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Unearthing revenue and expense opportunities through SOX

It is easy to see why, after Sarbanes-Oxley became law in the early 2000s and internal-control testers and reviewers became sought-after professionals, that the demand for their talents sometimes went to their heads. From being the mostly ignored internal audit department to becoming the highly noticed glamour boys and girls of their own movie called Corporate America, their first instinct was, “The power is with us and let us start policing.” I admit that happened to me, but only for a minute.

Two things happened to make me quickly snap out of it. First was a reflective process where I decided that I did not want to make a career out of solely pointing out errors that other people made — that would be too much negativity day in and day out. Then, during a chance encounter after hours with a corporate controller, she blurted out, “You know the best thing about having you on our team is that I feel more secure when I go home every night, that things are working optimally and the world will not fall apart tomorrow morning.” Viola! The statement was made by her, but the big impact was on me. In her mind, I was collaborating with her and giving her peace of mind, but in my mind, I had seen myself as the cop. I preferred her outlook and embraced it.

From that moment on, finding SOX errors became secondary to my working as a thoughtful partner who uncovers positive opportunities in the organizations I work with. Consider these real-life examples from my experiences:

  • SOX became a revenue generator when testers helped a disc drive maker realize that it had been needlessly throwing away material that was actually quite valuable. The finding began with a control test that read, “Excess inventory is classified as scrap and authorized.” Looking for authorization controls, the SOX testers wondered why the excess material from the precious metal (the inventory) used to make the disc drives was not worth anything. It was just thrown away. A group of employees, who had previously been ignored on this issue, revealed that the metal could be recycled at a fraction of the cost of discarding it, to actually make new disc drives and add new revenue to the bottom line. An outside perspective, through a SOX exercise, brought this opportunity to the forefront.
  • A company that took a conservative approach to its SOX control for the cycle counts of inventory had a monthly reconciliation process. The cautious way of doing things had an upside when management looked at the results of the reconciliation and decided to streamline the entire inventory management and supply chain process, which saved millions in costs and contributed to the closing process getting cut down by a week.
  • A retail giant was planning to implement a new system in the supply chain area and wanted to consider SOX upfront to ensure that prior to going live, the new system would pass all the relevant IT general computer controls (including user and developer access, termination, passwords and change management). This was a first for the retailer, which didn’t usually take SOX into account in the early stages of a new system. The proactive effort saved it time and money. The SOX readiness testing led to the operations side working more closely with the IT side, granting early buy-in, creating better communication between the two groups, and leading to an overall more efficient supply chain process. The net impact was a savings of $3 million, and the project went live and operational three months ahead of schedule.
  • The reach of SOX sometimes spills over to IT security and PCI compliance (the data security standard used by the payment card industry). This was evident in a retailer that was planning to break away from its publicly listed parent and go public on its own. As the team I was working with was putting the SOX controls in the various areas, we realized that although it did not having a direct impact on the company’s SOX compliance, the IT security systems did not rein in customers’ credit card information as much as it should. While this security gap sounds like a huge hole in today’s privacy-conscious environment, this finding was made back in 2007. Even then the very prudent upper management team, including the CEO and CFO, saw the need to plug the gap; they had the foresight to put in place strong IT security measures and encryption technology and prevent their customers’ credit card information from getting plastered on Times Square. If only all the retailers had followed suit! This company was not just ahead of the game in IT security; it also met PCI compliance, thanks to the initial recommendations that turned up during the SOX work.

The above is only a short list of the process improvements I have seen firsthand during my time working heavily in SOX. The point is that, if the only cap I had worn while going about my SOX testing was that of a policeman, I would never have seen past the brim to play a part in those process improvements. These are examples of positive changes from SOX that revealed new revenue opportunities or saved money. And, on a personal level, they have reinforced my profile as a “trusted partner” even in the eyes of the people being subject to SOX controls. This, as any SOX tester will testify these days, is the ultimate goal. Any feeling of being a SOX cop is long gone. All it took was a slight change in mindset and approach.

Vivek Kumar is a member of the RoseRyan dream team. He has been working in SOX since the time it became law and from both sides, in-house and as an external consultant. When not doing SOX, Vivek keeps himself busy playing tennis and making feature films, the first of which hits theaters this summer.

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Does the FASB need to step back and simplify?

