The Frustrated CFO

You Are the Most Knowledgeable CFO EVER... How sad!

Let me explain to the handful of readers who actually noticed my absence from these virtual pages that this is what it takes for a small business to close a $20 million three-year capital financing deal with a global bank (such as Citi):  You basically have to put your entire fucking life on hold. 

That is, of course, if you are someone like me - a CFO who rolls up her sleeves and plunges herself into the nitty-gritty of negotiating every single definition, every single term, every single condition, and every single covenant of the Term Sheet and then the  Credit Agreement in a pursuit of getting the best deal possible; someone who has the grasp of a fox terrier, who can shove pushy bankers and lawyers right back where they belong, who is not afraid of the ambiguous formulations, obscure terminology, and legal jargon.

But that's it, isn't it?  In order to be able to get exactly what you need out of any deal that involves money-holders and their supporting infrastructures you need to know your business better than anyone else and their business better than they do.  You need to speak their language and your comprehension of it must be more nuanced than theirs.  It's nothing short of a battle for the business survival, and if you don't prevail you and those who rely on you lose.  It's like in Game of Thrones: Tyrion's Champion, Prince Oberyn, mortally forfeits the battle to The Mountain, and that spells really bad news for Tywin Lannister's youngest son.  

The problem is that most corporate financial executives don't see it that way: just like many other salaried employees, they don't care to know anything beyond bare necessities and they don't feel fiscally responsible for their companies' wellbeing.  Hence, the low levels of professional awareness and circumvention of sophisticated issues is observed in most CFOs and Controllers today.  And it ends up costing employers a pretty penny in unnecessary legal, accounting, and consulting fees.

Hey, you don't have to take my word for it.  By the way, all numbers below are real and quotes are taken verbatim from various communications. 

Let's see.  When the bankers presented us with the Term Sheet back in March, I did not get either our corporate attorneys nor independent CPAs involved at all.  The bank's credit risk group and I spent two months going back and force, until I got the document into an acceptable shape (estimated savings on legal and financial consulting fees - $50K).  As a part of the Term Sheet, I insisted on the bank's due diligence and legal expenses (changeable to us) being capped (estimated savings - $35K).  

The Citibank people, stuffed to the gills with data and reports I've provided to them during this process, kept telling the other members of my Board of Directors things like, "Oh, that Marina, she is amazing! She is the best!  She is so tough!"  They would write emails like: "Thanks, Marina.  This is very helpful, plus your expertise is tremendous!"  As if I was performing some magic tricks - I was just doing my job... thoroughly.  When the Term Sheet was signed and sent to the bank my future relationship manager asked me in confidence (referring to the owners), "Do they understand that the only reason they are getting this deal is you?"  Hmm...

After successful due diligence and final approvals from the bank's Credit Committee, the Agreement package (186 pages of documents) was emailed to me by Citi's lawyers.  The lead attorney asked me in the cover email to provide him with the contact info of my legal representation, so that lawyers could start dealing with each other directly.  I was like, "Fuck, no!" 

You see, as soon as you officially appoint a lawyer as your representative, the other side is not allowed to discuss anything directly with you.  Here's what happens:  Let's say the bankers propose an additional clause or some adjustment; they call their lawyer; their lawyer contacts my lawyer; my lawyer, who doesn't know much about the intricacies of my business and is not allowed to make any decisions on his own, delivers the request to me.  And then in the opposite direction: I formulate my response; now I have to explain to my lawyer all details in a digestible format so that he can deliver them to his legal counterpart; the latter than communicates them to the bank.  

Are you counting the connections?  We are talking quadruple billable hours on both sides!  And it's like that for every single issue and point.  I'm not doing that! I say, "Excuse me, sir, but for now you will be talking directly to me - at least until all business and financial kinks of these documents are ironed out.  Okay?"  

Professionally lawyers are just as obnoxious as doctors - they think that their diplomas make them better than other people (yet, they discuss economic matters with me as if they too had a PhD in the subject and an MBA).  So, at first the bank's attorney bristles, but, as I start beating him up on one point after another, he gets quite tamed and develops respect.  He actually says, "I hold you in high esteem," which is very nice, because the majority of these assholes don't ever want to admit that you are their equal (estimated legal fees savings - $30K).

Finally, I was satisfied with the contract and introduced my attorney into the mix.  He literally had ten comments on the legalese and after that the process turned into technical preparation of documents between the two legal firms. 

 

Total closing fees savings upon signing: $115,000. 

