Archives for posts with tag: business

The Wall Street Journal recently ran a story about the government’s watchdog, the SEC, having concerns about the quality of audit reports issued by one of the Big Four CPA firms, KPMG. This resulted in an indictment of several people. What the government noted was poor audit quality based on their review. Big 4 CPA firms have also been charged with fraud in other high-profile cases. In fact, government test audits of all the Big Four firm’s work show that about 25% of all audits were what they call, “deficient”.

The issue is that investors rely on the outside auditors to check the accuracy of a firm’s financial reports. The SEC and the federal government has focused on this since the bankruptcies and accounting scandals involving Enron and World-Com in the early 2000s. And the Big Four CPA firms audit almost all the public firms in the Standard and Poor’s 500. So, this is not a good thing, no matter how you look at it.

As a former CPA in public accounting and a former CFO who worked with auditors for  decades, I have some thoughts for the Big Four CPA firms.

Training is first. Accounting firms send their new staff to a couple week training program. This is nowhere near enough. When I was an entry level staff person, I understood very little about internal controls, proper procedures, and really the whole auditing process. It took into my third or fourth year before I felt comfortable. More hands on training ever few months would have helped even though this is expensive.

Supervision is next. CPA firms have a very clear hierarchy of command where each layer above supervises and reviews the work of those below. The Senior on an audit might have a handful of staff reporting to them which does not sound unreasonable. But the Senior auditor also has work only they can do, like taxes, and rarely has enough time to supervise and help train their staff. Managers supervise Seniors but a bunch of them at once on often very different types of audits. More time needs to be allocated for review and supervision so that audit quality can improve.

Finally, we need a clear and mutually agreed understanding of what an audit is and what it is not. Audits are not meant to detect fraud yet many people believe they are. If fraud is found, however, it must be reported. As the government completes all these test audits perhaps the expectations versus the deliverables of an audit can become less fuzzy.  We also have whole new issues these days with technology,  cyber crimes and data security that did not exist that long ago. The responsibility of the auditor needs to be re-defined.

All of these items will take more audit time and thus audits will cost more. That will  become a reality. Historically, audit clients put constant pressure on their auditors to lower their fee. Going forward, if we want to improve audit quality and significantly reduce deficient work, audits will cost more. The investing public deserves it.

As recently reported in the Wall Street Journal, Warren Buffet just announced a new management structure for Berkshire Hathaway. This occurred, in part, to prepare for succession once Mr. Buffet is gone. When discussing one of the new leaders, Ajit Jain,  Mr. Buffett stated that if he, his longtime partner Charley Munger and Mr. Jain were stuck in a sinking boat, the most important person to save would be Mr. Jain!

This is not the first time I have heard of the Life Boat Theory of management.

Gene, my old boss and mentor from USG Corp., had a theory and a story about everything. And most of these contained valuable lessons about leadership.

After my company, Donn, was acquired by USG, they combined us with their similar businesses to form USG Interiors. Nothing about this merger or combination was going smoothly especially the people part. So, USG’s Chairman decided to move Gene in as Interior’s CEO which made him my direct boss.

The Donn business and its managers were still headquartered in Ohio at the time.

Gene decides to fly to Ohio for a day to meet Donn’s key people and see our operation. As the CFO of the former Donn and now Interiors, I am asked to organize this important trip. No problem.

I create a detailed agenda. I will pick Gene up at the airport and spend a little time. Gene will then meet, in half hour intervals, the other key Donn people and tour our facilities. By late afternoon back to the airport.

Except Gene decided to spend the entire morning with me which forced the whole agenda to compress.

Although I knew many of the senior USG people from their purchase of Donn, I had never meet Gene. Apparently, he had heard a lot about me! During the couple of hours that we were alone, we had a very frank conversation about everything that was going good and mostly not good with this new Interiors business.

By the time we rode back to the airport, Gene and I had gone from relative strangers to sharing mutual respect and even trust. Gene then ask us to move to Chicago where I could best handle the Interior’s CFO role. We made the move and never regretted it.