Having been involved in accounting for over 30 years, I have seen quite a few changes in accounting requirements, all enthusiastically introduced to “help the reader understand the financial status of a company better.”

I have to say that I believe the opposite is happening. Reading (interpreting) accounts is getting harder to do, as more and more intricate rules are introduced. In just the last 20 years, we have seen significant changes, including the introduction of stock compensation standards, revised fair value accounting, rewrites of revenue recognition rules, to name just a few. The changes have become intricate and mind-numbing.

There’s little sign of it stopping; although recently the FASB announced it will be focusing on reducing complexity and promoting simplification in its accounting standards, the Board has taken no meaningful action to date to do so. Board members have stated they want to simplify how inventory is measured and eliminate the need to disclose extraordinary items from income statements, but these pale into insignificance when compared to the revamped revenue recognition rules and the new operating lease accounting rules likely to be introduced too.

The bottom line is that unless you have a sophisticated understanding of accounting, you probably are unable to fully understand the accounts and what they mean to the health of the business. I don’t believe I am the only one who thinks the rules are going too far, and I understand sophisticated accounts! Every time I listen to a public company announce its quarterly financial results, I hear the CEO or CFO announce their earnings, and then they follow it with a pro-forma result, usually described as an “adjusted EBITDA,” which is to them a more meaningful result to disclose to their investors. Absolutely every company will back out stock compensation costs and other non-cash charges to get to a baseline cash-based result. Observers who trend these revised numbers on a quarterly basis can probably get a more meaningful trend of financial performance of the company and can make more meaningful decisions affecting their investment than if they tried to follow along with the pure GAAP figure.

I’m not saying cash-based accounting is the way to go. That is accounting at its simplest but that, too, doesn’t give a true picture of a company’s financial health. The reality is a simplified disclosure process is in desperate need. Maybe if this was introduced, companies would stop releasing pro-forma results, and I wouldn’t keep being asked to interpret accounting results into meaningful information. Seeing the proposed new rules on the horizon, it looks like it’s going to get worse before it gets better, which is unfortunate.

Until we see more progress, I expect to hear more and more complaints that financial statements are becoming more difficult to interpret. That to me is doing the U.S. accounting profession a major disservice.

Stephen Ambler is a director at RoseRyan, where he manages the development of the firm’s “dream team” of consultants. His interim CFO stints at RoseRyan have included a social media company and the management of the financial integration process at a company acquired by Oracle. He previously held the CFO position for 13 years at Nasdaq-listed companies. 

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Why an underfunded finance team is risky business

In a new small company, all the focus — and funds — tend to be on the development side, where the company’s product or service gets fine-tuned for the marketplace. The finance organization as a support function is often low on the priority list. But as the company grows — and tracking and managing the finances gets more complex — almost all spending will continue to be concentrated on other areas, leaving the finance department to fight over the bread crumbs.

Being a team player means making do with what you have, not complaining, and doing what it takes to meet your objectives. But sometimes, being a good soldier is detrimental to the overall good of the company. Consider just a few examples why finance should demand its fair share:

  • Systems that don’t keep pace with your business put your company at risk: When the business grows in complexity, so should the methods and technology for tracking its performance. Workflow that is highly dependent on top-side adjustments to close the books and spreadsheet tracking of critical information (revenue recognition, stock awards, etc.) are prone to error.
  • Rules and regulations are constantly changing — which means the company has to keep up: Staying current can take considerable time and effort, and not knowing what you don’t know can be harmful. Misapplying accounting rules to significant transactions can result in significant errors to your financial statements.
  • Understaffed and underperforming accounting teams can result in delays to the close process: The slowdown not only hurts morale and the department’s ability to keep moving forward — it can have a direct effect on the company if management is running the business with inaccurate or insufficient data to make decisions.

In addition to jeopardizing your own reputation, the inability to produce timely and accurate financial statements can result in a decrease in the company’s valuation, its ability to attract financing at favorable rates (or at all) and win (or keep) strategic partners and clients. The problems could also derail a business combination or IPO.

It doesn’t have to be that way. Finance organizations are beginning to be looked at as more than just a cost center and are on their way toward becoming key players in the overall business strategy. To get to that point, they need to improve how they anticipate and support the needs of other departments and get recognized for such work.

