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Falling off the rails? 6 tips for a smooth transition to your new accounting system

The next time your company undergoes an accounting system switch, will it make your team soar or fumble?

Of course, we dream of success and no one predicts failure when taking on a big project like this, but there is something to be said for expecting the unexpected when technology is involved. We’ve all heard stories and seen firsthand tech migrations and implementations that were painful to experience. We’ve seen the bad ones that left finance teams in the dark, went way over budget and scrambled up timelines.

We’re here to help you avoid such scenarios. We’re often called in as an implementation starts to go astray, to get it back on track. So we have lots of lessons learned in our back pockets. In those cases, companies realize after the fact that proper preparation could have mitigated the mishaps.

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At RoseRyan, we’ve worked alongside companies that started out with haphazard implementation strategies before they brought us in as well as companies that put seasoned finance aces at the helm from the get-go.

We’ve helped entrepreneurs outgrow the habit of keeping receipts in a shoebox, and we’ve assisted small finance teams as they adjust to QuickBooks rather than relying on a jumbled mess of Excel spreadsheets. And we’ve brought companies up the tech ladder to solutions like NetSuite, Great Plains, Microsoft Dynamics, and we’ve spoken up for the finance side when a transition to a larger ERP system is in the works.

We’ve stepped in at various stages of these switchovers, sometimes right at the beginning to help guide the way and sometimes in the middle, to pick up the pieces of a project that has gone awry or to offer heavy-lifting during a messy transition.

We’ve seen what can go wildly wrong and what can go just right. Here are the key takeaways for ensuring your next upgrade is smooth sailing:

1. Be realistic about the system you need.

Does your startup look in the mirror and see a muscled-up enterprise? Some dreamy, smaller businesses get caught up and buy solutions that have lots more capabilities than they can handle any time soon. We’ve seen some that pulled the purchase trigger based on unproven sales forecasts. You want room to grow, but you also don’t want to take on a pricey, honking system that you lack the resources to maintain.

Your trusted advisors who know how companies like yours run can skillfully help you make the right call.

2. Conduct some reverse engineering.

If the finance team is increasingly using manual methods to get the reports they need, then change is certainly in order. Would a new system get you closer to real-time information? Could it vastly improve productivity? Can you currently drill down to understand how a particular product is making money (or isn’t)? When the company starts losing visibility, it’s time to look for something more robust and powerful.

A big but: Many times, companies have vague goals and end up with a system that does the exact opposite of what they had hoped for—and users spend more time fiddling around with it than doing actual work, and they struggle to gather the information they need. Before plunging ahead with any new system, give careful thought to what you want out of it and work your way backward.

Who will be wanting the information that comes out of it? The CEO? CFO? Department managers? Compliance and auditors? Build your system with the outputs and users in mind from day one, and you’ll come as close as you can to a seamless implementation.

3. Have finance lead the charge as much as possible.

A common issue is IT’s steadfast claim on any new technology project that comes into the company. We’ve come on board post-implementations long after IT claimed ownership of a project and neglected to get input from the people who will be using the system day in and day out. The result was absolute frustration. At one company, an inventory manager was overwhelmed by a new system that could not help her manage 4,000 SKUs. If she had been asked to give input earlier, she could have preserved some valuable time and avoided agony.

IT surely needs to be involved, but depending on the makeup of the finance team, the controller will need access and editing capabilities from the beginning and a say throughout the process. Finance should operate as a partner with the IT department, not against it and not as a subordinate.

4. Ask the right questions.

Turn to colleagues and trusted advisors who have gone through recent implementations for the questions you should ask your vendor. They can help you express your pain points and determine how you can make things easier for yourself—and your team. So much of a successful tech implementation relies on good communication—everyone involves needs to understand each other, and trusted advisors can help facilitate the conversations to make that happen.

5. Keep your eyes on the clock.

Timing is everything. Many teams aim to make their switchover at fiscal year end—it’s the least expensive and least distressing way to go. However, timelines do often get stretched if whoever is managing the project is inexperienced and not held accountable as the months go by. We have helped companies pick up the pieces of implementations that got off track—including situations where the company lost out on free support from their vendor because so much time had passed. Build in accountability at the start.

6. Raise your hand for help.

If accounting-system switches were an everyday occurrence, finance teams would never get anything done. Thankfully, they’re few and far between. Experts who are more accustomed to transitions than your team and who stay up-to-date on the latest software and know the ins and outs of popular systems can help you make the right decisions and train key players.

They’ll test out the system, shooing away any bugs, and stand in the shoes of finance users. They know the full capabilities of the system and ways it can be customized (for instance, NetSuite can be easily tweaked for customizations, more than many users realize).

