There has been a lot of discussion around inflation in the economy and its impact on recall risk. Inflation is a topic that has many complex layers, although we do not intend to address all of those here. At its core, inflationary pressure will affect prices, which in turn will impact sales values and costs faced by a business. Product recall policies address the risk associated with both those operational elements.  The extent to which inflation impacts a business depends on the nature of the business, the customer base and the nature of the products and services being sold. It is fair to say that all businesses will feel the cost pressure. But how they deal with that pressure (and the resulting impact it has on performance) might differ by business. Let us break it down into three financial elements for now, setting aside operational impact, and examine the impact inflation has on these elements and, in turn, recall exposure and business interruption loss. Revenue/sales There has been a rise in sales prices – to protect margins and meet rising costs – but what impact will this have on customer demand? Is a price increase tolerable for customers, or will it erode demand? Does the price increase exceed the cost inflation being felt? Such questions will address whether the business should expect gross revenue to increase, remain flat or decrease. Of course, this will also impact future revenues/sales levels. The market has traditionally looked at revenue levels during the underwriting phase. It is common to look at sales levels as indicators of growth. But in isolation, is it misleading when gross profit is the actual risk protected by insurance through business interruption language? Costs  As operational and material costs increase, how does this directly impact current and future profitability? Can cost increases be transferred to the customer, or must the business absorb them? Where does the insured sit in the supply chain, and with what position? Are there alternatives to their product, or are there limited options? Changing suppliers is too complex, too risky. Again, such questions will address the impact that cost inflation will have on future performance. And of course, inventory levels and inventory shelf life will have a bearing on replacement cost issues. Margins  For me, this is the key to the inflation question – how economic forces will impact gross margins. A loss of profit, or business interruption loss, continues to be a significant risk attached to a recall. Data shows us that sales losses have the potential to become significant when impacted by a recall leading to a profit loss. As such, the future profitability, or inflation’s impact on margins, is a key to how economic forces are impacting business risk.  We are just scratching the surface here when it comes to inflation and insured risk. Many other aspects exist which need consideration. There are many operational decisions being made in the face of economic and supply chain challenges, as well as regulatory forces. But inflation will remain a factor into 2023. This article is part two of four of the Hot topics in product recall series. Read part three, “Complex claims process: recalls, third-party claims, and CPI/CGL/STP crossover”, to learn more.

How has inflation played a role in the product recall landscape?

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Inflation's impact on product recall

