In recent years, finance departments have been suffering from their own version of chronic fatigue syndrome. Symptoms include overstretched staffing resources, extra consulting fees, and an overall weariness with the steady stream of regulatory and accounting rule changes, which have run from tweaks to overhauls.
There is little hope for a cure, at least in the short term. In fact, the symptoms could soon worsen as U.S. and global standard-setters near their self-imposed deadline for converging key rules by June 2011. That convergence will bring major changes to how companies account for leases, revenue, and financial instruments.
The frequency, volume, and complexity of proposals and changes in recent years are taking a toll on finance staffs. "At any one time we're tracking between 100 and 200 potential regulations that might impact us," says Terry Lillis, CFO at Principal Financial Group. "It is putting a lot of pressure on the accounting and financial resources of the organization."
The Sarbanes-Oxley Act of 2002 touched off a continuous stream of changes to companies' financial-reporting methods, but the amount of guidance scheduled to be finalized next year is unprecedented. Rule makers have been on the fast track since last fall when they recommitted themselves to their June 2011 deadline. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board have met at least 10 times since then, providing frequent updates on their joint projects — and more data for already busy finance departments to ponder. The boards expect to unveil five major proposals by the end of this month.
How CFOs cope will depend on the size of their finance departments and to what extent various rule changes affect them. For some, the fluctuation in regulatory guidance and accounting pronouncements is a minor hassle that will require one or two staffers, on a part-time basis, to keep tabs on changes through occasional updates from their accounting firm and other outside sources. As Jeffrey Davison, CFO of small-cap software company RightNow Technologies, puts it, "We don't dig deep into any topics that don't impact us."
But for many finance departments, the complexity of their business demands that they keep a close watch, research the rules' implications (even when the final form of a new rule and its effective date are uncertain), and have their staff members ready to pounce when a standard is formalized.
No One on the Bench
Even companies with the finance bandwidth to monitor impending changes may find that's a luxury they can no longer afford as head count shrinks; smaller staffs may soon have to absorb big changes. "You've got a double-edged sword as increased regulation and complexity combine with reduced capabilities from a finance-function standpoint," says Carl Waller, a managing director at consultancy Protiviti.
Some pending rule changes, such as those involving revenue recognition and financial-statement presentation, could have strong ripple effects by possibly changing the metrics used in debt agreements and compensation plans, and by placing additional demands on departments outside of finance, including IT, investor relations, and human resources. "We're keeping all of the key functions and departments within United Technologies Corp. aware of what's happening and how their groups could be impacted," says UTC controller Margaret Smyth.
Ideally, companies should track proposals before they are finalized, according to observers. "It helps you be a better manager of your total accounting risk the sooner you get on top of this stuff," says Greg Elming, Principal's controller.
However, companies' size and resources may work against that need. After all, "there are only 24 hours in the day," notes Wendy Hambleton, national Securities and Exchange Commission director at BDO Seidman. "Small companies' accounting staffs are too small to see how new standards will affect them and to monitor those in the proposal stage."
Instead, smaller businesses have to rely on a mix of teamwork and priority-setting if they want to explore the effects of a rule change before it is finalized — or they will have to scramble to catch up later. "We don't have the bench to sit around looking at all the accounting literature that comes out," says Rob Ellis, vice president of accounting and finance at Radiant Systems.
Agents of Influence
Some companies, however, don't simply monitor changes but also help determine them. They communicate consistently with regulators, provide written comments, and act as quasi beta testers of rules before the rules are publicly released. Microsoft, Intel, and UTC are among the large companies that frequently take this tack.
"We want to help shape the rules and make sure we're going to be able to implement them and that they're not going to have a detrimental effect on us," says Smyth.
A year ago, UTC hosted FASB project managers involved in tweaking the revenue-recognition rules at two of its Connecticut facilities for a daylong session. The controllers of each of the company's six business units learned about FASB's leanings, asked questions, and shared their thoughts on the new standard. When the groups met again this past January, some of FASB's positions had changed, which Smyth partly attributes to many companies' input, including that of UTC.
