold of a live person). If you explain to the agent that you lost your documentation and need to complete your returns for 2004, 2005, 2006 & 2007 they can send you a transmittal that provides all the appropriate numbers needed to have your returns completed. Once you have the information needed to complete the returns, I advise that you seek a qualified tax professional to assist you in preparing these returns in a reasonable amount of time.

I stress qualified because there are many people and companies out there that prepare returns, but are not really qualified to prepare them. Most taxpayers are not aware that the Internal Revenue Service does not restrict non-licensed professionals from preparing income tax returns. In other words, according to federal regulations a paid tax preparer does not have to be a certified public accountant or enrolled agent to prepare taxes. In April, 2006 the Government Accountability Office published the results of a study it conducted that indicates that large tax preparation service companies contribute to error rate. It was noted in the report that most of the preparers at these companies are unenrolled, inexperienced, and have little or no background in tax preparaton. Such companies as H& R Block and Jackson Hewitt do not require that their employees or franchise owners to have any prior experience in tax preparation or a college degree in accounting. To make a long story short, before you find a tax professional, make sure that they have the background necessary to prepare your returns - a six-week crash course offered by H&R Blockhead is not sufficient. It takes years of experience and education just to begin the ins and outs of the tax law.

The second thing I would do is not accept the answer "I forgot to file" for four consecutive years. There are two reasons why someone doesn't file a return: sheer laziness or because they are afraid they owe and can't pay the bill. If you and your husband owe money, you will be subject to interest and penalties which will make the tax bill much higher. The IRS will not accept the excuse that you were not involved in your household's finances and tax matters. This makes you equally as liable for the debt as he is. To make matters worse, the IRS allows you 3 years from filing deadline date to complete your returns and claim your refund - so if you were due a refund for 2004, you lost your right to claim any part of it.

What's done is done and you can't change the fact that your taxes haven't been filed. To prevent this from happening again, I would begin engaging in conversations to openly discuss all financial matters and tax matters with your husband. Perhaps you should take over some of the responsibilities or plan a weekly time slot to do things together. I found in almost half of the cases where taxes haven't been filed, there are usually a few credit card bills or loan payments that have slipped through the cracks too.

Analysis of the Adelphia Acquisition

In applying Swiderski’s taxonomy of financial theory to the above purchase strategy, it is noted that only two of the theories listed can be applied based on the information available from Form 8-K: Accounting Model of Valuation and Modgliani & Miller's Irrelevant Propositions (Swiderski, 2006). The Accounting Model of Valuation "contends that Wall Street sets share prices by capitalizing a company’s earnings-per-share (EPS) at an appropriate price/earnings multiple (P/E). " (Stewart, 2001 cited in Swiderski, 2006, p. 1). Modgliani & Miller's Irrelevant Propositions “argue[s] that a coporation's financial decisions and/or policies have no material impact on the value of its shares. The only decisions that do are those that are relevant, such as investment and operating decisions that directly affect the entity's cash flows” (Swiderski, 2006, p. 1). By focusing on key analysis, such as leverage ratios, Time Warner is projecting the impact of the acquisition on its consolidated financial statements. More specifically, the CFO is concerned with how the balance sheet will look like and how many shares the buyers will have upon close. In addition, through an increased market share and profitability through the classification of the buyout on the balance sheet as a purchased asset (Form 8-K, 2005), earnings are projected to be higher over time, which yields a higher EPS and P/E ratio. The CFO’s comments on From 8-K serve two purposes: first, to explain the implications of the buyout in financial terms and, secondly, to reassure investors that the company is not making a mistake purchasing Adelphia. Hence, there will be some salesmanship presented in his comments. When eliminating the sales puffery, one can see by reading the Form 8-K that the CFO is stating only relevant information related to the implications of the buyout and the concerns of the investment community. To be more convincing, a comparison in financial data indicating the projection for Time Warner with and without the buyout could be presented, thereby incorporating the Economic Model of Valuation, which determines the corporation’s real market value “by calculating the future cash flow from operations outside of any new capital invested for growth (future cash flows) back to a present value that reflects the rate of return needed to pay back investors for bearing risk (cost of capital)” (Stewart, 2001, paraphrased in Swiderski, 2006). There are other areas of additional research that could be presented or conducted (if not done so previously) which would provide useful to this case study. Key calculations, such as the internal rate of return (IRR) on the investment, would provide a better indication of how profitable the acquisition really is. A regression analysis of stock prices in response to any news/press releases relating to the acquisition may also provide some insight as to whether the investor perception is positive or negative. Finally, historical analysis of financial implications of acquisitions of similar companies within the industry may also provide some insight as to what the ramifications of this buyout may be. Post-transaction Analysis As of the time that this essay was written, the acquisition has not yet closed. The FCC is scheduled to vote on whether to approve the transaction on July 13, 2006. “[T]he FCC has been considering putting conditions on the sale that would require Comcast and Time Warner to provide competitors with access to their local sports programming. The conditions could be similar to those placed on News Corp.'s (NWS) acquisition of DirecTV Group Inc. (DTV). As part of that approval, the FCC stipulated that News Corp. couldn't use DirecTV to withhold programming from competitors, charge higher prices or refuse to carry competing programs. Regulators also stipulated that News Corp. submit to a neutral third-party arbitrator in case of program disputes with cable and satellite operators” (FCC to vote on Comcast, Time Warner’s Adelphia buy July 13, 2006, par. 2). One ramification for Adelphia is that “[i]f the deal fails to wrap up by Sept. 1, Adelphia could be required to pay Time Warner $382.85 million or lower its price by the same amount. The company would also have to pay Comcast $87.5 million” (FCC to vote on Comcast, Time Warner’s Adelphia buy July 13, 2006, par. 4). Upon successful completion of the acquisition, additional research should be conducted to determine the financial implications of the buyout. First, Swiderski’s taxonomy of financial theory should be reapplied to determine if the previously identified theories will still be applicable after the transaction, whether they were properly incorporated, and whether theories were omitted. Second, an analysis should be conducted to determine how the use (or misuse) of financial strategy and risk analysis affected the transaction. Finally, an objective analysis should be conducted to determine whether any of the arguments and theories presented herein appear to be supported upon the outcome of the acquisition. Implications and Conclusions In this essay, the buyout of Adelphia Communications Corporation was evaluated to determine why it has become an attractive purchase. More specifically, the purpose of this essay was to evaluate the acquisition of Adelphia Communications Corporation by Time Warner and Comcast. Upon presenting background information on the company, an evaluation of the processes enacted to complete the strategy was conducted. No data on the measures used to value the acquisition could be found, except for the information contained on the company’s Form 8-K. However, one should be hesitant to make the determination that no analyses outside those previously mentioned in this report were conducted. Such an assumption would be merely speculative and should be made pursuant to the successful closing of the deal. The assumption was made, based on data contained in the Form 8-K, that Time Warner has taken the necessary risk management precautions, yet further research should be conducted after the transaction is complete to test that hypothesis. Additional research upon close should also be conducted to determine what specific valuation techniques were employed that lead to Time Warner’s decision to acquire Adelphia, in conjunction with proposals for research discussed in the post-transaction analysis section of this report. Ample time after close should be given prior to conducting such research to produce more accurate and reliable data.
References Adelphia (2006). Wikipedia. Retrieved June 20, 2006, from the World Wide Web: http://en.wikipedia.org/wiki/Adelphia. Adelphia Communications Corporation (2006). Retrieved June 20, 2006 from the Datamonitor MarketLine Business Information Center. Corporate scandal (2006) [list of recent corporate scandals], Wikipedia. Retrieved July 5, 2006 from the World Wide Web: http://en.wikipedia.org/wiki/Corporate_abuse. FCC to vote on Comcast, Times Warner’s Adelphia buy July 13 (2006, July 7) [Market Watch online]. Retrieved July 7, 2006, from the World Wide Web: http://www.marketwatch.com/News/Story/Story.aspx?dist=newsfinder&siteid=google&guid=%7BE04DE037-1D35-48C8-B4AD-A6CD6668EA6E%7D&keyword= Form 8-K [Time Warner, Inc., filed April 21, 2005] (2005). Retrieved July 4, 2006 from the World Wide Web: http://www.shareholder.com/Common/Edgar/1105705/ 1105705-05-33/05-00.pdf. Hay, D. A. & Liu, G. S. (1998, May). When do firms go in for growth by acquisitions? Oxford Bulletin of Economics & Statistics. 60(2). Retrieved from the EBSCOhost database on July 5, 2006. Higgins, J. M. (2006) Hey, Time Warner: Walk Away From Adelphia. Broadcasting & Cable 136(20). Retrieved from the EBSCOhost database on July 5, 2006. Swiderski, P. R. (2006). Taxonomy of Financial Theory.

