Category: CFO Folklore

Pop Culture Impediment and Career Advancement


The-economist-cover-facebookA couple of months ago I was working with a client, primarily concentrating on the improvement of accounting policies and the transition from QuickBooks to ERP. In the process, I interacted a lot with the company's staff accountant.

She is a sharp and ambitious young woman from Pacific Asia. I liked her very much and was particularly impressed by her outstanding work ethics (a rarity nowadays). She's been with the company for nearly two years and this was her first job after she got her BBA in Accounting.

Her knowledge of bookkeeping basics was pretty solid, which gave her much confidence. She was determined to leave the company and look for a job that would give her a faster career track. Never mind the fact that I've discovered a lot of errors and holes in those areas of company's records that pertained to somewhat more sophisticated concepts, such as Inventory/COGS conversion and revenue recognition.

It wasn't entirely her fault. She didn't have a benefit of working with a seasoned supervisor and wasn't savvy enough yet to understand that accountants were expected to look for standards pertaining to a specific industry. She is a capable individual, though, and most likely will get better with years. Hey, under contemporary standards, she is probably in a top 10% of quality workers. Those experience and knowledge gaps are not the reasons why I think it's unlikely for her to have a high-level career in an average American company.

Here is what happened during that consulting engagement.  Facebook filed S1, thus making public its hopes for a $5 billion IPO. The 02/02/12 issue of The Economist arrived at the client's office with a cover spoofing Mark Zuckerberg's profile on his own website, completed with Caesar's boast as a "status" and comments from various "friends," including Bill Gates, Matt Romney, etc.

Unfortunately, the "author" of the most amusing comment was obscured by the embedded subscriber's label – one could only see two letters "ge." I read, "The Death Star is fully armed and operational" and laughed, "This must be Google." The girl was standing next to me. She said, "It's 'ge,' not le' we can see." I explained, it's Larry Page of Google. She looked doubtful and also didn't understand, why I found it so funny. Something hit me and I asked, "Do you know what the Death Star is?" She shook her head, "No."

I didn't show it, but I was very surprised.  I understand that she was isolated from the rest of the world back home, but she graduated from high school and college here, in the States. I took her out for lunch and spent 40 minutes explaining: Larry Page, Sergey Brin, Google – Facebook competition, "Stars Wars," the Dark Side, Jedi, the irony of the reference – all fresh news to her.

This incident put me into an inquisitive mode and from time to time I threw well-camouflaged, unobtrusive questions at her.

"What kind of music to you like?" "Pop." "Like who?" "You wouldn't know them." "Try me. I am extremely eclectic when it comes to all arts. Who is your favorite band?" "They are all Asian."

Some time later she ventures, "What are your favorite bands?" "It's a long list, but there is a Top 10 that I can never rank – like Led Zeppelin, Radiohead, Nirvana, Pink Floyd, Queen…" She said she'd never heard those names. I am ready to give up, but still, "The Beatles is one of my Top 5." She has heard the name, but never listened to their music. My heart aches in utter pity.

Every night she watches funny videos from her home country on YouTube. How about TV? (C'mon, people all over the world watch American TV shows . In 2004, I flew from Amsterdam to Istanbul and saw a Dutch girl watching an episode of "Six Feet Under" on her laptop). Alas, not this girl, "I don't watch American television."

The question is, does this hard-working, diligent, and fairly bright person have a chance of ever becoming a partner in an accounting firm, or a corporate CFO, if the said companies are not under Asian management? Unlikely.

The higher you advance in your career, the more you have to communicate with people around you. Nobody sticks to just business, there is always the small-talk. People will be discussing the latest "Homeland" episode and she won't even know what it is? When everyone starts noticing, what will they think? In this country, pop culture is like English – a common language of the melting pot, and you must be able to speak it, or you will devalue yourself in the eyes of others.

To tell you the truth, in spite of my religious belief in the merit-based system, I don't think that this is wrong. You don't have to like pop culture and, like me, you can criticize its prevailing weaknesses all the time. Yet, not to be aware of it entirely – that's just strange. Someone who does her job well, but is so disinterested in her immediate surroundings, will be considered a reliable functionary, but unlikely to climb too high up the corporate ladder.