Watch the video Environmental, social and corporate governance (ESG) is a multidimensional term for strategies, reporting and action plans on various factors that impact an organization's sustainability. ESG presents an opportunity to build a more sustainable business and can be a key differentiator to enhance relevancy and trust with an organization’s stakeholders. These include external stakeholders (investors, customers, communities and regulators) and internal stakeholders (employees, management and board members). Built strategically, an ESG program can create value within an organization and be a catalyst to attract and retain talent.  Collaboration, coordination and leverage  A successful and holistic ESG function should build on an organization’s existing enterprise risk management (ERM) program and align with the organization’s strategic initiatives and priorities. This requires collaboration, coordination and leverage.  The collaboration is among existing ERM functions (the board, executive management and risk owners) and perhaps newer ESG functions to facilitate a comprehensive risk management program. This includes knowledge sharing, education and leveraging the skillset of each function to understand, identify, evaluate and address risk and recognize opportunities across the enterprise.    Coordination includes developing comprehensive risk management reporting for management and the board that incorporates both ESG and ERM risks.  Finally, organizations should leverage their existing risk management processes to incorporate ESG and ERM; there is no need to start from scratch regarding ESG-related initiatives.  Seizing the opportunity Many organizations identify talent management, cybersecurity, and community relations as risks within their ERM program. Likely, organizations have deployed different initiatives to address these risks. For example, an organization may struggle with attracting and retaining talent; managing employee performance; training and developing employees; planning for succession; and addressing workforce shortages.   Existing ERM mitigation plans may include initiatives for employee engagement, development programs, and commitment to a diverse, equitable and inclusive culture, all of which align with ESG-related initiatives. An organization may address retention issues by deploying employee engagement surveys and action plans to address concerns and improve employee experience. It may address talent gaps by evaluating campus recruiting strategies to support a diverse candidate pool.   ESG strategy and metrics Developing a successful ESG strategy requires engaging both external and internal stakeholders. Identifying data and information related to ESG risks provides organizations with the ability to evaluate the effectiveness of their ERM mitigation plans and ESG-related strategic initiatives. These metrics can inform an organization and provide visibility to where additional efforts may be needed to address the risks.  Organizations also should perform a benchmarking exercise to review risks identified by competitors, peer organizations or associations (like the Sustainability Accounting Standards Board (SASB)) to gather insight on the applicable risks they have identified. This exercise will help to create a comprehensive evaluation of relevant ESG risks.  The next step is to perform a materiality assessment to evaluate the impact of each risk and the likelihood it will occur. Some of the impacts to consider for each risk include:  Alignment to organizational strategy, mission, vision, and values​ Liability or fines incurred​ Regulatory and policy requirements  Disruption to operations  Supply chain considerations  Cost of operations  Reputation  Consumer product preference  Strategy and innovation  This exercise will help an organization define the applicable tolerance level for each risk. For example, ESG-related metrics for evaluation and reporting of talent management related risks may include: Voluntary and involuntary turnover  Employee engagement surveys  Diversity of employees  Materiality matrix Once an organization has identified relevant sustainability issues, it can undertake a materiality assessment. This is a way for an organization to identify and prioritize which ESG initiatives have the most impact and influence on an organization’s stakeholders. The results can serve as a guide to determine what an organization should focus on related to ESG. ​​ Some of the benefits of a materiality assessment include: Analysis of business risks and opportunities Increased chances of better meeting stakeholder requests and demands  Identification of emerging sustainability trends that the company should assess Identification of topics to measure and improve  The results and data can be used to identify disclosures and initiatives in public sustainability documents.  In order to complete a materiality assessment analysis, an organization should:  Identify key issues/topics, relevant stakeholder groups, and business drivers Collect data from internal and external stakeholders  Map and prioritize topics  Align with key management for strategy and initiative development  Report on progress and iterate  Challenges  An organization faces many challenges to successfully incorporate ESG strategies into its existing ERM program, including: Undefined ESG strategy Inadequate ESG ​governance ​framework Inadequate and ineffective controls over ESG related commitments and road maps to achieve success Incomplete and inaccurate data for reporting ESG related disclosures As the organization looks to address these challenges, there are some broadly applicable and industry-related questions to consider:   Broadly applicable questions Does your organization have a governance strategy to support ESG? Is ESG considered in your organization's risk assessment and long-term strategy?  What ESG information and data are internal and external stakeholders asking for?  Is your organization subject to regulatory requirements or reporting for ESG?  Are existing systems sufficient to supply complete and accurate ESG information and reporting? What controls or procedures are in place related to ESG communications and reporting?   Who has ownership and accountability for ESG information?  How do you view ESG as part of your strategic objectives and competitive differentiation?  Have you explored integrating new technology tools that automate ESG data collection and improve reporting efficiency?  If applicable, have you prepared for the pending SEC disclosure requirements and understand the Task Force on Climate-related Financial Disclosures (TCFD) framework and Greenhouse Gas Protocol for quantitative disclosures around greenhouse gas emissions? Industry-related questions


A successful environmental, social and governance (ESG) strategy should build on your existing enterprise risk management (ERM) program and align with an organization’s strategic initiatives and priorities.

