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Who has the time or resources to keep tabs on everything that everyone in an organization does? No one. Therefore, you naturally need to trust (at least on a certain level) the actions and motives of various personnel. At the top of your “trust level” are privileged users—such as system and network administrators and developers—who keep vital systems, applications, and hardware up and running.

With the rise of artificial intelligence, most malware programs are starting to think together. Fortinet recently released a report that highlights some terms we need to start paying attention to:

Is your organization a service provider that hosts or supports sensitive customer data, (e.g., personal health information (PHI), personally identifiable information (PII))? 

RANSOMWARE UPDATE: It happened again. Another ransomware attack hit very large corporations around the globe. Much like WannaCry, a worm spread through entire networks, and locked out encryption data and systems.

As the technology we use for work and at home becomes increasingly intertwined, security issues that affect one also affect the other and we must address security risks at both levels.

During my lunch in sunny Florida while traveling for business, enjoying a nice reprieve from another cold Maine winter, I checked my social media account.

People love the idea of being able to conveniently charge their phones without a cable or having to hunt for a plug. Free charging stations are popping up everywhere.

Editor’s note: read this if you are a Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, Chief Information Officer, or Controller.

Last month, the Office of the Comptroller of the Currency (OCC) issued its Semiannual Risk Perspective for Fall 2019. The report addresses key issues facing banks and focuses on those that pose threats to their safety and soundness. According to the report:

  • Bank financial performance is strong due to a favorable credit environment and the longest economic expansion in U.S. history.
  • Capital levels have reached historical highs.
  • Return on equity was above its 2006 pre-crisis level for the first time at 12.7%.
  • Net income grew 8.22% from the same period a year ago; however, net interest income grew only 4%, as loan growth is below historical averages and an increasing number of banks are facing a flat or declining net interest margin.
  • There is continued weakness in residential and commercial real estate loan growth.
  • Delinquent and nonperforming loans remain below their long-term averages.


Banks can thrive even with economic uncertainty

While these trends indicate that 2019 was by and large an excellent year, banks cannot afford to be complacent, as 2019 also saw increasing risks to the industry. For instance, in 2019 there was much discussion of the future cessation of the London InterBank Offer Rate (LIBOR). The OCC has indicated it will increase its regulatory oversight regarding the anticipated cessation, to ensure banks assess their exposure to LIBOR and are appropriately planning their transition from the widely used benchmark rate. The Financial Accounting Standards Board (FASB) is also working on a project to address accounting issues that could arise from the transition from LIBOR.

And, although 2019 continued the longest economic expansion in US history, economic uncertainty exists due to, in part, the US-China trade conflict and ongoing Brexit discussions. This economic uncertainty has caused volatility in the interest rate environment. Aside from the yield curve inverting in 2019, banks also saw the Federal Funds target rate increase 25 basis points prior to decreasing 50 basis points. Given the typically asset-sensitive nature of banks’ balance sheets, the current interest rate environment will also put pressure on net interest margins. The current volatility of interest rates has caused the OCC to conclude interest rate risk is currently at heightened levels. 

Net interest income continues to be the most significant driver of net revenues for community banks, comprising nearly 80% of net revenues. With a difficult interest rate environment and lackluster loan growth in residential and commercial real estate, banks may face a difficult path ahead. Banks should tread cautiously, especially if this uncertainty persists. Asset-liability management will need be a significant focus (more than usual) as banks try to position themselves to not only maintain profitability through this uncertainty, but also come out stronger than before. Specifically, if lower rates persist, asset growth will need be a priority over deposit growth to maintain profitability at lower net interest margins. If loan growth continues to wane, this will prove to be difficult.

Innovations to compete with new lending sources

Adding to the list of threats to performance is the increasing amount of alternative financial resources available to borrowers. Banks have traditionally been the only source of credit for borrowers. However, technology has rapidly changed that landscape. Person-to-person (P2P) lending (also known as crowd lending, or social lending), allows people to borrow funds directly from another person, cutting out traditional lending sources (banks). Additionally, blockchain technology, if the hype is accurate, has the potential to eliminate the need of a financial intermediary altogether. 