In the midst of the multitude scandals of corporate corruption around the turn of the century, including those of Enron’s accounting fraud, Halliburton’s overcharging of government contracts, and the Compass Group’s bribery of the United Nations to win business (Corporate scandal, 2006), there have been a variety of financial ramifications. On one end of this spectrum, organizations ceased operations, while others have become bait for acquisition. What makes a company attractive to others to pursue a merger, acquisition or partnership after its downfall is an issue that needs further examination beyond typical speculative reasoning. In this essay, the buyout of Adelphia Communications Corporation is examined. As explained in subsequent sections, Adelphia made headlines in 2002 when it filed a petition for Chapter 11 bankruptcy after the Rigas family (then majority shareholders of the company) misused corporate assets. Currently, the company is under contract by multiple firms to sell its assets in the U.S. and Puerto Rico (Adelphia Communications Corporation, 2006). Rather than shutting down operations, the corporation underwent a serious restructuring effort. This essay examines why Adelphia has become an attractive purchase, rather than another company, such as Enron, that has closed its doors after its corporate scandal has made press. More specifically, the purpose of this essay is to evaluate the acquisition of Adelphia Communications Corporation by Time Warner and Comcast (Adelphia Communications Corporation, 2006). First, an overview of Adelphia is presented, providing a history of the company, summarized details of the events resulting in the company’s petition for bankruptcy, and the strategy used to restructure the corporation afterwards. The processes enacted to complete the acquisition will be also evaluated, including an identification of the key leadership and management transactions. Valuation strategies used by the buyers prior to acting and the financing method(s) used to perform the transactions will be assessed as well. The following section will examine applicable financial theories that relate to the purchase of Adelphia, as well as any theories that were omitted that could have benefited the buyers. Finally, a proposal for post-transactional analysis will be presented. Company Background Adelphia Communications Corporation, founded in 1952, provides a variety of services under the umbrella of telecommunications, including cable television, high speed Internet, and media services, to over 5 million customers in over 30 states and Puerto Rico. It is currently the fifth largest cable operator in the U.S and is under contract “with Time Warner and Comcast, to sell all of its US assets for $12.7 billion … [and] along with its Puerto Rican partner, ML Media Partners LP, [Adelphia] entered into an agreement with two private equity firms, Crestview Partners of New York, USA and MidOcean Partners of London to sell its jointly owned San Juan Puerto Rico cable operations for $520 million” (Adelphia Communications Corporation, 2006, par. 16). History The company incorporated in 1972. “In the early 1990s, the company began building fiber optic networks to deliver communications solutions to the business community. In 1999, Adelphia and its majority-owned subsidiary Hyperion Telecommunications… announced their decision to operate Hyperion under the name Adelphia Business Solutions” (Adelphia Communications Corporation, 2006, pars. 9 - 10). Adelphia expanded by acquiring competitors in various markets later in the same year and in 2000 (Adelphia Communications Corporation, 2006). “Adelphia launched Wink Interactive TV in 2001. In the same year, Gemstar-TV Guide International and Adelphia signed a 20 year agreement with a commitment to deploy TV Guide Interactive in substantially all Adelphia systems” (Adelphia Communications Corporation, 2006, pars. 10 - 12). Scandal Adelphia filed for Chapter 11 bankruptcy protection in 2002, after it became known that “John Rigas and his family, who earlier controlled a majority stake in the company's shareholding, fraudulently used the company's funds for personal loans, manipulated financial figures to conform with analysts' expectations, funded non-corporate projects using Adelphia's line-of-credit for personal purchases, creation of fictitious companies and sham transactions for inflating the company's earnings and concealed increasing debts” (Adelphia Communications Corporation, 2006, par 34). Several lawsuits have been filed against Adelphia in relation with the Rigas scandal. The Rigas family subsequently gave up their shares of the corporation. Restructuring The organization also worked on restructuring efforts, and it has filed four restructuring plans with the bankruptcy court, with its most recent amendment in July, 2006. In 2004, the entity announced that it has decided to sell all of its assets as part of its restructuring plan to satisfy its creditors. (Adelphia Communications Corporation, 2006). The acquisition agreement between Adelphia and its buyers was approved by the Federal Trade Commission and is awaiting approval from the Federal Communications Commission. A deadline for the sale of the company’s assets to Time Warner is set for July 31, 2006. In opposition to the sale are several of Adelphia’s key bond holders and some Wall Street analysts. Buyout Strategy Despite some analyst’s opinion that Time Warner should walk away from the deal, executives at Time Warner “remain confident that the value that drove this transaction in the first place is still there” (Britt, cited in Higgins, 2006). “Time Warner Cable will gain systems passing approximately 7.5 million homes, with approximately 3.5 million basic subscribers… [to increase its subscriber base to] approximately 14.4 million… Time Warner will own 84% of Time Warner Cable's common stock, and the cable company will become a publicly traded company at the time of closing. Comcast will emerge from these transactions with approximately 1.8 million additional basic subscribers… [to increase its subscriber base to] a total of approximately 23.3 million customers” (Form 8-K, 2005, p. 7). “We… are paying around $2,700 to $2,800 per basic subscriber. This is 9 to 11 times expected first full year Adjusted OIBDA, which reflects approximately $200 million of realized cost savings... On a free cash flow basis, we expect the transactions to be… around breakeven in the second year… approximately $11 billion of net debt [will be added] at the… consolidated parent company level... Most of [which]… will be funded by existing cash on hand of over $7 billion [through inter-company loan] and availability under current credit facilities… [L]everage ratios… [are estimated to] be at or below the low-end of… previously-stated target range of 2.25 to 2.75 times” (Pace, cited in Form 8-K, 2005, p. 20). It may be determined that ratio and free cash flow analyses were conducted to estimate the profitability of the acquisition and the impact on the consolidated financial statements. One may become concerned as the valuations expressed focus more on the perceived value from the investor point-of-view to prove that Time Warner can afford the acquisition and that the purchase will not significantly impact the buyer’s stock/company value, as quantitative values were used to ease the qualitative concerns of current and potential investors. By exploiting Jensen’s free cash flow theory, Time Warner is banking on the assumption “that shareholders may be willing to accept takeover bids for companies that they suspect of not using excess cash wisely” (Hay & Liu, 1998, par. 6). From a risk management standpoint, Time Warner’s use of research to defend its position and explain to investors that it is can effectively acquire Adelphia with insignificant perceived financial impact may ease the minds of some investors, which provides an excellent method of preventative risk management. Further Britt states that Time Warner “performed extensive operational, financial and legal due diligence, which has given us a good understanding of the assets we're acquiring… [and] we had our operating people in the field inspecting contiguous systems” (Form 8-K, 2005, p. 23). There is a good indication that Time Warner has a solid understanding of the risks involved, as many of the risks were identified in the Form 8-K.

