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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.

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