In the aftermath of PwC’s review on M&C Saatchi’s financial report, the advertising agency has seen its shares plunge. For the new financial director – Mickey Kalifa – appointed by the company last year and who officially started working for the company in January 2019, this is clearly bad news!
In August, M&C Saatchi discovered accounting errors which put the group in a difficult financial situation, where it uncovered a £6.4m irregular charge. Following this, PwC was appointed to conduct an independent review, in which the Big Four firm identified a series of mistakes in the agency’s balance sheet.
M&C Saatchi isn’t alone. Ted Baker appointed a new financial director earlier this year, in which Rachel Osborne replaced Charles Anderson, who had initially resigned. The retailer later saw an overstatement on its balance sheet estimated between £20m to £25m – a big blow for the company’s investors.
When looking at recent news, it’s clear assigned financial directors can inherit unforeseen problems in their new roles – a situation which can leave them having to deal with numerous criticisms amid scandals.
How, then, can financial directors deal with problems arising from earlier accounting ’issues’?
The role of CFOs
With a rising number of UK businesses collapsing comes an increasing blame put on financial directors – their role being often correlating with the financial crisis of the company.
David Greenhalgh, Partner – Employment at commercially-focused law firm Joelson, explains: “The word ‘scandal’ should be far from the mind when discussing the role of the Finance Director – strategic and capable yes, but not scandal. All that has changed in recent weeks, as the situations unfolding at Saatchi and Ted Baker have shone the light of public scrutiny onto the important, but usually low profile role of Finance Director.”
To tackle the blame put on their roles, Greenhalgh claims that recruiters should ensure the protection of CFOs by guaranteeing that an independent investigation is provided in response to financial errors.
“When negotiating employment contracts on behalf of potential Finance Directors for roles under the above circumstances, our top priority is to establish a waiver protecting them from blame for any errors or malpractice originating before their tenure. Reputation management is a key consideration – how will taking the role look for future roles?
“Equally, when acting for a business in such circumstances, our focus would be on establishing an independent investigation into the cause(s) of the scandal, to ensure any issues were remedied and measures were implemented to prevent any future reoccurrence.”
What businesses can do
Whilst scenarios such as Ted Baker and M&C Saatchi have proven that the appointment of a new CFO can occur ahead of the financial crisis of a company, prevention should be considered a key measure to follow as historic issues of a business become tied in with the assignment of its financial director.
In other words, accounting issues detected within a company should be prevented beforehand as a means of protection for the CFO.
Simon Bittlestone, CEO of Metapraxis, explains: “The spate of accounting errors we’re seeing in the industry continue – Ted Baker and Saatchi are just the latest victims to fall foul of an industrywide problem. On the surface, appointing a new Financial Director at a time of crisis is understandable, but there is no guarantee that this type of accounting error won’t happen again. Instead, organisations need to start looking at preventive measures rather than dealing with the aftermath.”
To protect the CFO from inheriting previous mismanagement, finance teams within businesses should aim to actively engage amongst themselves, in which responsibility for accounting issues is shared.
Simon Michaels, CEO of HW Fisher Business Solutions, adds: “Businesses should appoint a finance director as soon as possible, rather than waiting until they face an accounting issue. Under investment in the back office often leaves finance teams playing ‘catch up’, rather than pro-actively preventing risks.
“Tighter resources means weaker control that can end up costing the business more in the long term. However, it is vital that responsibility for accounting is viewed holistically and the whole board takes responsibility for how finances are managed.”
Transparency is key
When accepting the task, financial directors should also be fully informed and acknowledge the current financial situation of the business.
Greenhalgh explains: “Our recommendation for individuals considering such roles would be to consider asking to take the role on a consultancy basis, viewing the steadying of the proverbial ship as a project for a set period of time, after which they may wish to take on the position full time when things are clearer. They can do so with full knowledge of the extent of the crisis and the impact it has had on the business and the potential impact on the individual’s reputation in the job market.”
Another main measure to follow to prevent blame being put on CFOs is communication – where transparency can become the wake-up call that businesses need.
Michaels comments: “A company’s financial journey will always be affected by unexpected changes, so a robust and flexible plan is needed. Without a roadmap, it is impossible to set targets and project growth.
“Communication is also key and it is the role of the financial director to be transparent and flag any issues to the board. A strong financial director should also challenge the CEO and be unafraid of difficult conversations, so any unusual matters are addressed head on.”
As the M&C Saatchi and Ted Baker examples show, businesses should obviously focus on prevention, while improved collaboration between management and finance teams within a company can also lead to the early discovery of financial error.
Simon Bittlestone, CEO of Metapraxis, says: “The fact is that accounting systems have become so complex that they’re hiding underlying business performance rather than providing clarity. Effective management information (MI) would have helped leadership to cut through the noise and spot these errors, but it’s often not good enough.”
What’s more, technology can be an enabler for more efficient detection of anomalies within a company’s financial report.
“Companies need far greater collaboration between financial and management accounting – when they start focusing on the underlying business model and using technology to better predict issues, the board will have a far better understanding of the whole business and will be able to spot when something’s not quite adding up.”
M&C Saatchi takes new measures
M&C Saatchi’s previous CFO left shortly before the company’s financial crisis came to light, with Mickey Kalifa being announced as new financial director in December 2018 and officially joining on January 14 this year.
But back in 2018, no concerns were raised by the company regarding its financial status – where warnings only emerged as auditors conducted the full year of audit during the second quarter of the year. When the first accounting errors were disclosed, Kalifa was in place at the time and decided to adopt new measures for the company to follow.
He led the internal review into the accounting misstatements and has since also led the process of strengthening the company’s financial controls and systems whilst putting in place common practices.
Since the reveal of financial errors, the advertising agency has however not pointed any fingers on individuals – despite three independent directors resigning.
In response to recent news, Jeremy Sinclair, Chairman of the agency, said: “We have accepted the decision of these Directors to resign. We are determined to restore the operational performance and profitability of the business and are already implementing all of the recommendations set out in the PwC report we announced last week.
“We had started a process to reconstruct our Board with new Independent Directors. This new Board will have a mandate to conduct a full review of all aspects of our governance.”
To avoid any future financial errors, M&C Saatchi has therefore decided to incorporate a set of rules:
“Led by the new Group Finance Director and overseen by the Group’s audit committee, the Company is taking action to prevent the incidents that resulted in the above accounting misstatements from re-occurring. The measures include:
- Reorganising the Group finance function incorporating Group Financial Control, Financial Analysis, Treasury, Company Secretarial and Legal, and Internal Audit;
- Creating new standardised Company accounting policies and procedures to be applied consistently across all companies in the group;
- Introducing tighter control and greater focus on cash and cash management;
- Implementation of an Oracle cloud-based accounting and forecasting system to be deployed across the worldwide group, replacing the many different accounting systems currently operating across the world. The platform is now fully operational in the UK and is expected to be live in all major markets by Q1 2021.
The Group’s audit committee has been appointed to oversee the implementation of the work that will be undertaken to strengthen the Group’s financial controls and the associated recommendations made by PwC.”
Following the new practices adopted by the agency, CEO David Kershaw said: “This restatement of our numbers and the reduction in forecasts make for very difficult reading – both for us as a management team and for all of our stakeholders.
“The only positives that we can offer are that a robust review has been undertaken and we have, under our new Group Finance Director, started implementing processes and procedures to prevent such issues arising again.”
The completion of the company’s audit is expected in March 2020, which will provide a full clarification on the agency’s financial crisis whilst it implements new rules aimed at preventing accounting errors. That will be a crucial time in the company’s history.