But what about the Life Boat Theory?

After we moved to Chicago,  Gene and I were working very well together.  One day I ask him why he spent all that time with me that first day in Ohio.

Gene smiled and said it all goes back to his training as an officer in the Navy. If your ship is sinking, each officer is assigned to be in charge of a certain life boat. Whatever roles the crew played in normal times are now dramatically changed. And as the officer in charge of a life boat, you need to decide not only who you want on your boat but also which order you will try to save them from drowning. And again, the skills one had on the main ship may mean very little in this new crisis.

So,  that first day that Gene and I spent time in Ohio, he was trying to figure out if I should be the first one he wanted in the Interiors life boat with him.

I was always grateful that I passed that test.

And, as with many things I learned from Gene, I used this several times in my career.

It does not just apply to a management crisis but to any major transition that occurs.  A major financial restructuring or downsizing could cause you to re-evaluate your priorities and your team. In USG’s financial crisis, a whole new group of senior business and financial managers were chosen. Starting a new job at a new firm can also lead you to quickly evaluate and rank the team you inherited. When I was hired as the CFO at IMC Global, I had to orchestrate a major bank and bond financing without a Treasurer in-place.

Just like in Gene’s Navy life boat story, at times in business and life, you need to quickly choose the best team for the situation that can help save you and your firm!

Gene never met Warren Buffett, but they would have gotten along very well!

One of the business blogs I follow is the Leadership Freak by Dan Rockwell. Dan had a post about the importance for Leaders and Managers to learn to say No. He cites the fact that saying Yes is much more popular in corporate America, as it tends to please people, while showing a willingness to try new things, etc. But No can be equally powerful.

So this got me to thinking about my own career and the power of Yes and No.

When I was a young, senior financial person at the private firm, Donn, I worked  with many older, operating people and the firm’s owner and his family. I found myself almost always saying Yes to try to please or impress these important peers or superiors. Of this group, one of the most famous and demanding was Branco, Donn’s European President. In my book, The Business Zoo, I tell a story about how skilled and smooth Branco was at getting his way. That story illustrates that Branco was a Grand Master at wining and dining, which was his preferred way to get things done.

After a while, Branco and I became friends and although he was always insistent on getting his own way, at times he gave me some advice. One day he told me that my problem is I cannot say No to anyone! An ironic comment from him, but very true.

I started to look at the world in a much healthier and useful light. I learned that there were times that, for the company or my own mental or moral well-being, I had to say No. But most importantly I learned how to say No without getting people upset, perhaps by suggesting an acceptable (to me) alternative approach. That made me a much better manager and leader. The Yes and No’s need to be in a balance that works for you.

And Branco? Sadly, after he retired he asked me for something and I said No. After that he quit talking to me. Branco will return in a story or two in my second book. Stay tuned!

Over the years, I have often been asked by younger people starting out, what second language should I learn? A great question and one to which I have discovered the correct answer can change over time.

When I was younger and working with Donn Corporation, we had international  businesses in the United Kingdom, France, Germany and Scandinavia. Since I was traveling several times a year to these locations, I really wanted to learn a second language. As I have often done when facing a new decision, I thought I would ask the experts what they thought. We had a French President, Chris and a German President Branco. On my next trip to Europe I had the following conversations:

Brad to French guy Chris: Should I learn French or German?

French guy Chris to Brad: Learn German because you can not trust the Germans!

Brad to German guy Branco: Should I learn French or German?

German guy Branco to Brad: Learn French because you can not trust the French!

Now I had created a Real problem. I safely chose Not to learn either language.

In the last two years we have travelled to Switzerland and to Paris and Brussels. The Swiss all speak 5 or 6 languages and excellent English. This year in Paris and Brussels we noted that almost everyone we came in contact with willingly and smoothly spoke English. This was not always the case, especially in Paris, but it is today.

