Are small-caps better served by mid-size firms?

A little late, but a blog post at CFO.com about the level of service a small-cap public company can expect to receive from a Big Four auditor compared to a mid-size firm seemed interesting enough to share:

CFO.com reader Kunal Ganguly wrote us to say a company of Catapult’s size, with its $102 million market cap, shouldn’t have been using a giant like Deloitte anyway. A local firm would be a better fit because it likely has more experience handling companies of a smaller size, he thinks. Adds accounting professor Zafar Iqbal: “[Smaller] public accounting firms have more experience with, and better knowledge of, the needs of smaller clients. Thus they are in a position to add more value.”

Catapult Communications is a US company based in California that recently announced it was switching from Deloitte to Stonefield Josephson and saving roughly 45% of their usual audit costs to do so. To be honest when I first read about the move it didn’t strike me as all that remarkable. Companies change auditors and save money doing so all the time. Not 43 to 49% of fees, sure, but it wasn’t as if the sky was falling.

Truth is, the stories in the media made this all about the money, which is why the blog post was special. It focuses on the quality of service and expertise Catapult and other smaller companies can expect to receive from a non Big Four audit firm. Something to think about, if you’re in the market for assurance services.

IFRS and principles too weak to work?

Al Rosen, in the second of a three part series in the Financial Post about the transition from Canadian GAAP to IFRS:

IFRS is too weak in its current form for investors to accept on par with current Canadian standards. Nonetheless, we are on course to implement IFRS in just three years.

He quotes and agrees with Arthur Levitt, who spoke out against IFRS and principles-based standards, claiming they will increase risk to investors, conceal fraud longer than current standards, and increase, not decrease, the cost of capital.

He believes that rules are necessary and argues that Canadian GAAP is largely rules-based:

In actuality, court cases have shown that Canadian auditors automatically gravitate towards a rules-based mentality. Published materials provide extensive appendices, interpretations, industry tabulations and other comparative guidance that are nothing more than rules.

I can see where he’s coming from, but I don’t agree that we should abandon plans to adopt IFRS and go back to what is essentially accounting isolationism. The standards are new and evolving, just as standards have done in individual countries before them, because that is just their nature.

Principles can work, and in theory are better than rules. Two additional changes should be made to the profession in order to fully realize the benefit, however. Mandatory audit firm rotation and even tighter restrictions on the ancillary services a company’s auditor can provide will help principles work.

Those steps could also increase competition for audits, helping to keep costs associated with switching auditors manageable. Although the effect is uncertain, they could make it easier to find fault in fraud cases, whereas rules may provide management or the auditors to make the case they followed the letter, if not the spirit, of the standards.

In a perfect world we wouldn’t need more rules, but history has shown that in this one we do.

History has also shown that rules don’t always work and often open a new loophole for each it closes. We can either try to find a better way or just make more rules.

The benefits of a strong set of international standards based on principles is a worthy goal and will require eternal vigilance. Perhaps the standards today need improvement in areas. This shouldn’t derail the whole process.

What do you think of Al Rosen’s position? Have rules been unfairly criticized? Could international standards be improved with greater specificity? Or should we just forget the dream entirely?

Staff retention at midsize firms charts new waters

An article in WebCPA talks about the steps midsize firms in particular are taking to ensure their young people stay put:

More midsized firms are starting to address this issue by paying attention to what younger people need to stay engaged. Some are including younger staff members in more significant firm decisions through advisory boards; others are pairing younger staff with older partners in mentoring relationships; and some have even postponed accepting large proposals until there is an assurance that a particular department can handle the increase in hours and staff demands.

Involvement

Giving younger staff a chance to be heard on firm decisions is a great idea, and one that is taking hold in my office of late. I have recently been involved in the formation of an IT Committee composed of young staff that work in the field, and we are working on ensuring the field staff have what they need IT-wise.

We found that IT resources in the firm are too centralized to respond quickly to staff needs and we are doing something about it, with the guidance of a partner of course. The inertia of centralization isn’t a new problem but hopefully our committee will be able to effect positive change and improve productivity in the field and client service.

Mentoring

As for pairing younger staff with mentoring partners, our firm already has a mentoring program in place. I’m not paired with a partner however, but a manager. I think it would be better to have two or more mentors — one at the manager or senior manager level(s), and a partner.

