You are the CFO of a public company and your CEO suggests you invest in Bitcoins, as their value has gone up a lot over the past few weeks, and he thinks that will continue. He says it will make the bottom line on the income statement look stronger. What should you do?
You’ll first have to do a little explaining. Bitcoins are a very new and highly volatile virtual currency, and should be treated with caution, by both personal investors and companies that decide to invest in them or incorporate them into their payment systems. Here’s an example of their volatility: In early December 2013, Bitcoins were trading at $421 per coin, and just a month later, they were trading at well over $1,000 a coin. So if you had bought some in December, you would have looked like a hero in early January. Unfortunately, if you had bought some in November 2013, you would actually be showing a loss in January, as they were trading at $1,100 back then. You would have been looking really bad when the price dropped to $421 in December. But there’s more of an issue here than how you look.
Bitcoins are an unregulated currency in the U.S. at this time. If the U.S. ever decides to regulate them, expect the price to drop significantly when that regulation is announced. China’s decision to not allow conversion of Bitcoins into local Chinese currency back in December was one of the big reasons for the drop in their price. Will the U.S. decide to regulate? Hard to say, but Bitcoin is associated with money laundering, and that in itself may invite scrutiny of your company should you trade in them, and it may also be the driving force to regulation. In addition, as Bitcoins are not regulated, there is and will continue to be no protection to consumers who buy them and lose money on them, and of course they have no intrinsic value. No government wants its consumers to suffer losses, especially when it’s avoidable. My guess is that at some point soon there will be regulation.
In the meantime, some companies, such as Zynga, are starting to accept Bitcoins as a form of payment. However, most companies are still not having anything to do with them, because of the risk involved. I don’t know what Zynga or the other companies are doing with the Bitcoins when they get receipt of them, but I suspect they are converting the Bitcoins to established currencies as fast as they can, so they can minimize their risk. If they don’t convert, they are holding the Bitcoins as an investment. That raises a whole slew of issues, including whether they can even do it under their investment policy. Nearly all public companies have investment policies that restrict the type of investment they hold to, say, AAA-level investments. I am pretty sure Bitcoins fall outside that classification, so companies would be barred from holding them without changing their policy. It would be a brave board of directors that changed that policy given the downside risk.
So, back to the original question of what should you do? This is a classic case of risk assessment, and I personally suggest you proceed with a tremendous amount of caution. First, you should check your investment policy and see if it allows for such holdings. If it doesn’t, there will need to be a discussion at the board level about that policy and what the company is trying to achieve under its policy. If the policy doesn’t allow for investment and the board wants to invest in them, the board will need to adopt changes. Second, if you do decide to invest and the policy allows for it, consider the downside risk. If you are not willing as a company to stomach the downside, do not invest. If you and your company are tolerant of some risk, limit your investment to that level of risk.
You as the CFO are responsible for the financial actions of the company, and you will get all the attention, whether Bitcoins go sour or they actually soar. I remember a similar situation with mortgage-backed securities in the last decade. Back then, I was a CFO of a public company with $150 million in investments, and investors were screaming at me to buy them because they had great returns. Our returns were 4% whereas others had double-digit returns. I did not authorize buying them, as we had a very cautious investment policy and they were outside the scope, plus their nature just made me nervous and I was not going to recommend we change our policy. When their value crashed in 2008, there was a tremendous backlash on CFOs and companies that had held them. My 4% return suddenly looked very good, and my board was very happy with my actions. Unfortunately, many companies and CFOs paid the ultimate price. You don’t want to be the one in that situation.
So act with caution, and remember that it’s not all about making the income statement’s bottom line look good. It’s actually more about making sure the bottom line does not look bad!
For more information about the many aspects companies need to consider when contemplating the use of Bitcoins, see Compliance Week’s Virtual Currencies Come with Real Accounting Concerns (subscription required), which includes commentary from Stephen Ambler.
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.
The 5 key traits of trusted advisors
One of the greatest compliments is when clients consider us a trusted advisor. Recently, some encouraging words came from a client that was just getting used to a new accounting method. After working with this startup for months on an assignment, our consultant made them aware of an approach that would give them a more accurate view of their business. “My encouragement to you is to keep pushing us toward ways of working that would be better for us, not just the way we have always done them,” our client wrote in an email.