 

I am his client, so my attorney feels free to make a frank comment: "I have to say, you are the most knowledgeable CFO I've ever met, and I'm not even talking about your understanding of the contracts.  It's everything.  Most of the time I talk to your peers and they are like...  I'm sorry...  They don't know shit."

On the day the deal was closed one of the shareholders wrote to me: "...Your performance transcended what could reasonably have been expected from a typical CFO."  

Well, that' nice, isn't it?  Except that all these praise-singers probably think that I'm flattered by their compliments (as if I live for their approval).  But I am embarrassed: I keep thinking how all those ignorant CFOs and Controllers taint the image of my profession.  And everybody thinks that you are just like the rest of them until you prove otherwise. 

People say to me, "What difference did it make for you personally?  Did you get a deal-completion bonus?"  And some ask, "Why try so hard?  You don't even care about 'business' things as much as you do about art!"  

They are absolutely correct: Yes, some music passage, or a scene in a play, or an image, or a hand-written poem will make me cry; yet, most people with whom I work can't even imagine tears in my eyes.  And no, I didn't get an extra bonus.  And I don't consider this my personal vocation.  But the circumstances of my life made this into my paying occupation and I have to measure myself by my own standards: as long as I must waste a huge chunk of my life on making other people rich, I'd better do it to the best of my abilities.  Why other CFOs don't feel like that?  Well, everyone probably has her own story, but mostly it's that plunging-quality-of-everything effect I like to write about so much.  It's pervasive.                             

The Frustrated CFO Presents: The FedEx Man Cometh

A Treatment for a Feature Short Film:

The present.

Brightly lit business office suite.  The camera moves out of the reception area, along a large sign on the wall "ALISP International," and into the open-design space in the middle.  There are a lot of boxes of various types around - file storage, heavy-duty cardboard with foam padding, etc.   Some are sealed and others are half-packed.  Office workers of both genders and different ages are busily occupied: most of them are at their desks, either working on the computers or talking on the phones, while a few are transferring files and folders from desk drawers and cabinets into the boxes.  The company is obviously packing up. 

PAIGE, 30, an accounting manager with plain but soft facial features, gets up from her chair, takes a huge pile of checks she just printed and walks into a private office with an open door.  

Inside the office, the CFO, a middle-aged woman with an almost visible weight of responsibilities and problems on her shoulders, is at her desk.  She is a hardened veteran of the professional work-force; one of those bitches who are said to have bigger balls than their male peers.  A permanent scorn for humanity is set deeply around her mouth. 

It looks as if her right hand is glued to the mouse, moving and clicking the thing in a seemingly erratic pattern, which causes rows and columns of data on the computer screen appear, disappear, reproduce, and rearrange themselves.  There is a tower of empty boxes in one of the corners.  Clearly, she didn't have a chance to start packing.  The CFO doesn't stop her manipulations of cells even when Paige comes up to her desk.

The desk's surface is completely covered with documents and reports, yet appears to be in a sort of a neat order.  Failing to find an empty spot, the younger woman asks, "Is it okay if I put them on this contract?" The CFO is her mentor and Paige feels guilty for giving her something else to do, as if those checks were intended to pay her personal bills. 

The CFO stops torturing the mouse and looks up.  "Actually, it will be great if you do that, because right after I finish this bullshit for the bank and sign the damned checks I will have to read that damned contract to make sure that our esteemed attorneys didn't miss anything," she says without any irritation, just matter of factly.

"Those RingCentral, guys, did they finally got what you wanted them to do with the phone system in the new office?  I heard you spelling it out for them."

The CFO produces a funny sound - a combination of a sad sigh and a bristle of disgust:  "People rarely disappoint me - most of the time they are exactly what I expect them to be." 

In a gesture of a female camaraderie, Paige lightly rubs the CFO's shoulder and leaves the office.

The CFO goes back to her computer and continues manipulating the database at the same high speed.  Her phone rings.  She hits the speakerphone button without taking her eyes off the screen.

"Yes."

The reciptionist's voice singsongs out of the phone, "Gary from LinkNet for you."

"Okay." 

The CFO keeps working, while a man's voice comes on after a click, "Hi, M."

"Hi, Gary.  What's up?"

"We just checked the tracking information - the boxes are on a FedEx truck, out for delivery to your new address.  I'm a bit concerned about nobody's being there.  It's a bunch of pretty expensive stuff: uninterrupted power supply unit, firewall, network switch, backup..."

"Don't worry - I have a standing order with the building's management to keep all our packages in the mail room until we collect them.  And I will be there Monday morning."

"Okay, and the next day we will come to install and connect everything.  Just in case, we included your contact information on the label."

"That's cool.  Okay, bye."