Banks are adapting to this competition and to customers looking for more convenience and alternative services by offering new, unique services that differentiate themselves from others and provide added value to the customer. Banks have delivered through remote deposit, ATMs, and interactive teller machines (ITMs). Banks will need to continue to adopt innovative services to remain competitive. 

For instance, banks could offer video conferencing services, in which customers could have a live conversation with a bank representative through their smartphone. This convenience would allow a customer to conduct a transaction, such as apply for a loan, from the convenience of their home, while still maintaining human interaction throughout the transaction. Such a service would help banks compete with digital channels offered by non-banks, such as Quicken Loans, which is now the largest mortgage originator in the United States.

Strategies to protect against technological risks

These services all require the use of existing and new technologies, which have caused banks to hold more personally identifiable information (PII) digitally across an increasing number of digital platforms. As noted by the OCC, this digital exposure has created persistent cybersecurity risks for banks. Adopting a robust cybersecurity framework is no longer an option. 

Banks should bring cybersecurity to the forefront of their strategic planning. Any strategic plan must consider cybersecurity implications, as a single disaster can be detrimental to a bank’s reputation. And, given this rapidly changing environment, the cybersecurity conversation must be ongoing through relevant bank committees and the board of directors.

Furthermore, these technological solutions require partnerships with businesses that banks would not traditionally partner with. Financial technology (fintech) companies don’t just pose as a competitor to traditional banks. Many fintech companies are offering their technological solutions to traditional banks. However, outsourcing technological solutions to fintech companies and other businesses does not relieve a bank from performing its own due diligence and ensuring those companies meet the bank’s standards. 

Banks should evaluate potential vendors to ensure they comply with the bank’s vendor management policy. Since environments are constantly changing, this evaluation should be ongoing. Many vendors now provide System and Organization Controls (SOC) reports which detail the control environment at the vendor and involve independent third-party testing of those controls that exist at the vendor. SOC reports can provide a useful starting point for evaluating a vendor’s ongoing compliance with the bank’s vendor management policy. However, it is not a substitute for ongoing communication with a vendor.

There is no doubt 2019 was a successful year for banks. But past performance is not a guarantee of future success. Banks face many challenges, risks, and uncertainties, of which only a few have been outlined above. The current landscape may be challenging but it is also filled with opportunity. Banks should consider expanding their services, adopting new technologies, and partnering with other companies to leverage their strengths. Doing so should help position themselves for an exciting decade ahead.

If you have specific concerns about challenges facing your institution, please contact the team

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Banking and finance: 2020 challenges and what to do to overcome them

Editor's note: Read this if you are a current or future owner of solar or other renewable energy equipment, or a solar investor, developer, or installer.

Maine LD 1430: An opportunity for businesses with solar energy systems

In 2019, Maine passed bill LD 1430, which introduces a solar tax exemption for both business and residential owners enabling renewable energy adopters to save money―while adding real value to their property and assets. As our experience in Massachusetts has shown, eligible businesses should take advantage of these types of laws, as you can reduce your property tax assessment by the value of your solar or wind energy equipment.  

Let’s look at a simple example assuming a $20 mill rate and a business owner who owns land and installs a large commercial solar energy system on it to meet the electrical demand of his business:   

Land 50,000 
Solar Equipment 200,000
LD 1430 Property Tax Exemption for solar equipment (200,000)
Net Property valuation 50,000
Property Tax 1,000
Property Tax without LD 1430 5,000
Annual Savings 4,000

Standardized valuation methodology provides clear guidance for taxpayers

In December, the Maine Revenue Service expanded on the bill by providing standardized solar valuation methodology. It provides much-needed guidance to municipalities on how to assess property tax on solar equipment, helps prevent over taxation of businesses, and streamlines the process for applying for the solar property tax exemption. 

Solar tax exempt laws in other states

Maine was not the first state to enact this type of legislation to help improve renewable energy adoption in the commercial space, nor will it be the last. Massachusetts, among others, has a similar law on the books, which allows for an exemption on solar or wind equipment used to supply the energy needs of a taxable property. Over the past few years, many of our clients in Massachusetts have taken advantage of the exemption, and have saved thousands of dollars doing so. 