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Environmental, Social & Governance

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Enterprise Risk Management

Aligning ESG risks with existing ERM program key for creating value, attracting talent

Nurturing a healthy risk culture  What is risk? Organizational risk generally includes the many things that will lead to an undesirable outcome or impede an organization from achieving its strategic objectives. This includes the risk of not identifying opportunities to grow a company or further an organization’s mission. Companies and organizations face a variety of risks. Some are unique to a particular sector or industry; some are more universal. Over the past year, as Baker Tilly professionals worked with their clients, certain risks were mentioned more than others:  Finding and retaining the right talent Dealing with an increasing variety cybersecurity events Mitigating supply chain gaps and delays Identifying environmental, social and governance (ESG) standards Preparing for one-of-a-kind black swan events When a company is focused on running the business, catering to customers, or serving the needs of clients or constituents, building an effective risk culture isn’t easy. However, a strong culture can be built over time, when inspired and nurtured by effective leadership. Ultimately, having a strong risk culture means that management and employees know what the organization stands for and the boundaries in which individuals can operate. In a healthy risk culture, the board, senior leaders, managers and employees will be empowered to discuss and debate openly which risks should be taken in order to achieve the company's long term strategic goals.

Baker Tilly practitioners take a closer look at some of the critical risks organizations are dealing with now, how those risks have evolved in recent years and some basic strategies to effectively manage those risks. 

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The evolving risk landscape

The real estate and construction industries are buzzing about the opportunities for enhanced Investment Tax Credits (ITC) for energy-related projects as included in the Inflation Reduction Act of 2022 (IRA). At the same time, both industries are confused about the criteria that must be met through the use of prevailing wage rates and registered apprentices.  Here is a summary of the requirements in order for the bonus 30% ITC to be awarded. Note that 6% is allowed even if the below requirements aren’t met but can increase to 30% for some projects. Apprenticeship requirement Relating to the construction of a qualified facility that produces energy from renewable sources, a certain percentage of the total labor hours must be done by qualified apprentices. (A qualified apprentice is an apprentice that is participating in a Registered Apprenticeship Program as defined by the National Apprenticeship Act.) Prior to Jan. 1, 2023, 10% of total craft hours must be performed by an apprentice. This increases to 12.5% of total craft hours prior to Dec. 31, 2023, and to 15% after Dec. 31, 2023. The apprentice-to-journeyworker ratio is subject to rules established by the Department of Labor (DOL) or applicable state apprenticeship program. Every contractor or subcontractor who employs four or more individuals to perform construction, alteration or repair shall employ one or more qualified apprentices. A contractor will be considered NOT to be in violation of these requirements if it makes a good faith effort to obtain a qualified apprentice from a registered apprenticeship program that is not met within five business days, or if it pays a penalty of $50 multiplied by total labor hours not satisfied by a qualified apprentice. This penalty can be increased by $500/hour if the Secretary finds that the failure was due to intentional disregard. Under a registered apprenticeship program (credentialed by the DOL or a state agency), apprentices: Are paid on an incremental wage schedule based on experience and skill Receive a minimum of 2,000 hours or one year of on-the-job training  Receive a minimum of 144 hours per year of classroom instruction Receive 1:1 mentoring and supervision Prevailing wage requirement Under the IRA, any laborers and mechanics employed by a contractor or subcontractor on certain renewable energy projects shall be paid at rates not less than the prevailing rates for construction, alteration or repair of a similar character in the locality in which such facility is located, for the duration of the eligible credit. A contractor who fails to satisfy this requirement can correct this by providing back pay, plus interest, and a penalty of $5,000 per worker who did not get the prevailing wage. If it is determined that a contractor engaged in intentional disregard of the prevailing wage requirement, the penalty is $10,000 per worker, and three times the back pay owed, plus interest.  Regulatory guidance that remedies the difference between non-compliance penalties and those under David-Bacon Act will be necessary. Frequently asked questions Will the prevailing wage requirement increase construction costs?  There is no consensus on whether or not prevailing wage rules increase or decrease construction costs. While many workers earn more on prevailing wage projects than similar non-PW projects due to enhanced wages, benefits and pension contributions, this is not always the case. Some believe that without a prevailing wage, bid competition decreases on public projects, leading to the potential for higher costs. What will the prevailing wage rates be and who will establish them? Currently only about half the states have prevailing wage laws; in the past, prevailing wage has only applied to public construction work. New regulations will define the rules and implementation to private commercial/industrial and residential projects.  If there is an increase in labor costs, will it be the same for union and non-union contractors?  Prevailing wage is the hourly rate of wages and benefits paid to a number of similar workers in a geography, regardless of union status.  Union wages are not automatically the same as prevailing wage but because the costs of pensions and benefits are included in the wage package, it is typically close.  For open shop (non-union) contractors, a prevailing wage requirement does not guarantee that wages will be increased as many contractors pay at that level. The value of the benefit package paid to non-union skilled labor will be added to the hourly rate to determine if prevailing wage rates are met. If not, the hourly rate would need to be increased for work on designated projects. Even if a prevailing wage regulation raised wages by 10%, the impact on contract costs would be less than 2.5%. Thus, even if there is an increase in contract costs it is likely to be small—to the point of being undetectable. What percentage of construction project costs are labor vs. material?  Labor costs are 20% to 30% of construction contracts, according to the Census of Construction. How will I know if the contractor meets the “registered apprenticeship” requirement in order to qualify for the bonus 30% ITC? Union apprenticeship programs are all registered.  Some open shop (non-union) contractor apprenticeships are registered, and some are not. You will need to verify this with the contractor and there will likely be monitoring regulation defined. Home builders typically do not participate in registered apprenticeship.
To better understand ITCs or how other parts of the Inflation Reduction Act of 2022 impacts your real estate or construction company, contact us today.