Not every client we work with needs to make significant changes to their processes, and we wouldn’t just go in and overhaul a client’s way of doing things (unless we were specifically asked to, of course), but there are times when employees and managers get stuck in their ways. We all do. Or we’re not able to see some strategic choices ahead. We all need trusted advisors who can pull us out of our rut, show us a better way, provide us with a new perspective, or just enlighten us on what others in our field are doing.
Similarly, many of us are in a position to be a trusted advisor. Whether you’re a CFO aiming for a tight relationship with your CEO, or a consultant wanting to be viewed as a business partner – and not merely as a “vendor” – the term “trusted advisor” is a coveted label. It can take awhile to earn such a status, but once you do, you’ll have a whole new level of respect and a stronger working relationship that can lead to longer and better professional engagements.
Anyone who aims to be a trusted advisor and keep that status needs to have the following traits:
Altruism: Trusted advisors always put the clients’ needs ahead of their own. During RoseRyan engagements, we sometimes observe companies getting bogged down with manual processes that could be automated. We could keep our mouths shut about how the client can work more efficiently – and rack up the extra billable hours that result when things take longer to complete. But that is not what’s best for the client, and won’t earn us their trust and loyalty in the long run. By always viewing ourselves as an extended member of our client’s team, we are more likely to come up with solutions and processes that are in their best interest.
The ability to listen: A trusted advisor listens carefully to what clients say and don’t say. The client may not always know exactly what they need or the right questions to ask. A trusted advisor is always asking questions, assessing the situation and offering recommendations. Trusted advisors are also listening for cues on the corporate culture so that they don’t overstep their bounds when it comes to how and when to make suggestions or implement changes.
A deep well of experience: Specific knowledge of a topic will get you only so far with a client. You may know the ins and outs of lease accounting rules, for instance, but what will really impress a client is your ability to confidently discuss how the rules have been implemented at other companies and play out in real life. Experience all feeds into my next point, as well; someone who has had practical experience and exposure to various corporate situations knows how to adjust to a client’s unique needs.
Adaptability: No client wants someone coming in from the outside with a big ego or an overbearing attitude who insists on doing things their way. This is especially true when a company is in the midst of a big change, like taking on new accounting software or becoming SOX compliant for the first time. Internal politics can really come to a head during such transitions, and stress levels can be high. A trusted advisor has a knack for understanding the politics, rising above it, and using a diplomatic yet direct approach to keep the client moving down the right path, in an efficient manner.
Candidness: Honesty is the best policy in any partnership, and that’s particularly true between clients and consultants. Being up-front with clients is a value we highly value here at RoseRyan, even when it involves awkward or tough conversations. If we have information that will help a client, we share it, hopefully with the right sense of urgency and diplomacy. For example, we pointed out to a finance leader when the privately held company’s finance department needed additional skills to transition the business to the public markets. We went above and beyond to help draft a new organizational chart, which incorporated the talents the company already had on the team as well as new ones to consider, such as people who had experience with SEC reporting.
Becoming a trusted advisor is a privilege that can easily evaporate if you are not careful. When you keep the qualities I mentioned in mind, you can differentiate yourself and become a respected partner.
The rewards of taking the time and effort to be perceived as a trusted advisor are too good to pass up. It engenders long-term client relationships with loyalty and repeat business. It can also lead to more challenging work, which we welcome wholeheartedly. We’re the type of people who thrive on a good challenge and love to have interesting work to sink our teeth into.
When one of your business partners has evolved into a trusted advisor, hold on to that person or firm and see what else they can do for you. They are not always easy to find.
Kathy Ryan is the CEO and CFO of RoseRyan. Since co-founding the firm in 1993, she has served as interim CFO at more than 50 companies.
Many Silicon Valley companies lack a ‘share price strategy,’ survey reveals
RoseRyan and Assay Investor Perspectives just released their Share Price Survey Results after meeting individually with more than 20 senior finance leaders and directors and surveying others online. We intended to gain an understanding of what private and public companies are doing to actively manage their valuation and share price over time.
