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IFRS: Is the disconnect as significant as I believe?

May 29th, 2009 Comments off

            I wanted to follow-up on my posting from last week in which I commented on a recent AICPA press release regarding IFRS preparation. In that commentary I had commented on what appeared to be a disconnect between the preparation of the accounting sector and the timeline being pushed by the SEC for IFRS adoption.  One of my observations involved a review of the USC Leventhal School of Accounting curriculum and the fact that there are only 2 classes of 84 that are international in nature, neither of which even mention IFRS in the course description. I decided to expand the level of research and review accounting programs from a more geographically diverse population and look to top schools churning out new graduates.

 

            I took a look at 8 additional schools, while still keeping the data from USC. These schools included both Top-5 universities, as well as a local Cal State school (Fullerton), which is known for it’s Accounting emphasis.  

 

School

Profile

# Acctg Courses

# Intl / IFRS Courses

University of Chicago

No dedicated school

3

0

Wharton; U of Penn

No dedicated school

19

0

Northwestern

No dedicated school

19 seminars

0

Harvard

Acctg/Mgmt Unit

4

4

University of Michigan

No dedicated school

22

0

University of Southern California

Leventhal School of Accounting

84

2

Loyola-Univ. of Chicago

No dedicated school

15

0

UCLA

No dedicated school

10

0

Cal State Fullerton

Dedicated Program

40

1

 

            What continues to be so surprising to me is that there is hardly a mention of IFRS-related classes offered or that there is even a mention within the course descriptions. Perhaps something more surprising is that these schools are attracting an international student population and these students are not receiving any exposure to IFRS.  Only speculation, but will a lack of emphasis or development in this area affect the decision-making of whether foreign students continue looking to the U.S. for advanced business education?

 

            When I reviewed the course offerings at top schools such as Wharton and Chicago there was not a single mention.  Further, in reviewing the course offerings for the Accounting & Management Unit at Harvard, the courses were somewhat rudimentary in nature when it came to covering accounting topics in a more mechanical manner. Courses included:

         Business Analysis and Valuation using Financial Statements

         Customer Intelligence Advantage

         Designing Organizations for Performance

         Financial Reporting & Analysis for Managers (1/2 course in Spring)

 

My aim here is not to bash any one school or discredit the Accounting programs out there, but to bring light to what appears to be a significant shortfall in the U.S.’s preparation for the adoption, or convergence, of IFRS. Consider the timeline of designing course offerings, implementing that at the University level, bringing those graduates into the working force, and having an “experienced” accounting population ready to address IFRS. I don’t see that happening.   After coordinating an IFRS implementation in North America for a France-based company I have a sincere appreciation for the effort that this takes. I do not see the necessary preparation happening.

 

Is our source of expertise and support going to come from only our EU-based accounting friends? Is the disconnect as significant as it appears, or what I believe?

 

Thanks for reading . . . .

 

Jeffrey Ishmael

 

 

 

 

Discipline #2: CFO as Analyst and Advisor

May 20th, 2009 Comments off

            In the last segment on “Reinventing the CFO”, I covered the CFO role as a Freedom Fighter, which mainly dealt with the CFO providing management with the necessary data for them to make effective decisions and execute the strategic goals of the company. Taking this role a step further, Jeremy Hope classifies the second discipline as the CFO as Analyst and Advisor.  In this role, Hope defines the role of the CFO as one that transitions from Accounting Specialist to that of a Strategic Business Partner. One of the quotes I value in this book, and worth repeating here, comes from an interview Hope conducted with the finance team at UPS, where they communicated “our business is delivering packages, not debits and credits.” Outstanding!

 

            One point that Hope touches on during his discussion of this discipline is that some CFO’s find themselves conflicted in this role as they believe they should “first and foremost be about effective stewardship and scorekeeping rather than business advice and score making.”  This is a good point, but Hope further clarifies that “this doesn’t mean that CFO’s can’t take their eye of the compliance and control ball.” Absolutely!  The view that I take when I come into a company, especially into a position where there may not have been a dedicated or performing CFO position, is that the position should not be looked at as an expense, but should be viewed as an investment.  With this in mind, the expectation is that the CFO delivers a quantifiable return on that investment. This return on investment is achieved by working collaboratively with all functional areas and providing the financial analysis and guidance that allows them to achieve goals. An achievement of goals that results in increased financial efficiencies, whether that might be improved working capital, reduced operating expenses, or improved gross margins by identifying deficiencies.