Not surprisingly, Massachusetts has seen strong growth in renewable energy in the commercial sector. According to the Massachusetts Clean Energy Center, Massachusetts went from a few hundred solar energy systems in 2006 to nearly 100,000 in 2018. Other states have also enacted this type of legislation. In fact, all but 12 states have enacted some form of solar tax exemption laws.  

Looking ahead

This law and others like it will continue to help renewable energy projects get off the ground. As the number of solar projects increases, so too does the ability to create more opportunity. 

We’ve been working with Massachusetts providers for many years, helping our clients grow as the market has been maturing. For more information on how we can help you in Maine (or other states) take advantage of these exemptions, please contact the renewable energy team.  

The Maine Revenue Service is planning to release a standard application for the property tax exemption in the coming weeks. Please stay tuned for updates.  

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Maine adopts solar property tax exemptions

In our consulting work with Skilled Nursing Facilities (SNFs) we have identified some early trends in PDPM implementation we would like to share. PDPM has been in place for a little over three months and while there were some hiccups in the first month, claims appear to be processing normally. SNFs are reporting that PDPM has been positive for their facilities. Many are reporting increases in Medicare revenues and feel PDPM has also been positive for the industry. However, it will still be a few months until we can really measure the financial and operational impacts of PDPM. As we continue to evaluate the early results, here are several lessons learned thus far:

  1. The good news is we were ready! 
    There were predictions that SNFs were not going to be prepared and smaller providers were going to go out of business because they could not adapt to PDPM. This has not been the case. Providers report they have been able to successfully bill under PDPM and most providers are reporting increased reimbursement under PDPM. Initial PDPM news is positive for the industry, but to be successful providers must continue to adapt.
  2. There still needs to be more education on the Minimum Data Set (MDS) to optimize reimbursement.
    SNFs are unsure how sections of the MDS work together under PDPM. MDS nurses need more training on what section to enter diagnosis codes and they are unsure when a diagnosis or a check box will generate the PDPM score. Diagnoses that impact Speech Language Pathology (SLP) and any diagnoses that impact Non-Therapy Ancillaries (NTAs) should be recorded on MDS Section I8000. Some diagnoses entered in Section I8000 also have check boxes in Section I that must be checked in order to be properly reimbursed.
  3. There were some missed reimbursement opportunities.
    There are several factors contributing to missed reimbursement opportunities, including delays in receiving information from physicians and other departments. Facilities need to build better relationships with physicians and provider networks to improve communication that focuses on clinical conditions and co-morbidities of the resident. Additionally, procedures need to be in place to gather clinical information within the first three days in order to get all relevant information on the five-day MDS.
  4. Diagnosis should be supported by patient care plan.
    To be in compliance with Medicare regulations and prevent takebacks on audit, diagnoses must be supported by the resident care plan. For example, if a diagnosis code for malnutrition is entered in Section I, then the resident care plan and medical records need to support the diagnosis. The care plan should document information, such as specific risk factors, lab results, and weight tracking results. Reimbursement and treatment decisions need to have a demonstrable benefit to the resident and must be supported by the resident care plan.
  5. Providers need to evaluate how they provide therapy.
    Before making significant changes to their therapy programs, facilities should analyze their therapy utilization and outcomes under PDPM, as compared to outcomes and utilization under RUGS IV. This ensures you are providing high-quality care at the lowest cost. Things to consider are per patient day utilization ratios, cost per minute under PDPM vs RUGS IV, productivity standards under PDPM, and outcomes. SNFs that are decreasing their therapy minutes should be sure they still have good quality outcomes. 
  6. The bad news? Rate adjustments may be coming sooner than expected.
    PDPM was intended to be budget neutral. Based on early results, this does not seem to be the case. More SNFs are reporting they are winners rather than losers under PDPM. The belief is if PDPM continues to track with early results there will be a rate adjustment that could come as early as mid-year. However, it is more likely that CMS will make an adjustment to weights and rates as part of the 2020 rulemaking process.