The real estate and construction industries are buzzing about the opportunities for enhanced Investment Tax Credits for energy-related projects as included in the Inflation Reduction Act of 2022. Here is a summary of the requirements.

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Contractors eligible for enhanced tax credits for energy projects, if they follow apprentice and prevailing wage rules

Video In Baker Tilly’s session at the 2022 Resource Center for Religious Institutes (RCRI) National Conference, our not-for-profit specialists along with Tim Schroeder, business manager at St. Lawrence Seminary, shared trending fraud examples and held an interactive session presenting quick solutions to optimize protection for organizations. Listen to this session to hear: A refresher on the Fraud Triangle – good basics to revisit and remind us of situations to look out for Before-and-after instances of how enhanced accounting systems helped prevent current fraud schemes Best practices for raising the topic of fraud risk with board members and stakeholders Tips and Tricks on improving internal controls with policies and procedures that you can afford

Fraud prevention and detection: leading practices to protect your not-for-profit

It is common for people, particularly those early in their careers, to hop from job to job, or to move from home to home.   In many cases, employees are enrolled in retirement plans that accumulate thousands of dollars during their tenure with a company. Yet when they leave a job, those retirement dollars often get lost in the shuffle, as it is common to change addresses and forget to update contact information with prior employers. Thus, their ability to one day receive their retirement funds takes a major hit.  With this issue in mind, the Employee Benefits Security Administration (EBSA) has started to place a high priority on helping retirement plans locate and communicate with these missing participants.   After all, these accounts are just sitting there dormant – and the money can be rather significant. And from the plan sponsors’ perspective, they are often paying fees on these accounts, or sometimes undergoing an audit because the number of missing participants is causing them to exceed the audit threshold. Not to mention that plan sponsors typically must pay out required minimum distributions when participants reach 72 years old and must disclose unpaid benefits to the public on their Form 5500.  In short, missing participants present a potential hassle for plan sponsors, as well as obviously a potentially squandered financial opportunity for the missing participants themselves.   Be aware of the red flags With so much on the line for plan sponsors, it is certainly important to recognize the red flags that commonly surround missing participants. In fact, plan sponsors quite often do not realize the number of missing participants that they have, so these warning signs can be particularly helpful in those cases.  The first warning sign is having more than a small number of missing or nonresponsive participants. Obviously any company can have one participant, or a few participants, who are difficult to track down. This is particularly true in industries that experience a high turnover rate. But more than a few is an early indicator that some (or many) of those participants might be missing.   Additionally – and this only applies to pension plans, it can be a warning sign when a plan has more than a small number of vested participants who are not receiving benefits despite being at a normal retirement age.   Problems with contact information, or census data, are another red flag. Disconnected phone numbers or mail that gets returned should raise eyebrows that a plan’s information is not up-to-date, which of course can be an indicator of missing participants. In turn, additional signs that missing participants may be a significant problem.  Leading practices to remember The Department of Labor has highlighted four areas of best practices that plan sponsors can focus on as they strive to locate and resolve missing participants – and to avoid falling into a similar situation in the future. We have highlighted the key areas in bold below.  The first is the importance of maintaining accurate census information for the plan’s participant population. That means contacting plan participants periodically to ensure their contact information is current. An important aspect of maintaining accurate contact information is having an online platform for the plan that allows participants to update their contact information and, in turn, the plan’s census information. With that in mind, plan sponsors also should regularly audit the census information and correct any errors.   