Here are a few questions to consider as you evaluate how others perceive your finance organization:

  • Do your cross-functional peers know what the finance organization does to add value to the business? How is finance communicating its value-add?
  • Does finance take time to understand what the business is doing, and provide information to support the tasks that are underway? Is it proactive in this, or does it wait for others to make requests?
  • Does the organization meet regularly with other departments to find out, from their perspective, what they need from the organization and how the team is doing in filling those needs?
  • Is finance able to support the organization with reliable information on a timely basis?
  • Does finance have a handle on the company’s current needs and realistic growth plans?
  • Does the organization know what best practices are for your industry? Is it in line with your competition?

When finance teams make progress in these areas, their stature will be elevated and they will be seen as key contributors to  the business, not a cost drain. This in turn makes getting finance’s piece of the pie much easier. And much more deserved.

For more information about building a foundation of financial integrity, read why timely, accurate financials are valuable for your company.

Pat Voll is a vice president at RoseRyan, where she mentors and supports the dream team, and heads up client management, ensuring all our clients are on the road to happiness. She previously held senior finance level positions at public companies and worked as an auditor with a Big 4 firm.

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SOX management testing: The debate over in-house vs. external testers

In its decade-long life, the Sarbanes-Oxley Act has triggered many emotional arguments. One that continues to persist, even all these years later, is whether management testing can be done in-house or should be done solely by independent consultants. Like any logical argument in life, both sides to the equation have valid points, including the ones below:

The case for independent consultants

  • Consultants provide independence: This is an area companies quickly embrace whenever someone looks at their past in-house testing with skepticism. I saw it firsthand at an established retail giant, where the company’s SOX project manager took great pride in asserting, “In the last five years, we have had no significant deficiency.” The applause that followed matched the kind you hear after an Olympic Gold performance. But another fine day, that same declaration didn’t get the same reaction. This time, the PMO said it to the brand-new controller, a former Big 4 partner, who wasn’t pleased. “But that means you have not been independent enough in your evaluation,” the controller said. Ouch! Silence all around. It’s hard to debate one of the strongest arguments for taking testing to external consultants — independence.
  • They bring a wider perspective: Independent finance pros step out a lot more than entrenched employees. They see different companies, distinct SOX departments, and a variety of mindsets. All of this makes them a valuable resource for SOX best practices, not just for uncovering flaws but finding ways to improve processes and figuring out the balance between tight controls and overwrought ones. They know what works well in certain types of companies and what doesn’t. Plus, they can anticipate what the auditors will likely expect down the line and prepare the company for those expectations (life is much easier when you can be proactive with your external accounting firm rather than scrambling when the auditors find something amiss). Employees, as an intrinsic part of the organization, usually can’t bring such up-to-date and diverse experience to the table.
  • They can reduce costs: It’s generally more cost-effective to outsource SOX testing to highly skilled, knowledgeable professionals, on a project basis, than taking on full-time employees. And these professionals may also help lower the total cost of SOX as external auditors will rely on the work of objective and competent third parties. The less time auditors spend scrutinizing what a company’s internal staff has done, the less the company has to pay in auditor hours.

The case for in-house testers

  • They may be able to extract more information from their colleagues. In-house testers, by working among their business and IT partners all year long, have the opportunity to build strong relationships and rapport over time. While such rapport can fuel the argument for independence, the fact is they could make more inroads in gathering information if their colleagues tend to be more helpful to those they already know and trust.
  • They know the business inside and out and have a vested interest in its future. Testers working from the inside can at times provide meaningful suggestions for process improvements — a strong and beneficial byproduct of the testing process. With a desire to keep their jobs and see their company thrive, they have a personal interest in uncovering inefficiencies. At other times, however, these in-house testers may hold back their ideas, not wanting to rock the boat with any of their fellow employees who may be affected by their suggestions.

What about a combo approach?
A trend, which appears to be gaining traction in Silicon Valley, is a mix-and-match approach, whereby the external consultants work in tandem with a select few from the in-house team. While it might appear that this is the “best of both worlds” scenario, it doesn’t play out that way in practice. The decision-making still tends to be made in-house, with all the pros and cons the in-house model entails.

The verdict: What makes sense for your company
Management needs and wants confidence in what the testers find and report to them (and so do investors and other stakeholders). The top executives put their name on the line to whatever is or isn’t uncovered during the testing process. Only you can decide, after weighing the pros and cons and the factors that go into the work involved, which method of SOX testing makes the most sense for your business and provides you with the right level of certainty.