Why do even the reluctant French speak so much English? It is not because they love Americans and certainly not the British all of a sudden. Rather it is because wherever we travelled in Europe we ran into huge groups of tourists from Asia especially China. And how do all these Asian visitors communicate in Europe? In English, of course.

Which leads me back to the question of learning a second language. Americans are lucky and blessed that English has become the international language of both business and leisure. But if a young American asked me today what language should they learn, my answer would be Mandarin, the most spoken of the several Chinese languages.  In the retail and hospitality businesses,  a young person who speaks Mandarin can get a job wherever they want to.

But there is another correct answer to this second language question. Young people around the globe should learn the language of Coding. Coding is what allows us to create and use computer software, use apps on your mobile devices, engage in social media sites like Facebook and to explore the web and visit websites. Technology is the future and Coding is the key to technology.

So that is my final answer, lock it in, learn Coding!

Not many firms have had the continued bad press as Uber has over the past couple years. Sued on their business and employment practices and then on their self-driving car technology. Employees filing numerous sexual harassment and discrimination suits. Now the private Board throws out the Founder and CEO, Travis Kalanick. Mr. Kalanick is a self-described bad boy who admitted before his firing that he needed help managing the company. He is also the person most people believe created and encouraged the firm’s toxic culture.

Uber has fired some twenty managers and brought a couple female executives on board. But all of these measures may be too little and too late.  So what is Uber to do?

Leadership and Culture are the flip side of each other. What Uber needs is not only a new CEO but a new senior management team. Uber should also replace most of the Board, especially the long time Directors.  Mr. Kalanick is no longer CEO but he was allowed to remain on the Board, which is another mistake. Why? Because it will take a new CEO, senior team and Board to create a new corporate culture. This is not an easy or a quick thing to do. Leadership starts at the top and that is the Board. If the existing Board could not figure out the many legal problems and ethical missteps that Mr. Kalanick and his team were subjecting the firm to, they need to be replaced. Actions speak much louder than words. And major cultural change, in this and most cases, must start at the top. The Board is who everyone in a company look to for guidance.

Uber is often cited as an example of industry disruption as taxi cabs are disappearing. But Uber has other capable competitors like Lyft. These competitors may find a way to gain an advantage while Uber tries to rebuild both its Leadership and Culture. We will see if Uber can truly change and survive.

Two recent articles in the Wall Street Journal raised some new thoughts about Boards of Directors. This, often little understood group, technically manage the biggest public companies. I have written before on the lack of attention and professionalism of some corporate directors and I keep hoping this governance area will improve! Here are a couple ideas that might help.

One article dealt with the growing trend of large investors, like hedge or private equity funds, who buy a block of a firm’s stock and then trying to force the company to elect a number of their nominees as directors. On the surface the concept sounds good and a way to shake up underperforming  firms. But here is the catch. The people nominated by the outside investor are not subject to any review or disclosure of their positions on critical matters that might impact the target firm. They are just listed as part of the slate of directors that the investor wants. So the shareholders who are asked to vote for the new directors do so with very little useful information. The Journal article suggests that these nominated directors appear at public forums with independent moderators or even some of the current directors to debate views. To make this work the very large institutional equity owners like Fidelity or the California Pension funds would have to insist on this additional step before voting. I really like this idea!

The second article rethought the current trend of having only one corporate officer like the CEO on the Board with all outside independent directors. The concerns here are twofold.  First, in large and diverse businesses the entire board might benefit from more internal knowledge especially during a crisis or new initiative. For example if the firm is about to launch a huge capital or technology project, another corporate officer on the Board might add a lot.  Second, if the Board has only one insider and something happens to that person-health or an unexpected dismissal- the other outside directors may be at a loss as to name their replacement. So the thought is on a board of 10-12 directors having 2 or 3 inside officers might be best. Again this seems like a worthwhile idea.

So as I have said before, the buck stops with the Board of Directors. All the officers report to them and the Board represents the mass of shareholders. The more knowledge shareholders have about directors the better and the more directors know and are comfortable with the senior officer group the better as well.