Implementing effective communication strategies is another area that plan sponsors should focus on to avoid having missing participants. Some of these best-practice strategies in this area are using simple language, offering non-English options, encouraging the use of websites and toll free numbers to update information, and addressing the importance of maintaining accurate information at employee onboarding – and during the employee exit/retirement process.   When it comes to missing participant searches, it is recommended that plan sponsors check other available plan and employee records for correct contact information – not just for the participant, but also for their spouses, beneficiaries and next of kin. In other words, even though one particular plan may not have current contact information (creating a missing participant situation), it is possible that another plan, or other company records (such as payroll) could be updated and accurate.   Other techniques related to this area are to use a commercial locator service (either an agency or an internet search tool) to locate individuals. Sometimes using the postal service to reach out to the participant’s last known mailing address can be a worthwhile endeavor. And of course email addresses, telephone numbers and social media are possible options, as well. Don’t limit yourself to mailing addresses.  Finally, it is very important for plans to document procedures and actions. Not only is it critical to have the plan’s policies and procedures in clear, consistent writing to help past, current and future employees understand the situation. But also if the plan ever came under audit, the documented procedures and actions could prove to be significant.   Having documented procedures and actions is even more critical for plans that use a third party to maintain records and contact information.  For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team. 

The EBSA places high priority on helping retirement plans locate and communicate missing participants to prevent exceeding the audit threshold.

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Employee Benefit Plan Audit

Retirement plans and missing participants: examining the issues, warning signs and solutions

Baker Tilly’s e-book, Innovation culture, reveals strategies and key considerations in creating something new, adding value, improving performance and fueling future success with a culture of innovation. It’s human nature to continually think of new ways to do things. In its simplest form, innovation occurs when a company or organization does something new or different that creates value. Innovation takes time and resources. If an organization has a dollar or an hour to spend, they will spend it servicing a customer, client or constituent. That’s a “today” goal, while innovation is about the future. The focus on near-term profitability and growth or servicing immediate client or constituent needs may distract an organization from realizing that innovation will fuel business growth or an organization’s long-term mission. When organizations allow employees at all levels to be stakeholders in the decision-making process, they foster a culture of innovation. To have an innovation mindset, organizations must recognize the need for change and be committed to supporting change through action. Talent development and data maturity are two primary initiatives that organizations can adopt to start on their innovation journey.
Baker Tilly’s wide array of advisory services can help executives looking to innovate and differentiate their organizations. Our specialists have the experience to help you determine opportunities for innovation and develop a culture of innovation. Baker Tilly’s Value Architects™ can help.

Innovation occurs when an organization does something new or different that creates value. Creating a culture of innovation is essential for organizations.

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Innovation culture – jumpstarting new ideas to drive organizational success

Attracting and retaining talent was a significant problem for many organizations before the COVID-19 pandemic, and it continues to be a major issue across most industries. The pandemic complicated matters, of course, by lowering the number of job seekers, expanding the geographic options for remote applicants, and generally altering the expectations of today’s job seekers. With these COVID complications in mind, Baker Tilly has updated its 2019 e-book, “The talent problem,” to reflect the modern-day environment and the new challenges that businesses face when it comes to finding and retaining talented employees. Topics include: Candidate-centric recruiting Culture  and  engagement Valuing expertise Apprenticeships and education Pivoting the workforce Diversity in the workplace