Vivek Kumar is a member of the RoseRyan dream team. He has been working in SOX since the time it became law and from both sides, in-house and as an external consultant. When not doing SOX, Vivek keeps himself busy playing tennis and making feature films, the first of which hits theaters this summer.

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How the new revenue recognition standard may affect your company

We’ve been hearing about it for years. Finally, the result of the joint project between the FASB and the IASB to update and consolidate accounting standards for revenue recognition into one global standard is just about here. They’re expected to issue it by the end of this month.

This is when the fun begins. While there is time before companies have to issue financial statements under the new standard (which we’ll see in the first interim period of 2017 for public companies with fiscal years beginning after December 15, 2016), they will need to disclose the expected impact of the new standard right away. And they will need to be tracking transactions under the new principles beginning in 2015.

The biggest change is the shift from industry-specific guidance to the application of general principles across all industries. Companies will need to re-think how revenue will be recognized for their transactions, and in some cases they will be able to record revenue earlier than they do now. Here are my thoughts on what our clients should be considering in the months ahead.

If you work at a life sciences company
The revenue standard applies to all contracts with customers, including some collaboration arrangements for life sciences companies if they are in effect transactions with a customer. Collaborations might fall outside the scope of the new revenue guidance if the collaborator or partner is not in substance a customer, such as when a biotechnology company and pharmaceutical company have an agreement to share equally in the development of a specific drug candidate as well as the risk that comes with it.

Another change that will arise with the new standard is that variable consideration (such as milestone payments) may be included in the transaction price allocated to deliverables as long as the company has relevant experience with similar performance obligations and, based on that experience, they do not expect a significant reversal in future periods. Changes to these estimates will have to be allocated to performance obligations based on that initial allocation, unless a payment relates to a specific element and is consistent with the amount expected to be entitled for performance of that obligation.

When life sciences companies license their drugs to commercialization partners, they can estimate and recognize sales-based royalties when the partners’ subsequent sales occur and will not have to wait, as they do now, until each partner has reported such sales. These estimates can include only the amount that has a low probable risk of significant reversal.

Another change that will result in earlier recognition of revenue for life sciences companies is the recording of sales of new products when they ship, minus the estimates for returns. Currently, companies have to delay recognition on a sell-through basis if a pattern of return has not been established.

If you enter into license agreements
The new standard’s emphasis on when control transfers to the customer may change the timing of revenue recognition on licenses. A license is the right to use an entity’s intellectual property, such as software and technology, patents, trademarks, copyrights, music and movie rights and franchises. In some cases, a license is a promise to provide a right, which transfers at a point in time. In other cases, it is a promise to provide access to a right that transfers to the customer over time, such as if a licensor has continuing obligations under the arrangement that do not otherwise qualify as separate performance obligations, or if the licensor must actively make the IP available on a continuous basis during the license period, or if the licensee benefits from changes over time.

If you have software arrangements
For software arrangements, VSOE (vendor-specific objective evidence) guidance is no longer required, resulting in earlier recognition of revenue for licenses that lacked it for undelivered elements, including future upgrades, additional product rights or other vendor obligations. Companies still need to allocate revenue to each of the deliverables in the arrangement based upon best estimated selling prices (BESP). It simply allows for alternate methods of determining BESP beyond VSOE.

If you sell software as a service
You will need to assess software license and hosting services to determine if they represent distinct performance obligations. It is unclear what criteria will apply to determine whether a typical SaaS arrangement will qualify for service accounting treatment (over time) or if the software element should be recognized separately (at a point in time).

In addition, provisions entitling the customer to a refund if undelivered elements are not successfully provided — an issue that currently delays recognition — will be a part of the estimate of variable consideration, resulting in earlier revenue recognition in some arrangements.

If you’re a contract manufacturer
In contract manufacturing situations, the timing of revenue recognition will no longer revolve around when units are delivered but instead when a service is performed and when the control of goods are transferred to the customer over time. This change may require contract manufacturers to modify their systems and processes to recognize revenue in the new way.

