This page will highlight some of my more unusual experiences in the accounting world and how I resolved them.
Can you beat an Intercompany Imbalance of £875 million?
I left PwC after 7 years in audit and Corporate Finance to join Trafalgar House, at that time, a $10 billion struggling conglomerate. A few weeks after I started, the company went live with a Hyperion implementation. At the time it was the largest Hyperion installation in the world. This was before hi-speed internet. The company had about 250 operations around the globe and the IT group had to mail 3.5 inch floppy disks and ensure each unit installed the monthly update.
When we first consolidated using the new system, our intercompany accounts were out of balance by £875 million! Within 2 months, I had managed to reduce that to about GBP 8 million. At the time the company owned the Cunard Cruises operations. It turns out in that first roll-up, the assets of Cunard were in one division, its liabilities in a second and its equity in a third division. They don’t teach that accounting at any business school!
Can you beat an Intercompany dispute of 18 years?
After a couple of years I was transferred to the Pittsburgh office. I found out we had an intercompany balance with our Toronto office that was 18 years old and in dispute. The amount in dispute was about $5,000! Neither Pittsburgh or Toronto could provide any paperwork to support their position, so we quickly split the difference and moved on.
Hell in Houston
After 15 months in Pittsburgh, I was asked by the Corporate office (Trafalgar House had just been taken over by Kvaerner) to become the CFO of the oilfield services unit as they had lost patience with the business unit and division to resolve the problems with the unit namely;
- the business had had 5 CFO’s in 2.5 years.
- the auditors (Arthur Andersen) had not signed off on the accounts for 3 years (lack of financial controls).
- The unit had customized the ERP system (JD Edwards) so much that JDE had disowned the installation and were not able to support it.
- Accounting department had turnover of greater than 100%.
- the business was loss-making.
I accepted the job in Houston without ever setting foot in the city. I was told in the interview that my predecessor had been fired. When I arrived in Houston, to my surprise, I found out that she had been kept on by the local CEO as a consultant for the ERP re-implementation. To be fair to her, she didn’t cause any problems for me.
The controller I inherited was mad at me for two reasons
- He didn’t get the CFO job
- Other members of the management team told me he was infatuated with my predecessor (I don’t think it was reciprocated!).
The guy wasn’t performing and I put him on a 60 day performance improvement plan. A few days before that was up, he waited until I left on a Friday evening and then slipped a resignation letter under my door. I never saw him again. That’s when I realized the meaning of a ‘Right to work’ state!
Within one year I restored the financial controls and managed to get a clean audit opinion from Arthur Andersen.
The keys to getting clean financials are
- Concentrate on cleaning up the balance sheet accounts first
- Hire good people at or above market rates. Many of the problems stemmed from the division CFO being a cheapskate
- Hire extra contract staff at the beginning to get on top of the problem and allow your good staff the time to implement process improvements. If your staff are constantly fire-fighting on a daily basis, you will never be able to make the process improvements. Once you have made the process improvements, you will be able to reduce staffing levels.
I left Kvaerner after its takeover by Aker and I joined Vetco Gray (then owned by ABB, now part of GE). I was asked to go to Kazahkstan for a week as the local affiliate owed monies to the US company. In doing so, I came across strong evidence of about $70,000 in bribes.At the time, ABB was under intense scrutiny from the SEC from making illegal payments in various countries around the world.
At the start of the week, the local accountant had given me a draft trial balance which had various amounts sitting in prepayments. I didn’t question them until I got an updated trial balance later in the week where these payments had been reclassified as ‘Consulting fees’. When I questioned her, she told me she had been instructed to code them there by the local CEO. There was no supporting invoices and the payments had been made months earlier. I couldn’t prove it but it was clear to me what they were and I reported them to the Corporate Office.
Spreadsheet woes and dangling debits
I once saved a company $6 million in cash by diligently working through complex spreadsheets! At the time I was working for Thermo Fisher. They had just acquired the Kendro division in Asheville, NC from another public company for $834 million and I was dispatched to be the interim Finance Manager for the division.
I was working on post-acquisition integration of the financial reporting systems and I wasn’t part of the Thermo’s M&A team. The Kendro business had managed its financial reporting through two large spreadsheets, one for the profit and loss account and one for the balance sheet. The sheets had lots of eliminations and topside adjustments (which I hate). Over a couple of days, through diligent digging, I figured out that the interco eliminations between the profit and loss account and the balance sheet were out of balance by $6 million. At the time, Thermo was in the process of finalizing the working capital adjustment of the deal. The result was a $6 million reduction in the cash purchase price.
For a time I worked at MMI Products, a building products group, owned by CRH, a large publicly traded company in Ireland. The business was losing money horribly and the parent company made the decision to sell off one of the divisions to a small publicly-traded US company. Because it was a material acquisition for the purchaser, we had to prepare carve out accounting on the division being sold.
The first challenge was that MMI’s books were created under IFRS, whereas the carve-out accounts had to be prepared under US GAAP. While there are a lot of similarities between IFRS and US GAAP for day-to-day transactions, there are some important differences. In this situation, the main difference was in how impairment of long-lived assets was calculated.
The second major challenge was allocating certain types of expenses to the carved-out entity. MMI operated a shared service center and we had to create a methodology to allocate different types of shared service costs.
One big surprise in this was how little guidance there was from the major accounting firms on preparing carve-out accounts.
7 year Goodwill impairment test
In 2012, I joined Greene’s Energy Group and I quickly realized that its accounting for the 13 acquisitions it had made in the previous 6 years was not in accordance with US GAAP and that we would have to restate our results. Basically no amortizable intangible assets had been created and no annual goodwill impairment test had ever been performed. At the time Greene’s, a private equity backed oilfield services company, was being audited by a small local firm.
The initial challenge was to restate the purchase accounting for all 13 acquisitions. This wasn’t so bad as there were fair value reports available for the major deals. The harder part was performing a goodwill impairment test for each year. Although I was performing the exercise in late 2012 when I knew the company did not have a goodwill impairment issue, I could not say that with certainty for the tests for 2008 and 2009 when the oilfield activity dipped. One of the big issues with US GAAP, is that, once you impair an asset, you cannot never write it back up, if the market fundamentals later recover (unlike IFRS, where you can write back your impairment).