October 2006

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.

While parts of the Southern United States were severely damaged by the effects of Hurricanes Katrina and Rita in 2005, it is no less true that any natural disaster, regardless of its size or location, can be just as devastating for a business.

Property damage, inventory loss, revenue shortfall due to business interruption, extra 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. 

Working together, the forensic accountant and insurance company representative can accurately and reasonably calculate both the physical losses of a company and its business interruption losses.

To substantiate any business-loss claims to an insurance company, a business owner must be able to produce detailed financial records such as 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.

Because this financial documentation is so essential, backing up data and recovery plans are critical to a disaster plan. Encouraging the business owner to think through the following questions will help him begin to create a back-up and recovery plan.

• What financial records will he need to substantiate his business loss claims?
• 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 it 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 part of an effective disaster plan.  However, for the insured to receive a prompt resolution to his claim, he must also remember to do the following:

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

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 both the insurance company and the forensic accountant and could accelerate the insurance claim process.

Don’t forget software programs. Businesses need to create copies of all the software programs their company uses and store them off-site. This process isn’t as critical if the business uses “off-the-shelf” software that can be replaced, but if it uses customized software programs tailored specifically for its business needs, losing these applications can be fatal.  

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

Test, test, and then test again. All the effort a business puts into backing up data can be for naught if it’s not capturing the information properly. Business owners should regularly check the data to be sure the back-up media contains all the information most critical to their disaster recovery.

The days following a natural disaster are stressful for everyone.  Reminding business owners to provide as much information as they can to appropriately resolve their claims will not only make the process much less draining for them; it will also help them get their 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.  To contact him, please call 407-531-1050 or e-mail him at twilson@mdd.net.

Matson, Driscoll & Damico’s Catastrophe Hotline is 800-MDD-0098.
For more information about Matson, Driscoll & Damico, call 866-MDD-2725 or visit www.mdd.net.