Audit Season Woes


As a corporate controller, CFO, and consultant, I've been on auditees' side of the table for the past 20 years. Yet, I still remember the gratifying excitement of coming to a company as an auditor and testing the depth of my expert knowledge in an unfamiliar territory, quickly absorbing the business's specifics and immediately identifying the scope of testing. Well, Ok, I've been called a "show-off" and "know-it-all" many times, so forget me. Over the years, there were other public accounting professionals (not many, but some), who impressed me with their knowledge and sharpness, but it doesn't happen anymore.

I've been complaining about the decline of the quality of work across all jobs, from customer service representatives on the phone to the cardiologists in fancy hospitals, for years. But somehow I still get very frustrated when I encounter the same trend in my own profession. I cannot even explain why. After all, I am very conscious of the managerial accountants' limitations. The main reason for writing "CFO Techniques" was the desire to fill their knowledge gaps. Just a few weeks ago I wrote about The Unimaginable Abyss of Accounting Ignorance in the small-business environment. So, I should not be surprised when I am faced with the same situation while dealing with financial auditors. Nevertheless, it still gets me.

It's audit season, so in the past couple of weeks I've been helping my client (a young company) to go through their very first independent year-end examination of books and records. It's conducted by a small CPA firm hired before my consulting engagement commenced.

Under my guidance, the client's accountants did what I always advise to do in preparation for an audit (see Chapter 30, What Guarantees Fast and Painless Audit, in "CFO Techniques"), i.e. they loaded the appointed auditor in advance with statements and schedules of data required to make all testing decisions. He definitely had time to prepare well.

The client is an importer of raw materials. So, the revenue/cost recognition and cut-off tests are very important. Accordingly, the auditor gives a list of sales and purchases he wants to test. We provide all supporting documents to verify the propriety and accuracy of each transaction. After a little while the auditor knocks on my door with a bunch of papers in his hands. "How do I know," he asks timidly, "if these invoices have correct dates?"

Inside my head I scream, "Are you fucking kidding me?" But this is not about my frustration, this is about my client. So, I calmly explain that he needs to compare the recording dates with the source documents proving the product's ownership transfer as defined by Incoterms. I go further and demonstrate with one of the selected items: this sales order states CIF (cost, insurance, freight), which means that the customer owns the product as soon as it's loaded on the transport; hence, your source document is the Bill of Lading (BL) attached right here to the Commercial Invoice and the Packing List; the BL's date is the sale's date.

He soon comes back with another file and he is very apologetic, "I am sorry, could you explain this to me again? I never heard of those… terms… before. What did you call them?" I help him out, "Incoterms?"

Will somebody, please, explain to me, since when it's Ok for an auditor, who is responsible to lenders, investors, and other outside users to verify the correctness of books and records, to come to the client without the full knowledge required to perform his tasks? Why is he not even embarrassed to admit that? Why the hell in 2012 it did not occur to him to get his ass onto the world wide web, as soon as he heard the word "Incoterms" from me, and study them?

I guess, that would be too much to ask. Hey, he didn't even know what a "metric ton" was and asked me for the ton-to-pound conversion ratio instead of finding it by himself. He continued coming over, I continued providing him with definitions and rules. At some point he got so comfortable with this teacher-student setup, he even asked my advice on how to "test for prepaid expenses." Seriously? Did he forget that I was their from the client's side, essentially being audited?

And here I have to bring up my book again. There is Chapter 29 in "CFO Techniques" called Choose Your Auditors Wisely… Dear business owners, CEOs, CFOs, and controllers, please, read it if you want to avoid paying $25,000 – $100,000 (average range for small businesses) for low-quality accounting services.

CFO Folklore: Joke of the Day


From an actual email exchange:

CEO:    "I wonder when my crack accounting team planned to tell me about this previously unknown accrual!"

CFO:     "First of all, it's not crack, it's dope!  Secondly, the accrual is only 5 minutes old and you are already informed.  We are not in an AT&T commercial, you know."

 


 

Unimaginable Abyss of Accounting Ignorance


We constantly read and hear about American students' low level of academic performance. They rank 23rd out of 57 nations participating in international testing. Researchers and public-policy makers have been trying to figure out the reasons for this abysmal show of intellectual power. The "education system" is usually blamed: different teaching methodologies, testing devices, and so on, and so forth.

In my opinion the problem has nothing to do with educational technicalities. It's has to do with obvious gradual degeneration of general public's intellectual abilities (blame it on the mobile devices' radiation, if you have to). Whatever the reason, fact remains: high-schoolers are doing worse and worse in all subjects.

The common sense should lead a logical person to a conclusion that the declining academic achievements translate into a reduction in college enrollments. If one cannot keep up in a secondary school, how can that person attempt to receive a quality post-secondary education, right? Wrong! Between 1989 and 1999 college enrollments increased only by 9%, but in the 10 years after that – by 38% (!!!), from 14.8 million to 20.4 million.

And, of course, it's not easy to get into Ivy League schools, which accept 10-20% of the applicants (well, my readers know my opinion about the quality of education there). Yet, more than 80% of colleges in this country accept every other applicant, and there are some with 100% acceptance rate. I mean, the colleges want money and they will lower their requirements to whatever levels in order to fill the seats in the lecture halls.

So, every year millions of young people who were not succeeding at the high school level enter post-secondary education system. Why do they do that instead of trying to start their own businesses, attempt creative pursuits, or go into honorable and well-paid blue collar trades, I have no clue, but it is what it is.

Now, those kids who had comparatively better grades, some artistic inclinations, and/or expect to utilize their parents connections in the future take pre-med, pre-law, finance, marketing, various arts and designs . Those who don't think, or don't need to think, about their survival head for liberal arts. So, who ends up taking accounting majors? Everyone else as long as they can count without using their fingers.

But accounting and taxation are not easy. To fully understand it one should possess propensity for conceptual thinking, analytical mind, ability to absorb high volumes of regulations, standards, codes. And I am just talking about basics. 30-35 years ago up to 50% of freshmen who signed up for accounting courses would drop out before the first midterm. Nowadays, they somehow struggle through and graduate. The best of them are snatched by the Big 4, the next tier by other large CPA firms and big-time corporations.

The rest end up in the small and midsize businesses and accounting firms. It's my plight to deal with them, exposing myself on daily basis to the devastating result of this natural selection process. In every company I observe the same thing: so much is wrong! The books of different corporations are co-mingled, revenues and costs recognized incorrectly, inventory is not valued properly, etc., etc. It's difficult for an entrepreneurial company to survive in the first place; the accounting incompetence drags them down even further.

Books are kept intuitively, as if rules and standards did not exist. The most shocking thing is that auditors look at all that and accept it. The main concerns appear to be that the bank balances are reconciled to the statements and the control accounts match with supporting schedules. The PRINCIPAL CORRECTNESS is irrelevant.

I give them the benefit of the doubt and let them explain themselves.

Me: Why doesn't your inventory in storage match with the warehouse's records?

Them: Because they don't account for the three lots that already been loaded on the trucks.

Me: Neither should you. That's inventory in-transit, not in storage.

Them (in complete seriousness): Oh, that's what "in-transit" mean.

And I have sad conversations like that practically every day. Pity the well-versed professional!

My book "CFO Techniques" can help these people to improve. Too bad my publishers are not doing match to deliver it into the potential readers' hands.

CFO Folklore: Audit Joke of the Month


Images-2It's time for CFOs to get in touch with their auditors and schedule preliminary work, field examinations, and so on and so forth.  Some diligently proactive CFOs send auditors estimates of their receivables, payables, and inventory balances even before the end of the year.

One such CFO receives a phone call from a middle-level auditor assigned by the CFO's primary contact John, the partner of the CPA firm, to do the preparatory legwork.

"Hi, my name is Luis, I work for John."

"Hi, Luis, nice to meet you over the phone."

"Based on your inventory levels John has decided that we must do a physical observation test at least at one location."

"That's fine.  Did you, guys, decide which one?"

"It's the one with the highest value of the stored product.  Hold on.  Let me see the name on your schedule…"

"Don't bother.  It's the Hudson Tank in Bayonne, New Jersey, near the port."

"That's right."

"Ok, I will make arrangements for the facility's management to escort you.  We have no activities scheduled for December 30th or 31st, so you can take the gauges' readings on the 30th as your year-end control."

"Well, will they be able to take the product out?"

CFO is silent for a few second, digesting the absurdity of the question and summoning her will power to prevent herself from laughing madly into the receiver.

"Luis, the product is a LIQUID chemical.  THAT'S WHY IT'S IN THE TANK.  The only way it can be taken out is if it's pumped out into another tank, or poured out onto the ground, or into the river, if you prefer that."

"So, I will not be able to actually see and count it?"

"Well, Luis, if you are really nice to the ladies who work there and bring them some Champagne for the New Year's celebration, they may let you climb onto the tank and dive in.  But I am warning you, Luis, it's over 40 feet tall.  Are you a good diver?"