It turns out they are making some efforts but lack the expertise and long-term strategy to pull it off well. After the clever pre-IPO road show presentations and after all the investment bankers have gone home, there’s little thought put into creating a comprehensive “share price strategy.”
It’s a hot topic. Share price and valuation always get attention whenever RoseRyan provides thought leadership papers or events on this topic. That’s not so surprising since we are in Silicon Valley after all, surrounded by all the hoopla that accompanies the latest IPO, merger or acquisition – and all the valuations that go along with them.
The excitement is even greater these days as we are in the midst of a busy IPO market. In 2013, FireEye, Portola Pharmaceuticals, Twitter, Rocket Fuel, Veracyte, Marketo and others kicked it off. And the trend is continuing, with anticipation that Box, KineMed, Dropbox, Asterias Biotherapeutics, Square, Spotify, Airbnb and others will soon file as well.
It is amazing how much effort goes into preparing for an IPO. What comes next involves hard work as well. Companies that let the inevitable “post-IPO hangover” take too much of an effect miss out on critical opportunities. Those hot-shot companies will need to take their singular focus off getting to the IPO bell and spend a little time considering how they will maintain their share price and valuation. But most likely they will not. Too often, newly public companies don’t come up with a strategy for how they are going to not only maintain their lofty valuation but also increase it over time.
What to Do Next
Executives usually have two choices to increase their valuation – grow their income or increase their multiple. What the survey results and our discussions show is that companies really don’t understand what the buy-side analysts are looking for. The buy-side analysts’ focus is usually on the multiple and the levers that will move the multiple directly. Most companies focus on increasing net income, which is what most buy-side analysts don’t focus on.
Why is there such a big disconnect? It is centered on the nature of the people doing the work. Most investor relations representatives have either a communications or a sell-side background, and most buy-side analysts have advanced degrees or PhDs in mathematics. And most company executives have MBAs. These different backgrounds can lead to a mismatch in the way these groups speak to each other and understand each other. Basically, they are speaking different languages.
The results of our executive conversations show that this disconnect is causing issues in long-term valuations. Companies’ lack of a solid understanding of buy-side analysts and what really drives share price can expose them to undervaluation. A depressed (from where it should be) valuation impacts recruiting, brand, motivation and culture.
Senior leaders can reverse this trend by deploying strategies that really drive the multiple and having a focused strategy on communicating those strategies to analysts. This does not preclude companies’ need for focusing on increasing income; it just means if they want to supercharge their valuation, they need to have clear strategies that increase their multiple. Read our report, Share Price Survey Results 2013, for the details.
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 is open to discussing ways to positively impact your company’s share price/valuation. Contact Chris at [email protected] or call him at 510.456.3056 x169.
5 qualities every public-company CFO needs
I have seen a wide range of public-company CFOs in my work at RoseRyan and I’ve been one myself, having spent 13 years at Nasdaq-listed companies between 1997 and 2009. So when a RoseRyan client considering an IPO recently asked me what qualities are vital for a public-company CFO, I came up with the following list:
Experience. Nothing beats it. Having a CFO who has gone through the demands of public-company life is so important. This type of CFO knows what he’s getting into and will have the confidence to get started from day one. I don’t mind admitting now that when I first became a CFO of a public company, it was a huge step up. I had been the corporate controller of the company, so I knew the underlying accounting well, but nothing I had done previously could help me with the new experiences of strategic direction, public-company investors, and public-company boards and committees. It was the same company but a new world. It took me a year to get comfortable handling the new responsibilities. The bottom line was that I let the company drive me in that first year as opposed to me helping drive it. In my view, I did not add anything close to the value that a more experienced CFO would have done. I am all for training, but for this key role, you always want someone with experience.
The ability to multi-task. Most of my CFO roles have involved managing finance, IT, HR, operations, investor relations, and legal. You need someone who can juggle many balls in the air at the same time. If your CFO can’t easily switch gears between the different business areas and give a fair amount of attention to her many roles, she will sink and be ineffective – and your business will feel the consequence.