Come up with a solid plan, and make room for the unplanned. Hold the project leaders accountable for meeting deadlines (you’d be shocked how often we’ve seen this not happen). The fact is, having to go in and massively fix something later is much more expensive—in terms of costs and time—than getting it done right the first time.

Figure out the right path to take and the smart people to take along with you as early as possible, and you’ll get to your destination efficiently.

Suzy Buckhalter is an accounting problem-solver when it comes to helping fast-growing companies gain efficiencies and grapple their full financial picture. Hear how she helps companies rein in their out-of-control chart of accounts in this webinar.

Ron Siporen, a consultant on the RoseRyan dream team, has over 30 years of experience working with startups, and he has been a successful business owner himself. He loves to help companies clean up problems and scale up for growth. Read his blog post on the rookie mistake that can doom a startup.

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Sports and digital technology: When industries collide and amazing things happen

Tech companies are in the business of transformation. They have the ability to transform something we do every day (like how we communicate) and transform entire businesses (back to the business-model drawing board for some folks). This is why it was fascinating to hear about the major impact that digital technology has had on the professional sports industry during a recent ACG (Association for Corporate Growth) meeting in San Francisco.

How technology has intersected with sports was the main topic of discussion by speaker Roger Noll, professor of economics, emeritus at Stanford University, who is an expert in the study of sports marketing and the economic expansion that has transformed professional sports in the past 20 years.

Here are a few statistics he shared that help illustrate how dramatic this industry has changed:

  • The average professional hockey team from 1965-1975 was family owned and had less revenue than a typical Chevron station.
  • The Yankees and the Dodgers were sold around 1970 for $12 million each, the first teams to be valued at over $10 million.
  • Bill Russell was the highest paid NBA player in the late ’60s. He made $12,000 a year.

The introduction of digital technology and the enormous expansion of the TV viewing audience have fundamentally transformed the reach and capabilities of pro sports teams, enabling them to enter more households and sell more merchandise. And increase their fan base at every turn. The downside: supply and demand. You still have the situation of a fixed number of teams and 10x the number of TV stations that want to broadcast games. Also, more cities want to host professional teams than there are in existence (something 49ers fans in San Francisco know all too well).

Sports team owners have taken smart advantage of demand. They realized they don’t need to build larger stadiums for additional seating—they can keep their stadiums around the 45,000-seat average—and use a lot of their space for concessions, shopping and arcades. Merchandising and broadcast revenue is where the big money is, and now teams are worth between $1 billion to $2 billion!

Of course, other factors have led to the dramatic increase in revenue, salaries and valuations, such as collective bargaining with the players and shared revenue contracts, but the key enabler was the growth of digital technology and digital media. Advances in technology have expanded how much time we all spent consuming and thinking about sports—and how many of our dollars we give toward it. People today spend much more of their free time watching sports, reading about them or shopping for merchandise.

One of the most challenging and thought-provoking books I’ve ever read sprang to mind when I was at the ACG meeting. Published in 1967, The Medium Is the Massage, by Marshall McLuhan, was packed with ideas that were decades ahead of their time. With his concept of an electronic Global Village and the mass influence of electronic communication technologies, McLuhan predicted the Web and social media over 30 years before they came into existence.

Now when we’re on the move, we can make sure we don’t miss a minute by teeing up the DVR through our smartphone. We can get the sense of camaraderie even if we’re watching alone in our living rooms by sending out real-time reactions on social media. On top of this, we’re living in a time where we can skip the stadium but feel like we’re still at the game through a virtual reality headset.

The transformative changes and the power and influence that technology has had on professional sports remind me of this quote in McLuhan’s book: “We become what we behold. We shape our tools and thereafter our tools shape us.”

What tool is going to shape your business in the year to come? What disruptive innovations, products and trends are wending their way into how your products or services are perceived, consumed and monetized? Some of the leading candidates—the internet of things, artificial intelligence, driverless vehicles and nanotechnology, to name a few—are poised for some transformative effects (not to mention they’ll be multitrillion-dollar markets within 10-20 years). How will these changes affect your lifestyle and your business?

Stay curious, my friends.

Stan Fels is a director at RoseRyan, who joined the finance and accounting consulting firm in 2006. In addition to helping the finance dream team keep their skills sharp and stay true to RoseRyan’s proven processes, he matches gurus to clients in the high tech and life sciences sectors. 

 

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Wrangling the evolving enterprise: How finance steers the company through boom and bust

Wham!