 

            A perfect example of playing this role in a company is during the time I spent working with a capital equipment company in which 30% of their revenues were Service-based.  At the time I was tasked with developing additional reporting on this segment, there was little in place.  The segment was 30% of revenues, encapsulated 35% of our headcount, and consumed a significant part of our operating budget. There were no hourly cost standards in place, nor was there any insight as to profitability of the different service segments. After a slightly painful period of changes (legacy employee habits…), we implemented a nationwide hourly reporting structure which tracked all hours according to a new site of activity codes. Based on these new activity codes, and whether they were productive or non-productive activities, we were able to calculate productivity levels by region, determine hourly costs rates, and then determine if our Service offering was appropriately priced.  Since this project had the ability to drastically improve our bottom line, I managed the effort, thus assuming the role of Analyst and Advisor.  The latter role more so as we used the data to prompt decisions about the management of hours and making proper deployment decisions.

 

            In Hope’s book he identifies 4-key steps “that the CFO and the finance team need to take to be in a position to act as trusted and valued business partners.”

  • Strike the right balance between control and decision support.
  • Build a high performance team.
  • Use technology to deliver high quality information.
  • Provide effective decision support.

 

This is clearly an area that can be discussed in much more detail. I believe that one of the more important aspects of this discipline is that assuming the role of Analyst and Advisor is not one of static reporting and involvement. This discipline requires the ability to by dynamic in the position and an ability to adapt to not only the changing needs of management, but to adapt to the changing conditions of the market and advise the team of your observations. It’s not about being continually buried in a spreadsheet, but being in tune with all aspects of the business and assuming a position to identify potential risks to the business. Have you effectively assumed the role of Analyst and Advisor?

 

Thanks for reading . . . .

 

Jeffrey Ishmael

Discipline #1: CFO as the Freedom Fighter

May 18th, 2009 Comments off

            As I tabled in my post from last week, one of the hardest disciplines to work into the day-to-day activities is to continually find ways to challenge myself and grow as a professional. As a part of a 7-part series, I discussed my continue reference and affirmation of Jeremy Hope’s book, Reinventing the CFO. Jeremy discusses 7 primary disciplines that he believes apply to the current CFO. The first discipline mentioned in his book is the CFO as Freedom Fighter.

 

            The primary belief behind this discipline lies behind the overwhelming levels of information and reporting that are available to the CFO, and expected to be reviewed as part of the decision-making process. Hope’s book specifically discusses how senior executives use “powerful IT systems to drill down to increasing levels of detail and demand instant answers to irrelevant questions”. Essentially, this comes back to the concept of analysis paralysis. This is ultimately a constant and increasing flow of information, which ultimately results in a significantly delayed or non-existent decision.  Hope also believes that it’s the responsibility of the CFO to “call a halt to this insane data-induced micromanagement”.  Hope further believes that the “CFO has to overcome the resistance of a number of people with vested interests in preserving the status quo”. He further comments that “These are often people whose skill is in spinning, fudging, and manipulating the information so that higher-level managers see and hear only a customized version of the truth”. Hope suggests that the CFO should:

         Rescue Managers from information overload

         Simplify systems and reports

         Focus on truth and transparency

         Avoid unnecessary tools and systems

 

With respect to my own approach, I have always tried to deliver reporting to my internal customers in a manner that will give them the necessary data to make well informed decision, but letting them know that further details are available if absolutely necessary for further supporting key decisions. Depending on the situation I am in, I will usually run a bit of a “diagnostic” to determine if the current level of reporting is really adding value to the existing management team. What I don’t want to do is put my team in a position where we are simply being kept busy generating a volume of reports that are not being used in any meaningful manner by management. My view is that Finance is present to drive results in the organization and the only way that we will be successful with that is providing reporting that will result in decisions that will improve productivity, justify elimination or expansion of product lines, or support longer-term strategic initiatives.