"Bye."

Same day, early afternoon.

A FedEx truck is moving down Broadway in NYC's Financial District, rolling closer and closer towards the Bowling Green Bull; then turns left a few blocks before the statue.

The FedEx truck is parked at the entrance of a steel-and-glass 30-story office building.  The driver, a man in his early 30s in FedEx uniform, unloads several heavy packages onto his hand truck and rolls it through the building's service entrance.  

Inside the building's mail room a young man, late 20s, is behind the counter. He is wearing a standard navy blue jacket of the NYC Service Employees International Union.  He stares intently into a computer monitor, which emits barely audible, muffled moaning sounds.  He mutes it as soon as the driver walks through the door. 

"Wussup, man!  Cold outside?"

"How you doin? Too cold.  I got boxes here all going to same place...  Lemme see..."  Looking at the label of the box on the top, "Al...  Als... Ali... Al..."

While the driver is trying to figure out the name on the label, the guy behind the counter strikes a few keys on the computer keyboard.  Tenants' directory appears on the screen in front of him.  Within seconds he exclaims, "Aliyes!  Sixth floor, man!"  He sounds very satisfied with the fact that he managed to find the company before the driver could read the label.

As the FedEx driver rolls towards the freight elevator, the mail-room dude clicks the mouse and the very quiet moaning comes back on.  About five inches away from the guy's hand on the mouse, a sheet of paper is affixed to the surface with a tape strip.  The letterhead indicates:

"From the Desk of Joe Funk, Building Manager"  

The header below states in bold letters:

"NEW TENANTS" 

"ALISP - Floor 17: Keep packages in the mail room" is the first entry on the alphabetized list that follows.

Same day, late afternoon.

The CFO is at her desk.  With her glasses on, she is now reading "that damned contract," marking it with a pencil every once in a while.  The phone on the desk rings.  Again, she hits the speakerphone button without looking.

"Yes."

The receptionist's voice is hesitant - she is obviously unsure whether she is doing the right thing by passing this call to the CFO instead of fielding it away.

"There is a person on the phone...  He says that he is from a company...  Aliyes... and that he got your packages, ma'am."

The CFO takes off her reading glasses and looks at the phone as if it was a curious living thing.  You can hear amusement in her voice when she asks, "My personal packages?"

"Yes, it seems so.  He asked for you by name."

"Okay, put him through."

In a second, a man's voice comes through the speaker.

"M.?"

"Yes."

"My name is Bill.  My company is on the sixth floor here at XX Broad.  Are you, guys, in the same building?"

"We are and we aren't.  We are in the process of moving in - the 17th floor."

"For some reason your packages were delivered to us by FedEx, and my secretary signed for them.  She started opening them up without even looking at the labels.  All this equipment seems expensive."

"It is quite expensive.  Your company's name is Aliyes?  Well, the first three letters are the same - that's as far as an average attention span can go nowadays."

They both laugh.

The man says, "It's a good thing that your name and number were on the label."

"I have to thank my IT Administration service for that."

"Look, we already sealed the boxes back - as good as new.  Why don't you call John, the building manager, and ask him to open your office for us.  I will have my guys bring it inside and I will personally supervise that nothing gets screwed up again."

The CFO's face changes and her voice is very earnest, when she says, "That would be great!  Thank you so much.  I am so grateful."

Indeed, she is grateful - she got lucky that someone with the common sense cut this chain of events short.  The whole thing could've turned out so much worse.   

Tech-Savvy CFO vs. Technologically Inept Owners: A Boardroom Chronicle

Premise:  

Based on true facts, this present-day farce unfolded right after the company at the center of the story signed a new office lease.  The entity's CEO, an infamous procrastinator and a successful decision-dodger, has delayed the execution of the document to the point when only 60 days remained before the moving-in day.

Up until now, the fairly young business always occupied a full-service furnished office suite, where everything from pen holders to receptionists is supplied by the landlord, including all telecommunications and IT administration.  However, by this point the successful business outgrew the little rooms and the shared common space of the suites - it was time for the company to obtain its own residence.

As all logical people know, lease signing is only the beginning of a relocation process.  A lot of work needs to be done before a company can feel at home and be fully operational in its new place of business.  And nowadays, the IT infrastructure becomes a prerequisite to everything else.

This flat-structured small business has a misfortune of having a board of directors that consists of three technologically clueless owners (the type who cannot connect a printer to a PC) and a CFO.  The latter has been combining her financial and accounting responsibilities with those of a CTO throughout her entire career.  Needless to say, she understands what needs to be done, knows how to go about it (nobody else does in this company), and is more than qualified to make all necessary decisions.  Yet, the Board has a rule: anything that involves spending money must be approved by all four members.

