|Terrorism and Business Credit|
The post-Sept. 11 costs to federal and state government
and private industry are in the billions and on several levels. The
U.S. government expects to spend billions in security.
The aftermath of Sept. 11 has and will significantly
affect countries overseas. Many European companies claim to have
business damaged because of the attacks. Some European governments
are considering intervening with emergency tax measures. A number
of European companies claim that Sept. 11 has resulted in a downturn
in their business. Some question whether certain European companies
are using this as an excuse for other problems facing the business.
Industry Wide Problems
The terrorist actions are impacting virtually all
industries, and all segments along the production chain, from manufacturing
to distribution to retail. Airlines, hotel and insurance companies
are facing extraordinary losses resulting from the attacks. Likewise,
telecommunications and transportation are seen as being strongly
affected by these events which have only worsened the pressures on
the American steel industry. Few customers will escape the downturn.
Corporate customer purchases are being scaled back, as consumer purchasing
wanes. It is reported that California, for example, will lose 265,000
jobs from the economic fallout of Sept. 11.
For public companies, there was confusion as to the proper accounting and reporting as to the terrorist attacks. The Financial Accounting Standards Board (FASB), which oversees corporate accounting standards, pronounced that companies may not designate losses tied to the terrorist attacks as extraordinary items with their earnings announcements. FASB reasoned that the economic impact of the terrorist acts were so pervasive that it would be impossible to capture this impact in a single financial line item.
A number of customers may be litigation targets surrounding
the Sept. 11 events, or their customers, whom they derive a significant
source of business. Scores of lawsuits are expected against airlines,
the airplane manufacturer and building owners, among others, for
failing to anticipate or take proper steps with the attacks. Insurance
companies contend that they do not have the financial wherewithal
to insure against the losses and have requested federal assistance.
Insurance companies have conceded that their policies that include
act-of-war policy exclusions does not bar claims from the Sept. 11
Insurance Premiums Rise
Many customers whose businesses were not directly
affected by the terrorist attacks have found their property and casualty
insurance rates increasing dramatically. Insurance companies are
looking to recoup their losses from Sept. 11 through increased premiums.
The aftermath of Sept. 11 is causing an increase of
bankruptcy filings. Many companies were already suffering through
a slowing economy before Sept. 11, and these events have created
financial crisis forcing bankruptcy filings with the result of suspending
payment of creditors. Many customers will face dramatic increases
in their business insurance premiums, which may further squeeze their
ability to meet expenses. Some customers may find themselves in default
of their bank loan covenants if they are unable to obtain Planet
Hollywood and Bethlehem Steel both attribute the aftermath of Sept.
11 as uncontrollable events that have forced them to file bankruptcy.
Likewise, home furnishings retailer House2Home attributed a downturn
in its business to the Sept. 11 attacks, which forced a Chapter 11
filing. A number of restaurants have likewise pointed to Sept. 11
as a cause for their failure to meet trade debt and filing bankruptcy.
Fraud and Bustouts
Given the problem economy, a credit professional must
be especially vigilant of customers taking steps to stay afloat,
including fraudulent accounting and reporting practices. Vendors
should also be mindful that the FBI and policing agencies are focusing
on homeland security, making white collar crime and bust out schemes
a lower priority. The Justice Department has shifted its focus from
investigating and prosecuting past crimes to investigating threats
of future terrorist attacks. Given the focus of law enforcement on
combating terrorism and not domestic business fraud, bust-out artists
may sense an opportunity to conduct fraudulent schemes against vendors.
Douglas G Fox, GSCFM, CCE is a member of Mid-Atlantic NACM and is active in the Greater Delaware Valley Region and Philadelphia area.
Scott E. Blakeley is a principal of Blakeley & Blakeley LLP where he practices creditors' rights and bankruptcy law. He can be reached at firstname.lastname@example.org
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