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The growing global accounting shortage; tackling energy costs; learning lessons from Katrina; why video games are good for morale; double-jeopardy for price-fixing; when bloggers leak; and more.
CFO Staff, CFO Magazine
August 1, 2006
There's a new raw-material shortage plaguing global business — only this one is in the finance department.
While the Sarbanes-Oxley Act has sent U.S. companies and accounting firms scurrying for financial talent, the problem is not limited to these shores. "There's a shortage of accountants throughout the industrialized world," says Rick Robertson, a professor of accounting at the University of Western Ontario.
While there are no exact numbers, the widespread push for stronger financial controls and improved governance has increased demand for accountants from Canada to India, where there are just 130,000 accountants currently chartered (versus more than a million in the United States). In addition, nearly 100 nations, including those in the European Union, are striving to implement International Financial Reporting Standards (IFRS), further driving demand.
The situation is particularly acute in China. By some estimates, a booming economy will leave the country more than 100,000 accountants short. Due to a long history of state-run business, accountants with experience preparing Western-style financial reports are few and far between. "There's a need for a particular level of reporting, legal, and regulatory expertise in a capitalist society that you don't have in a centrally managed economy," says Chris Higson, a professor of accounting at London Business School. "Those higher-level accounting skills are still largely absent in China." The Chinese government also announced this year that the country would be adopting IFRS, sharpening the need.
There is no quick fix. Students in Ireland and the UK continue to flock to the subject area, in part due to the high — and rising — salary levels and the opportunities for global work, says Peter Clarke, head of the accounting department at University College Dublin's Michael Smurfit School of Business. "We have more people taking accounting now than we have had in years," concurs Robertson. But training takes time; the benefit for business from today's bumper crop of students is likely five or six years away.
Different regions are approaching the supply problem in different ways. India's Institute of Chartered Accountants has reduced the required number of years of training to four from more than five. CPA Australia and the Australian government have launched a program to lure retired accountants back into the workforce. Meanwhile, China has enlisted England's Institute of Chartered Accountants to train 50 Chinese students a year. — Kate O'Sullivan
Countries and regions seeking accountants
Source: News reports
Expending Energy on Energy
Like consumers, companies are feeling the squeeze from rising energy prices. On average, electric rates are rising 15 percent per year. Wholesale natural-gas prices have tripled over the past several years. "As a nation, we're in the middle of a perfect storm," says Richard G. Lubinski, president of energy consultant Think Energy Management LLC. "CEOs, COOs, and CFOs realize they are looking at a budget-killer."
Take Carquest Corp. For years, energy was an afterthought at the auto-parts retailer and distributor. That changed last summer, when the Raleigh, N.C.-based firm learned its $21 million annual energy bill might top $30 million in 2006. Suddenly, energy was a high priority. "To the finance folks, a 25 percent increase sounded like extortion," recalls Adam Rice, director of energy and facilities management. "We had to learn to manage energy or energy would be managing us."
Energy consultants were dispatched to Carquest's 1,500 stores and 43 distribution centers. Thousands of utility bills were scrutinized. Stores and warehouses got energy makeovers. Automatic timers were installed to control heating, lighting, and air-conditioning. Even lowly lightbulbs were swapped for longer-lasting replacements.
In a similar move, hotelier HEI Hospitality sought to curb its energy bills last year. The effort began with a detailed analysis of energy use at the Norwalk, Conn.-based company's then 27 hotels. From there, HEI instituted a program to cut usage. In back offices, lights were dimmed or turned off at the end of business; energy-efficient doors were installed to reduce heat loss. "Understanding our consumption was a first, big step," says CFO Ernie Freedman.
Other firms are turning to Energy Star, a federally backed program that provides information on energy efficiency. One of its tools rates commercial buildings on a scale of 1 to 100, based on a year's worth of bills for lighting, heating, and cooling. Savings are also being found on the supply side. World Energy Solutions Inc., an online energy broker, conducts reverse auctions for clients seeking electricity or fuel in wholesale and retail markets. Recently, World Energy fielded 38 electronic bids from four suppliers interested in supplying a Massachusetts life-sciences firm. The winning bid was $300,000 lower than the local utility's.
