In recent years, finance departments have been suffering from their own version of chronic fatigue syndrome. Symptoms include overstretched staffing resources, extra consulting fees, and an overall weariness with the steady stream of regulatory and accounting rule changes, which have run from tweaks to overhauls.
There is little hope for a cure, at least in the short term. In fact, the symptoms could soon worsen as U.S. and global standard-setters near their self-imposed deadline for converging key rules by June 2011. That convergence will bring major changes to how companies account for leases, revenue, and financial instruments.
The frequency, volume, and complexity of proposals and changes in recent years are taking a toll on finance staffs. “At any one time we’re tracking between 100 and 200 potential regulations that might impact us,” says Terry Lillis, CFO at Principal Financial Group. “It is putting a lot of pressure on the accounting and financial resources of the organization.”
The Sarbanes-Oxley Act of 2002 touched off a continuous stream of changes to companies’ financial-reporting methods, but the amount of guidance scheduled to be finalized next year is unprecedented. Rule makers have been on the fast track since last fall when they recommitted themselves to their June 2011 deadline. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board have met at least 10 times since then, providing frequent updates on their joint projects — and more data for already busy finance departments to ponder. The boards expect to unveil five major proposals by the end of this month.
How CFOs cope will depend on the size of their finance departments and to what extent various rule changes affect them. For some, the fluctuation in regulatory guidance and accounting pronouncements is a minor hassle that will require one or two staffers, on a part-time basis, to keep tabs on changes through occasional updates from their accounting firm and other outside sources. As Jeffrey Davison, CFO of small-cap software company RightNow Technologies, puts it, “We don’t dig deep into any topics that don’t impact us.”
But for many finance departments, the complexity of their business demands that they keep a close watch, research the rules’ implications (even when the final form of a new rule and its effective date are uncertain), and have their staff members ready to pounce when a standard is formalized.
No One on the Bench
Even companies with the finance bandwidth to monitor impending changes may find that’s a luxury they can no longer afford as head count shrinks; smaller staffs may soon have to absorb big changes. “You’ve got a double-edged sword as increased regulation and complexity combine with reduced capabilities from a finance-function standpoint,” says Carl Waller, a managing director at consultancy Protiviti.
Some pending rule changes, such as those involving revenue recognition and financial-statement presentation, could have strong ripple effects by possibly changing the metrics used in debt agreements and compensation plans, and by placing additional demands on departments outside of finance, including IT, investor relations, and human resources. “We’re keeping all of the key functions and departments within United Technologies Corp. aware of what’s happening and how their groups could be impacted,” says UTC controller Margaret Smyth.