Accounting: Rip it up

In retrospect, this period will be the defining, mould-making moment for many financial directors and financial professionals. We have all witnessed dramatic events in corporate life ­ Guinness, Westland, Polly Peck, Enron ­ name your own favourite from the last 20 or 30 years ­ as well as economic downturns and stock market collapses. What is unique now is the conjunction of so many extraordinary events.

Individuals have been caught up in events they could never have imagined. Who joins a leading financial company expecting them to go bust? Who pursues a career with, for example, apparently financially-sound, leading retail companies, or car manufacturers, only to find the business on the brink of insolvency?

Along with their colleagues, FDs must reassess how they run things. So many of the old certainties of the FDs job are gone and now FDs will be making it up as they go along. Cash and liquidity management are back ­ big time. You could argue this never went away, but a couple of years ago FDs enjoyed a wall of liquidity as banks wanted to give them more credit than they knew what to do with, at such a fine price and with such undemanding covenants it was virtually being given away. Admittedly, the quid pro quo was the promise of ancillary business. But FDs may never see such crazy conditions again. Now a key task is to make the working capital management cycle as efficient as possible, finding efficiencies in inventory, creditors and debtors.

If cash is back as king where does that leave mergers and acquisitions? Despite the suggestion that it destroys corporate value, the M&A deal bandwagon propelled by private equity used to seem unstoppable. Even the biggest quoted company was not automatically immune. But the sector is now in retreat, nursing battered investment portfolios. Even if companies are in a fit state to be on the acquisition trail, the issue now is deciding on a fair price.

One victim of the credit crunch, the banking crisis and the so-called global downturn should be risk management. The last few years has seen an almost slavish adherence to the idea that every organisation can assess the risks it faces and then take steps to either eliminate or reduce them by introducing controls.

The danger with risk management is developing a tick-list mentality which drives out rational analysis and common sense. Go back and read Northern Rock’s 2006 annual report and accounts, peppered with references to how risk management was improving the business and giving the board confidence: nothing could go wrong. It should be used as a business school case study and a warning to all other boards.

The practice of risk management will not disappear, but it should no longer be held as the infallible answer to managing an organisation. If risk management is in retreat, how will its close cousin, corporate governance, fare? The view of the regulator, in the form of the Financial Reporting Council, is that the principles of corporate governance have held up well in the crisis of 2008. But it is too early to say whether the existing standards and guidelines have been observed in practice. Spring 2009 will be the time the cracks in corporate governance first appear as the results season gets into full swing.

However, unlike previous financial debacles, this crisis is not about auditing or corporate reporting. Auditors, to date, have been left on the sidelines observing the crisis develop. As the December year-end reporting season moved into full swing they became involved in key issues of valuations, write downs, impairments and going concern.

The actions of auditors in the next few weeks will determine how they are viewed for the next decade. This is no place for rule books or guidelines. It comes down to judgement. The global accounting standard setter, the IASB, has been desperate to exercise judgement as unprecedented pressure has been applied on it over fair value and financial instruments. That pressure remains, notably with the European Commission determined to carry on its fair value crusade. But the IASB has proved as adept at handling political pressure as formulating accounting standards.

The final uncertainty FDs face is in their own career. Vacancies at their level have tumbled and tales are emerging of unheard-of redundancies at senior levels amid FTSE-100 companies. The smooth career path ever upwards is over, for now at least. Those with jobs may want to consider how their hard work and long hours will be recompensed. Executive pay has long been a source of irritation to left-leaning politicians and trade unions. While the free market appeared invincible it was hard to halt the high earners. Now as bankers forgo bonuses and car chiefs in the US offer to work for an annual salary of $1, the cry that failure should not be rewarded will be bellowed ever louder. The irony is FDs and their colleagues may be working harder than ever putting all their skill and experience to work, and yet they may be doing so for less pay.