Optimization Strategy for EchoStar Communications Corporation

Optimal operations methodology requires a studied recognition of the constantly evolving, inextricably intertwined nature of organizational behavior (OB) practices and operations issues in the new global economy within which business functions. In reaching that studied recognition, paying attention to the manner by which national and cultural differences affect the operation and management of human resources is important. Implementing changes requires that management apply OB principles and leadership models; however, making such changes can be challenging in the midst of economic recession, especially for companies such as EchoStar Communications Corporation (Datamonitor, 2007).

The purpose of this essay is to provide an operational report for EchoStar that now looks to optimizing operations in the reality of the changed and changing domestic employee constituency. First, this essay discusses some of the operational organizational behavior issues facing EchoStar. The circumstances that the company now faces in light of the frequent changes in economy are then considered, and it will be noted whether there is, in fact, anyone in the company who is monitoring economic events and how they could have an impact on the operational plans for the future. A list of suggestions will be prepared for the company to prepare for combating the impact on operations of any sudden downturn in the economy, as well as a means to ameliorate any serious effects of any such downturn. Operational/organization behavior issues that are serious at the selected workplace will also be addressed. Finally, a plan to advise key personnel how to implement these recommendations in light of the fact that, in a depressed economy, finance professionals are reluctant to spend money.

About EchoStar Communications Corporation

EchoStar Communications Corporation (ECC) was founded in 1980 with Charles Ergen, Candy Ergen, and James De Franco (Dish Network, 2006; Dish Network, 2008; Marketline, 2007). In 1996, ECC began providing direct broadcast service under the DISH Network name. The same year, ECC became a publicly traded company (Marketline, 2007). In 2002, “EchoStar started offering DISH Network bundled DSL internet Service, Digital Satellite Television” (Marketline, 2007, par. 7), began offering high definition satellite television service two years later, and offered on-demand service in 2005 (Marketline, 2007).

Headquartered in Englewood, Colorado, ECC employs approximately 21,000 people (Marketline, 2008), and is “one of the leading providers of satellite delivered digital television services. The company's services include video, audio and data channels; interactive television channels; digital video recording; high definition television; international programming, professional installation and 24-hour customer service” (Marketline, 2008, par. 1).

As the company has grown, a hierarchical organization has formed to include executive, technical, research and development, corporate, international, sales, marketing, investment, accounting, human resources, and business development divisions; each consisting of their own hierarchy and structure. With the horizontal growth of an internal hierarchy, EchoStar has grown vertically as well, dividing into a hybrid organization consisting of nine separate functional organizations which are legal subsidiaries of the overall group (SEC, 2005). Figure 1 shows the organizational structure of ECC.

Organizational behavior issues facing ECC

EchoStar’s growth in an uncharted technological industry has created a need for diverse, unique employees who can assist in the process of growth at all levels of the organization.

As a result, ECC actively seeks out individuals who can appreciate the constantly changing and unique environment encouraging those who can offer their own perspective and innovative approach to solutions. In return, employees can expect to successfully shape their career according to their goals in relation to the organization (Hogan, 2006).

ECC has established educational programs in an effort to instruct employees in an industry without established guidelines and rules (Hogan, M. 2006). The organization is in a constantly changing mode of operations in order to keep pace with technology and competition (Datamonitor, 2007); hence all team members must remain flexible with the ability to move with the organization (Feurer, Chaharbaghi, Weber, et al, 2000; Jones, 2004).

The challenge of ECC is to continue the company’s growth while maintaining and expanding their employee and management teams. The organization needs to ensure the organizational system adjusts and realigns itself in order to keep pace with the environment (Feurer, Chaharbaghi, Weber, et al, 2000; Jones, 2004). Also, the firm’s executives to periodically assess the existing organizational structure to determine if the design is still applicable and can keep operations at an optimal level (Scott, 2003).

The problem that comes out when reading the various SEC and other business reports on the state of company affairs appears to lie in formulating a plan that is flexible yet definitive in meeting ECC’s goals of growth in an ever changing, competitive market (Davis, 2006; Farrell, 2006; Hogan, 2006; Powell, 1987; SEC, 2005). EchoStar has seemingly grown without a plan; however, the pressure of competition and technology may force management to create and follow a path.

Economic issues facing ECC

Adaptive ability of an organization, which is due in part to its organizational design, to meet the requirements of the environment is critical (Scott, 2003, p. 96), particularly when facing specific economic conditions, such as higher gas prices, economic slowdown, the lowering value of the US dollar and heavy debt.

Rising gas prices in the US is forcing many employees who have longer commutes to seek job opportunities closer to home in an effort to save money (Zuckerman, 2008). This can translate to employee turnover for ECC.

The primary market for ECC primarily is the US (Marketline, 2008). A continued economic slowdown and weak economic forecasts in the US could have a negative impact on the company’s revenues (Datamonitor, 2007).

Even though ECC is not a truly global company, the organization has contracts with foreign firms (Marketline, 2008). The lowering value of the US dollar can cause the prices of future contracts to increase (Grosse, 2000).

According to the EchoStar annual report, potential threats to the company include heavy debt (Dishnetwork.com). Higher debt, compared to other organizations in the industry, may negatively impact the organization’s liquidity position (Datamonitor, 2007).

Since the organization operates in an environment that is in a constant state of flux, having someone in the company who is monitoring economic events and how they could have an impact on the operational plans for the future would be presumed. However, no documentation could be located to indicate that such a position exists within ECC.

Recommendations

In an effort to optimize operations while facing economic changes, the following changes are recommended for ECC with respect to OB:

Executive management should increase the frequency of the organization’s situational analysis.

Focus on enterprise-wide planning, particularly in areas of human resource planning.

Offer (more) employees the option to telecommute.

Expand services into other forays of the world, and use a geocentric approach (Permutter, 1969).

Create a position within the company to monitor economic events.

Continue to foster an environment where leadership is promoted at all levels within an organization.

As discussed in previous sections, a concern for ECC is the perception that the company fails to conduct proper planning techniques. By conducting a periodic situational analysis, the organization can gauge environmental factors that may impact the direction of the company as well as plan for potential changes (Robbins & Coulter, 2007). The need for a plan, particularly in the area of human resources, is to determine whether the future economic outlook requires changes in manpower (Peter & Donnelly, 2005). Further, offering the ability for employees to telecommute may mitigate the risk that turnover will occur due to higher gas prices.