The sound of a large public company hitting the wall can be deafening—i.e., a front-page news story or a radical stock drop. Or it may occur slowly, almost silently over time, perhaps from stealthy competitor moves, a slower pace of innovation or hundreds or thousands of employees trying to adjust to strategy shifts and confusing directives. No matter what the reason for the disruption, the finance team, sometimes with the help of outside experts, plays a major role in the enterprise’s ability to dust itself off and reinvent itself for the future.

Big changes at a mature enterprise—growth spurts and turnarounds or spinoffs and restatements—definitely put a strain on finance teams. It’s a time when what’s needed most is tenacity and the ability to shift gears, to help guide the company through the trouble spots and keep it on course.

After all, the finance team plays a critical role in crafting the company’s future. They intimately know the ins and outs of running the company, along with the history. If they are fully staffed with the right mix of talents and skills, they can pave the way for the true business strategists to make sound decisions based on thoughtful, practical analysis of the team’s robust data and intelligence. The team’s wisdom can really influence the decision making.

Coping with growth and complexity

Mature companies need to continually evolve their product lines to survive. It may be time to reach out to new markets—or risk losing market share. The competitive atmosphere changes rapidly, and they must be nimble to adjust to new realities.

One major issue for companies during times of fast growth is finding the talent they need. Companies can bridge the gap by bringing in sharp consultants to help them get through a growth spurt. One-time transactions can knock the wind out of a team and the workload can be daunting. That’s when experienced consultants can be extremely useful to pick up the extra load, manage velocity and augment the staff with specialized expertise.

Coping with a downturn

At some point, a deceleration typically happens. The natural nimbleness of the startup phase is long gone, rapid growth is no longer a given, and the hard-fought battle for the IPO or an acquisition has already played out. A bunch of employees might be heading for the door. A shift in strategy is causing chaos among hundreds or thousands of employees, and there are complex global product lines to manage. Companies trying to stem the tide of departing employees can fill the gaps using interim consultants, such as an outsourced controller, accounting manager, SEC reporting maverick or other savvy finance pro, who can help the business move forward.

This is the mature enterprise stage in the business lifecycle where the ups and downs of staying relevant and gaining ground are challenging. The challenges have grown along with the company’s maturity and complexity. The reporting, compliance and regulatory issues are piling up, along with the ever-increasing demands from the board and investors. The finance team feels the pain firsthand and leads the way by rebalancing the business plan, cutting expenses and extracting efficiencies from every process. The team has years of transactions and data to mine, and sharp analysis and insights are critical to help the company stay afloat and turn itself around.

Consider some of the big ways that the enterprise can fall off course:

  • Shifting regulatory environment: Companies must stay on top of changing compliance and regulations in their space. For instance, implementing a huge new accounting standard (like the new revenue recognition rules or leasing rules) usually is a multi-year effort involving various systems and teams from different departments.
  • A spin out: A divestiture can pack a wallop to internal finance teams as well. “When a large company takes on a complex transaction, like we did with the divestiture of our information management business, it requires a lot of support,” Maddy Gatto, corporate controller of Symantec, a RoseRyan client, told us. Indeed, the finance team of an evolving company often commissions the services of multiple consulting firms and advisors at the same time. It can be a complex challenge to manage those partnerships and make the most of their assistance.
  • A messy restatement: If internal controls aren’t tight and financial reports can’t be trusted, a restatement may result. Yikes! Frankly, this would be a disaster for any company, and a PR nightmare. Maverick corporate controllers can ensure reliable reporting, and SOX experts can get the company through the compliance needs.

Onward and upward

Keeping to the status quo is not an option for companies at any stage. Massive change is inevitable. When it’s time to pivot, the finance team has a chance to shine. By adding in specialized finance experts as needed to help them navigate the tough spots, a company’s finance team can breathe easier. They can together discover the path forward, make the company more efficient and hopefully raise the valuation of the company.

Whether it’s coping with a wild upswing or a dramatic downturn, the finest finance teams move into swift action to get through it.

Not yet at the mature-enterprise stage? See our blog posts on handling the balancing act of the startup, managing through rapid growth and accelerating through on an IPO or M&A deal.

Maureen Ryan, vice president at RoseRyan, heads up business development and helps companies calm the chaos. From meeting with hundreds of companies of all sizes and types, she has seen the emotional rollercoaster of the business lifecycle first hand. Maureen has seen the ups and downs during her early career in various engineering, sales and marketing roles. She’s held positions at Nortel Networks, Bay Networks, Quantum Corp and General Dynamics.