Linkedin just had an article about the best places to work today. The usual suspects are listed: Google,  Facebook and Amazon and some newer, and surprising  ones to me,  Uber (lots of bad press and legal issues)  and Tesla (who makes no profits and may run out of money, not gas.)

But was really struck me was how few of the top companies even existed 25 let alone 10 years ago! The ones that remain have changed a lot: Time Warner (magazines to cable), JPMorgan (a dozen mergers later started as Chemical Bank) and Disney which looks like it may be around forever and never age like Mickey Mouse!

Fortune magazine had an article that stated that 88% of their 500 largest firms from the 1950’s are gone and predicted that 40% of today’s largest firms will be gone in 10 years.

Since I constantly advise graduates and young people where to work, this got me thinking. People used to get a job right out of college and then retire there 40 years later with a good pension. None of this is true today for millennials.

In my book, I stressed that as one moves up in their careers, they needed to study beforehand the leadership and culture of the next company they wanted to work for to try to gauge their personal fit and thus improve the chance to succeed. Now I believe that even graduates and young working people need to do this plus reading all they can about their targeted potential employer. What is their overall strategy, how sophisticated are they on technology and social media, are they well financed? And is their own business model sustainable or will they be the next industry subject to what we increasingly call disruptive innovation, like Uber to taxicabs?

Even though young graduates may work for a half dozen or more organizations in their career, they need to try to look down the road to try to figure out if their next employer will even be around! I believe this new group of millennials are better equipped and more comfortable, than my generation ever was, to research and analyze all the available, on-line information that now.  After all it is their future world. This may also be one of those few areas where most well meaning parents are just not able to help. Looking for your first job or your next job has always been difficult and in this rapidly changing world it just got harder!

USA Today had an article about the world’s largest hotel company, Marriott, using factory produced modular construction to build up to 50  of their hundreds of new hotels this year.  The guest room and/or the bathrooms are produced in a factory on a production line and then transported to the prepared construction site where they are erected by cranes. The plumbing, electrical and finish work then occurs. The theory is that this method of construction can reduce the time it takes to build a new hotel by several months. Thus, the hotel opens sooner and can make a higher return for its owners.

Is this new, you might ask? No, like most things in this world it is not new. In my book, The Business Zoo, I tell a similar story that occurred forty years ago. My old company, Donn, signed a deal to build one of the first modular hotels for the world’s largest hotel company, Holiday Inn. Our U.S. government even got involved to promote low cost housing  through the new department of Housing and Urban Development which was headed by a George Romney, father of, you guessed it, Mitt. The belief was that factory produced,  modular construction would revolutionize and change conventional, on-site construction forever.

What happened to this bold experiment those many years ago? It did not turn out so great. The timetable took just as long as conventional construction. The idea of just hooking these up on the site was a disaster with a lot of additional work required. And my old firm, Donn, lost several million dollars when that was a lot of money in general and specifically for a small, private business. The big company, Holiday Inn, did end up with a nice hotel, but having learned a few lessons, stayed away from modular construction. Modular construction never totally disappeared but it certainly did not replace or change the way hotels or apartments were built.

Will this new attempt be more successful? I am not sure. Construction  is one of our most localized industries. Local zoning and building codes vary by community and can offset some of the anticipated factory produced savings.  Construction is one of those businesses that are still highly unionized which can also impact costs and building codes.

What I do find fascinating is how sometimes business, like other things in life, goes around in a circle. Modular hotel construction in the 1970’s repeats four decades later. Sometimes the patterns and the results are similar and sometimes things change. The space shuttles of the 70’s now are replaced with Elon Musk’s rockets aiming for Mars but we really have not gone very far in space in all that time.

The famous writer George Santayana said, “those who do not learn from history are doomed to repeat it.”  Mark Twain said, “history doesn’t repeat itself but it does rhyme”.

I say,  there are a lot of Circles in both business and life so be careful out there!