Expanding into other areas of the world will allow ECC to increase its customer base and its profitability (Gupta & Govindarajan, 2004), and using a geocentric approach will provide ECC the opportunity to recruit quality personnel beyond its borders (Permutter, 1969).

Lastly, having someone in place to monitor economic events and advise senior management how to proceed can help ECC in adjusting to the ever-changing environment.

OB issues

ECC is entrepreneurial and is characterized by high innovation and extreme risk taking. When it comes to people, ECC appears to emphasize diversity and capability and appears to be more closely guided by a creative, entrepreneurial leadership, which is also its ownership (Hogan, 2006). Ergen and DeFranco appear to directly influence their teams of engineering and sales to achieve through a desire to compete (Farrell, 2006). Ergen and DeFranco appear have successfully instilled a competitive, thrifty, and entrepreneurial spirit within ECC.

Along with written corporate governance and code of ethics, to a large extent the behavior of ECC is set by the ethical and hard working leadership (Hogan, 2006). ECC proves to be a community participator, and proves to be a model for individuals who like to see a rags-to-riches story. None of the literature reviewed surrounding ECC suggests that any significant OB issues exist that would adversely impact the organization’s performance, with the exception that executive management does not want to use its resources unless it adds value to the company’s customers (Hogan, 2006).

Implementation

Keeping in mind that the organization does not want to invest in additional resources unless they add value to the company and the customers, implementation of recommendations can be accomplished without adding a huge burden to ECC. Existing employees may be used to create additional teams or broaden the scope of teams already in place.

For example, the current members of executive management can either develop a planning team or add the aspect of enterprise-wide planning to its existing responsibilities. The benefit to frequent planning is that the organization can gauge environmental factors that may impact the direction of the company as well as plan for potential changes (Robbins & Coulter, 2007). By foreseeing issues before they occur, the organization, with its entrepreneurial mindset, can find innovative ways to cut or absorb costs without passing on costs, which could have been avoided, to the consumer. This is also why it is important to have someone in place to monitor economic events.

Offering telecommuting as an option to employees not only reduces turnover but also can reduce costs for the organization, as fewer resources are needed. It is recommended that a small percentage of customer support and technical support employees be allowed to telecommute as a measure to test the option. Success of implementation can yield the possibility to allow a higher percentage of employees to work from home.

Prior to expanding into the global economy, market research must be conducted to determine which countries would be most profitable while balancing risk. Management needs to acquire knowledge about the market conditions, as well as business and political infrastructures, of the countries ECC chooses to explore expanding into.

Conclusion

ECC operates in an environment that is in a constant state of flux. Its organizational design and culture foster and environment where leadership and innovation can adapt to changes quickly. In the midst of an economic downturn in the US, ECC must find new ways to optimize operations while continuing to seek ways to grow. The proposed recommendations for ECC will allow the organization to better pinpoint future threats to the company, as well as increase its customer base by entering the global economy. Further, the option to allow customer service and technical support staff to telecommute will reduce costs to offset possible future loss in revenues.

References

Datamonitor (May 23, 2007). SWOT analysis [EchoStar]. Retreived July 23, 2008 from the Marketline database.

Davis, J. (2006). Telecom’s back, and so are jobs wages, opportunity grow in metro area as pay TV thrives. Rocky Mountain News, July 24, p. 1B. Downloaded from galenet.galegroup.com, on August 26, 2006.

Dish Network (2006). About US. EchoStar Satellite L.L.C. Retrieved August 12, 2006 from http://www.dishnetwork.com/content/aboutus/index.shtml.

Dish Network (2008). Dish Network corporation timeline. Retrieved July 23, 2008 from http://www.dishnetwork.com/content/about_us/company_profile/our_history/ index.shtml.

Farrell, M. (2006). Adelphia execs cash in. Multichannel News, August 7, v27, i31, p. 6.

Feurer, R., Chaharbaghi, K., Weber, M., & Wargin, J. (2000, Winter). Aligning strategies, processes, and IT: A case study. Information Systems Management, 17(1), 23.

Grosse, R. E. (2000). Thunderbird on Global Business Strategy. Hoboken, NJ: John Wiley & Sons, Inc.

Gupta, A. K., & Govindarajan, V. (2004). Global Strategy and Organization. New York: John Wiley & Sons.

Hogan, M. (2006). Top EchoStar execs dish about the then and now. Multichannel News, April 24, v27, i17, p. 34. Downloaded from galenet.galegroup.com, on August 26, 2006.

Jones, G. R. (2004). Organizational theory, design, and change (4^th ed.). New York: Prentice-Hall, Inc. Downloaded from galenet.galegroup.com, on August 26, 2006.

Marketline (2007). EchoStar Communications Corporation [company history]. Retrieved July 23, 2008 from the Marketline database.

Marketline (2008). EchoStar Communications Corporation Overview. Retrieved July 23, 2008 from the Marketline database.

Permutter, H. V. (1969). Some management problems in spaceship earth: the magafirm and the global industrial estate. Academy of Management Journal. 12. 59. Retrieved from the ProQuest database on August 1, 2006.

Peter, J. P. & Donnelly, J. H. (2005). Preface to Marketing Management (9^th ed.). McGraw Hill: Boston.

Powell, W. W. (1987, Fall). Hybrid organizational arrangements: New form or transitional development? California Management Review, 30(1), 67.

Robbins, S.P. & Coulter (2007). Management, (9^th ed.). Pearson: Upper Saddle River, NJ.

Scott, W. R. (2003). Organizations: Rational, natural, and open systems (5^th ed.). New York: Prentice-Hall, Inc.

SEC (2005). EchoStar DBS Corporations and Subsidiaries: List of subsidiaries [(SEC) Form S-4, Registration Statement Under The Securities Act Of 1933, Exhibit 21,. Securities and Exchange Commission]. Retrieved August 14, 2006 from the World Wide Web: http://www.sec.gov/Archives/edgar/data/920431/000095013402007646/

d97763exv21.txt.

Zuckerman, S. (June 29, 2008). Costs are changing commutes: high gas prices cause workers to consider distances to jobs as well as salary when deciding on positions. San Francisco Chronicle online. Retrieved July 25, 2008 from: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/06/29/BUTU11FMOS.DTL.

Optimization of Operations in Small Business through Leadership

Most scholarly articles on leadership and the applicability of models focus on large organizations, many of which are multi-national companies. A number of books and articles can be found to tell stories of CEOs of large multi-million dollar companies who have transformed an organization be either taking it to the next level or dramatically saving it from the clutches of near extinction. Textbooks make mention of the great accomplishments of leaders such as Sam Walton (founder of Wal-Mart), Tom Watson (known in the 1980’s for developing the IBM image of success), and Jack Welch (who’s innovative leadership broke the confines of beaurocracy and transformed GE) (Tichy & Cohen, 2003), but fail to discuss the importance of leadership in small business. A void in literature exists in this area.