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Private equity having a bang-up year: recap of the Western M&A/Private Equity Forum

Optimism wasn’t on the official agenda of the Daily Journal’s recent Western M&A/Private Equity Forum, but it was definitely a common theme throughout the event. Major legal players in the PE industry gathered at the Le Meridien in San Francisco, and it was clear these dealmakers are having a historically strong moment.

I had the privilege of attending the forum and soaked in the positive energy—the group as a whole is extremely optimistic. While 2015 saw $360 billion in deals, this year will most likely surpass that figure and put total deals in the $400 billion range.

This significant volume has been brewing for some time. At RoseRyan, which has many clients engaged with private equity, we have seen PE firms extend their traditional interest in mostly midsize companies to invest in smaller businesses as well as increase their activity in larger corporations. Perhaps there has never been so much firepower on the sidelines due to low interest rates and minimal places to invest.

Although the attendees and panels were optimistic, they did put things in perspective as the shadow of the dotcom and 2008 financial crises does persist. The upside right now is that we’re in an unprecedented time of growth as the following characteristics hold true:

  • Companies have better business models
  • Companies have more cash
  • Valuations are more realistic versus last year
  • Sellers are more pragmatic
  • Sellers and buyers are being more creative to get deals done
  • Companies are willing to spin out divisions

Where is the activity happening? The tech industry is particularly hot right now, of course, particularly considering the trends noted by the forum’s participants. These include:

  • 2015 seemed to be the year of semiconductor companies, while for 2016 the key areas of investment are big data, analytics, mobile, artificial Intelligence, and deep learning.
  • Chinese investors are aggressively looking to expand IP and want to place money outside of their own country. They want more innovation indigenous to China and are looking at making deep technology deals to make that happen.
  • Internet of Things (IoT) continues to expand. Large industrial companies (GE, Bosch, Intel) are getting more involved in this space, adding to the momentum.
  • Activist investors are packing more power with lower percentages of ownership. PEs are avoiding activist roles and are okay with being quiet and leveraging the activists’ activity.

In this age of uncertainty, when the election outcome is unclear and some businesses are reporting slowdowns, it was great to hear about a highly active market. Most deals are seeing multiple bidders, and participants reported that deal activity likely won’t be affected by elections or the Brexit fallout.

The fact is that companies, particularly in the tech sector, should be proactive as PE firms continue to extend their reach. Savvy companies that are fully prepared for the possibility of PE’s interest will be poised to make the best decisions for their future.

Chris Vane is a director at RoseRyan, where he leads the development of the finance and accounting consulting firm’s cleantech and high tech practices. He can be reached at [email protected] or call him at 510.456.3056 x169.

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Rethinking revenue and realizing opportunities in the new rules

It’s game time. Deals your company is making now could be affected by the new revenue recognition standard, and the effective date will be here before you know it.

This is why it is so important for finance organizations to actively process the rules, consider the potential impacts and plan ahead. There are opportunities to be realized as well as risks to be minimized—all of which can be done only if the company takes a strategic approach well before the deadline.

The changeover to the new rules is way more than an accounting exercise—reveal RoseRyan finance pros Diana Gilbert and Pat Voll in a new report, A strategic playbook for taking on the new revenue recognition rules. Their guide lays the foundation for how companies can make a smooth, thoughtful transition to the new rev rec standard.

Educate the team: Immerse the key players in the rules and gain an understanding of the big differences. There’s no shortage of analysis and interpretations of what all the changes mean. Look for webinars from sources you trust and get your auditor’s perspectives on the new standard, and share what you find with the key players in your organization.

Spread the love and make it a cross-functional thing: Get other stakeholders in the company involved, early and often. We’re talking about the big R—revenue!—and the changes could potentially impact many functional areas of the company. You want to gain perspectives from key stakeholders and share information—the impacts of the new rules can be huge. There are opportunities to change how you do business, and you want to be sure they’re part of your consideration.

Take the new rev rec rules for a spin: Identify sample arrangements that are representative of how you do business and analyze them under the new standard. You’ll want to understand the impact to individual types of contracts as well as the overall impact to the financial statements. This will help you understand what new estimates you will need make and identify data sources and or systems that you may need to develop.

Do the FASB 5-step: Take your representatives arrangements through the new standard’s five-step process. All the data you gather can be used to develop a model to estimate the impact of the new rules.

Evaluate your options and choose your game plan: Step back and reflect, once the potential impacts become clearer. Changes to contracts and incentive plans may need to happen. So could changes to how you package certain products or even how you fundamentally sell them. This is a big deal.

