Contingency Planning Now Crucial

As the countdown to Y2K continues, the discussion has turned from how to fix Y2K to what contingency plans to have if your remediation efforts fail. No matter what your stage of Y2K preparation--from businesses that have not begun to address the issue to those that have completed the necessary testing--with less than nine months left, contingency planning is no longer an option, it is a necessity. The issues raised below apply to both CPAs in industry and accounting firms, and include advice practitioners can offer their clients.

Contingency planning considers a worst case scenario. Assume the operations and trading partners critical to your business fail. Have a plan of action ready in case the worst that can happen does.

Look at your balance sheet and income statement. For example, start with cash. Although the Federal Reserve assures that the banking system will not fail due to Y2K, it plans to increase cash reserves by $50 billion in anticipation of bank runs. Remember that the Fed is a very conservative, prudent institution. By gradually increasing cash on hand beginning in the third quarter, you can reduce the risk of not having funds to operate your business in January 2000.

Other questions to consider are: Is your bank Y2K compliant? What will you do if your bank fails? How about accounts receivable? Rank your current top customers. Get their Y2K compliance in writing. Consider reducing receivable balances by increasing collection efforts in the last three months of 1999.

Think about inventory. Can you receive, stock, ship, and account for inventory if your computer system fails? Do you use a just-in-time inventory system? Are you dependent on a key supplier or shipper? What will you do if that key supplier or shipper fails? Most economists expect businesses to build inventory levels in the second half of 1999. Should you also do so?

Consider equipment. What are your plans to operate your business manually if embedded chips, machine control computers, scales, or electronic quality control fails? Are you prepared to issue paychecks manually if your payroll system or your payroll vendor's system fails?

What will you do if your security system fails? Elevators? Telephones? Heating and ventilation? If your accounting system fails, do you have a plan to process information manually?

If you think all of this is unnecessary, consider that the Federal Emergency Management Agency recommends that Americans should prepare for minor Y2K disruptions and store three days worth of water, food, and gas. The Nuclear Regulatory Commission proposes requiring all nuclear power plants to store a 60-day supply of fuel for emergency diesel generators.

To best prepare, assume Y2K failures will affect your business and have a contingency plan ready to deal with the worst case scenario. *

Bruce H. Nearon, a member of the Society's Emerging Technologies and Auditing Standards and Procedures committees, is director of management information systems audit at J.H. Cohn LLP.

GASB Revises Y2K Disclosures