The purpose of this essay is to develop a working leadership model that adopts and integrates existing theories to optimize operations in the present-day small business operational environment. First, the need for such a model is discussed. Second, the model itself is presented, and the existing leadership models that serve as the basis for it are identified. Finally, advantages and limitations of the model are presented.

Small business owners concerned with optimizing operations

Few scholarly articles exist concerning small business management, and none could be found tackling the issue of optimizing operations. An informal survey was conducted among ten small business owners in the Wilkes-Barre/Scranton area of Pennsylvania, each with fewer than 25 employees. Each business owner was asked to rate the operations of his/her business either as overall outstanding, satisfactory or in need of improvement and explain his/her answer. Data was tape recorded and transcribed. None of the business owners admitted to having outstanding operations, 60% stated that their operations were satisfactory, and 40% stated that operations were in need of improvement. Even those business owners who stated that their operations were satisfactory admitted that there was some room for improvement, and three common themes prevailed:

50% of the business owners surveyed indicated that they have difficulty getting employees to do more work when demand increased or when turnover occurs.

40% stated that they had difficulty finding ways to become more efficient.

20% indicated that employees were reluctant to learn new tasks.

Further conversations with these business owners indicated that employees did not have any specific job titles, but were hired and arranged to handle specific tasks. No formal hierarchy, policies or procedures were in place either. Nine of the businesses are structured with an autocratic style of leadership, “involv[ing] the use of commands and expected compliance” (Weiskittel, 1995, par. 2). All employees report to the business owner(s) and have little or no autonomy. The other business was structured under the team concept.

Small business optimization model

The autocratic model “is becoming obsolete in today’s world” (Weiskittel, 1995, par. 2). In small organizations, it is assumed that the owner really is the leader and that he/she requires others to follow. To a certain extent, the organization must grow according to the direction the owner wants to head in, and the subordinates are required to perform whatever functions are asked of them. Eventually, the owner must begin to trust his/her employees and empower them if the company is to move forward and implement changes. Hence, the business owners must move from the autocratic model to one that requires more post-modern application of transformational leadership.

The first step in the small business optimization model is to have the owner change first by transitioning from a manager role to that of a leader. While no solid definition of leadership exists (Weiskittel, 1999), a variety of characteristics set leaders apart from management. Managers plan, organize, staff, control, and solve problems, whereas leaders set directions, align people, motivate and inspire (Kotter, 2003). The transition may also require the business owner from transitioning his/her mindset from Theory X to Theory Y. Theory X

“assumes that most people dislike work and will try to avoid it if they can. Workers are seen as being inclined to restrict work output, having little ambition, and avoiding responsibility if at all possible. They are believed to be relatively self-centered, indifferent to organizational needs, and resistant to change. Common rewards cannot overcome this natural dislike for work, so management is almost forced (under Theory X assumptions and subsequent logic) to coerce, control, and threaten employees to obtain satisfactory performance" (Newstromm & Davis, 2002, p. 31).

Theory Y is in contradiction to Theory X and

"assumes that people are not inherently lazy. Any appearance they have of being that way is the result of their experiences with less-enlightened organizations, and if management will provide the proper environment to release their potential, work will become as natural to them as recreational play or rest and relaxation... [M]anagement believes that employees are capable of exercising selfdirection and self-control in the service of objectives to which they are committed. [Therefore] [m]anagement’s role is to provide an environment in which the potential of people can be released at work" (Newstromm & Davis, 2002, p. 32).

The purpose of the transition is to begin building trust between the owner(s) and the employees for the purposes of restructuring the organization as a team. This transition will require that the owner(s) shift gradually to a collegial role, which

“depends on management’s building a feeling of partnership with employees. The result is that employees feel needed and useful. They feel that managers are contributing also, so it is easy to accept and respect their roles in the organization. Managers are seen as joint contributors rather than as bosses" (Newstromm & Davis, 2002, p. 38).

The move to adopting the collegial paradigm from the autocratic style of leadership requires that the ownership move first adopt and transition through the custodial and supportive models. The custodial model involves the use of benefits and employee welfare programs to provide for employees' security needs (based on Maslow's theory of needs). The focus is on providing economic satisfaction in exchange for dependence on the employer (Newstromm & Davis, 2002). The supportive model is based on Linkert's principle of supportive relationships, the organization uses the concept of leadership to increase participation and unlock employees' individual potential, so that job performance and profits increase. Motivation is also a product of the supportive model (Newstromm & Davis, 2002).

Once ownership moves to the collegial paradigm, the company reorganizes as a team. Team members realize that working together as a team rather than relying on one particular individual makes the entity stronger. Members have a better sense of belonging and commitment to the organization. Ideas can be brought to the table and implemented. Cross training can also occur. The team leadership model still leaves room for the owners to maintain some control over the organization, as a team leader is required.

Once the team is established the small business owner(s) communicate a vision to remainder of the team while learning to balance control and autonomy. A business owner cannot grow an organization by him/herself. Rather, the need to trust in one’s staff and empower the right people becomes an important issue. What may not always be apparent is the importance of maintaining an open relationship with employees. This results in lower training costs, less turnover, and an employee base that will often support the right management decisions of the organization (Toney & Oster, 1998).

Benefits and limitations of the model

By transitioning from an autocratic form of organization to a team design, the small business can use the team leadership concept to solve problems with efficiency and get employees motivated. However, the model is limited to small businesses, as transforming the design of a larger entity in this manner is impractical. The model is also limited by the actions of the small business owner. The company cannot change if management refuses to commit to it.

Summary

The purpose of this essay was to develop a working leadership model that adopts and integrates existing leadership theories to optimize operations in the present-day small business operational environment. First, the need for such a model was presented. After conducting an in formal survey of small business owners, it was noted that the need to optimize operations was present. However, the outdated autocratic design was not practical for allowing the organization to change. Before the organization can optimize operations, ownership must commit to changing its design.

The small business optimization model requires that the organization transition from an autocratic to a team design. The gradual transition in leadership styles is necessary to avoid culture shock within the organization. Once management and employees embrace the collegial model, the organization can be redesigned to take exploit the advantages of team leadership. The model can be used for existing small businesses, but is not intended for larger organizations.

References

Kotter, J. P. (2003) What leaders really do. In Jossey-Bass (Series Ed.) Business Leadership (1^stSan Francisco: Jossey-Bass. ed., pp. 29-43).

Newstrom, J. W., & Davis, K. (2002). Organizational behavior (11th ed.). New York: McGraw-Hill Higher Education.

Tichy, N. M. & Cohen, E. (2003). Why are leaders important? In Jossey-Bass (Series Ed.) Business Leadership (1^st ed., pp. 4-28). San Francisco: Jossey-Bass.

Toney, F. & Oster, M. (1998, Winter). The leader and religious faith. Journal of Leadership Studies, 5(1), 135.

Weiskittel, P. (1999, October). The concept of leadership. ANNA Journal, 26(5), 467.

Double Tax Jeopardy Implications for Multi-National Companies from an Accountant’s Point of View

As a result of entering the global economy and reaping the financial rewards, more U.S. multi-national companies (MNC) and their expatriates are finding themselves in a position where tax liabilities may be owed to two or more national jurisdictions based on foreign income earned. The issue of double tax jeopardy has caused officers of such organizations to consider the means whereby they can minimize overall tax liability accruing from all their global activities, their organizations, and their employees. Being American firms - often repatriating or directing funds to and from the United States - they usually look to the United States as the part of their global operations where they would be most familiar with tax consequences, thus seeking to minimize tax in the U.S.