If you work in the technology sector
Distributors and resellers tend to require price protection or right of return from manufacturers of technology products to protect themselves from obsolescence and price reductions. Manufacturers currently delay recognition of revenue from these transactions because of the possibility they’d have to give money back or accept product returns. Under the new standards, fees that are currently not considered fixed and determinable can be recognized to the extent the company can estimate the amount that has a low probable risk of significant reversal. This will result in earlier recognition of revenue for manufacturers.

When companies license their technology for use in tangible goods or services, they can recognize the royalties when sales or usage occurs to the extent they can estimate the amount that won’t reverse (subject to the constraint on variable consideration). Today, recognition is typically delayed until such sales are reported by the licensee.

What everyone should do in the meantime
These are just a few examples of impacts in certain industries. When the new standard is released, we encourage you to evaluate its impact on your company and business model. Don’t underestimate the subtleties the new principles guidance will change in revenue recognition. Without bright-line rules, there will be room for judgment but also room for differences in interpretation and implementation, particularly between you and your auditor. Let the fun begin!

Diana Gilbert has been a member of the RoseRyan dream team since 2008 with almost 30 years of professional experience. She excels at technical accounting, revenue recognition, SOX/internal controls, business systems and process improvements.

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New report: What high-growth CFOs need to thrive

CFOs at high-growth companies are in a whirlwind. Everything around them is moving fast and the pressure is on to keep the positive figures moving upward and get a hold of the huge amounts of data the company is taking in every day. Unlike the CFOs of yesteryear, they’re not just stewards of their company’s finances but strategic players who have a direct say on how the company will move forward.

The smart ones, the ones who will be successful, will take a moment amid the crazy times to take a breath and figure out how can they live up to the expectations and responsibilities they have taken on. And here’s what they’ll remember: the key to their success are the people behind them. It’s easy to overlook this point when the company is barreling forward with new hires, shifts in strategies and expanding complexities. With a strong finance team that’s empowered by the trust of their superior, the CFO and the company as a whole are poised to make quick decisions that can ensure they stay on the high-growth track.

In a new intelligence report, A guide for high-growth CFOs, RoseRyan hits upon this challenge head-on with an emphasis on developing a hyper-efficient finance team. This involves shaking off silos and encouraging openness and collaboration between finance employees and the rest of the company. The CFO is in a position to cross any divide and push for any changes in technologies or processes to both empower the finance crew and give them access to real-time data to make real-time decisions.

The concept of entrusting employees of various levels in a mid-sized or large organization to make decisions based on their assessments of real-time data is relatively new. In this report, RoseRyan dream team member Jason Barker explains why it’s now possible and crucial for any company that wants to maintain its high-growth status. Download A guide for high growth CFOs to learn more.

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Non-GAAP measures: Do they provide helpful insights or hide the “bad stuff”?

Many companies, especially in tech, supplement their income statement produced under generally accepted accounting principles with a non-GAAP income statement. It’s a practice that has proliferated in recent years as companies want to focus attention on the underlying “run rate” of the business and feel pressured to copy what their competitors are doing. Critics label non-GAAP measures as companies presenting “income before the bad stuff.” It’s true that presenting financials on a non-GAAP basis often has a major impact on the bottom line presented, by doubling a profit margin or turning a loss into a profit (as shown in our chart below).

Does non-GAAP reporting mean a company is hiding poor performance? Or is it providing investors with more information for judging the health of the business?

On balance, more disclosure is usually better. When companies present non-GAAP income statements in a thoughtful way and in good faith, investors will usually prefer the additional information and use the non-GAAP income to calculate P/E valuations. Note that most investment analysts report and focus on non-GAAP results. And the Securities and Exchange Commission has accepted their use as well, as long as the information is not misleading. The regulator outlines how and when companies can share non-GAAP figures with Regulation G.

So non-GAAP income statements look like they are here to stay. Let’s look at the most common areas where companies adjust GAAP numbers to give non-GAAP measures and why such measures have become accepted by both companies and investors.

Stock compensation: These are charges based on employee stock options and purchases that rely on theoretical models of their worth. Probably the most commonly listed adjustment to GAAP numbers, this charge is a lightning rod for criticism that GAAP has become overly conceptual and less relevant. As my colleague Stephen Ambler points out in his blog post “Stock compensation rules mask true operating performance,” stock comp charges are non-cash and can vary significantly depending on stock price and model assumptions, making it near impossible to compare two similar companies. Also, if the stock price declines, the company must continue recording the charges, which were based on the grant date value, even though the options have no value to the employees or to the company from a retention point of view.

