To clear of uncertainty and confusion ,
Provide an interpretation that removes obstacles to achieving results
Hi, I’m Patrick Flaton and for over 25 years I’ve dedicated myself to demystifying financial jargon and concepts and putting responsible people back into control.
Don’t get me wrong, in most cases accountants don’t deliberately set out to befuddle you. Like other professionals, they are so focused on their specialty they can find it difficult to communicate with people at another level.
Sadly, in some cases, I have found that accountants are so fixated on the numbers that they've lost the ability to look at them strategically.
In fewer cases they have gotten caught up in the mad rush to produce good results that they abuse accounting principles to get the bottom line other people want.
And finally there are cases where finance managers, CEO’s and even board members have used financial statements to hide deliberate fraud.
I don’t raise these scenarios to scare you but rather to highlight the need for you to develop a mindset that enables you to objectively analyse financial reports, ask better questions and critically evaluate the responses you get.
There was a time when accounting and financial management was fairly straight-forward. We could apply a dozen or so financial ratios and be reasonably confident we knew the liquidity, profitability, and long-term stability of the organisation.
Today there are a myriad of options available for everything from raising capital, through valuing assets to managing risk. And with each new technique a plethora of questions need to be addressed. Questions like
What is the true and far value of the resulting asset/liability at this point in time?
Does adopting this option limit our ability to make changes in the future?
If so, how does that affect the value of the firm?
How do we communicate those limitations and the impacts?
When should we recognise the income/expense associated with this option?
How do we report this in financial statements so users can understand our strategy and its implications?
Does this relationship need to be disclosed?
Is this a capital or recurrent item?
If capital, what is a fair and reasonable depreciation/amortisation rate?
What new risks are we open to and how do we disclose that risk?
Will the risk increase if we put greater reliance on this strategy?
To what extent is this strategy “commercial in confidence” and if so how do we communicate the impact without losing competitive edge?
Is the reporting of this option in line with accounting standards?
Is it in conflict with our current accounting policies?
If so, what are the ramifications on other items of changing this policy?
The answers you arrive at do far more than change the numbers in the financial statements. They affect the availability and cost of funds as well as the value of the organisation.
There is an obvious temptation to answer these questions to minimize cost of funds and maximize value.
However, as board members it is your responsibility to determine the real impact and ensure this is clearly communicated to owners and other stakeholders.
Many of the company collapses we have seen over the past decade are as a result of directors not meeting this responsibility. Sadly, the defense offered by many directors has been – I didn't know or I trusted another board member who was an accountant or I believed what the accountant told me
Before you resign from the board or become paranoid about every financial report/decision bear in mind what Albert Einstein said
It should be possible to explain the laws of physics to a barmaid.
If we can do it with physics we must be able to do it with accounting and finance.
However, whether it is understating a foreign exchange hedge fund or the impact of impairment on the P&L and balance sheet making it complex is easy; simplifying it, that takes creativity.
And that is my forte'!
If there is a particular issue you’d like clarified, or an item you’d like to discuss in confidence please contact me to organise a time to chat.