A sole practitioner's tough lesson in disaster planning.

Many small firms go out of business after experiencing a major disaster, but there are preventive measures that can help a practice survive. Bruce Chase, CPA, PhD, Radford University, Radford, Virginia, William J. Withrow, CPA, owner, and Gwen L. Withrow, office manager, William J. Withrow, CPA, PC, recount what one sole practitioner learned when his greatest fears were realized--at the peak of tax season.

As April 15 looms closer on the calendar and last-minute returns and extensions fill the in box, most CPAs have little time to think about anything but taxes. However, for William J. Withrow, a sole practitioner in Covington, Virginia, the approach of April 15 always will serve as a reminder of his worst nightmare--an office fire that destroyed client records and tax returns.

In the sidebar on page 85, Withrow recounts what happened that night and the steps he took to put the business back together. This article offers some practical advice to assist any sole practitioner in preparing for a disaster.

WHAT A SOLE PRACTITIONER CAN DO

Withrow's success in reconstructing his business was due partly to luck. Many businesses are not so lucky. There are several steps a sole practitioner can take to increase the chances of surviving a disaster. They include:

* Maintain adequate insurance coverage. Most CPAs carry some form of property damage insurance, which covers furniture, computers, software, publications and virtually anything movable. Most policies offer replacement value with a set dollar coverage limit. CPAs must ensure the dollar amount is adequate to cover the potential loss in case of a complete disaster and should reevaluate coverage after any major purchase.

Two additional types of insurance are business interruption coverage and additional expense coverage. These coverages are relatively inexpensive and provide important protection. Business interruption insurance will cover lost business after a disaster and the additional expenses insurance will cover added costs of operating during recovery.

In another vein, practitioners should consider liability insurance that protects them from the building owners' and other building tenants' claims if a fire resulted from a firm member's negligence.

In any insurance decision, the cost of insurance must be weighed against the potential loss. However, the cost normally is minimal compared with the coverage. CPAs need a good insurance agent who will come to the office and review the alternatives.

* Maintain adequate computer file backups. Old disk backup systems for personal computers are slow and cumbersome. Practitioners must invest in an efficient tape backup system (such systems start at less than $500) and make sure the tapes are stored off-site. Backing up files at the end of the day and taking the tapes home should be part of every sole practitioner's routine. For added protection, there should be two sets of tapes--yesterday's backup always should remain at home and the tapes from the day before should be brought to the office to be used as the current day's backup. If the entire hard disk isn't copied, a copy of the system software and programs should be stored off-site.

* Develop a computer hardware backup plan. Backup files are of little value if there is no computer to replace the one that was destroyed. Developing a plan to replace the equipment can be more involved than it might seem. CPAs first must determine how long the business can survive without hardware and then choose the best way to obtain replacement equipment. One approach is to seek an agreement with a local vendor that enables the CPA to borrow equipment immediately while an order is being processed. Another idea is to establish an emergency backup agreement with a local company that has compatible computer equipment that can be used after a disaster. Having timely access to computer hardware may be one of the most critical elements in disaster recovery, and a CPA must know where to turn for this support.

* Plan for temporary physical needs. Practitioners need to know the minimum amount of space necessary for recovery operations and how it can be secured in a short time period. Include furniture and communications needs in the plan. Practitioners should discuss with local realtors the possibility of procuring emergency short-term office space in case disaster strikes.

* Maintain a neat office. The items likely to suffer the most damage in a fire or other disaster are the ones left in the open. If possible, only the files needed for current work should be kept out and refiled at the end of the day. Even regular file cabinets can provide some protection. Remember--any files on top of a desk are liable to be lost in a fire.

It's a good idea, too, to keep an inventory list, including photographs when appropriate, of the office contents. A copy of this list should be stored off-site.

* Perform fire drills that teach employees about evacuation routes and procedures.

A FEW WORTHWHILE HOURS

Sole practitioners spend many hours developing and maintaining an accounting practice. A few of those hours should be devoted to protecting the business. Proper planning could make the difference between a successful recovery or a total loss.

EXECUTIVE SUMMARY

* MANY SMALL FIRMS perish after experiencing a major disaster. One local CPA learned there were several steps that increased the chances of survival.

* PROPER INSURANCE coverage is key. Property and liability insurance policies should have up-to-date limits. Business interruption and additional expense coverage also should be purchased.

* DATA BACKUP SYSTEMS must provide for safe off-site storage of computer files. CPAs should have hardware backup plans as well.

* SPACE, FURNITURE, equipment and communications needs should be determined. Items left in the open are likely to suffer the most damage in a disaster.

