Will IFRS Make CPAs a Requirement for SOX Compliant Boards?

By: Tracy Levine, President, Advantage Talent, Inc.

Most articles about IFRS have been technical in nature. The focus has been on what items will be accounted for differently under IFRS versus GAAP. Little attention has been given to how the switch to IFRS will affect corporate governance. While the SEC supports the switch to IFRS, they have expressed concern that the switch will cause a short term SOX compliance issue as it relates to financial experts on the audit committee. Under SOX at least one member of the Audit Committee must be defined as an Audit Committee Expert. The SEC defines an Audit Committee Financial expert as a person who has the following attributes:

An understanding of generally accepted accounting principles and financial statements;………………..Under the final rules, a person must have acquired such attributes through any one or more of the following:

(1) Education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions;

(2) Experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions;

(3) Experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or

(4) Other relevant experience.

Under the final rules the SEC makes it clear that just because someone was already serving on an Audit Committee did not mean they could automatically be grandfathered in as the Audit Committee Financial Expert. It further states that the fact that a person has experience as a public accountant or auditor, a principal financial officer, controller or principal accounting officer or experience in a similar position would not, by itself, justify the board of directors in deeming the person to be an Audit Committee Financial expert.

(http://www.sec.gov/rules/final/33-8177.htm)

The rules of the game are changing. An understanding of GAAP is no longer going to be the starting benchmark. IFRS knowledge is going to be the starting benchmark. Audit Committee Financial Experts familiar with IFRS are going to be in short supply. Very few financial experts have the prerequisite experience to qualify as the expert under SOX. One of the groups actively preparing for and educating their members about the switch to IFRS is Certified Public Accountants (CPA). Starting in 2011, the CPA Exam will include testing on IFRS. A CPA is required to finish a predetermined amount of Continuing Professional Education (CPE) each year to keep their licenses current. For the last couple of years they have been able to take numerous CPE Classes on IFRS. Putting a CPA with IFRS training on the Audit Committee may be one of the steps companies may have to take to protect themselves from litigation.

Shareholders have become very litigious. Many feel the gatekeepers have failed miserably and left the shareholders with diminished assets. The Security Police and Fire Professionals of America are suing Goldman Sachs and Morgan Stanley over large bonuses and losses sustained by investors. The Atlanta Firefighters’ Pension Fund is suing their custodian, Chicago-based Northern Trust, over risky investments. These are just a few examples of shareholders lashing out.  Corporate Boards run the risk of finding themselves the next group of gatekeepers subject to shareholder litigation. If the company loses money or fraud is discovered, shareholders might put forth litigation challenging the competence of the Audit Committee Expert, the Audit Committee members and of corporate decisions approved by audit committees who are alleged to have lacked the necessary competence.

The Securities and Exchange Commission is soliciting comments on this issue and several others related to IFRS and Corporate Governance. If you are interested in commenting on this issue, the SEC requests the following:

DATES: Comments should be received on or before October 18, 2010.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

•Use the Commission’s Internet comment form

(http://www.sec.gov/rules/other.shtml);

•Send an e-mail to rule-comments@sec.gov. Please include File Number 4-608 on the

subject line; or

•Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

•Send paper comments in triplicate to

Elizabeth M. Murphy, Secretary

Securities and Exchange Commission

100 F Street, NE

Washington, DC 20549–1090.

All submissions should refer to File No. 4-608. This file number should be included on the subject line if e-mail is used.

Click the following link to read about all of the Coporate Governance Issues being addressed by the SEC:   http://www.sec.gov/rules/other/2010/33-9134.pdf

The Devil Went Down to GA: Goldman Sachs vs. Credit Suisse-Noncompete Agreements

AtlantaBy: Tracy Levine, President, Advantage Talent Inc.

In February of this year, Credit Suisse lured away seven of Goldman Sachs’ top Wealth Managers.  Purportedly some were offered upwards of $10 million to move to Credit Suisse.  According to some of the articles written, Credit Suisse is the devil, and companies like them are the reason Georgia needs to change their view on noncompete and non-solicitation agreements.  It is amazing how much media this situation got in Atlanta that was not just gossipy news but highly politically charged news.  I am sure the defection did hurt Goldman Sach’s business.   However, Goldman Sach’s is hardly the poster child for reform.

How shocking, a Wall Street firm stole top talent from another top Wall Street firm.  Wrong.  This is not shocking at all and is business as usual. The top Wall Street Firms have been raiding each other’s top employees for decades.  In this instance, Goldman Sachs filed a lawsuit not against Credit Suisse, but against the seven wealth managers.  It was voluntarily dismissed the next day.  What makes this situation so ironic is that Goldman Sachs is no saint.  This is a situation of what is “good for the goose is good for the gander.”  In 2010, I believe the score is Goldman Sachs 55 and Credit Suisse 7.  Earlier this year, Vestra, a Goldman Sachs backed UK company lured an estimated 55 employees from UBS.  Shocking really shocking…..not.

Full disclosure: Back in the 1990’s, I was an employee who was lured away from Credit Suisse, then Credit Suisse First Boston, by Smith Barney with 3 other employees.  In that point in time very few people had non-solicitation agreements.  Obviously, Credit Suisse has more than thrived since then to have the money to lure people from Goldman Sachs for millions of dollars.  Over the past three decades, it hasn’t been unusual for the very top Directors and other top employees to be lured away from one Wall Street firm to join another and lured back by the original firm in a year or two.    

So why has this business as usual situation in Georgia led to many trumpeting the horn for stricter noncompete and non-solicitation agreements?  Wall Street already has a current master agreement that all Wall Street Firms and Investment Firms are encouraged to sign that says a firm will honor nonsolicit/non-compete employment agreements.  If Goldman Sach thought honoring non-solicitation and noncompete agreements were good for business in the long run, they would have signed it.  Or was it their arrogance of being one of the biggest or strongest bullies on the block that made them feel immune to the ramifications of not playing nice with others?  Credit Suisse is another firm that has up to this point not signed the agreement either; probably for the same reasons as Goldman Sachs.

Noncompete and non-solicitation agreements have been problematic for both employers and employees in Georgia’s current environment.  I agree Georgia needs to review their approach to non-solicitation agreements and noncompete agreements.  However, it needs to be viewed in a real context and not the lens of hyperbole.  Goldman Sachs is not a victim but the recipient of their own practices.  Yes, they might lose millions of dollars.  I am sure UBS probably lost millions of dollars also when Vestra hired their employees.

In the real world, it is not appropriate to leave each contract brought before the court to individual judge’s discretion on whether they are enforceable or not.  The Georgia Courts’ approach with these type of contracts is a little like defining pornography…I know a bad contract when I see one.  On the flipside it is not o.k. to go too far the other way by changing the Georgia Constitution to the point it makes it impossible for an employee to work for up to three years after leaving a company due to corporate downsizing.

In November, the public is going to be asked to vote to make the following changes to the Georgia Constitution in regards to non-solicitation and noncompete agreements.

H.B. 173, codified in relevant part at O.C.G.A. §§ 13-8-2.1 and 13-8-50 to -59, provides for a host of revisions to the current status of Georgia law on restrictive covenants.

  • Georgia courts will be allowed to partially enforce restrictive covenants that are otherwise overbroad, thus reversing Georgia’s strict and longstanding “no blue-penciling” rule;
  • provides that in-term restrictive covenants will not be considered unreasonable because they lack specific limitations on the scope of activity, duration, or territory, as long as the covenants promote or protect the purpose or subject matter of the agreement or deter any potential conflict of interest;
  • establishes a presumption that post-employment noncompete agreements with a duration of two years or less are reasonable;
  • establishes a presumption that post-employment customer and employee non-solicitation agreements with a duration of three years or less are reasonable;
  • permits employers to extend post-employment restrictions on customer solicitation to customers and potential customers with whom an employee did not have actual contact as long as, within two years prior to the date of termination, the employee supervised the employer’s dealings with the customer, obtained confidential information about the customer, or earned compensation, commissions, or other earnings as a result of the customer’s purchase of the employer’s products or services; and
  • permits employers to enforce post-employment restrictions on employee solicitation that lack an express reference to a geographic area.

See Paul Hastings Client Alert for complete information.

It is about time that Georgia did away with the non-blue penciling law that made it hard for employers to have any kind of meaningful protection.  The rub for the employee is that Georgia is an “at will” state.  A company can end your employment at anytime.  This wouldn’t be such an issue if noncompete and non-solicit agreements were only being signed by the very top level executives.  Up until recently, they were the only employees asked to sign such agreements.  Now many companies make all employees sign a non-solicit or noncompete agreement whether they are a top level executive or integral to the overall big picture or not.  It is hard to discern what the appropriate balance is for protecting the employer, the employee and the public’s intrinsic right to have free competition and the right to do business with whomever they want.

I would like to hear your thoughts on the amendments to the Georgia Constitution.  Is it not enough of a change? Does it go too far? Or do the changes strike the right balance? Why do you believe that some of the Wall Street firms don’t see the advantage of agreeing to honor nonsolicitation/noncompete agreements and completely ignore employment agreements?

Cost Cutting without Sacrificing Human Capital

In the current economy, corporations are asking Senior Management to take a closer look at the bottom line and cut costs.  This creates a koan for the CFO.  The dismal state of the economy has necessitated that corporations eliminate jobs for short term survival and economic health.  A global approach using cold hard numbers and math is the deciding factor on the percentage of jobs that have to be eliminated. 

A common concern among CFO’s is how do you keep from decimating and sacrificing the company’s human capital that will be needed when it is time to turn the company in a positive direction or to support growth when the economy rebounds.

Companies are taking the follow actions to reduce cost without sacrificing the human capital that they had already invested in developing.  The following were some of the steps being taken: 

1.) Reducing work week hours;

2.) Implementing partial month furloughs;

3.) Creating situations where employees can job share; and

4.) Reducing the pay of employees.   

These measures save money for the company while allowing the company to retain more of its human capital.  However, it creates a unique environment that management has to address.  Many employees just see these steps as a precursor to the next reduction in force.  Senior Management needs to clearly communicate their vision for the future of the company and how the employees are an integral part of this success.

CFOs Driving Corporate Growth

CFOs Driving Corporate Growth

By:  Michael Levine, Principal, Advantage Talent, Inc.

 

Many CFO’s ask me how to increase their job longevity.  There is only one answer to this question.  Expand job responsibilities beyond assuring the financial statements are presented on time.  The senior financial executive has to be actively involved in the growth of his or her company.

 

Through my CFO and Controller Roundtables and direct communication with many senior financial executives, I’ve learned about ways financial executives are driving the growth of their companies.  Examples that fuel the internal corporate growth engine include:

 

1      Utilizing a variety of financing vehicles to obtain additional liquidity.

2      Working with the executive team to develop sales professional compensation, which rewards salesmen for focusing on sales with greater profitability. 

3      Working with sales reps in the field when they encounter perceived internal corporate “red tape”.  In many cases, there are opportunities to streamline processes by easing overly restrictive controls or eliminating previously unidentified bureaucratic bottlenecks.

4      Initiating meetings with industry specific business strategists to provide guidance for growth.

5      Evaluating and improving health and other corporate insurance policies to attract and retain employees.

6      Developing tax strategies, which produce significant savings to free up cash for other productive uses.

7      Finding value in liabilities by taking aggressive stance on discounts by vendors, and getting rebates on credit cards, all of which provide cash for growth.

8      Relocating plant controllers to the factory floor vs.‘ivory tower’ offices.  This allows them to better see what is going on in real-time.  They are part of the floor team and therefore are more accessible to concerns which otherwise would not be communicated to the proper parties for action.

9      Negotiating with banks to reduce account and credit card fees.

10   Doing homework on competitive vendors and using information to achieve best pricing without necessity of changing vendors.

11   Securing State tax credits for software installation (training credit) and Federal Income payroll tax credits for certain geographic areas.

12   Developing strategies on timing of inventory purchases to balance tax reduction, holding costs, and pricing trends.

13   Working with the purchasing department to develop policies and procedures for inventory, supplies, and even capital expenditures to eliminate waste and maximize rebates.

14   Analyzing sales profitability by vendor, and subsequent vendor selection.

15   Analyzing sales profitability by customer, and subsequent ‘firing’ of certain customers.

16   Implementing travel and entertainment policy to maximize cash flow and eliminate waste.

 

Several CFOs are taking an outward focus and evaluating business opportunities that create competitive advantages.  Examples include:

1      Expanding current business territory to increase profitability with limited investment.

2      Creating a strategy and business plan to enter a new business sector.

3      Going on sales calls to better understand challenges being faced by sales reps in the field.  One such sales call resulted in development of a customer financing plan with an independent financing company which allows the customer to make payments over time, and also mitigates corporate A/R exposure, helps collect past due accounts and allows company to increase the size of customer orders.  As a result, finance is viewed as an asset to the sales team rather than an adversary. 

4      Investing strategically in IT (Information Technology) to improve customer experience when interacting with the company website, providing easy product catalog access, allowing customers to efficiently perform their own inquiries on product features, appearance, availability and secure order status updates. 

5      Creating online E-Commerce solution allowing customers to purchase directly online which provides for cost savings in customer service areas and improvement of customer satisfaction at the same time.

6      Selecting facility sites for maximum strategic advantage.

 

By taking on responsibilities that improve profitability and growth of the company, the senior financial executive should be able to better position his or herself for a long-term relationship with their current employer.  Come to one of the roundtable meetings and learn about what your peers are doing to drive growth in their companies.   Also, contact me with other questions or ideas at mlevine@advantagetalentinc.com.

Originally published in the CFO Advocate-The Newsletter for the CFO Roundtables.

Corporate Cost Containment in Tough Economic Times

As the economy continues to create challenges for companies, many are searching for ways to cut cost. Included in the list that follows are some common and some not so common examples of what companies are telling us they are doing to survive and thrive:

• Reduce hiring and/or terminate underperformers

• Encourage employees to take pay cuts

• Find sublease tenants for underutilized properties

• Identify new sources of revenue

• Hire firms that specialize in cost containment strategy to help (logistics audits, telecom, etc.)

• Review all items on income statement and determine which need reduction/elimination

• Use zero based budgeting and determine ROI for each expenditure

• If you have a sourcing department, use them to pressure pricing concessions

• Create a ‘CFO Bounty’ to pay employees for identifying cost cutting ideas over certain thresholds

• Re-negotiate fees for Tax and Audit and Legal services, etc.

• Shift to a ‘pay for performance’ compensation model. Reduce base and increase commission/bonus where possible.

• Consider purchasing a company that is a supplier to you to reduce overall costs

• Elimination of 401K match

What are some of the steps your company is taking to deal with Cost Containment in the current economic environment?