So, here is the chronology of making a single decision under the described circumstances:

Motion 1 - 60 days till D-Day.  Upon receiving the fully executed lease from the lawyers, the CFO writes an eMemo to the owners requesting a Board meeting in order to develop an action plan that would ensure successful and painless relocation.  The plan should assign responsible parties and establish deadlines for each task.

The owners don't acknowledge that the issue was raised and two weeks pass in a complete silence regarding this matter.

(Side Note: All four executives are actually heavily involved in their day-to-day responsibilities.  They communicate extensively every day discussing various commercial concerns, while avoiding difficult extraordinary topics.)

Motion 2 - 46 days till D-Day.  Recognizing that the owners have fallen into their typical pattern of pretending that the problem doesn't exist (this happens every time an issue lies outside of their comfort zone), the CFO makes another attempt to mobilize the Board to set up an action plan.  This time she speaks to each of them in person.  They all nod in agreement - "Tomorrow," they say.  The CFO squeezes a two-hour time slot into her crazy schedule.

Three days pass without anything happening. 

Motion 3 - 43 days till D-Day.  The CFO feels the time pressure - at the very least she must start working on IT components, regardless of the owners' ostrich behavior.  The business will be simply paralyzed without an adequate infrastructure.  She really has no room in her schedule for all research, comparison, and optimization of  various ISPs, telecoms, and IT administrators...  But who else is going to do it?  So, instead of pestering the owners again about the "action plan," she writes a very specific inquiry:  "Please confirm your agreement with my taking charge of the groundwork for obtaining the Internet service, telephony, and IT administration support."  Without waiting for replies, the CFO starts working on the subject of the highest priority, i.e. the Internet connection, by reviewing nine ISPs whose services are available in the new building.    

Motion 4 - 41 days till D-Day.  At different hours, the CFO receives messages from the owners - all three are worded very similarly: "Thank you for asking and forward thinking.  Please go ahead with the projects." She can almost hear their sighs of relief - somebody else has made the decisions for them!!!  The CFO closes her eyes for a second and thinks, "The same shit every time.  I wish at least once I would let things run their course - just to see what would happen if I didn't worry about all of this, if I didn't jump in."

By carving little chunks of time in her schedule to deal with this shit, the CFO manages to come to her final ISP conclusion in 5 business days: to accommodate all of the  company's needs (including VoIP) she needs a reliable fiber-optics broadband.  She narrows down her choices to two ISPs - the award-winning Cogent with dedicated connectivity and Verizon's newest product FiOS Quantum ran through communal cables shared with all other users in the vicinity. 

Motion 5 - 36 days till D-Day.  She immediately gets quotes from both: Cogent values itself highly - $700/month with a three-year contract, plus $1,000 installation fees; Verizon's rate is only $129/month with a two-year contract.  Even with such a disparity in pricing, it's a simple choice as far as the CFO is concerned - she knows that Cogent will provide uber-fast, uninterrupted connection, and if something happens, she can be on the phone with an engineer within 30 seconds.  Verizon, on the other hand...  well, we all dealt with Verizon at one point or another.  Yet, for the owners all this technical staff is as difficult as Icelandic; the huge price difference, however, that's easy.   So, the CFO goes back to Cogent's salesperson and dangles FiOS Quantum at $129/month in front of his nose (virtually, of course).  He is taken aback - he had no clue that Verizon had started offering this brand new service in that building.  He cannot stop himself from uttering, "That's a compelling alternative."  The CFO doesn't dissuade him from this train of thought; she waits.  And he says that he would go to his director and try to get her a better deal.

Motion 6 - Same Day. Cogent wants the business - the salesperson reverts in two hours, dropping the price to $500/month with a three-year contract or $400/month with a four-year contract.  Both rates are exclusive of taxes and charges.  With this reduction in hand, the CFO immediately prepares a presentation for the Board, breaking down her selection process step-by-step and making a strong case for Cogent through detailed comparison and scoring of all providers.  She sends it out to the three owners and requests a board meeting to make the final decision.

Four days of silence passes.  The CFO understands: it's too fucking much for them, they don't want to deal with this, they are hiding.

Motion 7 - 32 days till D-Day. The CFO has no choice but to write to the owners again: "Let me remind you that installing the Internet connection must precede all other IT and telecommunication actions, including setting up the phone system, the computer network, etc. - basically everything that we need for the business's operations.  And it will not happen overnight!"  This gets CEO's attention.  She comes over to the CFO's office and says, "Let's decide by tomorrow the latest."