Amortization of acquired intangibles: GAAP accounting for acquisitions requires the acquiring company to value the intangible assets of the acquired entity, other than goodwill, at fair value and amortize them over their useful lives. On one hand, the acquiring company paid hard cash or used its valuable stock to acquire these assets, and just as companies depreciate the purchase price of equipment they use in production under GAAP, they also should amortize their acquired intangible assets. They are matching cost with use over time. On the other hand, the amortization is a non-cash charge that the acquired business wouldn’t have shown on its own. To assess the sum of the underlying businesses, it is useful to show amortization removed.

Restructuring: These charges include such items as severance, facility and equipment write-offs, and contract termination costs tied to the resizing or closing of some part of a business. CFOs would prefer to keep the costs of these non-recurring events separate from the ongoing business’s results. Companies do need to be careful, though, that these “non-recurring” charges don’t recur every year or two! To mitigate abuse, Reg G sets rules for what is non-recurring — basically, it is something that hasn’t happened two years before the reporting date and is unlikely to happen in the next two years.

We commonly see the non-GAAP income statement remove other measures as well, such as the amounts paid to plaintiffs and attorneys to settle legal disputes or impairments of intangible assets or goodwill. Again, the rationale is to derive an income number that represents the fundamental ongoing business apart from non-cash charges and one-time events. The value to the investor is that these items are shown separately. The investor can value the company on its ongoing business while noting the size and frequency of these non-cash and non-operating charges.

To GAAP or to non-GAAP?
While investors are open and usually welcoming to non-GAAP income statements, they also value consistency. Companies should not use “good news” non-GAAP items and ignore “bad news.” Consider a company that accrues $1 million for a legal settlement and excludes the charge as a non-GAAP measure. It has effectively created a good news item. But if the actual settlement in a subsequent period turns out to be only $800,000, the company should include the $200,000 difference as a non-GAAP item when it comes time to report it. This difference may be perceived as bad news, but this keeps reporting consistent.

In general, companies should use an approach that relies on both full disclosure and moderation. Reg. G requires full disclosure, of course, including a presentation of the most directly comparable GAAP measure with equal or greater prominence as the non-GAAP measure, as well as reconciliation between the two. As for moderation, the investment community will reward companies that practice it, as moderate, thoughtful use of a non-GAAP income statement will build credibility and respect for the company. Finance pros who do these types of evaluations all the time can help you determine when applying non-GAAP makes sense for a particular situation.

Ray Solari is a member of the RoseRyan dream team. He has served as the CFO/VP finance for private companies and managed SEC reporting for public companies. He began his career at Deloitte. 

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Equity compensation: 4 hard truths you need to know

Equity-based compensation — Northern California’s universal answer to engendering loyalty in employees — is a useful tool but a complicated one. This was one of several hard truths heard by attendees during BayBio’s recent Lunch & Learn event by RoseRyan. Accompanied by compensation consultancy Radford, RoseRyan hosted this packed event on February 26 at BayBio’s headquarters in San Francisco.

To retain top talent these days, companies have a variety of stock-based methods, which are accompanied by their share of accounting, tax, and legal issues. What strategy a company picks today for rewarding employees could affect how smoothly it can transition to another version of itself later on, either as a public entity or as an acquisition target.

During their comprehensive overview of what private companies need to realize as they structure and maintain their comp plans, Kelley Wall, a director at RoseRyan who leads the firm’s Technical Accounting Group, and Kyle Holm, an associate partner at Radford, hit upon the following hard truths.

1. Your company will have to up the ante as it matures.
Startups tend to begin with just stock options and then work their way up to restricted stock or restricted stock units and eventually performance-based awards. Each compensation type comes with its own set of pros and cons. For example, stock options do not lead to immediate dilution whereas restricted stock does. Employees may favor restricted stock for the fact it will give them ownership right away, but tax consequences upon vesting can be troublesome.

And while performance awards encourage goal-based behavior, they are not without their challenges. With these type of awards, companies have to regularly determine the probability of employees meeting their performance targets and adjust their stock-compensation expense accordingly, which can create some volatility in earnings. And it may be difficult for early-stage companies to adequately assess performance targets — any modifications of those targets down the road will result in modification accounting and likely additional compensation expense.