Still, energy experts say supply savings average only 3 to 5 percent. The other problem, says Rice, is that "electric rates are rising so fast I don't think we've reduced a lot of costs yet." — P.B. Gray
Until Katrina, many Gulf Coast businesses thought their disaster-recovery plans were pretty solid. As the first anniversary of the hurricane approaches, some of those companies have renovated the old plans or built new ones.
Like other companies in the storm's path, New Orleans–based Entergy has spent the last year making its plans more robust. "With an event of that size hitting so much territory, much of the infrastructure wasn't operating. A lot of what we needed to improve [concerned] communication," says CFO Leo Denault, who also spoke with CFO right after the tragedy (see "Regrouping after Katrina," Topline, October 2005).
The utility has lessened its dependence on the local telecom network by contracting for satellite phone service and has moved its remittance-processing functions from New Orleans to Hammond, La. — "well out of harm's way," says Denault. Some critical IT functions have been moved to Little Rock, Ark. And while Entergy's original plan allowed it to remotely close its books only four days late, its new version is "much more robust, much more codified," he says.
Harrahs Entertainment, which operates several area casinos, has centralized its disaster-preparedness plans. "Last year, if you were the general manager of a facility, you made the decision when to close," says CFO Charles Atwood. This year, someone who has access to information from a national database and from law enforcement makes that decision in conjunction with the general manager.
Like Harrahs, PetroCom's updated disaster plan involves more centralization, but the telecom supplier actually created a health, safety, and environmental director post to oversee the plan. Says CFO Dennis d'Aquin, "Most things we were doing worked; we just did not have enough of everything in place." For example, last year PetroCom had only enough diesel fuel to run its generators for three or four days; it has since installed extra fuel tanks in its parking lot.
Going into this hurricane season, generally firms with fewer than 500 employees or less than $100 million in revenues have not modified their plans, says Hank Chase, director of homeland-security programs for Smart LLP. "There appears to be an improved preparatory state at the bigger companies, with evacuation plans, satellite sites, measures to take care of employees, and the like," he notes. "But when you get below the large companies, regrettably, there is not much difference." — Allan Richter
Las Vegas at Work
Fourteen months ago, employees at Circulation Services Inc. (CSI) were leaving at an alarming pace. To stem the annual turnover rate of nearly 500 percent at the call center, CEO Andrew Orr decided to play games.
Specifically, Orr teamed up with Snowfly Incentives to introduce Internet games to motivate his staff — particularly the Gen X workers — and entice them to stay more than a couple of months. CSI employees are awarded tokens for good job performance, which they can then use to play games like slot machines and balloon popping. Players earn points that can be redeemed for gift certificates and debit cards, and limits can be placed on the number of tokens played to ensure employees are not abusing the privilege. "To earn tokens, employees still have to perform," says Orr. "If a call comes through and an employee is playing a game, the call automatically overrides the game."
Brooks Mitchell, the founder of Snowfly, says the approach is based on the idea that intermittent positive reinforcement is more effective than annual incentives. "Employees come in and immediately check to see if they've been awarded tokens so they can play," says Orr. "It gets them excited about coming to work."
On average, Snowfly sees 6,000 hits a month from the 250 CSI employees that use the system. Since it was implemented, turnover is now below 400 percent — no kidding, the industry average. The system, Orr adds, is also affordable. In addition to a flat $2–$5 per user per month fee, Snowfly charges a minimum $1,500 start-up fee. CSI also allocates $3,000 per month to be turned into points (employees receive a penny per point). "It's really hands-off for us," says Orr. "The program has paid for itself." — Laura DeMars
Paying Nothing — or Double?
Not only may companies implicated in price-fixing schemes have to pay hefty fines, they may have to pay them twice, if not more.