Normally, implementing new accounting rules impacts only the accounting department. This one is different—the changes to rev rec could change how the company does business. With what little time you have left before the standard takes effect, you need to take advantage of the potential opportunities and thoroughly evaluate your options. (The new standard will be applied to filings starting after Dec. 15, 2017 for public companies—that’s just six quarters away!)

Many companies have a major undertaking ahead of them as they evaluate and adopt the rules. The full extent of the effort should not be underestimated, or you’ll get caught in a painful crunch. The timeline will continue to shrink and so will resources as companies go through their analysis.

With pragmatic guidance and specialized expertise at the ready, savvy companies can avoid mishaps and tap into certain opportunities they might not have thought about before.

Kick off your transition to the new way of accounting for revenue by downloading A strategic playbook for taking on the new revenue recognition. The guide goes through the why, who, what and how of adopting the standard and includes helpful examples of how the rules could affect pricing and contracts at tech and life sciences companies.

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A defined culture and a clear strategy: How the two are a “winning” combo

Here’s a tip about growth (we have many up our sleeves): The smartest strategy ever won’t work if the company’s employees are unclear about the execution plan and don’t hum as a team.

At some companies, particularly those bound to crash and burn, senior management and employees operate on divergent paths, not completely understanding one another or what’s going on. They’re muddled by a disconnected culture.

More than 20 years in this business, we’re experiencing the opposite at RoseRyan, united by a defined culture that’s earning its fair share of accolades. We are enormously pleased to have received a spate of fabulous honors that recognize our awesome, distinctive culture, our mix of talented people and our innovative spirit. Wahoo!

 

Recognized as a high-trust, high-performing workplace

RoseRyan has recently received a new national distinction—we’ve been certified as a Great Place to Work® based on anonymous surveys by our employees. The folks behind the Great Place to Work certification come up with the annual Fortune “100 Best Companies to Work For®” list every year.

Employees rated us highly for management credibility and integrity, high levels of respect and a warm sense of camaraderie, and they are proud to say they work for RoseRyan. They also feel extra effort and great work are recognized.

 

Scored a spot on the “Top 100 Workplace” list for the second year

The Bay Area News Group has once again included us on their Top 100 Workplaces list. The list is based solely on what our folks say about our leadership, direction and execution.

Our consultants raved in particular about how they know our strategy, understand how we get things done efficiently and how senior managers have a grip on what is really happening at our firm. We have a long-term strategy in place, and everyone is well informed. We’re forthcoming about our plans and keep our employees informed through regular all hands meetings, virtual chats and casual get-togethers.

 

Founder Kathy Ryan noted as an innovator

RoseRyan founder and CEO Kathy Ryan received honorable mention for CPA.com’s Innovative Practitioners 2016 Award thanks to our in-house developed software application that manages our scheduling, timesheets, skill sets and more behind the scenes. This award recognizes innovations in process, services or technology implementation in accounting firms. Our Dream Team System (DTS) has been spearheaded by Matt Lentzner, who heads our IT efforts.

 

RoseRyan tops equity list for women

For the second year in a row, we ranked high on a national equity leadership list for the accounting sector. Each year the Accounting & Financial Women’s Alliance and American Women’s Society of CPAs recognize firms with high proportions of women partners and principals in the accounting field. Our executive team is composed entirely of women: Kathy and vice presidents Maureen Ryan and Pat Voll—a rarity in the industry.

 

Why our culture sets us apart

Since she founded the firm in 1993, Kathy’s mission has been to gather a diverse and really smart, talented group of finance aces who provide outstanding work every time. We hire people based on experience, brains and how well they align with our values. Our emphasis on diversity and working with amazing people are both aspects of our culture.

Grounded by four core values (to be Trustworthy, to Excel, to Advocate, and to be a great Team player), RoseRyan’s winning culture is something that is reinforced and nurtured over the years by a special internal team creating special programs. It doesn’t “just happen” but is the culmination of lots of internally orchestrated effort. Our values are our center of gravity, how we get things done, and how we interact with each other and clients. It’s teamwork and open communications all the way.

Our culture is also one of the main reasons we’re able to attract and keep top people in this time of a war for talent. They like a place that is exceptionally friendly, flexible to their needs on employment arrangements, and is supportive and teamwork oriented. Not many companies are truly this way. It’s quite a feat to create this kind of company in today’s hypercompetitive world.

Like what you see here? If you think you’d fit right in with the RoseRyan culture and you have the right stuff, we’d love to hear from you. We’re always on the lookout for top talent—full-time and part-time. Contact Michelle Hickam at [email protected].

For more about our winning culture, read all about how it developed, in a recent Accounting Today column by RoseRyan Vice President Pat Voll.