2. Modifications can be messy.
Modifications will happen. The roles of employees change, employees come and go, and employees’ individual targets for reaping the benefits of a pay plan will evolve. And so will the way the company accounts for compensation. Situations where accounting changes come into play include: giving a terminated employee an extended period to exercise their options beyond what was initially agreed upon; changing performance-based metrics; and hiring consultants and allowing them to continue to hold the stock options they were granted as consultants. In general, any change to an award or an award holder’s status should trigger a review of accounting modifications.

3. Your payment systems are only as accurate as the data you’ve put into them.
Wall acknowledged this truth seems fairly obvious but cautioned that lack of data integrity continues to trip up companies. Too often companies lean too heavily on outside lawyers and accountants without realizing those service providers can’t keep up with changes within a business if they don’t know about them.

The fact is the majority of stock-based compensation data has some underlying issues. For instance, RoseRyan has seen a company with vesting stock options for employees who left five years ago — which led to an overstatement when the information was uncovered. To make sure the data surrounding their equity plans are clean, companies need a system of checks and balances — such as reconciling awards granted with board minutes at least once a quarter and having a process to tie employee terminations to the equity records.

4. You have a lot to consider about your equity plans if an IPO is in your future.
One of the hardest truths hits in the time leading up to a public offering. This is when tough questions arise over all the decisions that have been made beforehand, Holm warned, and even more difficult choices will need to be made. Those who have a stake in the company will shift their focus from their percentage of ownership to the actual value of their shares. Companies going through the transition will need to determine whether they should consider amending their stock plans. They’ll also need to define their post-IPO equity pool size. And they’ll need to take a look at how they communicate beyond one-on-one pay agreements. It’s also a good time to consider what information will be publicly disclosed in your registration statement. For one, details about pay plans for the most highly paid senior leaders will be publicized, not only to investors and securities regulators but employees as well. There’s also a lot of information regarding the plans and award details included in SEC filings, and newly-public companies are burdened with additional disclosures around stock valuation.

While equity-based compensation comes with issues, Wall noted, managers can provide robust pay plans that do what they’re supposed to — retain top talent — as long as they operate with their eyes wide open with an awareness of how changes and new decisions will have consequences.

This post originally appeared here, on BayBio’s website.

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Bay Area entrepreneurs: inspiring stories, winning ideas

The announcement was just made for the Northern California CEOs who are regional semifinalists in EY’s Entrepreneur of the Year™ Awards program. In the months ahead, RoseRyan and other sponsors of this amazing program will interview these Bay Area leaders and get to know what makes them tick and how their high-growth companies stand apart from the rest. The actual regional winners will be announced at an awards gala June 10 at the Fairmont in San Jose.

But first, congratulations to all of the semifinalists who were announced last week. They are getting recognized as high-impact entrepreneurs who have barreled through challenges during shaky economic times to transform their great ideas into promising businesses. RoseRyan is proud to once again be a sponsor of the program, which is in its 28th year. It puts us in direct contact with CEOs who are innovative, highly motivated and representative of how business is evolving in our area.

This year’s impressive list of semifinalists reflects a very strong showing for Northern California, as the area tends to be well recognized in EY’s program. In fact, last year’s overall national winner was CEO Hamid Moghadam of real estate firm Prologis, which is based in San Francisco. With this region’s ever-changing pool of new companies, new technologies and new ideas, we continue to be an innovation engine.

Pride in our region is just one reason why it’s so exciting to take part in the awards program. Another is the chance to observe the diversity and dedication in all the nominees. These entrepreneurs are leading a mix of public, private, nonprofit and women-owned businesses. And many candidates are serial entrepreneurs who are sitting on fortunes. They don’t even have to work, but they love what they do. These leaders are a marvel to watch, and they’re inspiring.

Of course, a great idea and a passion for work will take an entrepreneur only so far. From my observations with the EY program over the last several years, I have also noticed the following common traits among the semifinalists:

  • They deal with business problems head-on, with flexibility and a strong sense of their company’s core strategies.
  • They recognize the value and strength of honest communication and transparency.
  • They have a clear vision and don’t sway from it.
  • They’re willing to take risks, based on their strong belief in themselves, their ideas and their team.
  • They know how to attract and retain talent. This is quite a challenge for any Bay Area company.