The Wall Street Journal had an article recently about the former CEO of the “doomed brokerage firm” MF Global testifying that his firm relied on their auditors, Pricewaterhouse Coopers to “make sure its finances were accurate.”

The former CEO is Jon Corzine, who was the former Governor of New Jersey and before that the former head of that famed Wall Street firm, Goldman Sachs. Mr. Corzine agreed to pay a $5 million fine to settle his role in MF Global’s collapse. For a person whose net worth is estimated at around $300 million, this is not even a slap on the wrist.

A number of articles from Vanity Fair to the New York Times have been written about the collapse of MF Global, and the fact that neither Mr. Corzine or any other officers or directors were charged with a crime. It has been suggested, by others, that it may be due to the fact that Mr. Corzine was a major contributor to President Obama and the Democratic party. But I will not venture into politics, but rather just stay with business.

As an investment banker with Goldman Sachs, Mr. Corzine certainly understood what role auditors perform for all his many clients. The role of an outside auditor or CPA firm is to examine the books and records of a firm and issue an opinion on the fairness of the financial statements taken as a whole. To perform that work, the outside CPAs rely, in large part, on the expertise of the firm’s Board and senior management. Others have stated that it was Mr. Corzine and his team that made the huge bets, with their clients’ money, on sovereign debt instruments that caused his firm to fail. And, in this case, the CPAs were relying on the former head of Goldman Sachs, a man that Joe Biden called “the smartest guy he knows, in terms of the economy and finance.” (That was not meant as a political comment as I actually like Joe!)

In my book, The Business Zoo, I cite a lesson I learned from investment bankers- “share the pain”- which means all parties to a bad deal should participate in cleaning up the mess. I am guessing that may be what is motivating Mr. Corzine as he is testifies against Pricewaterhouse Coopers or PwC. Poor PwC is having a hard year already with the Oscars and now this $3 billion lawsuit.

Jon Corzine and his team took a huge gamble with their clients’ money and lost. The PwC auditors  provided his firm with accounting advice not investment advice. Boards of Directors, the Chairman/CEO and Senior Management should be the responsible parties when a firm fails.

So, Corzine, the former CEO, pays a nominal fine, but then tries to stick it to anyone else who came near his bad deal. Sometimes, capitalism and our legal system punish the wrong people. Not fair.

News Flash! The Wall Street Journal now reports the lawsuit against PwC was settled out of court for an undisclosed amount. In my opinion, any amount over Mt. Corzine’s meager $5 million fine is still not fair.

Most of this blog’s readers know that I am an Accountant. Trained in school as one, practiced as a CPA, and willing to proudly explain, at the drop of a hat or visor, the difference between finance people and accountants (which ranges from golf skills to dealing with details).

Over the years, my blog has touched on various aspects of accountancy. These have included the need for accountants to become more strategic and big picture oriented. And the fact that accountants get hired out of college at a much higher rate than general marketing or communication majors. I even advise young people going to college to consider accounting as a career.

But now there is a major crisis! The Wall Street Journal reports that there is a major shortage of accountants for firms to hire. Obviously the young people going to school have not been listening to me. Companies, such as Johnson and Johnson, took a year to fill a junior accounting position. The unemployment rate for experienced accountants and auditors is listed at 2.5%, about half of the unemployment rate for all workers.

But the news is not all grim. Schools, not just me, are pushing accounting as a career and recently the number of accounting graduates hit a record level, which was up 7% from a few years ago. Major accounting firms like PwC are encouraging high school students to enter college accounting programs. PwC probably has a couple job openings due to their “performance” at the Academy Awards this year!

But, in all seriousness, accounting is a great career for any young person to consider. Some people ask me, don’t you need to be great at math? Answer, no. Accounting is more about understanding concepts and how to view numbers, than it is to work with numbers. And, as I have said before, all businesses need accountants-small, private ones; big, public ones; even government and not-for-profits. All organizations have budgets, financial records and reports and thus need accountants.

Go for it!