Two days passes.

Motion 8 - 30 days till D-Day.  One of the owners (already in possession of the previously distributed detailed presentation) sends an inquiry, "Can you make a comparison for me between Cogent and Verizon?" as if he just woke up to the issue. 

Motion 9 - Same Day.  The CFO prepares a simplified comparison chart intended for a 4-year-old audience.  Meanwhile, she tells Cogent that the decision is not settled yet and that she will appreciate if the provider gives up something else - like do away with the $1,000 installation fees and make rates flat, all-inclusive (taxes, charges, etc.)  The salesperson conferences in his Director and they yield.  The CFO simply cannot lose this deal: she goes around and collects the owners' consents in person. 

Motion 10 - 29 days till D-Day.  The CFO signs the contract with Cogent.

Curtains 

And this is just Act I.  Ahead, there are still decisions on a VoIP system, an IT Administration service, furniture, equipment... 

CFO Folklore: The Illusion of Irreplaceability

This is what always happens with severely responsible and talented people who take pride in the quality of their work and apply themselves hard, regardless of the rewards and recognition, material or otherwise: They do an extraordinary job in every function they are assigned, they show initiative and undertake tasks beyond their scope of responsibility, they set their own lofty goals and high performance standards, they pull off feats of creativity and miracles of ingenuity.  Truly they accomplish things that no one else would in their place. 

More frequently than not they don't run around screaming about their achievements - after all, they simply cannot operate any other way and they don't care that nobody asked them to be like that.  They themselves know that they are the best.  Plus, people around them acknowledge such efforts in one way or another - subordinates show respect, peers get testy, etc.  And the bosses?  They either don't notice anything, because their heads are usually up their asses, or they are too limited to appreciate the ace-level pilotage they are witnessing. 

As someone afflicted by this condition, I can assert that there is nothing healthy about it.  Privately wallowing in the knowledge that you are "simply the best" and that your work ethic is a cut above everyone else's, while not being adequately rewarded for your efforts, is nothing more than an addiction to one's own ego. It's vanity of the worst kind, because it violates the principles of objectivism and merit-based recognition.  And, like any addiction, it is accompanied by a couple of supplemental attributes. 

One of them is the inevitable development of passive-aggressive behavior: no matter how many times a person is going to say that she does it for the sake of her own self-satisfaction, something deep inside wants to be celebrated for the extraordinary abilities, efforts, and results.  This secret desire is in a constant fight with an extreme dislike of boasting.  Thus, the feelings and impulses get mostly suppressed and come out in the form of classic indirect hostility and resentment.

Another attribute is the illusion of irreplaceability.  The tormented crazies convince themselves that without them the company will not be able to survive; that everything will fall apart and go to hell.  They believe that there is no way somebody else could be found to fill their shoes.  And why not?  Nowadays, people like that are quite rare.  It's most likely that, if an employee in question leaves on her own accord or is let go for some reason (because she becomes unaffordable or her attitude becomes unbearable), the employer will never ever have someone that good in the same position.  But does it really mean that losing these truly invaluable workers is an incurable disaster?  Are they really irreplaceable? Let me answer this question by doing what I frequently do - relating the readers to an example from popular culture. 

In case you have not had a chance to check out the Netflix/Lionsgate's co-production Orange Is the New Black, I urge you to do so - trust me, you will not regret it.  The show's creator, Jenji Kohan (widely known for her Showtime offspring, Weeds), is a member of a still rare breed of entertainment developers, who is able to focus on female characters without reducing the finished product to gender-specific genres.  Orange is the New Black takes place in a women's federal prison, and its ratio of male to female characters is about 1:10.  Yet, 47% of IMDb users who rated Orange is the New Black (8.5 stars overall) were males.

One of the primary characters in the first season of the show is an inmate of Russian origin, Galina "Red" Reznikov (Kate Mulgrew).  This formidable woman runs... no, she rules the prison's kitchen and has an influence on pretty much the entire social canvas of the place.  By the show's start she has apparently been there for years and assumed a role of a Godmother for a tight circle of her "daughters."  She can be a real bitch, and a newbie should think twice before contradicting her.  But the truth is she is doing a remarkable job, keeping her fellow convicts and the staff fed and even rewarded with treats under the conditions of ever-shrinking budget, broken fridge, and oppressive hostility from some nasty guards.  As early as the 5th episode, it is impossible for the audience to imagine the kitchen without Red.  Obviously, she herself thinks she is irreplaceable.

