It’s worth it

This week, well actually almost this entire month, has been trying to overcome bad advice and management practice which was provided to a client.  I would love nothing more than to share names, opinions, and actions which got this entity into the mess they are in but that won’t solve the problem.  It would make me feel a whole lot better though.

Last night, after spending another 7 hours trying to figure out how to take incorrect balances and make them right, while at the same time trying to write the letter which explains to them why they now owe new balances, I asked myself, “Is it truly worth it?”

And when I almost convince myself to really question what I am doing, I think about the poor accounting clerk at the unnamed management company who, several years ago, no doubt discovered that what was being done, was wrong.  This accountant, filled with the righteous fury of making accounting meaningful, marched up to the unnamed boss at the management company, and laid out the facts.

“We are wrong.” The intrepid accounting person said.

“You are fired.” Said the boss.

Shooting the messenger is so much a part of the game isn’t it?  When things are not going well, it is easier to get rid of the those who question the steps, who report the unpleasantness, than to deal with the problem.  For the people who don’t want to hear it, they get silence and are grateful.  The ones who sounded the warning likely become gun shy and possibly vow to never raise a concern again.  There mantra might become, “It’s just how they do it here.”  Without realizing that by mouthing the phrase, they too become caught in the trap of decay.

Let’s be clear.  I think that when you start to simply accept poor behavior you become part of the problem.  When you see your manager using the company car on weekends, the same week you were involved in a termination of an employee who borrowed a work hammer, and you are silent, you are part of the problem.  Excusing the behavior of the manager simply because she is manager means that the rot won’t end.

Wrong is wrong.  Oh don’t misunderstand, no one will thank you for taking the stand.  Not your boss, not your bosses boss.  If you are lucky, you keep your job but get stuck with the title SNITCH.   But maybe, just maybe, people will start acting a little more ethical, at least in your presence.  And maybe, just maybe, they will act a little more ethically all the time because frankly it is too much work always looking over their shoulder to see if you are watching.

To that accounting clerk who, years ago, noticed that their employer was doing something completely wrong and called them on it, I thank you.  I know you tried and you succeeded.  Perhaps not as quickly as you might have hoped long ago but you are being vindicated.

One journal entry at a time.

Is it worth it?  Yes.  Doing right by people isn’t a zero sum game, it is the easiest way to live.  And like any questing knight, when you see people not wanting to correct a mistake, don’t be afraid to call them out.  Do it for the sake of the game, not because you expect an atta’ boy (or girl).  The greatest rewards in life are from within, when you can lie your head on the pillow and say, “Thank you, me, for a job well done.”

Auditing investments

It is always refreshing to see associations which take responsibility for their future replacements by trying to find investments which can actually grow beyond the rate of inflation.  A solid investment plan can help them ease the burden of reserve assessments by using collected funds to grow at an accelerated, but reasonably safe, rate of return.

Auditing these investments is challenging though.

Conceptually, auditing investments is not any harder than auditing cash.  Except that investments carry certain additional disclosure requirements and the treasurer typically has little to no exposure on how to record the transactions let alone report them to be audited.  Which means that our work as the auditor grows significantly.

You see, Generally Accepted Accounting Principles (GAAP) requires that the investments be reported as either trading, available for sale or held to maturity.  How many investment advisors even understand what can be assigned to these categories?  And our role, as auditor, is to make sure that the investments are properly categorized and that the related gains, losses, and earnings is properly reported in the statement of activity; i.e. the profit and loss statement.  To ensure that they are properly recorded in the period, the accounting department has to know the difference between realized and recognized gains and losses, temporary impairment, other than temporary impairment and put those in the right reporting areas.

Which of course leads to another big accounting issue, accumulated other comprehensive income.  This is the series of holding accounts for the unrealized gains.  You have to know how to close out the transaction to recognize the ultimate sale of the investment.