 

At my current company, I started my engagement at a time that I would have considered late for most Budget calendars. However, it was also a small enough company that I knew we would be able to respond quickly to changes and could still finalize a Budget before the end of the year. Coming into the company, I found a GL that was entirely too detailed for the type of business that was being operated, had been only mildly enforced during prior budgeting efforts, but not in any serious level of internal accountability. While I would normally choose to have as much detailed info as possible, I felt that we needed to take a number of steps back, budget at the 40k foot level, implement that Budget, and ultimately, perform to that Budget with the requisite levels of accountability.  I would then expand the level of detail and expectations going into 2010 once we had reestablished a solid foundation.  I also wanted a Budget that was not so complex that it couldn’t be easily followed by all employees.

 

Once the Budget was finalized, I took the step of providing a much higher degree of transparency than had previously been present in monthly reporting. In fact, much of the financial information had not been shared with the wider employee base. The view I adopt is that unless all parties in the game know what the ultimate goal is, then how can you expect that those goals will be achieved? To further clarify, I certainly don’t provide the same level of transparency to general staff that I do with the Board or key Executives. Nonetheless, all employees know what our key goals are.

 

I’ve had too many experiences at prior companies to know that having a high degree of information overload will virtually paralyze the decision process, and depending on the availability of the information, can serious cloud the accuracy of the data. I’ve also had enough experiences to know that increased levels of transparency, tempered for the specific audience, will result in a higher degree of involvement and belief in the end goals. Although I have also found that shared information can also result in undesirable situations, this is more the rare exception than a norm.  No question, the CFO is in place as a Freedom Fighter for management to execute at the highest level.

 

Thanks for reading . . . .

 

Jeffrey Ishmael

IFRS: Misaligned SEC / AICPA Priorities . . . .

May 15th, 2009 Comments off

While I usually try and remain neutral and stay with the facts as it relates to accounting topics, I read a press release yesterday, which absolutely left me shaking me head with respect to the planned adoption of IFRS reporting in the U.S.  I have posted quite a few entries regarding this area and have my doubts that we are moving towards a successful implementation of these standards in the U.S. and this doubt was further reinforced after the AICPA press release from yesterday.

 

                Keep in mind that the schedule is still in flux as key business representatives are pushing for a delayed adoption of IFRS, but let’s assume that we are going forward with the SEC adoption date of mandated phased-in adoption starting in 2011. With this in mind, the accounting profession, who will be required to provide professional guidance, and my colleagues in the corporate sector, need to already be training on these standards and planning system reporting calendars for adoption.  It will not be as easy as “flipping the switch”. In fact, we ran IFRS reporting parallel to our GAAP reporting for two quarters before fully converting.  Back to the preparation though for IFRS – below is a sampling of statistics from yesterdays IFRS press release:

 

When asked to rate their level of familiarity with IFRS:

a.  36% responded they “want” Advanced or Expert knowledge

b.  24% responded there is a need for “some” knowledge.

c.  21% responded they require a “Basic” knowledge.

d.  There was no info reported on the missing 19%.

 

The AICPA further reported that “CPA’s are still evaluating their business & client needs”.   Really? What is there to evaluate on the “needs” front when the SEC is looking to have mandated phased-in reporting by 2011?

 

The AICPA further reported on the status of IFRS knowledge over the last 6-months:

                a.  22% responded they have no knowledge of IFRS (down from 30%).

                b.  43% have a “Basic” knowledge

                c.  24% have “Some” knowledge.

                d.  There was no info reported on the missing 11%.

 

I would also be interest to know what the difference is between “Basic” and “Some” knowledge.  I feel fortunate that I have been through a full IFRS implementation, but what if I were the CFO of a public company that wanted to start planning for an implementation and was looking to hire consultants, where 69% of the population has only “Basic” or “Some” knowledge?

 

                I took my review one step further and conducted a quick review of what the USC Leventhal School of Accounting is doing to prepare accounting students for what could be a massive shift in accounting standards and reporting.

 

                a.  For the MAcc degree, which has an offering of 21 classes to choose from, only one class was international in nature; Accounting in a Global Environment.

                b.  In further review of the entire Accounting course catalog, which consists of 84 classes, there are only two classes that are international in nature; the one listed above, as well as Taxation of Foreign Business Operations.

                c.  There is not one class that is titled as IFRS specific.

                d.  There is not one class that mentions IFRS in the course description.

