July/August 2005

In the immediate aftermath of a major natural disaster—hurricane, flood, or tornado—the first order of business is to ensure the safety of family, friends and colleagues.

But once the security of loved ones and homes has been established, it’s only natural for business owners to begin a mental accounting of potential losses—and to begin the sometimes demanding process of business recovery.

Property damages, inventory losses, revenue short falls due to business interruption, extra operating expenses and damage to financial data and other important records can set a company back for months, if not permanently, especially in the absence of a detailed disaster recovery plan. 

Considering that eight of the 10 most costly natural disasters in U.S. history have been hurricanes - including Andrew, Charley, Ivan and Hugo - businesses in Mississippi are especially vulnerable to catastrophes, defined by PCS (Property Claim Services) as causing widespread damage in excess of $25 million in insured property and financial losses. 

To substantiate any business-loss claims to an insurance company, a business owner must be able to produce detailed financial records—inventory spreadsheets and asset listings, profit and loss statements, tax returns, contracts or lease agreements, bank statements and any other document that can help recreate the company’s financial picture.

Using these business and accounting tools, the forensic accountant working with an insurance company representative can accurately/reasonably calculate both the physical losses of a company and its business interruption losses.

Since financial documentation is so essential, backing up data and recovery plans are critical to a disaster plan. By thinking through the following questions you can begin to create a back up and recovery plan.

• Who will back up and who will recover the files from the back-up location?
• What information needs to be backed up and what data needs to immediately be retrieved in order to continue operations?
• Where is the back up and recovery located?
• When and how often will back up be performed and how quickly will they need to be retrieved?
• How will the back-up process work and how will it get to the end user?

Answering these questions will ensure that back-up and recovery plans are included in your comprehensive disaster plan. Most companies today back up data as a matter of day-to-day business, but to best work with a forensic accountant in the wake of a catastrophe, keep in mind the following: 

Capture data early and often. Rotate the back-up media frequently enough to ensure the most current data is completely captured. Only you can determine how often that is based on how much data your company generates, but for some businesses it’s a daily or weekly process; for others, monthly might be sufficient. You should also maintain an archive of your historical data as well.

Segment relevant data during back up. Create an electronic data file that specifically contains financial information essential to disaster recovery. This self-contained file will expedite the work of the forensic accountant and could accelerate the insurance claim process.    

Don’t forget software programs. Create copies of all the software programs your company uses in the course of running the business, and store them off-site. This process isn’t as critical if your business uses “off-the-shelf” software that can be replaced, but if you use customized software programs tailored specifically for your business, losing these applications can be fatal.  

Convert hard copies. If your business has a disproportionate volume of historic financial data in paper format, consider converting it to electronic means, which can be accomplished using a scanner. Store this data in a safe, off-site location along with the more current financial documentation.

Test, test, and then test again. All the effort you put into backing up your data can be for naught if you are not capturing the information properly. Regularly check the data to be sure the back-up media contains all the information most critical to your disaster recovery.

Finally, remember that the days following a catastrophic natural disaster can be stressful for everyone, but realize that the insurance company needs as much information as possible to appropriately process your claim in accordance with your policy.  Do your best to cooperate with the forensic accountants assigned to work with you; it can make the process much less draining and will help you get your business up and running again as quickly as possible.        

Thomas Wilson is the Catastrophe Director and a Partner of Matson, Driscoll & Damico, an international forensic and investigative accounting firm.  For more information visit www.mdd.net.