Like many finance executives, Terry Lillis, CFO of Principal Financial Group, is tired. The constant stream of guidance from regulators and accounting standard-setters -- plus the expected inflow of more to come over the next few years -- has created "huge accounting fatigue" among his finance staff, he told a roomful of finance chiefs at the CFO Rising conference in Orlando this week. In fact, he put employee fatigue at the top of his list of concerns for 2010.
Judging by the grumblings we heard at the conference, he's not alone. Companies that are trying to keep up-to-date on changes that could have a significant impact on their financial results will see the burden on their staffs only worsen, predicted panelists at the conference, as accounting rulemakers approach their deadline for converging their standards.
Indeed, six major projects are under way and are expected to be revealed next June, although their effective dates have yet to be determined. These new rules entail major changes to the way companies account for leases, pensions, and revenue, and even to the way they present financial statements. To deal with the new lease-accounting rules -- which will require companies to capitalize all lease agreements -- some companies may have to hire "an army of people," particularly retailers that have hundreds of leases, warned Jay Hanson, a partner at McGladrey & Pullen. Moreover, the employees won't be cheap: the more principles-based rules will require seasoned professionals, not recent graduates, according to conference speakers.
While the panelists gave no hope to CFOs who wish the standard-setters would either slow down or cut back on their agenda, they did offer one tip for ending accounting fatigue. "If I were a CFO, the first thing I would do is look at my early-retirement provisions," quipped J. Edward Grossman, a Crowe Horwath partner, which earned him some uneasy laughter from the audience. Indeed, we overheard conference attendees half-jokingly respond to the panelists' warnings about pending rule changes by noting that it's a good time to back out of the profession.
One point eight billion dollars. That's one price tag on the productivity that will be lost this year to March Madness, the NCAA men's college basketball tournament, set to tip off on March 18.
The number comes courtesy of Challenger, Gray and Christmas, the executive outplacement firm that has made something of an annual tradition of such tongue-in-cheek calculations. The figure is based on 45% of the workforce participating in betting pools, watching games, and trash-talking at the water cooler for an average 20 minutes a day, and assumes an average wage of $18.70 per hour.
But don't ban bracket-filling just yet. People can find ways to get their jobs done even if their lunch money may be riding on an afternoon basketball game. Even John Challenger, CEO of the outplacement firm, acknowledges in the press release announcing the estimate that "it is nearly impossible to gauge the impact of March Madness on productivity in an information-based economy where workers possess portable technology that allows them to work from anywhere and any time." In fact, he adds, the $1.8 billion estimate "is probably about as accurate as the point spreads computed by Las Vegas bookmakers."
The presumed inaccuracy of bookies aside, Challenger's admission makes it easier for companies to tolerate betting pools and even game-watching, which are widely acknowledged to be morale boosters. "This year of all years, the importance of camaraderie and bringing employees together is greater than ever," says Jonathan Shapiro, a partner in the Maine office of Fisher & Phillips, a labor and employment law firm. After all, "if people are talking about March Madness, they're not talking about the state of the business, or the pay cuts, or the layoffs, or things like that," he points out.
Of course, companies ought to set rational limits to the Madness. For instance, Shapiro says that executives and managers shouldn't lead the charge on betting pools; otherwise, employees might feel pressured to participate. Make sure other employees don't create that pressure, either, he advises. Also, as far as possible, companies should limit the time employees spend participating in pools to meal and break periods.
Meanwhile, companies may even want to consider rolling in a TV for the first two days of the games, which are played during business hours. "If everyone is streaming video, I would guess that the company e-mail would slow to a snail's pace," Shapiro says.
That, at least, is one idea that will be examined over the next year by a blue-ribbon panel sponsored by the American Institute of Certified Public Accountants, the Financial Accounting Foundation (FASB's parent organization), and the National Association of State Boards of Accountancy. The 18 experts on the panel, who were named last week, will consider whether the United States needs a single set of accounting standards for private companies. (The experts include three CFOs: Steve Feilmeier, finance chief of Koch Industries, one of the nation's largest private companies; Daryl Buck, CFO of Oklahoma grocery chain Reasor's; and William Knese, vice president of finance for Angus Industries.)
The subject has been raised before but never got much traction. That may change now that the International Accounting Standards Board has released a slimmed-down version of its 2,500-page set of international financial reporting standards used by public companies. Released in July, the 230-page IFRS for SMEs (small and medium entities) is a ready-made rule book that could become a de facto standard for U.S. private companies.
The panel appointments come on the heels of an announcement by the Securities and Exchange Commission confirming that the regulator is still on track to evaluate whether public companies should be required to file results using IFRS. Both the blue-ribbon panel and the SEC will release their findings in 2011. But whether there will be much interplay between the two groups is unclear.