 

                I would absolutely welcome feedback, but if we are truly moving towards an implementation of IFRS reporting in the U.S. does it really appear that we are preparing ourselves for this shift?  Does it appear from the stats above that we are being set-up for a massive talent squeeze of IFRS experts who can provide the appropriate guidance? I have had my doubts with the SEC calendar and the likelihood for an IFRS adoption for some time, but now that doubt seems to be further supported.

 

This is one area I’d love to hear back from peers on.

 

Thanks for reading….

 

Jeffrey Ishmael

Challenging yourself when the climate is challenging you….

May 14th, 2009 Comments off

     I have found that one of the hardest disciplines to work into the day-to-day activities is to continually find ways to challenge myself and grow as a professional. I have no problem putting myself in situations where the work environment is a challenge, in fact, I pursue it and welcome it.  Over the last 18-months there has been no shortage of external challenges that have forced me to up the skillset and focus on daily operations. With that in mind, the biggest challenge has been taking time to step back and assess the overall package, what I bring to the organization, and review what areas I can improve on. 

     With respect to the introspective review, I tend to cross-reference a book I believe is a great read for all Finance staff, regardless of level; “Reinventing the CFO” by Jeremy Hope.  The book discusses how the role of the CFO has clearly moved beyond the role of Accountant and reporter to the NECESSARY role of Strategist, Architect, Engineer, & Mechanic. I’ve coined my own acronym to remember the four elements; S-E-A-M , since I believe that Finance really is the department that keeps the “seams” of the organization together and keeps everyone focused on a unified goal – positive corporate financial performance.

     In Jeremy Hope’s book, he expands on 7-key concepts that he believes are the core responsibilities of the CFO within an organization.

  • -CFO as the Freedom Fighter
  • -CFO as the Analyst & Advisor
  • -CFO as the Architect of Adaptive Management
  • -CFO as a Warrior against Waste
  • -CFO as a Master of Measurement
  • -CFO as a Regulator of Risk
  • -CFO as a Champion of Change

     The seven concepts above will be the basis of my next seven blog entries as I go through and provide an overview of Hope’s views on each of these, as well as my application of these seven principles in my daily activities. I firmly believe in the principles above and believe I practice them on a constant basis. In fact, I tend to believe that it’s my relentless pursuit of these points, in the face of adverse conditions, that might have cost me a prior position. I’m curious to challenge myself and see just how effectively I am working the points above into my work approach on a daily basis. There’s certainly no shortage of projects to complete at my company, but I believe it’s equally important to step back on a regular basis, challenge myself, and ensure that I am delivering the highest level of value in return for the investment that the company is making in me. How are you challening yourself when this difficult economy keeps challenging you?

 

Thanks for reading . . . .

 

Jeffrey Ishmael

Credit management – Do you know your current risk level?

May 7th, 2009 Comments off

     Working at a smaller company, there are the inherent benefits of being able to quickly adapt to changing market conditions, implement changes quicker, as well as having a more direct line of communication with your account base.  At the same time, however, there is the probable loss of information tools you may have had access to before. For our company, which is a footwear company based in the Action Sports industry, we are typically dealing with the “Mom & Pop” retailer who typically have only 1, or a few locations. Having the most current financial profile on these folks is typically unlikely, any reliance on D&B info is sketchy at best, and the possibility of credit insurance is unlikely considering the customer profile. So how do you handle the credit granting decisions with a hand like this dealt to you?

     At one of the previous companies I was at, we dealt with larger, capital-intensive projects with blue chip accounts where accurate financials were a google search away. These were also accounts that were seldom turned down by our credit insurance company Coface. Although at times I questioned the need to pay the high annual premiums to insure our credit portfolio, it would have only taken a single job to go sideways to make up for years of paid premiums. I would bet that in 18-months since I left that their credit insurance was tapped on a few occassions considering the primary customer profile was in the financial services sector. But then again, these guys were solid…right? But alas, my Coface coverage was a tool that can’t be applied to the customer profile that I am dealing with now.  On to the next move….