The resourcefulness to work constructively with the CEO. Most chief executives are very driven individuals, with a flair for marketing or product development but not finance. It’s up to CFOs to work closely with the CEO and get their viewpoints heard and inserted into the decision-making process. If they can’t do this, they will fail, critical decisions will not take place, and problems will arise. When I was CFO, I liked to think of the CEO as a peer, not as my boss. I preferred to think of the audit committee chair as my boss.
The resilience for handling investor relations. One key role of the CFO is the ability to market the company. They have to be salesmen, notably when they are on a roadshow or an investor call, but they can’t oversell at the same time. Finding the right balance is a fine art. Investors rely on a CFO’s every word and how it’s said, and they expect a lot. So the CFO has to fully understand the company’s products, market opportunity, and direction, and be able to handle a tough audience. More than any other executive, CFOs get grief when the stock price falls, or executives sell stock, or the company doesn’t meet investors’ expectations or preferences. When this happens, CFOs have to be professional and move on. They should not take it personally – it just comes with the territory. If your CFO cannot market or handle the tough calls, you have the wrong CFO.
The desire to manage the finance function. I have seen CEOs bring in CFOs who want to concentrate only on investor relations–related matters and ignore the finances of the company, the finance team, and the internal controls. That is the worst type of CFO. Finance chiefs are ultimately responsible for the financial integrity of the entire organization, and they should never forget it. Thus, they need to continually understand the numbers and actively manage their finance team. So often you see companies that have to restate their financials or that get dinged for internal control weaknesses because the CFO did not consider either to be important until it was too late. Don’t let that be your company.
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.
Tough love in finance: how to deliver bad news
When you work in finance and accounting, tough conversations go with the territory. At some point, you may have to tell someone their numbers are off, that they need to rethink a corporate strategy or a new hire, or that some part of a project or the company itself isn’t doing well.
While it’s understandably tempting to avoid awkward talks, your best bet is always to be honest and say what’s on your mind even when dealing with difficult topics. It’s a practice we regard highly at RoseRyan, where honest communication is a major part of the values we have embedded in the firm (Trustworthy, Excel, Advocate and Team).
The next time you have bad news to share with someone else, whether it’s your boss, a client, an employee, or an investor, I suggest you take a deep breath and keep the following tips in mind:
Pipe up early: As soon as you notice an issue, bring it up. If the people involved find out on their own, they may be surprised and upset, and less open to listening to what you say. During a RoseRyan engagement where a client had gradually expanded the scope of our work and the project had become more complicated, our project manager sat down with the client as soon as we realized the project was heading toward over-budget territory. Other service providers could have waited until billing time to spring this news on the client, but we don’t work that way. By proactively telling the full story and not waiting until the end of the project, RoseRyan was able to get the new budget approved and the client could plan accordingly.
Don’t hold back: If you’re tasked with helping others do their job better, you sometimes need to tell them something that they don’t want to hear or that they don’t even realize is happening. This scenario can happen at fast-growing companies when key people’s skill sets are not able to keep up with the more complex business’s needs. For example, a controller who has limited experience with complex revenue issues may be fine for a small startup in the development stages but may be in over his head as the company grows and starts to ship product. Supervisors and advisors may need to step in and alert the CEO that a change is necessary. While such conversations should be done in an honest and sensitive way, these issues are best dealt with as soon as possible before they affect the business.
Tread lightly: The topic of an under-skilled team member is a highly sensitive one, of course. Whenever you’re dealing with personnel issues, it’s best to focus on the skills and talents required – and not get personal. In the finance department, this topic comes up all the time as new skills become needed and roles are expanded. If the situation requires bringing on board a more highly skilled professional for a particular role, it is best to communicate the specific requirements needed for the job to the individual getting reassigned, rather than dwelling on a list of failures in the past.
Keep the message brief: Rambling on about why something happened doesn’t do anyone any good and may make the situation worse. The person on the other end may even think the news is worse than it is. Take the time to plan out what you will say – I usually make an outline of the key points I want to make – so that you stay on message and don’t take all day to say it. Get to the point, and deliver the bad news clearly and quickly.
Suggest a solution: The communication process often provides an opportunity for turning a negative situation into a positive one. This is another reason to think carefully about what you’re going to say. Whatever happened, happened. Focus on the next steps and provide some options for resolving the problem. The recipient of your message will be grateful for the creative solutions.
