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Question
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Dear Ken,
I am an installer with 40 years of experience. I have been a manager and business owner. I have seen a wide variety of things that I have questioned and even found fault with. I am going to attempt to bring forth a couple of questions that might have far reaching applications.
First, Oregon has two different licenses for low voltage (under 100 volts) in the electrical section of the State statutes. These licenses are required licenses for individuals, not companies, agencies or corporations. There is a B license which allows the holder to work on voice and data, clock systems and intercom systems, NOT life safety. The other license is an A license, which covers anything under 100 volts, including life safety (security and fire alarm systems and CCTV). I have seen the practice by several local companies that do NOT see a problem with using B license holders to work on Fire and Security and CCTV systems . If it came down to a customer suffering a loss, and either the party or the insurance company representing the loss suffered by that party, presented evidence in the case that work was done by a B license holder, possibly WITH the knowledge of the installing company, and it was not an uncommon practice of that company to do so, would this effect your ability (if you were representing the installation company) to defend a client in such a situation? Would this possibly cross the line to the point that the $250.00 limitation could be voided or nullified, and the company could be held responsible for a greater financial amount ? Could the incorrect license holder be held personally responsible for the loss ? At first, this may sound specific to only States that have multiple licenses. But, if we carry the question further, wouldn't the same question apply if the contractor was not properly licensed in another state?
Second, I have seen the practice of several local alarm companies of NOT following manufacturers directions, instructions and illustrations. The best illustration of this is the practice of several local alarm companies to install the resistor in the panel, at the terminal connections. The manufacturers show the end of line resistor is to be installed at the contact/device or further down line than the device. By installing the resistor in the panel, instead of at the device, if there was incident to the wiring to the device, be it a door contact or a motion detector, and the wire was shorted due to an " incident " as a result of the building "settling" or what ever, then it could not respond to an open or short in the circuit and fail to activate the system, resulting in a loss to a party. Again, if you were representing this alarm company in a suit, either by the party suffering the loss or the insurance company representing the party, would this type of installation, if brought out in the proceedings, effect your ability to defend this case? If it were introduced that the company followed this practice, could it effect your defense? Would the effect be sufficient to void the $250.00 limitation of liability? Again, this is only my observation of local practices, but I would assume that it is NOT localized or infrequent in occurrence and could therefore be of general interest.
Your input and resulting exposure to this, and other industry related topics, can only continue to help this industry improve and advance.
Thank you.
Mike Lake
ARGUS Security
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Answer
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The failure to use licensed or even properly trained personnel who fail to follow manufacturer's installation or service specifications would not void the protective provisions of a properly drafted alarm contract. All those combinations may of course add up to gross negligence or willful conduct, which may be sufficient to overcome the protective provisions. Even an idiot can figure out a way to burn himself with a safety match.
Violation of law can be proof positive of negligence, but not always. Failing to follow manufacturer's recommendations would be evidence, perhaps strong evidence, of negligence, but not dispositive. An explanation why the manufacturer's specifications were not follow in a particular instance would negate the negligence charge. Of course, independent expert testimony that the deviation was negligence isn't going to be very damaging. I think you would start with the presumption that the manufacturer's recommendations should be followed and there better be a solid reason why they weren't followed.
The Standard Form Contracts all contain protective provisions that embrace the concept that alarm companies can, by contract, insulate themselves from liability and damages for breach of contract and negligence. Most states will not enforce the protective provisions if gross negligence is established. The definition and standards for gross negligence differ by jurisdiction. In some jurisdictions, Michigan comes to mind, the factors in the above scenario would probably be gross negligence. Other states too. How the lawsuit is handled will be crucial. Run of the mill insurance defense counsel? Not a chance.
Thanks for the question.
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Question - follow up on writing off bad debt
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Ken
I’m confused at your explanation on the accrual side of booking the contract. I’m under the assumption of GAAP that you should match the revenue and expenses at the same time or same year. When a contract is received that does not represent income. You would actually only book the money received and invoices would be created for that entire contract term and you would book “rev” or income as you receive it over the contract term. Likewise with expenses they were not all expensed in that same year. The expenses associated with creating that account would be amortized over the life of the contract hence matching rev. or income from that account. Why were you stating they should book $1000 when they receive the contract when really they would only be booking $20 for that first month plus any install fee’s?
I understand your Cash basis comments.
Please help me understand what you were saying.
Mike Proudfit, Chief Executive Officer
Titan Alarm, Inc.
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Response
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Guilty as charged. The best part of my advice was the last sentence where I wrote: "Accountants and tax attorneys can no doubt give a better answer". Maybe I should have written that they can give the right answer. Here are better answers:
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Comments
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Ken
Your answer on bad debts needs to be revised [from Sept 20 2012 article]. On an accrual basis, the 5-year contract has no financial impact because it is not an invoice. The contract may or may not have a balance sheet impact, depending on if the installer capitalized any of the materials and labor associated with the customer. If costs were capitalized, then those costs could be removed from the balance sheet and shown as a loss on disposal (nothing to do with $20 RMR times term). Since most small alarm companies do not capitalize installs, most would have nothing to write off upon default. Any amounts billed to a customer that become bad debt can be written off (say $20 a month for 3-4 months) – the accounts receivable would be reduced and bad debts would be charged for the billed and unpaid amounts.
Harry Schenk, CFO
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Ken,
A company that uses accrual basis accounting would earn the monitoring revenue from a contract as it is earned. For example, a customer that pays $25 per month and is billed quarterly would be billed $75 each quarter. Assuming that the customer was billed in the first month of service (not in advance) the alarm company would "earn" $25 in the first month and have $50 of prepaid, or unearned, revenue. In the second month, the alarm company would "earn" an additional $25 and have $25 of unearned revenue. In the third month another $25 is earned and there is no more unearned revenue. The process would repeat itself in the fourth month.
A company that uses cash basis would earn the income when the customer payment was received.
The question is whether a cancelled contract can be written off as bad debt. To be able to expense the contract as bad debt, there would have had to be revenue. If an accrual based company has billed a customer, earned the revenue, but was not paid, then there would be a deduction for bad debt. A cash basis company was never paid in the first place, therefore, no revenue was earned, and there is no deduction.
Mitch Reitman
S.I.C. Consulting, Inc.
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