In May, the European Court of Justice, an appeals court for the European Union, upheld a fine of €43.9 million ($55.5 million) imposed on Decatur, Ill.-based Archer Daniels Midland. The fine was in response to the agricultural company's attempts to fix the price of lysine, an ingredient in animal feed, in the mid-1990s.
The court dismissed ADM's claim that it was being punished twice for the same crime. That claim stemmed from the fact that the fine, originally levied by the European Commission, was imposed on top of $100 million ADM had already paid to U.S. authorities. But in the court's view, because the price-fixing case affected both U.S. and European markets, the commission was right to levy a fine for the damage done in Europe.
On a broader scale, the ruling highlights the growing willingness of governments to prosecute price-fixing schemes. "Within the past 10 years, there has been a proliferation of cartel enforcement around the world," says Ray Hartwell, antitrust partner with Hunton & Williams LLP. For example, earlier this year, both the European Commission and the U.S. Department of Justice began investigating about a dozen airlines, including British Airways, Japan Airlines, and Air France, looking for evidence of price-fixing within the companies' air-cargo businesses. Four airlines have subsequently been sued for alleged price fixing on passenger flights. Elsewhere, countries such as Australia are seeking to introduce criminal penalties and even jail time for cartel conduct.
In addition to being seen as aggressively guarding their markets, regulatory agencies want their piece of the pie. Fines levied for various price-fixing and related anticompetitive behavior can run millions of dollars, with those imposed in the United States and the EU often larger, since they are calculated based on the volume of affected sales, says Hartwell.
Given the willingness of regulators to prosecute price-fixing, companies could end up paying fines out of proportion to the impact of their actual actions, says J. Mark Gidley, chair of the global competition practice at White & Case LLP. And short of not being involved in price-fixing at all, companies need to take the risk of fines from multiple governments seriously.
"It's a new world," says Joshua Newberg, associate professor at the University of Maryland. "More countries are getting into the act of competition enforcement." — Karen M. Kroll
You Say Potato, I Say...
CEOs and CFOs may wax poetic on strategy, but the message may be lost on one important constituency — employees. According to senior executives surveyed by Deloitte & Touche LLP and the Economist Intelligence Unit, fewer than 10 percent believe their employees are completely aligned with their company's strategy. The barriers include lack of accountability and poor communication.
When Talk Isn't Cheap
As blogging's popularity rises, some major companies, including Sun Microsystems and IBM, are encouraging employees to contribute to company-backed Websites. Some even let them rant — Microsoft's Robert Scoble, for example, a popular blogger who stepped down this past summer to work at video-blogging start-up PodTech.net. The one requirement: keep the company's confidential information confidential.
But some employees may be stepping over the line, according to a recent survey by Proofpoint, an E-mail-security-software provider. Nearly 1 in 10 companies has investigated the exposure of material financial information via a blog or message board in the past year, reports the study of 294 respondents. In one case, Google fired an employee just 11 days after he started a blog in which he cited the strong financial growth of the company.
Companies are mistaken if they think blogs don't risk the release of sensitive information, says Michael Weider, CTO of Watchfire, a Website-security firm based in Waltham, Mass. Instead, he says, the first line of defense should be a strongly worded policy for company blogs as well as for personal blogs that employees may write in their spare time.
IBM's blogging policy, for example, is extensive, including the caveat "You must not comment on confidential financial information such as IBM's future business performance, business plans, or prospects anywhere in the world." Such parameters help employees avoid being fired for dishing about their workplaces — cases of which have been reported at Wells Fargo and social-networking site Friendster in the past three years. In 2004, a Kmart employee was fired after his attempt to post positive information about the Thanksgiving shopping weekend revealed internal sales data.