Theresa Eng is a member of RoseRyan’s dream team. Her areas of expertise include financial planning and budgeting, finance operations, and SOX.
3 quick tips for streamlining your stock-based pay plans
Keep your employees motivated with stock-based compensation, the thinking goes, and you will be rewarded with high productivity and gains in your company’s growth track. What managers often fail to consider is that if they make mistakes along the way—and we’ve seen many when it comes to equity-based compensation plans—they could actually end up with low employee morale, putting a crimp in the pace of the performance-aligned goals they have set up.
Whenever a company has to amend awards previously made or restate their financial statements because of adjustments in equity-based comp, employees will naturally have concerns—even when the change has little, if any, financial impact on them.
The risk of dents in morale is just one of many consequences RoseRyan has observed while helping clients with issues in their equity-based pay strategies. You’d be amazed at the range of problems we have seen—many of them due to honest mistakes. In our experience, 9 out of 10 companies have had some issue with their underlying stock data that affects their stock-based compensation expense.
To prevent such problems at your company, consider these three tips the next time you evaluate your stock-based compensation strategy (we’ll get into more detail about this topic at our February 26 luncheon called Compensation for Private Companies: The Ins and Outs of Equity, which will be held at BayBio with Kyle Holm, associate partner at compensation consulting firm Radford).
Be obsessive about looking for modifications: Some modifications are obvious (say, repricing a stock option); some modifications are less so (say, allowing a consultant to keep options after you hire that person as an employee). Keep an eye out not only for board decisions but also for management decisions, material transactions, and liquidity events. The rule is, any change to the award or the award holder’s status should trigger consideration of accounting modifications.
Identifying that you have a modification is just the first challenge; the accounting can be tricky as well. How you account for the modification will depend on the type of modification. Variations include measuring the incremental value only, accelerating the expense, or valuing the new award and reversing the value associated with the original award. You also need to be sure you’re entering the modification in your equity system in a way that captures the appropriate modification accounting.
Make sure performance-based awards are on everyone’s radar: Performance-based awards are great tools for both retaining employees and motivating goal-driven behavior. But there is accounting risk here as well. With performance-based awards, companies must assess the probability of achieving the metrics at each reporting date and adjust the expense accordingly. This step often doesn’t happen. Maybe the board minutes lay out the performance goals associated with an award, but the stock administrator gets only a spreadsheet of grants to administer, with no indication that vesting is contingent. Or maybe the stock administrator is aware of the performance targets but doesn’t flag performance-based grants in the equity system, so the accounting team doesn’t know they exist. Such miscommunication can lead to overstated stock-based compensation expense.
Tie your 409A valuations to major grant dates: For private companies, the rule of thumb is to obtain a 409A valuation of your stock at least once a year, and in conjunction with major events such as financings, significant transactions, or material changes to the business. Some companies instead tend to do their 409A at the end of the year, just because they’re doing other valuations and financial decompressions at the same time. But think about this example, from one of our clients that approved a major grant to executives and employees in June 2011, six months after valuing its common stock at $1.25 per share for its annual 409A. By that point, the value of the stock had increased significantly—to $3—based on several design wins and other economic factors. While that’s a nice problem to have, they suddenly faced additional stock-based compensation expense and time-consuming updates to their equity system, among other issues.
It’s easy to think your equity-based compensation is under control; however, we have found time and again that it’s an ever-evolving tool that needs tending to, as your headcount grows, the complexity of your company expands, and situations evolve.
Get in the mode of reevaluating your pay strategy during the RoseRyan February 26 Lunch & Learn seminar about equity in South San Francisco. It will be geared toward private companies. Click here to register. And for more details about these best practices as well as some others to consider, also check out the RoseRyan intelligence report I wrote called Stock options: do you have a problem?.
Kelley Wall leads RoseRyan’s Technical Accounting Group, which provides technical accounting and SEC expertise to public and private companies on complex accounting matters and implementation of new accounting pronouncements.
Bitcoins: should CFOs be willing to take the risk?