Did I mention that you have to also track bond premiums and discounts and do some accounting work to get the amortization right?  Again, all this has to be tracked correctly to report in accordance with GAAP.

The rub is that treasurers and boards don’t really understand the complexity of this and often don’t really care.  Their issue is the investment and the return, not its reporting.  Which brings us to our dilemma.

Trying to account for, and then audit, investments can add a substantial cost to the engagement.  It is a cost that probably won’t be valuable to the board and owners in the association.  So, do we allow for a GAAP departure on the investments and simply say they are recorded at cost and have associations report gains and losses at the time of sale?

It is a difficult position.  On the one hand we want the statements to fairly represent the financial activity of the association but on the other hand we don’t want to drive up the cost of the engagement to the point where they find another auditor.  One who perhaps will take huge shortcuts on the reporting and auditing side.  Yes, we see that far too often as well.

So, putting your reserve fund to work by investing it strategically and at reasonable risk is a fair approach to managing the money.  But there are other things to consider besides the actual investing and you, as a board, need to be aware of these issues and take a position on how to report this to the owners in your association financial statement.

Have a great day and an awesome weekend.  And, if you are looking for an experienced audit team to help you maintain effective controls over your association’s finances, feel free to contact us anytime.  We look forward to the opportunity to be of service to you.


Topic number 3 today so far.

I am in the process of designing our proposal template.  Actually templates because we will end up with several different ones for each type of work we do.  I was originally going with only having one but doing so required far too many variables.  Take an audit proposal, as an example, we list out several things that could cause the clients costs to increase beyond what was quoted.  We decided to do that because our goal is to provide a high quality and fairly (i.e. low) priced audit.  But when there is a lack of cooperation our time commitment increases and so does the cost.  We wanted to convey this fact to the reader.

For a review engagement we don’t face those same sorts of hurdles.  So the list is not only smaller but vastly different.  It would take a lot of variable programming to make use of a single template which added and subtracted elements.  I dislike the idea of having multiple templates but we want to provide proposals now and we want them to feel right.  So we did a trade-off and I am learning to be ok with that.

Yes, I strive for excellence.  I strive for things working well and with the least amount of effort.  In my mind excellence is an attitude that says I will always try to improve.  Improve me, my relationships, my work experience.

But I am not a perfectionist.  Not by a long shot.  I believe in the concept of materiality; not only as it applies to auditing and accounting but in life in general.  Some things just are not material – they seem important but in reality have little impact on decisions.

For example – I love giving examples – lets talk accounting adjustments.  In my mind, a client’s accounting records, the trial balance they send me, is the Word.  I treat it as true and correct, to the best of the clients knowledge and ability.  Which means that it holds blemishes and inaccuracies.  It has to as it was crafted by a person.

The perfectionist accountant wants everything to “tick and tie”.  They immediate start making $2.00 adjustments to “tie-out” the depreciation schedule to the trial balance.  They go through each line item in hopes of bringing the trial balance to the “right” numbers.  And in the process cost the client thousands of dollars.

We focus on excellence.  Excellence starts with the end product in mind.  Lets say atax return.  An excellent tax return is one that can be filed and then never recalled.  What keeps it from being recalled?  Certainly not the little differences between supporting schedules and the trial balance.  Material differences cause returns to be recalled.

Sometimes materiality is an amount, sometimes it is a concept.  If the taxpayer is an accrual basis corporation then not having any accounts receivable, no matter the amount, is material.  The accounts receivable being overstated by $50,000 might not be; with a client who makes $200 million in sales annually.

Yes, the perfectionist says adjust the books.  I say only adjust if it is going to make a difference.  Yes, the amount doesn’t agree to something but who says that something is actually correct?

In our opinion, the excellent practitioner of his or her art starts with an entirely different premise.  They start by asking, “What is the purpose of this work?”  They frame the end game.  The perfectionist starts by asking, “What is wrong with what I am looking at?”