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Without the right tone at the top, you could be encouraging fraud

Stop us if you’ve heard this one before. A top executive of a public company suddenly resigns. This person had bypassed the company’s processes and procedures to move forward with a huge transaction that really should have been approved or at least communicated to the board. Other mishaps that could have been prevented with proper internal controls have come to light as well.

The stock price drops as the company’s worth and its future are questioned in the days that follow. The information the company has previously put out about its financials faces skepticism.

Such a public scenario is fairly rare to see over a decade after the passage of the Sarbanes-Oxley Act, but companies are at risk if something is off with their “tone at the top.” Set by the board of directors and carried out by senior management, the tone lays out the ethical climate as well as the foundation for internal controls.

A poor tone at the top opens up the company to a higher risk of fraudulent activity. It could feed the temptation or make it possible for someone or some people to successfully do something wrong and not get detected for a while. This is especially true at companies that discourage any questioning of authority.

To stay grounded and preserve a good tone at the top, companies need to do the following:

Communicate often: The board and the senior management team lead by example in the way they communicate. Have an open-door policy and be transparent with what’s going on at the company, with frequent updates, including regular company meetings. Under a culture of communication, employees are less likely to think secrecy is acceptable.

Give internal controls a voice: It’s a topic that should have a spot on the agenda of the audit committee for conducting free-flowing discussions with external auditors when management is not present. Also check in with outside experts on ideas for strengthening the company’s internal controls.

Expect accountability: Make it clear everyone is accountable for their actions and what they observe. Outline expected behaviors in the workplace with a code of conduct and business ethics policy that is revisited periodically.

Finally, a best practice is to have all employees annually acknowledge they have read the company’s code of conduct and send a reminder letting everyone know they have access to an anonymous whistleblower hotline and shouldn’t fear retaliation if they need to use it. SOX mandates that employees who report fraud suspicions are protected, but it’s up to the company to remind employees that the tool is available and that the board and senior management values it.

All of these points are in management’s interest. We were once brought in to help a company after an employee made a report on a whistleblower hotline that unraveled a two-year-old fraud. Six quarters of financial results had to be restated because two sales executives had orchestrated an environment to recognize revenue earlier than allowed under GAAP. Their orchestrations included colluding with the customer to take delivery of product earlier than needed, forged documents and misrepresentations to company management and auditors.

How could the executives get away with it? The company lacked a proper tone at the top. Without this key foundation, companies are in effect encouraging employees to break the rules.

Theresa Eng, a member of RoseRyan’s dream team, is a superstar whether she’s working with a client or rallying her coworkers to volunteer for a good cause. Her areas of expertise include financial planning and budgeting, finance operations, and SOX.

Michelle Perez was honored in 2012 with RoseRyan’s coveted TrEAT Award, which honors a guru who has best exemplified our firm’s values (Trustworthy, Excel, Advocate and Team) throughout the year. She excels at SOX testing and documentation, finance management, general accounting, audit prep and support.

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SOX compliance evolves: What’s worked so far and what’s still out of whack

When SOX was first invented, we all struggled to figure out what companies were supposed to be doing, and what auditors were expecting to see. All this happened while the auditors were trying to follow new audit rules just as their new regulator (the PCAOB) came into existence. We were all stumbling around together.

AS2 came out with principles-based guidance—and was the shortest auditing standard in history. It threw everything into the auditors’ scope regardless of materiality, and created a lot of work for dubious value. And a lot of expense.

Along came AS5 to replace that standard, with an attempt to focus auditors on items that could reasonably give rise to a material misstatement. Use professional judgment was the message. That helped settle things down for a while … until the PCAOB started failing audit firms in the inspection process, citing deficiencies in its reviews of internal control over financial reporting.

The audit firms pushed back, and the PCAOB pushed harder. All the pushback was occurring behind the curtain. Companies were often left in the dark about priorities and expectations. And disagreements over what should be in scope of the audit have persisted.

Interpretations in flux

Over a decade after SOX’s passage, a mismatch in expectations continues. The interpretation of the rules keeps evolving. The new directives aren’t always official but are instead happening piecemeal, audit firm by audit firm, and sometimes even engagement team by engagement team. Companies have often been caught unawares of new changes, not realizing that the bar had been raised.

Most of this direction has stemmed from inspection findings. Audit firms are in the unenviable position of delivering the news to their clients about what the PCAOB inspectors find, and companies understandably cry foul that it’s not helpful to have them change their ways “after the fact.” When it comes to audits, no one likes surprises.