Younger, new staff often feel like the partners don’t know who they are (and that’s often the truth), so having them become more involved in the beginning will really help staff feel valued and encourage their development and loyalty to the firm. It’s a net benefit for all parties involved, really.

Client Acceptance

More important in my opinion to accepting new clients and ensuring the capacity is there, is the issue of client retention. It’s far more demoralizing to work on a client that is abusive towards the auditors than it is to work long hours. In fact, I have a client that is incredibly long hours for 3-4 weeks straight and it is one of my favourite clients! Why is that? The client’s staff makes the work fun and enjoys the audit!

That being said, the effort to ensure staff workloads are appropriate is undoubtedly appreciated.

The three strategies the article touches on are all important in the fight to keep young staff on board at midsize firms. It’s great to hear that firms are starting to implement them in earnest, as it indicates that staff like me will continue to feel valued and challenged as we build our careers and serve clients.

Facebook as the intranet

When I first heard about the company using Facebook as their intranet, I wasn’t sure what to think.

Serena Software is really replacing its existing intranet with Facebook as a front end linked to a low-cost content management system behind the firewall. The firm is just over 800 employees but is still globally based (operations in 18 countries) with 35% of their employees working virtually.

I could see how something like this would be valuable for a company like this, where employees need to work together from different locations towards a common goal. But what about in an accounting firm? On audits you’re working closely with audit team members in one location, at least in my experience, so it may not be as useful.

But the value of a system like Facebook is its emphasis on people, and facilitating document sharing and collaboration. Which is where the typical corporate intranet fails to serve its customers adequately:

Like many companies their existing intranet was a poor platform for document finding, much less sharing. As an aside when I speak on web 2.0, I often ask anyone in the audience who can more easily find stuff on their company intranet than the web to raise their hand. This is a question I learned from Andrew McAfee. He reported that no one has raised their hand to this question and I have found the same results.

My hand wouldn’t be raised either.

How would a company implement something like this? WorkBook:

A secure enterprise overlay for Facebook. WorkBook allows employees to securely interact with their peers using the hugely-popular Facebook service. WorkBook combines all the capabilities of Facebook with all the controls of a corporate environment, including integration with existing enterprise security services and information sources.

The picture is really worth a thousand words in this case, as it shows you just how WorkBook appears to users.

Andrew McAfee, a professor at Harvard Business School, blogs about WorkBook and addresses the security concerns and technical operation:

Inside this [corporate] section were a number of standard Facebook features — friends, groups, Q&A, profiles, etc. — presented using the standard Facebook UI. But the data populating each of these were specific to [the company], came from the Worklight server installed at [the company], were encrypted as they traveled across the Internet, and did not pass through Facebook servers.

I really like the idea, and the implementation is perfect because it doesn’t try to do too much. Facebook already exists and works well for its users. There’s no need to reinvent the wheel. For corporate intranets usually designed and maintained by the IT department, less involvement on their part from a UI perspective is a big improvement.

What do you think? Could this be just the thing to push Facebook onto the intranet for many companies?

Do we have a software valuation issue?

Soumitra Dutta of French business school Insead thinks so, as reported in this story on CFO.com:

Insead has developed a “novel technique” to value software assets. Using conjoint analysis — “a time-tested and widely used robust technique in marketing science,” Dutta claims — companies can place a value on software by identifying its individual attributes, compiling trade-off data from employee surveys and crunching the resulting numbers using “a complex form of analysis of variance.”

The report produced by Dutta asserts that companies are therefore “under-reporting” their software assets, which is a troubling leap to make. When it comes to financial reporting, we need to be conservative about the value of an asset like software and stick to objective data like cost and a reasonable amortization rate. Comparability and consistency as twin aims of any accounting framework are thus maintained.

There is great intangible value tied up in software — as well as the users of the software — but that’s not enough to warrant writing up software assets en masse.

The report also argues companies are not leveraging these assets optimally, and cites the company’s brand value and patent portfolio as examples of more optimally levered intangible assets. But if this is the case, they shouldn’t be arguing that accounting treatment is to blame. Other intangibles are not written up using the types of analysis the report urges either. There are more important objectives to financial reporting.

What do you think? Would valuing software assets like this improve or distort financial reporting?