Which is why I think many people have difficulties choosing professionals to help them.  Lets face it, we choose a tax practitioner based on the claim of the largest refund, i.e. the perfectionist.  Never mind the fact that in order to gain a large refund you first had to pay it in.  We choose lawyers based on the claim they have never lost a case, because they always settle cases where there is the risk of loss.  Perfection.

Focus on excellent, on improvement.  Think about the bigger picture and then surround yourself with those who can support your vision.  You will be a happier person in the end.

Have an awesome day.


GAAP and Projections

I have a new project which I started at the end of last week and which must be ready for discussion by Friday.  I need to pull together a projection for a start-up company, determine its capital requirements, figure out how it should be structured by debt and equity class and then make sure that, given a certain range of possibilities, what the ROI is going to be.

Did I mention this has to be done by Friday?

It is interesting and I have a great model I have developed over the years (in my humble opinion) that helps me focus on the big picture while also making sure I cover the necessary ingredients.  One area I have spent a lot of time updating is the revenue projection side.  First, I am trying to design a revenue model which takes certain assumptions, like lead generation rates through sales close rates and figure out how many sales will happen.  And then from there how many sales support people are needed.  And then…

Sorry, I was going to slide right in and describe why I like modeling this so much but really, today I am writing to discuss how Generally Accepted Accounting Principles (GAAP) are causing a serious headache for me in this projection.

Naturally, my first irritation is the requirement of recognizing stock awards as compensation expense, although I know intuitively that it is something the employees earn.  It is still a challenge because the only “cash” part of this is the amount paid in taxes to gross up the award.  Why am I worried about it?  Because I am thorough and don’t want anyone to say they were “Unaware” that earnings were going to be lower than projected because GAAP treats stock compensation differently than cash models.

The bigger concern is the new GAAP on revenue recognition.  You remember, the one I have blogged about here recognizing that this particular headache was coming.  Well, this projection is impacted by it because, naturally, it is a software company that licenses its program on an annual subscription and offers free, unlimited tech support.  Love it.  Revenue recognition side?  Not so much.

I spent about 6 hours last night after the game (nice to see the Saint’s work hard to try and lose but they managed to survive until next week – not much hope there) updating my assumptions page and working through the model to address control and amortization of revenue.  No, I am still not done but I am getting closer.  What I can tell you is, I don’t like the results.

On a cash basis, this particular start-up should get to positive operating cash flow in about 14 months; right now it takes about 52 months to get to profitability under GAAP.  I am also seeing about $8,000,000 in deferred revenues.  That is, by the way, cash collected from customers that the company cannot claim as revenue.  Yes, it is software and there is no right to refund but still, under the control principles in new GAAP, the revenue is unearned.

How I get there is to make certain assumptions about purchasing patterns and I am making a rather aggressive assumption that most purchases will happen in the first part of the year.  It is more intuition at this stage but my research indicates that this is the likely time when this sort of software is installed – something about New Year resolutions.  So, this is only a few months of overall deferred revenues but it is enough to throw off accounting ROI.

Don’t get me wrong, I think the most important information comes from cash flow.  How quickly cash is burned through, minimum cash levels, marketing expenditures are absolutely essential to figuring out minimum equity positions, acceptable leverage, target interest rates; all that delightful CFO stuff that can make or break a project.   But still, I think that potential investors have a right to know everything about the project they are taking under consideration and GAAP is one of those things – because at the end of the day, if the goal is to go public, then GAAP is the beast to tame.

Like I said, I try to be thorough.

I will keep you updated, probably at the end of the week when I meet with the ownership to review what I have and start changing assumptions and figure out what to add.  They want to start pitching by the end of the month so I have my work cut out for me – because I am doing this on top of everything else I do!

If you are looking for an accountant who might be able to help you get to that next level, either by acting as your controller or CFO (or combination) feel free to contact me and lets schedule a time to talk.  I enjoy being of service to growing entities and risk-takers.ready for discussion

Have a great day.