You are the CFO of a public company and your CEO suggests you invest in Bitcoins, as their value has gone up a lot over the past few weeks, and he thinks that will continue. He says it will make the bottom line on the income statement look stronger. What should you do?
You’ll first have to do a little explaining. Bitcoins are a very new and highly volatile virtual currency, and should be treated with caution, by both personal investors and companies that decide to invest in them or incorporate them into their payment systems. Here’s an example of their volatility: In early December 2013, Bitcoins were trading at $421 per coin, and just a month later, they were trading at well over $1,000 a coin. So if you had bought some in December, you would have looked like a hero in early January. Unfortunately, if you had bought some in November 2013, you would actually be showing a loss in January, as they were trading at $1,100 back then. You would have been looking really bad when the price dropped to $421 in December. But there’s more of an issue here than how you look.
Bitcoins are an unregulated currency in the U.S. at this time. If the U.S. ever decides to regulate them, expect the price to drop significantly when that regulation is announced. China’s decision to not allow conversion of Bitcoins into local Chinese currency back in December was one of the big reasons for the drop in their price. Will the U.S. decide to regulate? Hard to say, but Bitcoin is associated with money laundering, and that in itself may invite scrutiny of your company should you trade in them, and it may also be the driving force to regulation. In addition, as Bitcoins are not regulated, there is and will continue to be no protection to consumers who buy them and lose money on them, and of course they have no intrinsic value. No government wants its consumers to suffer losses, especially when it’s avoidable. My guess is that at some point soon there will be regulation.
In the meantime, some companies, such as Zynga, are starting to accept Bitcoins as a form of payment. However, most companies are still not having anything to do with them, because of the risk involved. I don’t know what Zynga or the other companies are doing with the Bitcoins when they get receipt of them, but I suspect they are converting the Bitcoins to established currencies as fast as they can, so they can minimize their risk. If they don’t convert, they are holding the Bitcoins as an investment. That raises a whole slew of issues, including whether they can even do it under their investment policy. Nearly all public companies have investment policies that restrict the type of investment they hold to, say, AAA-level investments. I am pretty sure Bitcoins fall outside that classification, so companies would be barred from holding them without changing their policy. It would be a brave board of directors that changed that policy given the downside risk.
So, back to the original question of what should you do? This is a classic case of risk assessment, and I personally suggest you proceed with a tremendous amount of caution. First, you should check your investment policy and see if it allows for such holdings. If it doesn’t, there will need to be a discussion at the board level about that policy and what the company is trying to achieve under its policy. If the policy doesn’t allow for investment and the board wants to invest in them, the board will need to adopt changes. Second, if you do decide to invest and the policy allows for it, consider the downside risk. If you are not willing as a company to stomach the downside, do not invest. If you and your company are tolerant of some risk, limit your investment to that level of risk.
You as the CFO are responsible for the financial actions of the company, and you will get all the attention, whether Bitcoins go sour or they actually soar. I remember a similar situation with mortgage-backed securities in the last decade. Back then, I was a CFO of a public company with $150 million in investments, and investors were screaming at me to buy them because they had great returns. Our returns were 4% whereas others had double-digit returns. I did not authorize buying them, as we had a very cautious investment policy and they were outside the scope, plus their nature just made me nervous and I was not going to recommend we change our policy. When their value crashed in 2008, there was a tremendous backlash on CFOs and companies that had held them. My 4% return suddenly looked very good, and my board was very happy with my actions. Unfortunately, many companies and CFOs paid the ultimate price. You don’t want to be the one in that situation.
So act with caution, and remember that it’s not all about making the income statement’s bottom line look good. It’s actually more about making sure the bottom line does not look bad!
For more information about the many aspects companies need to consider when contemplating the use of Bitcoins, see Compliance Week’s Virtual Currencies Come with Real Accounting Concerns (subscription required), which includes commentary from Stephen Ambler.
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.
How to prepare for your year-end audit. Are you ready?
It’s that time of year again. Remember last year, after the auditors came and went, when you promised yourself next year would go a lot smoother? Well, here we are, with an opportunity to set up all of your department’s information as organized and as clean as possible so that you can keep any bumps between your team and the audit team to a minimum. To help with this process, I have put together a list, primarily for accounting managers, to prepare for the year-end audit.