Guess what?  Towards the end of the season, the combination of some people's foolishness and others' unsavory scheming gets her kicked off the throne and out of the kitchen.  So, what happens?  Do the lights go out in the mess hall forever?  Do the prisoners get shipped to another facility to be fed?  Nah ah!  Another head cook is found right there in the general population and installed in front of the range; she brings in her own crew; the cooking continues somehow.  True, there are no more yogurt favors, the menu is severely skewed towards Latin-American cuisine, and even the oatmeal comes out spicy.  But the plates are not empty, people are not starving.  Life goes on, while Red is driving herself insane with displacement anger.        

So, the answer to the above question is: No, you are not irreplaceable.  It may take a whole team of less adequate and more expensive people to pick up your tasks.  And collectively they will accomplish less and it will not be brilliant, but it will be just good enough for the business to continue, at least in the short run.  Let me assure you that nothing will fall apart, because doing things half-assed and with little care has become a widespread norm.  Everyone accepts poor quality at a higher cost nowadays, and so will your bosses.  And you, with your talents, skills and unsolicited attempts to jump over the high-standard bars, are just an ego freak.      

The Knee-Jerk Reaction to KPI's Showing a Loss

I fucking LOVE how every time you give small business owners, who are usually personally responsible for commercial side of the business, bad news about the company's performance (i.e. report losses), the first thing they do is start looking for faults in accounting instead of strategically correcting their own buying/selling practices.

"Are you sure no extra/double costs were somehow recorded by accident?"

What the fuck is that even supposed to mean?  And yes, I am fucking sure!  I've only been doing this shit for 25 years!!  You, on the other hand, found out that accounting exists only 2 years ago, and I was the one who told you!!!

The same shit - company, after company, after company...  It's like a fucking natural instinct - the goddamn knee jerk.   

2013 Audit Season: Joke #4

I remember a few years ago, during a business lunch, somebody was recapping an episode from one of the numerous crime series all networks are running to compete against each other.  My head was preoccupied with the business purpose of the meeting, nevertheless I do recall that the murder plot turned on a discovery that one of the characters, a compulsive gambler, bet his classy wife's sexual favors in poker and lost.  FBI questioned if the payoff actually took place.  Of course, it did: the real gamblers are "men of honor."  When asked how the pimped out wife handled it, the winner said, "She was willing, but not happy."  I bet this is the best line the screenwriter who churns out this pedestrian crap has ever written! 

Willing, but not happy...  The state of mind applicable to so many situations.  This is exactly how all corporate accountants feel about financial audits, lenders' exams, investors' due diligence, etc.  Commercial and fiscal needs of our employers throw us at mercy of the outsiders: we are forced to carve out time from our main responsibilities and open ourselves up to various poking, probing, and testing.  Oh, we totally understand the importance and the unavoidable necessity of it.  Frequently,  it's our own search for new financing resources that culminates in these proceedings.  Yes, we are totally willing, but we are not happy to go through with it.

I devoted two whole chapters (29 and 30) of CFO Techniques to advising readers on how to deal with auditors, keep yourself focused on the ultimate benefits for the company, and minimize the pains of distraction and intrusion.  It helps to remind yourself that your company needs it more than the one that sends people to conduct the examinations.

And I have to say, most of these specialists of prodding are well aware of the invasive nature of their jobs.  They understand that a financial executive abides by their standards and accommodates all their requirements, because he wants good results, and that this puts a CFO or a Controller into a subservient position. Many auditors are very apologetic for the endless interruptions, inquiries, requests, follow-ups, etc.

Of course, there are always exceptions...

For the CFO with exposure to international measurement systems from this season's joke #2, the last stage of the bank's field exam included physical inventory counts at three locations specifically selected by the bank.  This is habitually done by auditors and examiners in order to (a) establish the presence of various inventories and (b) verify the accuracy of the subject's records.  Obviously, nobody at the audited company has any impact on the choices of locations, timing, or people sent to perform the task.  In fact, the CFO, who every year faces a financial audit and three bank exams, never knows who the hell the counters (usually junior auditors) are. 

This time was bound to be different.  One of the locations the bank selected was the company's storage in Savannah, GA.  A day before the scheduled visit the CFO gets a phone call.  An agitated young man in the receiver tells her that he is from the bank's Jacksonville office and that, according to Google Maps, the drive is 2 hours and 40 minutes each way.  "And it's Friday!  This is outrageous," he says.

