Tag: banking

2013 Audit Season: Joke #2


StimpyA lender's field examiner is sent to conduct a periodic review of a borrower's books and records. 

These exercises are regular occurrences in, what I call, the balance sheet financing: a company pledges its assets, receivables and inventories foremost, against a line of credit.  It's only natural that the financial institutions want to make sure, from time to time, that the collateral securing the loans, letters of credits, bank guarantees, etc. actually exists and is properly valued. 

The banks used to be somewhat lax about it and satisfied themselves with quarterly internal financial statements and annual audit reports.  Most of them would ask a client to undergo a field exam (it's always at the client's expense, by the way) only when the issue of a credit line's increase came up.  However, the neverending tittering on the verge between recession and depression has changed things.  The banks got burned by failing companies and defaulted mortgages.  Those that couldn't recover their losses got acquired for peanuts.  The remaining institutions got smarter and stricter.  Nowadays, many lenders demand 2-3 field exams a year.  

Most of these engagements are outsourced to specialized accounting firms, the rest are conducted by the banks' auditing departments.  Either way, the examiners are constantly rotated – every time it's a new team, which is very prudent as far as the auditing standards go, but a pain in the ass for CFO's and Controllers of the companies being reviewed: you feel like a fucking parrot, delivering a summary of the company's business, its operating processes, and accounting procedures over and over again.

Many companies with significant receivables and inventories to pledge against credit lines of $10 million and up are, obviously, international businesses.  The commercial globalization affects both the procurement of resources and the distribution of products.  The ancient golden rule of market success still holds true: people try to buy where the prices are the lowest and sell where the prices are the highest.    

Now, let me remind you, boys and girls, that the United States of America is a solitary customary-measurement island in the global ocean of the metric system.  (Of course, it will cost billions to convert the entire American existence into the world-wide standard. Yet, I always thought that this clinging to the 18th century  units is primarily a manifestation of our country's fundamentally puritan conservatism.  But that's another joke altogether). 

So, back to our examiner.  On the second day of the assignment she comes to her designated point person – the borrower's CFO (the best practice to avoid someone saying something stupid, especially a CEO, is to restrict auditors' access to one person) and shows her an item on the inventory breakdown.  "It says here that the cost is $1.05 per pound, but the supplier's invoice states $2,315 per em tee," she says, actually spelling the stated weight unit – mt.

Reportedly, at this moment the CFO felt like making a joke: "…You know what they call a Quarter Pounder with Cheese in Paris?/They don't call it a Quarter Pounder with Cheese?/No, they got the metric system there, they wouldn't know what the fuck a Quarter Pounder is." 

But looking at the shellac-stiff blond hairdo of this Western PA resident, she changed her mind.  The examiner looked utterly perplexed.  So, instead, the CFO said, "This product is distributed here, in the States, and we keep the inventory records in pounds to match the sales units. However, it was purchased in Korea, so all of the supplier's documentation is in the metric system.  'MT' stands for 'metric ton,' which contains 2,204.62 pounds.  So, if you divide the cost of one metric ton ($2,315) by 2,204.62, you will successfully convert it into the cost per pound ($1.05)."  She writes everything down as she speaks, so that she doesn't have to repeat it again; at least not to this woman. 

The examiner is extremely relieved and very grateful for the little lesson.  The CFO (obviously in humorous mood that day) says, "Wait until you get to our liquid products.  They are bought in metric tons, stored in gallons, and sold in pounds."  "Oh, my God," the auditor looks mortified. 

This is not an isolated anecdote.  It's remarkable how frequently this happens.  I personally never met an auditor who didn't require a tutorial on US vs. metric units conversion.  I'm used to the appalling ignorance. The question is: why is it Ok to come with your tail between your legs and your tongue out, asking these stupid questions?  Haven't these people ever heard about Google?       

CFO Folklore: An Insult of the Month


-1After a long period of solicitation, due diligence, term sheet amendments, and credit agreement negotiations, a company finally closed a new multi-million dollar credit line with a major national bank. Now, it's time to build working relationships with different departments: the CFO is busy establishing communication channels with the treasury services, trade finance, foreign exchange, collateral control, and so on, and so forth. There are conference calls, meetings, lunches.

This is an introductory period for both sides – a short lull between the stormy deal-making and the times of daily grind that lie ahead. There is not much business yet to discuss, so the conversations, especially during lunches, turn to probing each other's backgrounds and chatting about general topics.

During one such first-meet lunch with yet another banker, the CFO, a person of broad interests, talks about this and that, displaying familiarity with various subjects.

Banker (in a very friendly, non-offensive, even appreciative tone): You know a little about everything, don't you?

CFO (waiting for the second part of the expression, but none is coming; so she takes offence): Well, that would make me very superficial, even shallow. I assure you that there are a few areas of knowledge within and outside my professional scope, in which I can claim in-depth expertise.

They look at each other silently for a moment than move onto a discussion of the bank's operational features, both hiding their own grudges.

The Frustrated CFO's situational analysis:

My personal experience of dealing with American bankers throughout my entire career is that the majority of them are not overly bright. I assure you that I am not saying this out of disrespect – it's just a fact of life. The European banking is altogether a different matter. Overseas, the banks are smaller and the profession itself is still considered to be a prestigious occupation, even if you don't deal with investments and make million-dollar bonuses. Some of the European bankers I know graduated at the top of their classes and were recruited right out of the business schools. Ours – they are mostly average.

That's why I think that at the crucial moment of a split-second decision, the CFO went the wrong way. These mental "forks in the road" present themselves in our minds all day long. Sometimes we make right decisions, and sometimes (most of the times, for some) we don't. Looking at the situation from the outside, I gather that the banker did not mean to be brash. She was just limited. Most likely she only remembered the first part of the frequently paraphrased and transformed saying – know a little about everything and a lot about something, and used it, inappropriately, to complement the CFO's erudition. You know, it's like one of those bushisms, "Fool me once – shame on you, fool me – you can't get fooled again." You cannot take that kind of stuff seriously.