Be sure you are on the same page as the auditors: Every quarter, you have provided documentation per the audit request list (also known as PBC, or Prepared by Client). Check with the auditors that they will be using the data that you’re taking the time to put together for them. Oftentimes, those of us who are tasked with working with auditors find out only after we have provided a schedule with multiple tabs of information that they will not be using those tabs. They may instead rely on other data points they have collected over the year or they are just not fully aware of the additional information. Communication here will prevent everyone from wasting time.
Take a look back at the past year: In the preparation of year-end, review the information that was provided to the audit team on a quarterly basis as well as any comments the auditors or your internal SOX team made afterward. Keep in mind quarterly reviews do not necessarily find all issues or errors. They are more likely to crop up during the year-end, when the audit team really digs into the details.
Check your work: When creating the year-end schedules, look at the logic of the worksheet, the formulas used in each calculation, and verify the totals match the financials. Hint: if using Excel, select the “formulas” tab and select the “show formulas” option. This will change the worksheet from showing the resulting number to the formula used in each cell. Look for any changes made since the last quarter’s review in methodology, calculations, method of gathering the data (because of a different report or an updated system), or presentation on the schedule. Then, if you are the person creating the audit schedules, have someone else take a look who is familiar with the process. That person will probably find little things that you didn’t see simply because you are too familiar with the information.
Address any mistake in the schedule ahead of time: If a discrepancy is found during the internal review process, create a new year-to-date schedule by quarter with the changes identified, documented, and quantified. Discuss your findings with management so they can determine if the changes are material and how best to communicate them with the audit team.
Be organized: Make an audit binder or a folder on your secured internal site with the schedules and any information that would help someone else prepare them. Keep track of when you submit your schedules to the audit team and what version you give them. If there are any questions, you will both need to be looking at the same schedule.
Don’t forget about the effect on the first-quarter review: Lastly, when creating your first-quarter review schedules, verify they contain any updates from the year-end review – both yours and the audit team’s. In other words, don’t automatically pull the previous first quarter schedules to use.
These tips will hopefully make your audit process much smoother than last year. For more information about this topic, check out our intelligence report Audit time? Don’t sweat it.
Monica Zorn is a member of the RoseRyan dream team. She specializes in controllership issues, reconciliations and audit prep, and SOX.
2014 will be a busy year for finance teams
It’s New Year’s Eve—as so many people do, I’ve taken the time to reflect on 2013 and look ahead to the next year.
2014 should be a good year—the economy is improving, a lot of bigger companies are preparing for growth once again, and things are going really well for early-stage companies. But it’s definitely not like the dot-com boom, as some are saying. The market may be picking up, but it’s doing it in hiccups—and many companies aren’t feeling it yet. Our clients are getting traction, but they’re working really hard to make progress.
We’ve been diligent at RoseRyan too—we’ve been following our own advice to invest during the down times. We’re seeing starts and stops and ups and downs in our clients’ business, and we’re putting things in place so when the market uptick goes full-on, we’ll be ready. We’ve expanded the management team, and we’re investing in our products and services, and making sure we have up-to-date tools and technology.
We are also investing in our consultants, deepening and expanding our bench strength so we have the right talent for our clients as well as the services they need. I feel confident that we’ll be able to tackle just about anything that comes our way.
And 2014 is looking to be a very busy year. Revenue recognition will have a huge impact on our clients (this train is coming whether we like it or not), and the new COSO framework is at the top of many to-do lists. The proposed changes to lease accounting are also potentially big, but it’s not on the near horizon.
Finally, private companies have the opportunity to simplify their accounting, but I think most companies looking to go public one day won’t take that route. It does make sense if a company has no desire to go public but needs audited financial statements.
I see three big challenges for CFOs, and they have nothing to do with rules. The first is the endemic talent shortage. It’s affecting everyone here in the Bay Area.
The second challenge is the ongoing shift from a portfolio of accounting and finance projects to also providing business savvy to the organization. What exactly does it mean to be a strategic CFO? A lot is written about this and discussed at conferences, but the piece that always gets overlooked is the need for a strategic team behind the CFO. Among other things, they need to understand analysis and provide the right information to all stakeholders—the SEC, the C suite, other departments, investors—in a way that resonates with them. CFOs get it, but I’m not sure the rest of the departments are there yet.