     In consideration to all the D&B reports that I have pulled, I have found, in general, that this information is not typically reliable at the corporate level and often lags in getting the information updated. Sometimes over significant periods of time. I would NEVER make credit decisions based on Dun & Bradstreet information alone. It’s merely a single factor in the consideration of approving a new account or keeping tabs on a existing account. Ok, what next….

     I am a huge advocate of trade groups and their ability to gather and share information at more of a “street-level” application.  But from a financial perspective, I have found that trade groups within the Action Sports industry are somewhat non-existent. There’s fantastic trade groups at the Retail level, Environmental level, Manufacturer level, but I have not found one that focuses on the financial side.  Maybe an opportunity here?  I was recently contacted to become part of Footwear Industry Trade Group. The concept is in its infancy, but we went through a demo and reviewed the available tools. Really a solid approach and has great promise. However, in reviewing some of the companies they have participating, they are not in our peer group. Any sharing of information would be of no benefit to us. The companies that are currently signed up are not sold through our typical account profile. I tentatively committed to our participation in the group, but only if they successfully signed more of our peers. So what am I left with…?

      I’m left with the key element that is driving the current growth in our business and allowing us to post numbers higher than last year….the relationships that we have with our accounts and the collaborative approach we take with them.  We take a sincere approach to developing partnerships with our account base and supporting them in whatever way we need to, so long as it also makes sense for us as a business. Whether that’s international or domestic. Whether that means sending out an email myself on a past due invoice, calling them directly to discuss a paymet plan, or to just discuss their general outlook. I believe it’s that approach that has allowed us to mitigate our credit risk and realize a bad debt expense percentage that is far below industry standards.  While there’s always the unforeseen risk that might always catch us by surprise, I do everything I can to minimize that risk and maintain a keen focus on our collections activity in this environment. Do you know what your current risk levels are?

Thanks for reading. . . .

Jeffrey Ishmael

Finance is from Mars…all others are from Venus.

May 6th, 2009 Comments off

     If you work on the Finance side of the table, how often have you been trying to explain certain strategic planning elements or changes to the Forecast and all you seem to get is a slight tilt of the head from your audience as if they’ve just adopted that dear-in-the-headlights look? I have learned enough from earlier situations that I’ve been able to effectively cater my discussions to the audience that I’m presenting to. The key comes down to understanding who you’re audience is and communicating technical data in a way that they can relate it to their function area.

     Recently we revamped our compensation and bonus plans for the 2009 fiscal year to be split between personal performance goals and corporate financial goals. It’s one thing to explain the achievement of personal goals to staff, regardless of their function. However, try taking that broad-based staff group and tell them their going to be incentivized on Revenue, Gross Margin, Operating Expenses, and Operating Income. Ok, the Revenue part is a slam dunk….that’s the easy one. Once you move on to Gross Margins or Operating Expenses, well….that’s a whole different story. It really comes down to not explaining the formulas or discussing the percentage goals, but discussing the different elements that make up that portion of the income statement. The same approach goes for the Operating Expenses.  Especially when it takes a little more commentary on explaining how you purchase new software or a trade show both but the expenses are amortized over a multi-year period!

     As frustrating as the process can be sometimes, or as many times as you might need to review the data with staff, the effort is entirely worth iftso that Finance and the rest of the company are on the same page.  It’s worthwhile for all members of the company to truly understand the financial results that are being presented to them and what their bonus is being calculated against. Did I say BONUS? As a matter of fact…I did!  Yes, we pulled all employees together at the close of Q1 and paid out bonuses based on both personal and corporate performance. As discussed with our employees when the Budget was presented, we communicated the expectations, and while I don’t believe fully understood, the new plan was embraced and pursued with vigor by our team. That made it all the more gratifying to pay out a bonus when revenue goals were surpassed and operating expenses were under plan.

     More often than not, it’s just a common fact that Finance will be speaking a different “language” when working with the other areas within a company. It’s that same “language” that will prompt staff to seek you out for clarification or guidance.  The cooperation and support you will get by keeping the conversation straightforward will be noticeable and it will eliminate any of the expected contention points between Finance and “everyone else”.  It’s probably worth your time to establish contact with new planets 🙂

Thanks for reading . . . .

Jeffrey Ishmael