The purpose of this paper is to examine the risks associated with using certain tax minimizing strategies in an effort to avoid double tax jeopardy. This paper first defines and discusses the issue of double tax jeopardy as it currently applies to U.S. employees working overseas and their US based employers. Next, the paper discusses how U.S. firms and their expatriate employees currently avoid double tax jeopardy, followed by a discussion on whether the techniques employed can be justified and/or are ethical. Also the risks associated with avoiding double tax jeopardy are identified, and implications of using tax minimizing techniques are discussed.

What is double tax jeopardy?

Double tax jeopardy is an issue that stems from the concept of double taxation, wherein income is taxed twice (Turnier, 2007; Wilkinson & Fancher, 2004). Double taxation can occur when:

The same tax authority taxes multiple entities’ income and/or assets (Wilkinson & Fancher, 2004; Encyclopedia of Small Business, 2002).

Multiple tax authorities tax the same entity’s income and/or assets (Reuven, 2005).

Income and/or assets can be taxed by the same tax authority, as evidenced with treatment of corporate dividends (Wilkinson & Fancher, 2004). Corporate dividends are paid out from retained earnings, an account which represents the cumulative impact of net incomes and losses since the entity’s inception (Horngren, Harrison & Bamber, 2005). Internal Revenue Service (IRS) regulations reflect the same principle, and common stock dividends cannot be paid unless a sufficient balance in the retained earnings account to cover payment exists (Horngren, Harrison & Bamber, 2005), indicating that dividends can only be declared on income that was previously or is currently being taxed. Also according to IRS regulations, corporate dividends are recognized as taxable income by the entity receiving the payment (Internal Revenue Service, 2008 [Instructions for Form 1120 U.S. corporate income tax return]; Internal Revenue Service, 2008 [1040 instructions 2007]; Internal Revenue Service, 2008 [2007 Publication 17]); however, the corporation neither receives a deduction for common stock dividends declared nor issued (Wilkinson & Fancher, 2004). Since the money that dividends are paid out from taxed income (Wilkinson & Fancher, 2004) is subject to tax again by entities receiving the dividend money, double taxation occurs.

An individual entity can be subject to double taxation by having income and/or assets taxed by multiple tax authorities. U.S. companies and individuals can be subject to double taxation simply by being located in a state that taxes income. On the corporate level double taxation is inevitable when a company is located in a state that charges a corporate income tax, since the IRS does not allow a deduction for taxes based on income taxes paid to a state or local tax authority (Internal Revenue Service, 2008 [Instructions for Form 1120 U.S. corporate income tax return]). On the individual level, however, double taxation can be avoided when the taxpayer(s) can use state and local taxes paid as an itemized deduction on Schedule A (Internal Revenue Service, 2008 [1040 instructions 2007]; Internal Revenue Service, 2008 [2007 Publication 17]) and in instances where the taxpayer(s) income falls within specific income guidelines to take advantage of state tax relief programs, if such provisions exist. An example of such a program is Pennsylvania Tax Forgiveness, where resident taxpayers can apply for a credit up to 100% of the state tax liability (Pennsylvania Department of Revenue, 2008).

Double taxation can occur in similar manners for U.S. entities involved in international commerce, although the more common method of double taxation stems from the situation where assets and/or income are subject to taxation under U.S. and foreign tax regulations. While Congress has taken steps in reducing the tax burden for U.S. MNCs, the IRS admits that a tax gap still exists (Internal Revenue Service, 2008 [The tax gap and international taxpayers].

Methods of minimizing international tax liabilities

U.S. entities involved in international commerce have several options to avoid international double taxation. Bilateral tax treaties are a common form of relief (Beck, 2002). U.S. entities can also shift their operations, assets or earnings abroad, which the current U.S. tax structure is trying to avoid (Graetz & Oosterhuis, 2001). A third option is to partake in tax arbitrage.

Bilateral tax treaties

According to Beck (2002):

“Most [tax treaties] are based on one of three models--the United States Model Income Tax Convention of September 20, 1996 (the U.S. Model), the United Nations Model Double Taxation Convention Between Developed and Developing Countries (the U.N. Model) or the Organization for Economic Cooperation and Development (OECD) Model Tax Convention on Income”(par. 1).

Under common international practices, the host country taxes the entity, while the home country provides the tax relief. In order to qualify for tax relief, the entity must meet residence and/or citizenship requirements (Beck, 2002). “No international consensus dictates the appropriate relief method; countries commonly use three--the deduction method, the exemption method and the credit method. Countries can use one method or a combination to provide relief from international double taxation” (Beck, 2002, par. 2).

“The deduction method (such as the U.S., under Sec. 164(a)(3)) allows residents/citizens to deduct foreign taxes paid in computing their taxable worldwide income. This treats the foreign taxes paid as a current expense; it is the least effective means of providing relief. Residents paying and deducting foreign taxes on foreign-source income are taxed at a higher combined rate than on domestic-source income.” (Beck, 2002, par. 3).

“Under the exemption method, a taxpayer's home country will tax its residents/citizens only on their domestic-source income. The country of residence exempts the taxpayer's foreign-source income from domestic taxation, leaving it to be taxed by the source country” (Beck, 2002, par. 4). The credit method provides relief by offering the entity a credit against the home country’s tax liability in an amount equal to the tax liability assessed or paid on foreign income. The credit taken cannot exceed the home country’s tax liability.

Shifting operations, assets, or earnings abroad

Existing U.S. laws dictate that domestic corporations are considered residents of the U.S. and that, if the organization has branches overseas, then the income earned in the other country(ies) is subject to the U.S. corporate tax as well as foreign income tax (Graetz & Oosterhuis, 2001). To avoid double taxation, the corporation can open a foreign subsidiary (i.e., a separate entity) which is not subject to taxes in the U.S., provided the subsidiary earns no income in the U.S. (Graetz & Oosterhuis, 2001). The earnings of the foreign subsidiaries are only subject to U.S. taxation when distributed to their U.S. owners in the form of dividends (Graetz & Oosterhuis, 2001).

International arbitrage

International arbitrage is known as “the exploitation of differences between or within national tax codes” (Haworth & Buchanan, 2005). In other words,

“international tax arbitrage arises when a taxpayer or taxpayers rely on differences between the tax rules of two countries to structure a transaction, entity or arrangement in a manner that produces overall tax benefits that are greater than what would arise if the transaction, entity or arrangement had been subject only to the tax rules of a single country (Reich, 2007, par. 1)”

Arbitrage can be obtained improperly via “incorrect or improper application of the tax laws of any country, transactions in which the taxpayers take inconsistent factual positions in their respective countries and other cases that are more appropriately viewed as abusive tax shelters” (Reich, 2007, par. 2). Below are a few examples of how a U.S. MNC can legitimately take advantage of international arbitrage:

“[S]eparate the foreign tax credit from the tax base to which it relates, so that the taxpayer can benefit from the credit without having to include the related income” (Reich, 2007, par. 10).