The third challenge is the pace of change. It’s not going to get better, and finance organizations need to keep up. I think that’s why the bigger companies struggle; they’re just not as nimble as smaller companies.
I’d love to hear from you if you have ideas about how the CFO can meet the challenges facing finance organizations in 2014.
Happy New Year to you!
Visions of carrots dance in volunteers’ heads
Usually this is a time of year for visions of sugar plums, but the RoseRyan crew at Second Harvest Food Bank had visions of carrots—and carrot recipes, like carrot ginger soup, honey-glazed carrots, carrot raisin salad and of course, carrot cake. It was the result of helping to pack more than 8,000 pounds (four tons!) of carrots during our annual volunteer event Dec. 11 at the San Jose–based food bank.
Last year, it was oranges. This year, one of our jobs was to break down 1,250-pound pallets of carrots into 25-pound boxes. Similar to last year, we constructed boxes, filled them with good carrots, weighed them to ensure they were approximately 25 pounds and stacked the boxes so they were ready to be distributed. To add a little extra fun, we competed among ourselves to see who could fill their box to exactly 25 pounds. Two of our volunteers, Sheila Manzano and Courtney Hunter, won bragging rights to this!
After packing carrots, a few of us sorted and labeled cans. This required digging through a huge box of unlabeled can goods, inspecting the code stamped on the can (for example, 42T was corn) and reconciling the code with a list identifying the contents. As accountants, reconciliations are right up our alley, so we completed this task in no time. Once we identified the can contents, we sorted and labeled them. The final task was to put them into boxes, then label and stack the boxes to be ready for distribution.
Our 13-member team effort is just a small part of the 310,000 hours that volunteers devote each year to keeping Second Harvest running, but it’s important—volunteers save the nonprofit more than $6.2 million in personnel costs. So far this year, Second Harvest has distributed 52 million pounds of nutritious food to people in need from Daly City to Gilroy. Since its inception in 1974, Second Harvest has become one of the largest food banks in the nation, providing food to an average of nearly a quarter of a million people each month. The organization also plays a leading role in promoting federal nutrition programs and educating families on how to make healthier food choices.
Whether it’s boxing carrots or labeling cans, we RoseRyan consultants look forward to helping Second Harvest every year, as it gives us the opportunity to catch up with each other, take a break to have some fun and make an important contribution to our community and the fight against hunger.
We wish you all the happiest of holidays!
The Friday Cocktail: Year-End Cure
Whether you’re facing year-end close madness or recovering from it, this warm, nourishing wassail will mellow you out. A marriage of mulled cider and hot buttered rum, it’s perfect for a party or relaxing by the fire. For that toasty feeling without the buzz, make the rum-free version.
Wassail recipe (4 servings):
Make the compound butter: Mash together 2/3 cups unsalted butter and 1/3 cups brown sugar. Add ground cinnamon, allspice and star anise to taste. Mix well. Roll into a log on waxed paper. Refrigerate wrapped in the waxed paper until firm.
Make the mulled cider: To a 2-quart saucepan of apple cider, add whole cloves, a cinnamon stick, a star anise or two and the peel of an orange. Bring to a simmer. Remove from heat and steep for 30 minutes.
To make the wassail: Add butter, cider and rum to a saucepan and whisk over medium heat until butter is melted and cider is hot. Pour into 4 cups. Garnish each cup with a clove-studded orange peel, a star anise and a cinnamon stick.
Nonalcoholic recipe (4 servings):
In a 2-quart saucepan, combine all ingredients over medium heat and bring to a boil. Simmer for 20 minutes. Discard orange peel, cloves, cinnamon, and anise. Serve hot in heavy stemmed wine glasses.
Need other drinks for your holiday celebrations? Check out the rest of our recipes in the RoseRyan 20th Anniversary Cocktail Collection cocktail book. Every one of these drinks has its charms, thanks to the fine mixologists at the Bull Valley Roadhouse in Port Costa, California, who invented them.