The upsides of SOX

Years of SOX compliance have resulted in positive progress. The way companies design controls is far different today than the early days—and how they evidence the execution of controls has matured as well. We see that companies have integrated SOX into their operations—it is not some “thing” off to the side, separate and apart from ongoing operations. And real, tangible benefits are being derived from it. Financial statements are more reliable. There are more checks and balances in place. We see a better defined “tone at the top”—there’s clear integrity and transparency in how SOX-compliant companies do business.

We’ve also seen companies becoming more mature in their operations and documentation of accounting entries. In the past, we were more likely to see journal entries with no supporting documentation. Or we’d find that reconciliations were performed but nobody reviewed them. Now, the level of documentation produced and retained is more robust, and there is more scrutiny of the underlying data itself.

What do they want?

Still, it’s not always clear whether companies are living up to their auditors’ (and their auditors’) expectations. In 2013, some light shone through when the PCAOB released an audit alert following three years’ worth of serious deficiencies in internal-control audits. The general public finally got to hear what the inspectors were seeing beyond their vague inspection reports. The PCAOB expected to see more proof that the auditors were doing what they are supposed to be doing while reviewing internal controls, and those demands have trickled down to the auditors’ clients.

Here’s one example of how it plays out now: When auditors want to look over management review controls (controls that help management identify errors), they need to understand them and then test to see if they are operating at a precise enough level to detect a material misstatement. The potential snafu here is that management documented their review in accordance with their own needs, not the auditors’. The auditor will want sufficient evidence to prove what management looked at, what was investigated and how it was resolved.

Management does not need a stack of paperwork to perform a meaningful budget-to-actual analysis and be comfortable that there are no material misstatements. But auditors want to know for sure that the analysis was done and thoroughly reviewed or else they are hard-pressed to place reliance on that control. Ten years ago, a simple signature on a page was often sufficient evidence. Not so today.

At times it seems audit requests are coming from a “one size fits all” approach rather than a tailored approach based on specific facts and circumstances. Companies end up feeling a need to pile on the documentation to make future audits easier but on areas that have little connection to the possibility of a material misstatement.

What’s next

How the PCAOB goes about its inspections could change. In May, the PCAOB revealed that it may go about the selection of audits to review differently, shifting from a risk-based focus to taking some audits at random (as it is now, the PCAOB tends to review the riskiest/most complex clients in a company’s portfolio).

That change may not address the issue of mismatched expectations but it will certainly get the conversation going, which isn’t a bad thing. As usual, the devil is still in the details. What matters to the regulator—and the firms it audits—will continue to evolve as precedents get set and the bar gets raised. Some areas, such as cybersecurity risks, could attract more focus.

Here’s the bottom line: The evolution could all be for the better, as long as we can use judgment about what adds value and what is merely checking off boxes.

Pat Voll is a vice president at RoseRyan, where she mentors and supports the dream team, and heads up client experience, ensuring all our clients are on the road to happiness. She was recently asked by ComplianceWeek for her take on the “new normal for internal controls.” Pat previously held senior finance level positions at public companies and worked as an auditor with a Big 4 firm. 

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What’s your move? The big consideration for data security

RoseRyan VP Pat Voll recently weighed in on a recent CFO.com debate that posed the question “Is your data more secure in a data center or in the cloud?” CFO published her bylined article alongside other data-security experts in one of its monthly Square-Off virtual panels. Pat’s take: Companies need to focus on the “who” rather than the “what” when looking at where they store their information. See below for an excerpt of Pat’s article:

Ultimately, you are responsible for the protection and security of your data, regardless of where it is stored. Where your data is safest depends on your company’s own internal processes, infrastructure, controls, training, and discipline, and those of your cloud provider.

Consider this fact: The most common reason companies suffer from a data breach is because of an employee error. In a recent survey by the Association of Corporate Counsel, 24% of in-house lawyers blamed employee error for a breach at their company. That’s higher than phishing attacks (12%), third-party access (12%) and lost devices (9%).

A mishap by an employee could happen no matter where the data resides—on-premises or in the cloud. To tamp down the risk, it is essential that companies take a hard look at their internal processes, including periodic training for all employees and robust on-going monitoring of controls, to ensure policies and procedures are being followed.

CFOs can’t pass off the responsibility for data security to the IT department and hope it’s getting done. Similarly, you can’t assume the vendor has adequate controls and procedures in place. It’s not only the right thing to do—it’s increasingly becoming an expectation.

To read the article in its entirety, go here.