The stories that come out of these job creators and innovators will continue to evolve. Those of us who can watch from the sidelines will not only admire the changes and ideas that are afoot but be inspired as well. We all need insights into how to do things differently and explore whether we too should work in a new way or consider new strategies for hiring and retention. These entrepreneurs are bringing the best ideas to market, supported by solid teams and a healthy dose of enthusiasm and energy. Plus, they’re energizing our local – and national – economy. All of these achievements make RoseRyan a proud sponsor of the EY Entrepreneur Of The Year™ program.

Stan Fels is a director at RoseRyan, who joined the finance and accounting 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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Why Bitcoin’s demise could be good for Silicon Valley

It’s the end of Bitcoin as we know it, and I feel fine.

My apparent giddiness over this news is not about Bitcoin per se — although my RoseRyan colleagues had tracked its progress and discouraged CFOs from taking on the risk — I wouldn’t wish such big losses on anyone.

But it has created buzz in more ways than one. I don’t think I have had more e-mails and comments from my friends and colleagues in the last few years than I have over the past several weeks regarding the cryptocurrency. The heat was turned up with the recent announcement that Tokyo-based Mt. Gox, one of the largest Bitcoin exchanges, rapidly closed up shop amidst a potential loss of $473 million of its users’ money.

Now the buzz will shift toward the complete revolution happening in the payments business and its effect on Silicon Valley, and this is a change I’m excited about. PayPal, Square, Google, Apple and others are transforming the world of payments, by inserting themselves into a process that has been owned by the banks (full disclosure: I actively use PayPal). Gartner estimates that mobile payments alone will top $720 billion by the year 2017, up from $235 billion last year. The expansion of payment options will mean everyday Americans will hopefully no longer get so nickel-and-dimed on financial transactions.

In regard to the next “big thing” mantra of Silicon Valley, the payments business is already in full frenzy. It is your classic innovators dilemma: Venture capitalists are funding young, innovative startups; midsize players are adopting the changes; and banks — typically slow moving elephants — are running scared. Why? Those teeny-weeny payments add up. There were $15 trillion worth of retail transactions last year. The upside is huge not only because of transaction fees but also the ability to harvest large troves of consumer data. Security concerns will be an issue as players position themselves for the gold rush. This fast-moving train is a tough one for bureaucrats, who try to promote innovation but who must also put in place adequate consumer protections.

With Bitcoin, things did move too fast. The Bitcoin issue reminds me of Napster. Initially, Napster was a site to share music files and was frequented mostly by teenagers who were not willing (or couldn’t afford) to pay for digital music files. Napster caught a lot of heat for allowing a forum of users to access illegally obtained music, and it was subsequently shut down. A result of the Napster shutdown was that Apple came into the same space and built an incredible music delivery engine — iTunes on the iPod, then the iPhone and now the iPad — off the back of 25 billion–plus songs that have been downloaded since 2003.

How does the disruption to the music industry relate to Bitcoin? Stay with me here. Bitcoin’s ubiquitous network has allowed people throughout the world to anonymously transact commerce. It was envisioned to have tremendous ease of use, to be something as simple as email.  Although there are many differences with the PayPal network (and other networks), a key differentiator is that Bitcoin does not take a toll every time a payment is made. Once you have created a digital wallet, it is very simple for you to exchange money pretty much the same way that you would purchase something with cash.

So where is this leading? I expect there to be many issues that will continue to impact Bitcoin (lack of a governing owner, security concerns, and exchanges going out of business are among its many challenges). And I do expect innovative firms to emerge in this digital cryptocurrency space — and perhaps there will be multiple winners. Bitcoin “could, in the long run, give rise to one or several very robust currencies,” writes George Selgin, an economics professor at the University of Georgia in a paper on Bitcoin’s properties. “That’s how competition works generally, with winners and losers but with quality generally improving as the struggle goes on.”

And in an MIT Technology Review article, Tom Simonite notes that “even if interest in Bitcoin fades, it could still have a lasting legacy as an inspiration to better-designed forms of digital money.” It took Apple 10 years to get to 25 billion downloads — perhaps the next cryptocurrency will have 25 billion transactions in 5 years!

Chris Vane is a director at RoseRyan, where he leads the development of the finance and accounting 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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