The CFO was perplexed: anyone who had dealt with these matters even for one month would know that she had nothing to do with the rookie's plight; that, if it was up to her, she would much rather avoid the scrutiny.  Considering her executive position and professional status, she could've just hung up on this wimp.  But she is the one with a sense of humor, remember?  So, she asked the boy, "Well, what would you like me to do?  Move the inventory to Jacksonville, or cancel your visit?"

"Could you, please, cancel it?" was a hopeful answer.     

2013 Audit Season: Joke #3

A bank's field examiner (read my previous
joke if you don't know who that is) comes to review books and records of a company in the NYC's Financial District.

The company leases space in one of those pre-furnished/pre-wired office suites setups with reception services, heavy-duty business equipment, and highly presentable conference rooms shared by various renters.

(Educational  Side Note:
It's a very profitable business. I believe Regus, headquartered in Luxembourg,
is the largest player in the world. Started only in 1989, today it has presence
in 99 countries, operating over 1400 centers. During my career I have dealt with Regus in Amsterdam, London, Moscow, Frankfurt, and New York.)

Those who have never been in such places don't realize that owners try very hard to maximize the rentable footage and fit into the space as many offices as they can without violating occupancy regulations. There could be, like, 120 companies, some of them consisting of a single employee, on one floor. And, therefore, during business hours it never feels empty or quiet. People are coming, going, walking by. The noise level is much higher than in a conventional business space: at any given moment one can hear at least three phone conversations and virtually participate in two neighboring meetings - one with a real estate attorney and another with an advertisement outfit specializing in cosmetics. It's pretty much your garden-variety beehive that sometimes gives an impression of being even more populous than it actually is.

One of the specific aspects of the office suites is the absence of companies' signs and name plaques - just the numbers on the doors. Yet, if you give the name of the company you are visiting to the doormen, they will direct you to the right floor. There, receptionists will not act surprise when you ask for a particular person and will call him or her up right away. (I mean, there is a reason why these businesses are doing
well.)

This is how the field examiner found her way to the company's CFO, with whom she was in contact after the assignment was scheduled.  The auditor was set up in a separate room next to the CFO's office.  Most of the electronic communications and data exchanges transpired between the two of them.  The supporting documentation was provided by the CFO's staff.  But in the hallways, reception areas,  at the coffee station in the kitchen, through the open doors of multiple offices - everywhere the visiting woman saw, to put it mildly, quite a few people.

Please keep in mind, this is a little story about a person of numbers. Moreover, one of the key requirements of qualified auditors is their ability to gage the validity of the data in front of them. The examiners cannot possibly look at every recorded transaction - they make representative selections for documentary proofs; they construct trends; they look at schedules and statements; and they must apply analytical scrutiny and critical thinking to every number to make sure that it makes sense in the context of the examination's scope.

For example, it is expected of an auditor, who already studied a company's Profit & Loss statement, to understand the physical reality of annual rent expense of $85,000 (especially in NYC's Financial District) and annual payroll of $1 million. Call me crazy,
but I don't think one needs to have a business degree and a CPA to interpret these numbers. I mean, any logical person can effortlessly come to the correct conclusion, right?  One can only hope.

The field work was going very smoothly; the company's finance and accounting staff was well prepared and accommodating; the books were clean and the paper trail was flawlessly coherent. Yet, at the very end, when the auditor was reviewing prior exams'
statistical questionnaires to see if anything required an update, all of a sudden she hit a stumbling block...

She walks over to the CFO with the papers in her hand, looking genuinely puzzled. She points out to a section in the questionnaire, "It says here that the total number of
employees is 10." Now, it's CFO's turn to be baffled as she doesn't understand
why this is so surprising, "Yes, that's correct. Ten total."

The field examiner looks into the CFO's face, still confused, "But I thought this whole floor was you..."

2013 Audit Season: Joke #2

A 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?       

2013 Audit Season: Joke #1

I already wrote about subsequent-events analysis during audits in my post Ignorantly Insolent Bosses.  Payments received from customers in January and February prove the validity of sales invoices outstanding as of 12/31.  On the other hand, if you made a payment to a vendor on 01/07/13 for an invoice dated 12/08/12, which wasn't included into your accounts payable schedule - that's an error: both the liability and the related expense should've been recognized in 2012.  There are subsequent events tests for all accounting cycles - really useful, powerful, mandatory for any audit.  If done thoroughly, they can uncover all those overstated revenues and hidden costs that result in public companies' going out of business and their executives going to jail.

"If" is an operative word.  Here is an actual story that happened during the week of 02/25/2013.  An audit field work was under way at ABC International, Inc.  A mid-size NYC CPA firm has been servicing this company for a few years, covering all corporate taxation needs as well as providing their independent opinion on the annual financial statements, which the company submits to their lenders, insurance underwriters, major suppliers, and other users.  ABC has a very strong CFO and the auditors never find anything out of order in the company's books, records, and statements. 