Nevertheless, the U.S. private sector has already set some IFRS wheels in motion. In 2008, AICPA recognized the IASB as an official standard-setter, which means U.S. auditors are allowed to issue opinions on private-company financial results filed using IFRS.
Currently, U.S. private companies "can use whatever they darn well please" with respect to accounting standards, notes Bruce Pounder, a former private-company CFO who now heads Leveraged Logic, a consultancy. He says many private companies use U.S. GAAP, but many others use tax-basis accounting, cash-basis accounting, or so-called OCBOA (other comprehensive basis of accounting.)
And while Pounder admits that as a practical matter there are some reasons for private companies to stick with U.S. GAAP -- such as loan covenants that require GAAP reporting -- not every company is constrained in that manner. So by the time the SEC is ready to announce its decision on IFRS, the blue-ribbon panel may have already given private companies its blessing to go global.
I didn't see any CFOs on the 37th floor of the Standard & Poor's building Thursday, where a panel of experts in the leveraged credit markets discussed where bank and institutional lending is headed. But if any had been there, the dialogue would have warmed the cockles of their hearts.
While snow and rain pounded Wall Street, a glint of sunshine showed in the discussions about the availability of capital to corporations. To start out, S&P banking analyst Vandana Sharma pointed out that commercial and industrial loan portfolios were one of the brighter spots for banks in the fourth quarter of 2009, with noncurrent loans declining 7%. It was the first drop in NCLs in three years, Sharma noted. Then, Martin Fridson of Fridson Investment Advisors, bond investor extraordinaire, plainly started (sans any irony) that there was no reason to expect companies' credit situations not to improve.
Forecasters predict corporate defaults will drop to as low as 4% by year-end, after hitting the mid-teens last year. But even with loads of defaults in 2009, loan investors have had decent recoveries on defaulted borrowers, the panelists said, so the financial crisis "will not break the investment thesis for bank loans," said Scott Page, vice president of Eaton Vance.
And what about that wall of corporate refinancings expected to overwhelm the markets from 2011 through 2014? It's not a big a threat as imagined, Page said. "I tend to look at it on a company-by-company basis," he explained. "Solutions will be found as [refinancing] problems arise." Some of those solutions: loan-market and bank-provided capital being replaced by bond issuances, financial sponsors infusing their portfolio companies with equity, and investment-grade companies acquiring distressed assets.
There are two problems however, that no one had a good answer to. One, what will replace the $300 billion of annual appetite in the corporate loan markets that came from now-near-dead collateralized loan obligations? Don't count on hedge funds or mutual funds, the panelists said, because they have retreated from less-liquid investments. The bond markets are the big hope, but therein lies the second difficulty. Huge inflows into bond mutual funds backed record issuance of high-yield bonds in 2009, said Michael Zupon, founder of Sound Harbor Partners. But when interest rates start to rise, bonds don't look like such a hot investment. That situation could "change the dynamic for corporate credit," he said.
It will be incumbent on central banks to keep interest rates as low as possible as the refinancing cycle hits, Zupon argued. But with government deficits accelerating, central banks, especially the Federal Reserve, may not be able to control rates for much longer. "Market forces may take [the] tools out of their hands," Zupon said. So the picture for corporate financing may not be that bright after all. But in contrast to a gloomy, wet day in Manhattan, it sparkled.
Two years ago, CFO published a cover story
about the decline of the dollar, in which several sources speculated that the U.S. currency's dominance was coming to an end. Some observers suggested that the then-strengthening euro might eventually take the dollar's place as the world's reserve currency, while others thought that perhaps a blend or basket of currencies would play the role instead. There was a general sense that the dollar was on its way down, if not entirely out.
Now, it's hard to know what to think. Currency markets have become more volatile, as highlighted by recent headlines on succeeding days in the Wall Street Journal: "Euro Gains in Field Day against Dollar," followed by "Dollar Gains in Broad Rally." The dollar is bouncing around like a ping-pong ball, while the euro, far from replacing the greenback as the global standard, could be on the verge of breaking up, as debt-crippled Greece threatens to bring down the European Union's 11-year-old common monetary unit.
"It's so difficult to have a currency union without a political union," says Campbell Harvey, a professor of international business at Duke University's Fuqua School of Business, adding that if the EU does bail out Greece, it may create a moral-hazard issue. What will the EU do if Spain, Portugal, or Ireland faces a crisis next?
Meanwhile, the volatility makes currency risk management extremely challenging. In CFO's quarterly Global Business Outlook survey, in which we team up with Duke to poll hundreds of finance executives, currency risk rarely ranks as a top concern. Yet for those with significant international operations, sourcing, or sales, now would seem to be the time to at least consider an approach to hedging that risk. Modeling the impact of such extreme scenarios as a breakup of the euro would be one place to start, says Harvey.
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