"They could physically see for themselves how the rules they were thinking of putting forward would impact a real live company, from people constructing elevators for new buildings to people repairing jet engines with 14,000 parts," Smyth says.
Between the do-what-you-can approach of smaller companies and the direct involvement of some large companies lies a middle ground of dedicated resources combined with internal processes for confronting significant rule proposals. For example, Celanese established a four-person "center of excellence" five years ago.
"Their primary role is to anticipate and interpret complex accounting rules so we're efficient in executing them and we're not surprised," explains Steven Sterin, CFO of the $5.1 billion chemical company. He calls the dedication of just a handful of staffers to the task a "modest" but important investment. "It has really allowed us to reduce bottlenecks and deal with the complexity" of new rules, he says.
Sterin believes in tackling proposed rule changes when they begin to gain traction on standard-setters' agendas and seem likely to have an effect on his company. "In today's world, the accounting rules are so complicated that you've got to ensure — whether it's a new rule that's complicated or a transaction that touches complicated rules — that you've got very structured processes to deal with it," he says.
Such processes at large companies include setting up a committee to look at a rule's impact on the P&L and balance sheets, as well as communicating to the various departments that could be affected.
Still, while dedicating full-time staff to emerging rules is helpful, the extra work doesn't always seem worth the distraction. "Investors don't value the changes that are coming," Sterin says. "It makes the financial statements more difficult for them to understand, and that tends to push them away from GAAP [generally accepted accounting principles] financials and more toward cash-flow statements and non-GAAP measures."
Regardless of their ultimate usefulness, accounting rule changes are coming and must be addressed. Even finance chiefs with less-complex operations who can ignore many of the changes must still pay close attention. "We would rather manage the business by pointing out things management should work on than worry about accounting technicalities," says James Graner, CFO of Graco, which manufactures fluid-handling equipment. "But we work hard, do our analysis, and make our conclusions, and our external audit firm seldom challenges what we're doing."
But How Firm Is That Deadline?
Adding to the challenge, of course, is the fact that, for all the impending changes, there is also a legacy of altered deadlines and general delay. Proactive companies have sometimes endured months or even years of needless preparation.
The most recent example is the SEC's 2008 proposal that would have required all U.S. publicly traded companies to convert to international financial reporting standards by 2016, and would have allowed some of the largest to begin using IFRS this year. The financial crisis pushed the project onto the SEC's back burner, and the commission could decide to scrap the whole concept next year.
Multinationals like UTC that had been actively providing the SEC with feedback and examining how an IFRS option would affect them internally have had to shift their own priorities. UTC is instead focusing on specific pieces of the convergence project, rather than addressing it as a whole.
While standard-setters have set 2011 as the deadline for finalizing that convergence, they have not indicated when companies will have to implement its various elements. "There is fatigue in having to deal with so much uncertainty and dates shifting around," says Gina Kim, director of public policy and external affairs at Grant Thornton. "It's hard to keep motivation up."
Indeed, some finance staffers may occasionally wonder who they work for, the company or the regulators. "These new rules keep finance's attention away from running the business and helping to support the strategic objectives of the company," says Principal's Elming. "You have to get the right balance. The balance is out of whack right now."
Sarah Johnson is senior editor for regulation at CFO.
Moments of Truth
In theory, the Securities and Exchange Commission's delayed decision on whether to require all U.S. publicly traded companies to adopt international financial reporting standards (IFRS) should be moot a year from now; over the next 12 months a series of rules is scheduled to be revised so as to achieve seamless standardization between U.S. generally accepted accounting principles and IFRS. In reality, it will be more complicated; rule makers have acknowledged that some proposals will lag because standard-setters have thus far failed to find common ground on some issues (such as accounting for insurance contracts), and accounting observers believe "convergence" doesn't necessarily mean the two sets of rules will be the same. Major projects are scheduled over the next year as follows: