Talk to auditors these days and you hear the machinery of a nascent industry whirring: the business of international financial reporting standards and the revolution it will bring.
While most client eyes are on the Big Four for their role in convergence, of course, the second tier is immersed as well. CFOs of middle-market companies, and those whose companies do business primarily in the United States, who think IFRS won’t affect them for a long time to come might be startled to see full-scale mobilization efforts underway among their auditors. Case in point: McGladrey & Pullen and its non-attest affiliate, RSM McGladrey.
“What’s underestimated is the educational effort it will require in the heartland, the bread basket of the U.S., including among banks and other customers. It will certainly impact them all,” says Bob Dohrer, partner and practice leader of McGladrey & Pullen’s International Assurance Services Group. A lot of McGladrey’s bread is in that basket. The Bloomington, Minn.-based firm has 150 listed companies as clients on the audit side, many of them middle-market. “When one adds up the numbers of people who are going to have to know about IFRS, it’s clearly a daunting issue.”
Whatever the time frame that eventually applies to the switch from U.S. generally accepted accounting principles to IFRS — generally presented as a five- to seven-year horizon, with some conversions taking place by next year — the stakes are high. “It would probably shock many companies to stop and analyze how many of their business agreements and other arrangements are based on GAAP,” Dohrer says. “I think it behooves them, after looking at the educational considerations, to then move to the impact on business operations: incentive comp plans and relationships with key vendors,” for example, which may require the application of financial information.
“Debt could in fact be called and become due on demand if financial numbers changed due to the adoption of IFRS,” he notes. Talk about potential impact.
Direct and Indirect Costs
Like all new industries, this one will be lucrative for some, and costly for others. McGladrey is working to explain the costs and responsibilities for clients, while also taking note of the rewarding — and busy — job ahead for it and its fellow accountancies.
“As we talk to our clients, we explain that there are going to be direct and indirect costs,” Dohrer says. “The direct costs are easy to get your hands around.” For each member of a company’s accounting department, for example, there are educational options already emerging: classes being offered by industry groups like the American Institute of Certified Public Accountants, and other courses being developed by state associations and Big Four and second-tier firms. They include one-day, high-level conceptual sessions, and deeper, more inclusive four- or five-day “full-immersion courses.”
“From 20 to 25 percent [of finance staff] will need the in-depth, full-immersion courses,” Dohrer suspects. But even with the minimal training that other office employees will require, “I’d figure the cost in the neighborhood of $1,000 per day, per participant. That’s the most direct cost.”
He cautions clients not to forget the indirect expenses, however, including time lost among employees trying to learn new systems. “Certainly, there will be third-party external providers that will come into play and assist companies with conversion.” And companies will have to choose their approach.
“I see the training coming in a few different buckets,” in Dohrer’s view. “For the larger, more complex entities, the training will come from the Big Four or second-tier accounting firms. Certainly we are looking at our own programs not only to train our people internally, but also to see how we can help train clients. We look at this as a great opportunity.”
A Four-Step Cure
Right now, McGladrey is offering an introductory webcast to all its people in the U.S., examining the theoretical and conceptual difference between principles-based and rules-based approaches, for example. In the offing are 16-to-18-hour courses that will be conducted by a cadre of 40 to 50 trained IFRS specialists, “the champions in that area,” according to Dohrer. Through RSM McGladrey, the firm has a presence in 70 countries, with 100 offices, and Dohrer says experts familiar with IFRS convergence in Europe have recently moved to the U.S. to help mobilize training efforts here.
The education of clients really started about nine months ago. Moving into the summer, its training approach for clients has concentrated first on those “with international touches,” he says. It is there where tax-related issues, for example, arise first — including how accounting changes for value-added taxes and transfer prices under IFRS affect companies.
The McGladrey four-step training methodology starts with a preliminary assessment for clients, in which financial managers meet with the firm and walk away with a “heat map” showing areas of greatest sensitivity to conversion, and those where delays may not matter so much. Stage two is the more detailed planning phase, with stage three beginning the implementation — “whether the clients want us to perform the conversion, or to assist them with it.” Stage four, completion, involves publishing IFRS statements and establishing ongoing training programs.
Going through the four stages “is an 18- to 24-month process,” Dohrer says.
It may seem more comfortable for clients to lean on trainers, he notes. “But companies need to become self-sufficient at this. As much as we would love to do this for them for the next 10 years, realistically that’s not going to happen.”
The next shock Dohrer expects client companies to experience is the realization that convergence doesn’t mean learning both GAAP and IFRS, and the differences between them, as it means training people in IFRS alone.
“Take banks, as they start dealing with international financial companies,” he says. “I think it won’t take them long to figure out that it is an inefficient and ineffective use of their time to train people to deal with both. In fact, it’s wasteful.”