As we move further into 2020, you can expect to see more data on PDPM claims and reimbursements, which will help you make operational and financial decisions about your facility. In the meantime, you should keep focusing on patient care and achieving quality outcomes while thinking about what you can do now to adapt to be successful under PDPM.

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Patient Driven Payment Model (PDPM) implementation lessons learned

Editor's note: read this if you are a CFO, controller, accountant, or business manager.

We auditors can be annoying, especially when we send multiple follow-up emails after being in the field for consecutive days. Over the years, we have worked with our clients to create best practices you can use to prepare for our arrival on site for year-end work. Time and time again these have proven to reduce follow-up requests and can help you and your organization get back to your day-to-day operations quickly. 

  1. Reconcile early and often to save time.
    Performing reconciliations to the general ledger for an entire year's worth of activity is a very time consuming process. Reconciling accounts on a monthly or quarterly basis will help identify potential variances or issues that need to be investigated; these potential variances and issues could be an underlying problem within the general ledger or control system that, if not addressed early, will require more time and resources at year-end. Accounts with significant activity (cash, accounts receivable, investments, fixed assets, accounts payable and accrued expenses and debt), should be reconciled on a monthly basis. Accounts with less activity (prepaids, other assets, accrued expenses, other liabilities and equity) can be reconciled on a different schedule.
  2. Scan the trial balance to avoid surprises.
    As auditors, one of the first procedures we perform is to scan the trial balance for year-over-year anomalies. This allows us to identify any significant irregularities that require immediate follow up. Does the year-over-year change make sense? Should this account be a debit balance or a credit balance? Are there any accounts with exactly the same balance as the prior year and should they have the same balance? By performing this task and answering these questions prior to year-end fieldwork, you will be able to reduce our follow up by providing explanations ahead of time or by making correcting entries in advance, if necessary. 
  3. Provide support to be proactive.
    On an annual basis, your organization may go through changes that will require you to provide us documented contractual support.  Such events may include new or a refinancing of debt, large fixed asset additions, new construction, renovations, or changes in ownership structure.  Gathering and providing the documentation for these events prior to fieldwork will help reduce auditor inquiries and will allow us to gain an understanding of the details of the transaction in advance of performing substantive audit procedures. 
  4. Utilize the schedule request to stay organized.
    Each member of your team should have a clear understanding of their role in preparing for year-end. Creating columns on the schedule request for responsibility, completion date and reviewer assigned will help maintain organization and help ensure all items are addressed and available prior to arrival of the audit team. 
  5. Be available to maximize efficiency. 
    It is important for key members of the team to be available during the scheduled time of the engagement.  Minimizing commitments outside of the audit engagement during on site fieldwork and having all year-end schedules prepared prior to our arrival will allow us to work more efficiently and effectively and help reduce follow up after fieldwork has been completed. 

Careful consideration and performance of these tasks will help your organization better prepare for the year-end audit engagement, reduce lingering auditor inquiries, and ultimately reduce the time your internal resources spend on the annual audit process. See you soon. 

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Save time and effort—our list of tips to prepare for year-end reporting

Read this if you are a solar investor, developer, or installer.

After a recent article where we highlighted some of the major points of the ITC safe harbor, we received many calls and e-mails looking for clarification on some of the related issues. In working to answer these questions we teamed up with Klavens Law Group, P.C., a Boston law firm that specializes in clean energy. Together with Brendan Beasley and Jon Klavens we have compiled a list of frequently asked questions that may be helpful as you navigate the last few weeks of the year. 

Q: My project is not ready for construction due to a pending decision on a land use permit. How can I minimize capital expenditure while still qualifying the project for the 5% safe harbor?
A: There are a couple approaches you as a taxpayer can take. First, if this project is among several in your portfolio, you can pay or incur expenses prior to December 31, 2019 for enough safe harbor equipment under a single binding contract to qualify each project in your portfolio and retain flexibility to allocate that equipment. Applying the master contract approach (per Section 7.03(2) of IRS Notice 2018-59), you would then transfer equipment, even after December 31, 2019, to affiliate special purpose entities under a second binding contract. Second, you can enter into a binding contract that is subject to a condition, applying section (ii)(B) of the “binding contract” definition at 26 CFR Section 1.168(k)-1(b)(4). In this case, the condition would be the project receiving the land use permits and clearing any related appeals period. Under this approach you would still need to pay or incur―or have your EPC contractor pay or incur under the look-through rule―at least 5% of the project’s depreciable cost basis by December 31, 2019. A limitation on this approach is that, if the condition is not likely to be satisfied within three-and-a-half months of the date of your binding contract, either you or your EPC contractor (applying the look-through rule) must take delivery of the equipment while the condition―and presumably the viability of the project―is still open and uncertain. 