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Going dark: What it means and why it might be a smart move for your company

What happens if your public company decides to “go dark”? If you are in the military or in covert operations of some sort, this slang term means you have ceased all forms of communication—probably to save your life. Teenagers can sometimes go dark. If your teenage son or daughter is not responding to your phone calls, texts, tweets, and any other way you to try to communicate, they’ve gone dark. You may feel snubbed and left out. But consider the positive aspect: This quiet period is actually part of their development. They are establishing their independence. Are they using their time wisely? That is what needs to be determined.

For publicly traded companies, going dark means they are delisting from an exchange (e.g., NASDAQ) and simultaneously deregistering with the Securities and Exchange Commission. In this age of transparency, going dark may not seem like a smart move. In fact, it might be just the right move, depending on the company’s objectives. Returning to the teenager example, you need to know—is your company using its time wisely?

If you are an investor, business partner or employee of a company that is going dark, pay attention to these areas as you explore the future potential of the business.

Take a closer look. While there are several practical considerations in the decision to “go dark,” the company may also have strategic implications. Review company filings with respect to the process, as well as press releases announcing the decision. These documents are intended to provide information as to the considerations involved in making the decision to go dark. Strategic implications may or may not be evident from the press releases and filings. It pays to take a closer look and see if you notice opportunity behind the ominous sounding development (more about this later).

Review current shareholder listings and changes in shareholdings. You can get this information from periodic SEC filings, including the latest proxy statement. This will tell you if there are major shareholders owning the stock. A little more research may give you some insights on the major shareholders and their plans for the company.

As an example, a major investor might have a strong track record in turnaround situations, or industry consolidation strategies or other strategic moves. Chances are, you will see a concentrated shareholder base, as companies that go dark must have fewer than 300 registered shareholders (an SEC rule). It pays to know who is driving the bus.

Also review company liquidity and capital structure. Once a company has gone dark, it no longer has direct access to the public capital markets. As a practical matter, if it is a small or microcap company, or if it is underperforming its peers, the company may not have access to such markets in any case. This is something to consider if the company has liquidity issues or is undercapitalized. Private equity and debt may or may not be available, and it can get expensive.

Consider whether cost avoidance is a legitimate driver. Publicly traded companies spend a lot of time and money maintaining the standards required by the national stock exchanges and the SEC. The costs easily exceed $500,000 per year for even the smallest of the small cap companies, to include annual audits, quarterly reviews, legal fees, audit committee fees, SOX compliance costs, annual registration fees and increased insurance premiums for director and officer liability. Oftentimes, boards find that the incremental costs of the public listing outweigh the benefits. Companies often site cost savings as a significant factor in going dark. Saving precious capital is a legitimate reason, but it has a downside.

Look into shareholder liquidity. Shareholder liquidity is probably the scariest part of the going dark process. When the company delists from national exchanges, its stock may continue to trade, but liquidity will depend on whether brokers will continue to make a market for the shares. There can be no guarantees. As such, shareholders may find it difficult, expensive and/or at least time consuming to sell the shares. And there may be a very thin market or no market at all. However, as long as there are market makers, the alternative exchanges—the pink sheets, the bulletin boards, etc.—will continue to trade the shares.

See if you will still have access to financial information. Transparency is another possible casualty of going dark. Most companies that deregister follow a practice of posting their periodic financial results either through quarterly press releases or direct posts on their websites. While they are under no obligation to do so, it’s good business practice, and it doesn’t cost much. And many companies continue to maintain a website and provide contact information. While you won’t see a Form 10-Q or Form 10-K or any of the other SEC filings, at least you will see quarterly and annual financial information, and hopefully you will have contact information if you have questions.

Study the strategic intentions. As noted above, there may be strategic reasons a company goes dark. It could be a logical step in taking a company private and could be a part of a bigger plan. Going dark is a relatively low cost exercise, with immediate cost benefits. If the strategy is in fact to “go private,” and your research shows that the major shareholders have a good track record, you could stand to benefit. At some point the majority shareholders and/or the company may be back in the market to cash out minority shareholders. Once again, no guarantees, but it’s something to consider.

Anytime a company goes through a transformative event, it’s wise to turn to experts who have gone through similar situations and can step in to guide the company, based on their past experiences, best practices and what makes the most sense for the business. Going dark is not routine—it’s a vital, transformative time that requires specialized expertise.

Terry Gibson heads up RoseRyan Private Equity to help PE firms extract more value from their portfolio companies. A founder of Steel Partners Corporate Services, he has been focused on serving the PE industry for over 15 years. He was the CEO of CoSine Communications and BNS Holdings, and he oversaw the finances at Calient Networks and served as controller at Lam Research.

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