It's not always employees whose online postings put companies in a tough spot: Earlier this year, the Securities and Exchange Commission settled a case against William A. Day, a business owner accused of insider trading. In 2002, Day allegedly posted a coded note online revealing that medical-device company Smith & Nephew planned to acquire all outstanding shares of Oratec Interventions. Subsequently, he bought and sold thousands of Oratec common shares in a three-day period. The acquisition was publicly announced about 24 hours after Day's posting. — Sarah Johnson
See You in September
Now that the second-quarter books are closed, why not take a vacation? Your boss won't mind. In fact, a new survey by Accountemps finds that senior executives believe August is the best month for employee vacations. So go ahead: hit the beach, play a round of golf, or clean out your basement. Just make sure you're back by Labor Day.
Sins of Commission
Talk about nightmares that won't end. In late April, $3.5 billion software firm CA — ostensibly in the midst of a postscandal turnaround — shocked investors with the news it would miss GAAP EPS estimates by at least 75 percent. CA's original turnaround artist and former CFO Jeff Clarke left for a new job, while CFO Bob Davis and other executives were ousted. By late May, CA was delaying its annual report and planning to restate the previous quarter. A month later, more accounting irregularities had emerged, leading CA to miss its extended 10-K filing deadline and contemplate restating results as far back as 1997.
A key issue in CA's most recent travail appears to be a new sales-commission plan gone awry. The goal was to motivate salespeople to get new business instead of just maintaining old accounts. The result, however, was that the firm ended up paying out higher-than-expected rewards on lower-than-expected revenues and billings. "The only conclusion is that they must have had a poorly designed commissions program," says Walter Pritchard, a research analyst with Cowen and Co.
The problem of paying higher commissions for lower sales can arise for a number of reasons, says Raoul Choos, sales compensation practice leader for Pearl Meyer & Partners. Timing is one issue: if a company defers revenue over the life of a contract — as CA does — but pays a large percentage of commission upfront, there may be a gap between sales revenues and costs. Using accelerators, or higher incentives for selling particular products or for going over quota, can also lead to margin erosion. Rewarding multiple people for the same sale — as CA did in trying to integrate acquired companies — can also lead to disproportionately high payouts.
CA is now paring down its sales force and relying more heavily on resellers, according to a June announcement. But analysts doubt the firm will get back on track until it improves more fundamental issues. "The biggest problem is that it's been unable to achieve the amount of sales it forecast," says Bert Hochfeld, an analyst with Hochfeld Independent Research Group. "It needs best-of-breed products, and it doesn't have them now." — Alix Nyberg Stuart
"If you're on appeal and you die before that appeal is decided, it's like stepping into the Way-Back Machine. It's as if Lay had never been charged." — Wayne State Law Professor Peter J. Henning, commenting on the legal implications of former Enron CEO Kenneth Lay
Setting a Gold Standard
Candente Resource Corp. no longer calculates currency-exchange rates. It doesn't wait for international wire transfers to clear either. It doesn't have to: the gold- and copper-drilling company, based in Vancouver, converted some of its corporate dollars and cents to gold grams and mils.
"When I discovered how easy it was to hold money in gold, I said, 'Why not?'" says CEO Joanne Freeze. To facilitate the process, Freeze opened an account three years ago with GoldMoney.com, one of about nine gold-backed currency exchanges in operation. Since then, Candente, which works with both Canadian and U.S. monies, has used the neutral currency whenever possible, says Freeze.
If both firms are using gold, says James Turk, founder of GoldMoney.com, based in Jersey, British Channel Islands, "the transaction is instantaneous and costs a fraction of what it would in other currencies." (A bank wire transfer can cost $25 or more; GoldMoney.com charges 1/10th of a goldgram, currently about $1.90.) Turk, who hopes to reestablish the metal as an international currency, estimates that GoldMoney.com has about $140 million in gold and silver in circulation and processes several million dollars' worth of payments monthly.
Before calling up your nearest gold-backed exchange, do your homework. Turk recommends making sure the exchange has tight security measures, such as a recognizable auditor and third-party providers. And Jeff Wallace, managing partner of Greenwich Treasury Advisors, cautions that, like any other currency, gold can be risky. "Recently, the price of gold dropped $70 an ounce over three days," he says. "It's just as volatile as any other currency." — L.D.