“[Taking advantage of] transactions that permit the effective duplication of tax benefits in two countries, usually because the United States treats the U.S. participant as the owner of the entity that pays the foreign income (or withholding) tax and allows it a foreign tax credit while a foreign country treats the nonU.S. participant as owning all or a substantial portion of the entity for purposes of its tax law” (Reich, 2007, par. 17). This is known as double dipping (Haworth & Buchanan, 2005).

Exploiting reverse foreign tax credit transactions, wherein “the non-U.S. participant claims the U.S. tax as a foreign tax credit in its home country, while the U.S. participant receives its share of the investment entity's profits without additional U.S. tax, as a result of the 100-percent dividends received deduction or filing a consolidated return with the investment entity” (Reich, 2007, par. 29).

Claiming U.S. withholdings tax paid “as a credit by both the U.S. participant and the foreign participant in their respective countries” (Reich, 2007, par. 33).

Justification of tax minimizing strategies

There is a fine line between using the tax law to one’s advantage and illegally abusing the tax laws. Tax avoidance is defined as “[t]he use of legal methods to modify an individual's financial situation in order to lower the amount of income tax owed” (Forbes, 2008). Tax evasion, however, is “[a]n illegal practice where a person, organization or corporation intentionally avoids paying his/her/its true tax liability” (Forbes, 2008). Provided that the entities that operate in the global economy did not violate any laws, the use of tax minimization strategies is not illegal, including taking advantage of bilateral tax treaties; shifting operations, assets, or earnings abroad; and/or international arbitrage. For example, timing dividend distributions from a controlled foreign subsidiary to take advantage of the U.S. foreign tax credit (Reich, 2007) is legal.

Organizations and individuals must be careful to stay abreast of changes in tax laws to avoid being in a situation where the entity is not complying with tax laws (Bauman & Mantzke, 2004), as even inadvertent violations are deemed to be methods of tax evasion (Corley, Reed, Shedd, et al, 2002). For example, the U.K. proposed anti-arbitrage rules in an effort to prevent double dipping and to protect its tax base in 2005 (Haworth & Buchanan, 2005). Also important to note is the fact that the IRS provides information on what the U.S. government considers abusive international tax schemes and tax shelters. Staying abreast of potential regulations will help a company stay legal.

Even if an entity is following all applicable laws, the individual or corporation may not necessarily be acting in an ethical manner – at least according to U.S. standards. For example, the presence of tax treaties may entice domestic companies to conduct business overseas while preventing the transfer of assets, operations, or income overseas from occurring (Graetz & Oosterhuis, 2001), the treaties allow U.S. corporations to participate in international arbitrage (Haworth & Buchanan, 2005). While international arbitrage is legal, it is not equitable, as it takes advantage of another country’s tax laws for the sake of profit – forcing one country to forsake its tax base. Also, if a company decides to transfer its operations, assets, and income to a foreign subsidiary it costs U.S. employees jobs.

The biggest risks in minimizing international tax liability are not ethics related; rather they are related to the failure to keep up with tax laws in the countries that the entity does business in. Failure to comply with tax regulations – whether home country or host country – can result in fines, penalties and/or imprisonment. The bottom line: consult a tax professional familiar with international tax laws.

References

Bauman, C. C. & Mantzke, K. L. (2004). An education and enforcement approach to dealing with unscrupulous tax preparers. Journal of Legal tax Research, 2. Retrieved October 11, 2006 from Business Source Complete.

Beck, A. M. (October, 2002). Relief from international double taxation. The tax Adviser, 33(10). Retrieved June 5, 2008 from the Gale Power Search database.

Corley, R. N., Reed, O. L., Shedd, P. J. & Morehead, J. W. (2002). The Legal and Regulatory Environment of Business, 11th Ed. McGraw-Hill: New York

Encyclopedia of Small Business, 2nd Ed. (2002). Hillstrom & Hillstrom. Retrieved June 5, 2008 from the Gale Power Search database.

Forbes (2008). Tax avoidance. Investopedia. Retrieved June 5, 2008 from http://

www.investopedia.com/terms/t/tax_avoidance.asp

Forbes (2008). Tax evasion. Investopedia. Retrieved June 5, 2008 from http://

www.investopedia.com/terms/t/taxevasion.asp

Graetz, M. J. & Oosterhuis, P. W. (December, 2001). Structuring an exemption system for foreign income of U.S. corporations. National Tax Journal, 54 (4). Retrieved June 5, 2008 from the Gale Power Search database.

Haworth, D. & Buchanan, H. (May, 2005). Clamping down on international arbitrage. International Tax Review. Retrieved June 5, 2008 from the ProQuest database.

Horngren, C. T., Harrison, W. T., & Bamber, L. S. (2005). Accounting, 6th Ed. Pearson Education: Upper Saddle River, NJ.

Internal Revenue Service (2008). Instructions for Form 1120 U.S. corporate income tax return. Retrieved June 5, 2008 from http://www.irs.gov/pub/irs-pdf/i1120.pdf.

Internal Revenue Service (2008). 1040 instructions 2007. Retrieved June 5, 2008 from http://www.irs.gov/pub/irs-pdf/i1040.pdf.

Internal Revenue Service (February, 2008). The tax gap and international taxpayers. Retrieved June 5, 2008 from http://www.irs.gov/businesses/article/

0,,id=180215,00.html.

Internal Revenue Service (2008). 2007 Publication 17: your federal income tax for individuals. Retrieved June 5, 2008 from http://www.irs.gov/pub/irs-pdf/p17.pdf.

Pennsylvania Department of Revenue (2008). PA personal income tax guide. Retrieved June 5, 2008 from http://www.revenue.state.pa.us/revenue/lib/revenue/

pitguide_chapter_20.pdf.

Reich, Y. Z. (March, 2007). International arbitrage: transactions involving creditable taxes. Taxes, 85 (3). Retrieved June 5, 2008 from the ProQuest database.

Reuven, S. A. (Fall, 2005). All of a piece throughout: the four ages of U.S. international taxation. Virginia Tax Review, 25(2). Retrieved June 5, 2008 from the Gale Power Search database.

Turnier, W. J. (Summer, 2007). Theory meets reality: the case of the double tax on material capital. Virginia Tax Review, 27(1). Retrieved June 5, 2008 from the Gale Power Search database.

Wilkinson, B. & Fancher, M. M. (August, 2004). Eliminating ‘double taxation’: the dividend imputation alternative. (tax policy analysis)(Jobs and Growth Tax Relief Reconciliation Act 2003). The CPA Journal, 74 (8). Retrieved June 5, 2008 from the Gale Power Search database.

Information Technology Risk Issues Facing US Companies Seeking Global Expansion

Rewards and risks surround any organization considering the notion of going global, and identifying the potential risks of expansion can be challenging. One area that is often overlooked is that of information technology (IT) risk (Goodwill, 2006). The purpose of this essay is to discuss how the explosion of information technology and the incredible advances in global communications pose significant risks to American global organizations as they expand in the international environment. This essay examines four areas of IT risk: ineffective or nonexistent IT risk management programs, supply chain fraud, technology risk associated with entering into a joint venture (JV) and foreign protectionism practices. Each issue is discussed, as well as potential solutions to mitigate risk.

