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Sharing perspectives can promote
better understanding and communication
among all of us.
Our interviews showed that
many of us are seeking solutions
to the same challenges.
Over the past few months, Blythe Global Advisors has engaged the services of an external firm to interview some of you – both companies and accounting firms. We had two objectives with the interviews. First, we wanted to find out what you consider your most urgent needs to ensure Blythe Global is focusing on the right services and offering the greatest value. Second, we wanted to use the findings to foster greater understanding and better communication among all of us – clients, accounting firms and audit partners – on the premise that it always helps to know that our problems are not unique and that we’re not alone in searching for solutions. We’ve synthesized the responses into top-level findings that I’ll share in two newsletters starting with this one.
Before I launch into the details, let me thank all of you who generously took time from your busy schedules to talk with our representatives. I read each interview and was humbled by the trust you exhibited in the frankness and scope of your responses. As promised, we’re treating your input with complete confidentiality.
On the client side, we interviewed companies in the small to mid-sized range, each in a different industry. On the accounting side, we interviewed Big Four, national and local accounting firms. We focused the interviews on two broad areas: the most pressing challenges in the near term and the client/firm relationship. Where time allowed, we asked company executives how they stay up-to-date both on financial and accounting issues and with their peers. In this newsletter, I’ll focus on the challenges. In my next newsletter, I’ll address the relationship findings and where/how clients prefer to get information. At the end of each newsletter, you’ll find my perspective.
In terms of challenges, the responses were remarkable in their consistency – albeit with clients and firms each having their own perspective on the issues. Here are the top three challenges:
- Resource constraints
- The continually changing and expanding universe of rules, regulations and laws
- Lack of internal (client) technical accounting knowledge
Let’s look at each in detail.
Resource constraints: On the client side, respondents are committed to doing more with less. They’re looking to their current, experienced staff to carry additional responsibilities. As one respondent put it, management is looking to leverage resources to their maximum. In some cases, executives themselves are responsible for multiple functions. For instance, one CFO is also responsible for IT and Legal. That said, respondents were candid about the tension between the bottom line and investments needed to keep staff current on issues and technology, with one respondent citing the availability of resources (or lack thereof) as the most significant challenge to meeting reporting requirements. Clients expect this pressure to continue in the foreseeable future.
Their clients’ need to run a lean shop is not lost on accounting firms. Several respondents connected the impact of limited resources to some clients’ inability to meet deadlines. And while one firm executive acknowledged that the burden on clients’ staff to handle routine business and strategic functions AND meet audit and other deadlines can sometimes be unrealistic, he also pointed to the reality that the requirement for clients to produce audit-ready financial statements with full documentation is not negotiable. Several accounting firm executives cited the negative results when reports are not audit-ready: an often cumbersome back-and-forth that puts pressure on the client/firm relationship both in terms of maintaining firm independence and fees.
To be clear, the pressure on resources is happening across the board – in small, mid-sized and large companies, public and private, as well as within accounting firms themselves. And while clients often look to external partners to fill the gap in expertise, it’s not an automatic solution and is only taken with great prudence. Finally, resource constraints have tentacles, directly affecting the ability of executives and their staff to keep current – which brings us to our next finding.
Changing and expanding rules, regulations and laws: This finding wasn’t a surprise. Many finance and accounting firms, as well as consulting agencies have devoted a lot of communications over the last two years to discussing the pace, requirements and ramifications of changing regulations and increased scrutiny that show no signs of easing. Despite the volume of information from both private and public sources, the changes are outpacing executives’ ability to keep up with them.
On the client side, executives described a constant game of catch-up with little confidence that they are ever truly current. While most clients look to their accounting firm to keep them apprised of changes and to keep their companies in compliance, they portrayed a reactionary approach. Issues are addressed as they arise – a model that one executive said was not ideal but was the company’s reality. Specific issues that clients cited included IFRS convergence, FASB clarity and the Affordable Care Act.
On the firm side, respondents widely acknowledged the burden posed to clients by the continually changing accounting landscape. While their clients are usually aware of specific changes, their staff sometimes lacked the skills to complete new documentation requirements or apply new principles (see reactionary approach above). The result is usually additional costs that strain both the relationship and clients’ already squeezed bottom lines. The specific issues about which firm executives are concerned for their clients included anticipated changes to revenue recognition and lease accounting (with the latter putting greater pressure on management and affecting fair value investments), IFRS convergence and how to best leverage the Jobs Act.
Lack of internal (client) technical accounting knowledge: Client respondents did not specifically cite this issue; however, its incidence among firm respondents was significant enough to warrant inclusion. Firm respondents connected the challenge of meeting the rigors of an audit to the lack of internal technical knowledge of the nuances and supporting documentation required for a quality audit. For their part, accounting firms stand ready to help clients better understand accounting literature and principles in order to address accounting issues proactively.
From my perspective, these challenges are interconnected. Bottom line pressures lead to resource constraints which lead to additional responsibilities which inhibit staff from keeping up with changes. Clients look to their firms to help fill the gap. Firms, who are having their own internal cost pressures, respond as best they can without putting too much strain on either their fees or the client relationship and while also remaining independent. This is where external partners can help. While freelance accountants can augment routine recordkeeping, a full-service external advisory firm (such as Blythe Global Advisors), should be considered when the need is ensuring reports and documentation are audit-ready. To get the best return on any investment of precious budget dollars, clients need to make certain they’re matching the right level of expertise to the need. Advisors may not be the most cost-effective solution for lower-level engagements; however, “lone ranger” accountants often lack the skills to meet complicated regulatory requirements.
With regard to the continuing changes to rules, regulations and laws, the repeated delays to the convergence of U.S. GAAP and IFRS standards make it difficult for companies to justify defraying precious resources now to prepare for an implementation that’s been a long time coming. While this lack of preparation is concerning to firm respondents and to me, it’s understandable given the current economic environment. That said, we all need to keep in mind that the changes are coming, and we’ll all have to scramble at that time.
On the other hand, when it comes to changes to U.S. GAAP, SEC, Sarbanes-Oxley, IFRS, PCAOB or the implications of evolving legislation such as Dodd-Frank and the JOBS Act, these require immediate and complete application. And that’s the point of intersection where both clients and audit firms feel the rub according to our survey.
Look for my next newsletter in which I’ll share what respondents told us about their client/firm relationship and where/how clients’ executives prefer to get information – a topic of interest to all of us who want to provide value outside of our engagements.
In the meantime, if you need to fill a gap in financial and accounting expertise, we at Blythe Global Advisors would be honored to help you.
To discuss this important topic further
or if you’re looking for general accounting advice and counsel,
- Assisting a $200 million public company evaluate the accounting for a $30 million sale lease-back transaction.
- Assisting a family-owned business restructure and consolidate its various debt arrangements which aggregate to approximately $12 million.
- Assisting a $13 billion public company with purchase accounting related to a recent acquisition.
- Assisting a $500 million private equity-backed company with its analysis of potential goodwill impairment.
- Helping various companies currently backed by private equity and venture capital firms with technical accounting analysis, including preparation of accounting white papers to support the financial statement audit.
- Providing on-going, part-time CFO and controller services as well as SEC reporting services to smaller public and private enterprises.