Q: Can I finance a purchase of safe harbor equipment for my project?
A: Yes; however, you can’t use vendor financing. 

Q: I have a project that will be ready to construct in Q2 2020. The project company will execute a binding EPC agreement by December 31, 2019 that includes a procurement component. It will make an initial milestone payment of 7% upon execution. Does my project qualify for the 5% safe harbor?
A: Maybe. There is not enough information here to confirm. As taxpayer you must pay or incur expenses amounting to at least 5% of the total cost of the energy property prior to December 31, 2019, and must take delivery within three-and-a-half months from the date of payment under your binding contract. So the critical question here is what your EPC contractor is doing with that 7% payment. Here are some possible outcomes:

  • The EPC contractor purchases inverters on December 31, 2019 pursuant to a binding contract with a vendor. Applying the look-through rule, the safe harbor is satisfied.
  • The EPC contractor self-constructs a specialized racking system in January 2020, per your EPC agreement, and delivers it to you within three-and-a-half months of the binding contract. The safe harbor is satisfied.
  • The EPC contractor prepares 10% construction drawings and applies for a building permit, each at nominal cost, and holds your 7% payment while waiting for module prices to come down. The safe harbor is not satisfied.
  • The EPC contractor allocates its previously purchased inverters to your project, per your EPC agreement, holding them in its warehouse until May 2020 before delivering them to your site. The safe harbor is likely satisfied. Applying the look-through rule, the EPC contractor’s purchase of the inverters pursuant to a binding contract in 2019 (even if prior to the EPC agreement) will qualify the inverters for safe harbor purposes. The EPC contractor must take steps to identify and segregate the particular inverters within its warehouse.

Q: Can I sell safe-harbored equipment?
A: The buyer of your equipment (unless it is an affiliate) may not utilize the safe harbor unless you are selling the equipment together with the solar project. If, for example, your sale also includes a site lease and a PPA, the purchaser would receive the benefit of the safe harbor. In certain circumstances, you may also be able to become an affiliate of a project LLC by acquiring a membership interest of at least 20% and make an in-kind contribution of the safe-harbored equipment to the project LLC.           

Q: Can I satisfy the physical work test by building roads within my site?
A: Yes; however, the roads must be integral to the energy property. An access road would likely not be interpreted as integral to the property. However, roads used for purposes of operations and maintenance activity―within the area of the facility itself―are considered integral to the energy property.

Q: What constitutes work of a physical nature?
A: This is really open to the facts and circumstances interpretation. The IRS notice instructions referenced previously indicate some specific activities that do not qualify, but there is no quantification of how much of a qualifying activity must be done in order to satisfy the safe harbor requirement. Preliminary planning and site work do not count. But starting construction would, so you could satisfy the requirement with excavation for a foundation, drilling for moorings, pouring concrete, etc. The best bet would be to actually put up a section of panels.

Q: What is the continuing work requirement?
A: There is an additional safe harbor that says if your project is placed in service within four years of the end of the calendar year in which you started it you will have automatically met the continuous work requirement. If your project goes beyond that you will need to show facts and circumstances showing you were taking steps to continue working towards completing the project. For example, if the delay was due to a delay in getting interconnected, be prepared to show documentation that you were continuously working towards resolving that issue.

Unless there are changes to the current tax law, these same provisions will be in effect for each step of the phase-out through the end of 2023. If you have further questions, please contact a member of our renewable energy team

Please note that this Q&A, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Klavens Law Group, P.C. or its attorneys. Please seek the services of a competent professional if you need legal or other professional assistance.

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ITC safe harbor frequently asked questions