Poor IT Risk Management Programs

Lack of (effective) established IT risk management programs, especially in the financial services sector, creates an inherent risk in that it exposes data that is supposed to be privy and confidential. Ernst & Young issued a report in February, 2008 indicating that 22 percent of companies surveyed with assets over $10 billion have no formal IT risk management program, and that more than 40 percent of executives (Curtis, 2008) “did not feel their firm was effective in risk reporting and disclosure, risk and issues management, and trend analysis” (Curtis, 2008, par. 2). The issue of IT risk management is overlooked, as most companies focus on political, economic, environmental and regulatory risks (Curtis, 2008).

Supply Chain Fraud

Supply chain fraud is an issue that is currently on the rise (Anonymous, 2008), especially among international shippers (Hoffman, 2008). According to the Federal Bureau of Investigation supply chain fraud is costing US shippers an estimated $15 billion to $30 billion annually (Hoffman, 2008). “Vulnerabilities for companies increase as they expand and globalize, add new information-technology systems, and as their supply chains become more extended and complex” (Anonymous, 2008, par. 2). Also, “[s]ince it is relatively cheap and easy to store information electronically, companies are holding on to data (and) information longer, which increases risks for fraud due to the increased volume" (Demichelis, cited in Hoffman, 2008, par. 2). Lastly, the supply chain is open to fraud “because of global growth and increased outsourcing, according to a recent Global Fraud Report released by Kroll, the New York-based risk consulting firm” (Yoo-chul, 2008, par. 3). Most of the incidents of fraud are considered to be carried on from the inside (Hoffman, 2008).

Joint Ventures

Entering into a JV is an inherently risky decision, as A JV, in essence, is a partnership between two or more entities. Partnerships do have a high degree of risk due to joint and several liability of the entity’s owners, which is why many international JVs fail (Borgonjon & Hoffman, 2008). “Nearly 30 years of experience has taught foreign investors that, when possible, it is better to go it alone” (Borgonjon & Hoffman, 2008, par. 3). This is not to say that JVs aren’t attractive in certain markets, though. The easiest way to enter the Chinese market and share in the rewards (i.e., increased profitability, higher market share, and exploitation of technology) is via JV (Collins, 2007; Borgonjon & Hoffman, 2008). The disadvantage to sharing technology is that existing intellectual property is difficult to protect once it is shared by the JV, especially in China (Collins, 2007).

Technological Protectionism

US firms attempting to expand into other areas of the world may encounter practices of protectionism, which are designed to restrict foreign trade (Gupta & Govindarajan, 2004). Protectionism of technology occurs when a country establishes its own unique technical standards for the purposes of shutting out foreign competition (China Post, 2008). This puts US based and other companies at an unfair disadvantage. “Many American companies have expressed concern about security standards for information technology products that made it costly for them to enter the Chinese market” (Padilla, cited in China Post, 2008). JapanChina is using this method of protectionism to provide its companies with a competitive advantage (China Post, 2008). attempted this practice in the 1980s, and it failed (China Post, 2008). Currently,

Combating IT Risk

In terms of IT risk management programs, it is important to first have an effective system of internal controls in place. An established, written system of checks and balances is a good start to mitigating risk (Robbins & Coultier, 2007), but it is not enough to have written policies and procedures. Internal controls must be carried through and enforced from the top down (Kinney, 2000), and management must refrain from overriding controls (Horngren, Harrison, & Bamber, 2006)

Also, the design of the IT Risk management system should be carefully considered.

The problem with many IT risk management programs that leads to their ineffectiveness is the fact that most large companies place risk in the various silos of the organization. Many international organizations are designed to have multiple lines of business, each with its own IT systems. Even though the processes from multiple silos overlap – due to common processes and services – there is no common, binding understanding and/or assessment of the IT risks involved in the organization as a whole. The need for convergence – or at minimum integrated risk management - exists (Curtis, 2008).

The problem with converging systems is the fact that most risk management solutions vendors and software packages are designed for specific aspects of the organization: there is no blanket package yet available to facilitate an integrated approach (Curtis, 2008; Goodwill, 2006). However, the push towards a more holistic approach to IT risk management is starting to be met by market demands:

“There is a movement toward automating the risk management process to make it lower in cost and more efficient… The tools supporting risk management are evolving and becoming more integrated. This is where we see opportunity, [in part] by implementing acommon risk language to roll up and report risk to an organization (Barrett, cited in Curtis, 2008, par. 16).

The holistic approach can be a viable solution to other areas of IT risk, such as supply chain fraud. “[S]hippers and service providers invest heavily in security guards, fences, access controls and locks” (Hoffman, 2008, par. 6), but a level of internal controls deemed adequate from a textbook approach is not enough to deter fraud. The human element is being ignored (Hoffman, 2008). Chains, locks, and a well-documented system of internal controls is sufficient to be in compliance with “Customs-Trade Partnership Against Terrorism and Transported Assets Protection Association security programs” (Hoffman, 2008, par. 7), but the controls will not prevent “a part-time warehouse worker

with temporary access codes who knows when the high-value cargo is leaving” (Hoffman, 2008, par. 7) from engaging in fraudulent activity.

“The lesson is that you really have to approach protecting your business and supply chain with a very holistic approach… There has to be some actual human element to try to beat those systems once you're compliant. There is no silver bullet (Hoffman, 2008, par. 8).

The holistic approach can also work well when deciding whether to do business in China, but it should be in used in conjunction with every effort to carefully and properly plan expansion. Any US company seeking to expand into the Chinese market should consider placing tight controls over the supply chain management, constantly monitoring and reviewing quality control programs, as well as finding the right company to do business with (Canning, 2008).

“U.S. companies looking to do business with China, therefore, would be wise to adopt the famous Boy Scout motto: ‘Be Prepared.’ Armed with the right information and resources, they will be able to reap financial and other rewards from relationships with respectable Chinese manufacturers. To ensure the highest quality and safety of the private label end products, Bi [sourcing specialist in China] recommends that companies thoroughly research the industry to identify highly qualified manufacturers. An expert who’s bilingual in English and Chinese is critical to this effort and should be involved from the very beginning. After the deal is authorized, the U.S. buyer should put someone in place to monitor the production on a continuous basis” (Canning, 2008, par 20-22).

Companies that do not have the resources necessary to effectively set up operations in China should seek a sourcing agent who can assist the U.S. organization in finding reputable companies to do business with (Canning, 2008). Much like finding the right business partner, employee, or investor, the U.S. company seeking to go into a JV with a Chinese firm should find someone who can be trusted. Despite China’s reputation, a perfect marriage in business can be attained (Cunningham, Cunningham, and Park, 2008).

Careful consideration should also be taken when dealing with China’s stance on technological protectionism. When faced with this issue, U.S. companies wishing to do business with the Chinese have three options:

Invest the necessary resources to effectively enter the Chinese market.

Postpone the decision to do business in China until the short-term effects of protectionism are short lived.

Consider entering into another country.

Summary

This essay discusses how the explosion of information technology and the incredible advances in global communications pose significant risks to American global organizations as they expand in the international environment by examining four areas of IT risk: ineffective or nonexistent IT risk management programs, supply chain fraud, technology risk associated with entering into a joint venture (JV) and foreign protectionism practices. Textbook solutions and hasty decisions are not adequate to hedge IT-related risks. Rather, careful planning and a holistic approach are favored.

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