BILL WITHROW'S FIRST-PERSON EXPERIENCE

I worked until 9 P.M. on Friday, April 9, and headed for home, taking pleasure in knowing there was only one more working weekend in the tax season. An hour later, I was standing in front of the office building I leased watching firefighters trying to control an intense fire. My greatest fear was that eight years of practice and my future livelihood were going up in flames.

When I was allowed to enter the office the next morning, it seemed my worst fears were realized. My office was almost unrecognizable. All of our computers, furniture, library and the client files I had been working on the night before were ashes. The four offices I used for support staff and files were almost as severely damaged. Smoke, heat and water damage had destroyed items left in the open.

Much of the tax work was done on computers, which all appeared ruined from the heat and water. Worst of all, the disks used to back up the computer files had been stored next to the computers and were totally destroyed. We never had anticipated that a fire could occur. I did not see how I could recover from such a loss.

With a tremendous amount of luck and cooperation from insurers and others, I was able to put my business back together more quickly than I thought possible. First, the computer containing the main database used for tax files was sheltered in a covered workstation. Although the machine's cabinet was badly charred, the hutch cover had shielded it from most of the water. The computer was not operable, but the local computer vendor was able to recover the files from the hard disk. This ultimately was our salvation. Ironically, I was getting ready to toss out the remains of this computer with other ruined materials when a friend advised me to investigate whether the disk could be recovered. Following this advice saved a tremendous amount of work.

My next concern was the paper files. Since we didn't have fire-proof file cabinets, I thought they all must be lost, but again luck was on my side. Because my file cabinets were packed so tightly, the lack of air retarded the spread of flames. I actually lost only a few files at the front of each drawer. Thus, most of the current files for which work recently had been completed were intact. Of course, all the working files left in the open were destroyed.

With computer records restored, temporary office space became the next priority. I knew of some empty space a few blocks away, and a local businessman and client offered it to me on a short-term basis at no charge. A few days later I was able to begin setting up shop again.

The local computer vendor provided loaner machines immediately, which made a critical difference for my business. Their availability gave me time to think about the types of computers I needed to replace those lost in the fire and, more important, allowed me to continue processing tax returns. Even a week's delay would have meant missing the tax deadline.

This experience made me realize how important it was to develop a relationship with the local computer vendor. As CPAs become more dependent on computers to do business, it is imperative to devise a computer backup system, which includes knowing to whom to turn for help in an emergency.

I recovered from the computer hard disk or paper files all but 13 of the tax returns I had completed and was able to file extensions with the Internal Revenue Service for some 30 incomplete returns. Fortunately, my clients were understanding and stayed with me during that tax season.

Once April 15 passed, I could devote my energies to finding permanent solutions to my problems. I found out firsthand about both the benefits and limitations of insurance. Fortunately, my coverage provided the funds needed to restart my business. I had a comprehensive renters' insurance policy that covered contents, lost income and additional expenses, as well as general, fire and legal liability. My insurance company and claims adjuster were most cooperative and understanding in handling my claim. There are several different types of business insurance available and the right coverage can make the difference between rebuilding a practice or closing shop.

A COMPUTER DISASTER RECOVERY CHECKLIST

Vital information can be lost through equipment theft, malfunction or destruction. Preparing for possible data loss enables a firm to rebuild and reopen in a short time. Here are some important tips:

1. Secure computer equipment. This can be accomplished by controlling access to the building during off-hours. A recent study revealed that most office equipment theft occurs between the hours of 6 A.M. and 8 A.M. Thieves find office buildings unlocked for employees who arrive early but unguarded by a receptionist or other employee.

2. Back up data daily. Programs needn't be backed up as often, but should be backed up periodically--or when adding upgrades.

3. Monitor the tape backup procedures daily to ensure they are strictly followed. The tape should be tested to be sure the backup procedures are working.

4. Maintain a current list of hardware and serial numbers as well as software and version numbers. Doing so will help in case of loss or insurance claims.

5. If employees are allowed to take equipment out of the office, set up and follow a system that tracks usage and returns.

6. Acquire a fire-rated file cabinet in which to store and maintain valuable data processing equipment and software. While there should be backups for software, such a cabinet is a good place to store original diskettes and other types of magnetic media.

7. Acquire antivirus software. It is extremely important to choose software the manufacturer updates regularly because new and more innovative viruses are being created all the time. Data should be tested periodically for viruses. In addition, all outside media should be tested before they are placed on a network or other company computer.

This sidebar was abstracted from, the American Institute of CPAs information technology membership division's practice aid Computer Disaster Recovery Planning Guide, by Christopher Leach, CPA, a member of the information technology executive committee.