That's great, except that the audit quality should not be affected by the previous experience.  Yet, this time around the CFO noticed that the audit manager seemed a bit lax - the test selections were smaller, there were less questions and supporting documentation requests.  She was pleased: it shortened the exam time and also signified the auditors' confidence in her own work.  Of course, there is confidence and there is negligence. 

As soon as the audit started, the CFO asked her staff accountant to generate January and February schedules of sales, receipts, vouchers, and payments (the subsequent events), which were provided to the auditors with a copy to her.  When the CFO reviewed the information to make sure that everything was in order, she has realized that the payment journal was drawn for the beginning of 2012 instead of 2013 (people do have a tendency of clicking keys without thinking).

The CFO immediately generated correct schedules and was about to email them to the audit manager, when she stopped herself.  Why the hell didn't he notice it?  Did he even looked at it?  She decided not to do anything for the moment and see what would happen.

A couple of days later, the field work was completed.  Two weeks later the CPA firm prepared the draft of their independent opinion and the footnotes, which were sent to the CFO for review (she told me she's received it today).  Nobody ever mentioned the year old supporting data.  Nobody caught it: not the auditing staff, or the manager, or the firm's quality control department.  What quality?  Please, don't make me laugh!                

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CFO Folklore: Ignorantly Insolent Bosses

CFO Folklore: Ignorantly Insolent Bosses

In accounting and auditing, first two months of a fiscal year (for most, January and February) make up a period of Subsequent Events, which are directly related to a company's previous year's Financial Statements.  Goods listed as 12/31 inventory are (hopefully) selling; last year receivalbes are being collected; cash being disbursed for unpaid expenses that comprised your year-end payables and accruals.  Financial auditors specifically target these post-12/31 sales, receipts, and payments to test the accuracy of the Financial Statements.  

Business owners, most of them lacking formal accounting knowledge, are especially confused about the expenses: they see payments being made now for the last year's interests, services, and commissions, and it worries them that somehow the current period's profitability will be affected.  Never mind that every year you explain to them that these items have been already recognized as expenses in the previous fiscal period through payables and accruals, and, therefore, impact only current cash flow, not the operational performance.  Even the ones who don't ignore your explanations and, furthermore, remember some of the terminology you've used, can't help but be a little disconcerted.

So, let's say last week (a week of 02/11) you have approved a $75K commission payment due to a procurement agent for the fourth quarter of 2012.  It requires a second signature - your boss's.  Now, she sees the check and your approval.  She knows your qualifications and what you've done for her company.  Before meeting you, she didn't know anything about accounting and finance at all, but she has learned a great deal from you.  Yet, she is a Business Owner - someone who is not capable of making an effort to overcome her impulses.  The strength of the "I-pay-you" sentiment in her subconsciousness is empowering.

So, she comes to your office, announces the topic ("This commission check") and tries to formulate the question.  First, she mumbles something about "the last year's income," and then the light bulb comes on in her head and she asks, "Was the expense accrued?"

Your mind is very fast and in a fraction of a second a swarm of neurotic, childish thoughts storms through your head: "Are you fucking joking me?  This is from someone who had no concept of revenue and costs recognition?  From someone who like a fucking bookie recorded everything when cash exchanged hands?  You, bitch, didn't have proper records, reports, financial statements!  Your tax returns were made up!  Did you forget that the bank demanded you hire a CFO before they gave you the credit line?  Now, everyone gets weekly, monthly, quarterly, annual reports and statements, thanks to ME!  I pass audits and bank exams without anybody finding a single error or omission!  How dare you!!!"

But you have two post-graduate degrees, 20 years of business experience, a book on CFO's functionality, 10 years of age, and a lifetime of hard knocks over this privileged pixie financed by her husband.  So, you look her straight in the eyes and calmly, almost jokingly, say, "Are you checking on my work?  Accruals and prepaids is what I do.  This was a 2012 expense and, in accordance with the Generally Accepted Accounting Principles, it was recognized as such."

Look, the truth is you should not get upset at your bosses for who they are.  "...Forgive them, for they know not what they do," and all that.  I always say, they are like spoiled and unruly children, who cannot control themselves.  And as long as you need the salary, you have to continue swallowing their shit pills. 

I wish I could stop taking incidents like that personally.  People with my intellect, background, knowledge, and experience - professional, psychological, cultural - should just brush it off.  Yet again, if I was able to do it, I wouldn't have had this blog.