Ready for Year-End? Experts Recap Audit and Planning Considerations
For accounting and finance professionals seeking a clear path for 2022 audit and 2023 planning cycles, here are highlights from an expert discussion on year-end readiness.
As companies close out the year and seek a new level of clarity and planning for the year ahead, a cross-functional group of Riveron experts gathered for a webinar discussion exploring how to ensure year-end preparedness. The economic landscape presents many complexities that will inevitably impact year-end planning and audit cycles. The specialists also provided considerations for how to overcome the year-end intricacies driven by economic uncertainty. Here are key takeaways from the event:
(1) Prepare for increased scrutiny due to volatility and M&A
Inflation rates, high borrowing costs for both companies and consumers, lower GDP growth rates, and many other factors are driving today’s economic uncertainty. In turn, specialists are calling for continued agility and predict an increased need for financial and accounting rigor. With regards to the auditing cycle, many companies are already experiencing more extensive annual impairment testing. In the past, auditors typically first performed a qualitative test to determine whether a company appeared well-positioned to continue forward in a comparable environment. Now, against a backdrop of volatility and change, auditors might be more likely to conduct both the qualitative and quantitative sides of the process, to revisit value assumptions that may no longer hold.
“There’s plenty of uncertainty that impacts year-end financial reporting processes and the 2023 operating plans. Looking back, we saw record M&A activity in 2021, and even a strong start to 2022. And these transactions bring with them a range of accounting, reporting, integration, and FP&A challenges that are just now starting to be felt.”
In addition to the general economic landscape, mergers and acquisitions (M&A) are another major driver of change. While the rapid pace of M&A transactions may have cooled, attention must be paid to the post-transaction environment. Here, companies should prioritize integration considerations knowing the new context will call for structural changes across accounting, finance, and operations.
“M&A activity is a heavy lift for everyone involved: the company and the auditors, with a lot happening pre- and post- transaction. New acquirers may have improvement ideas that can create challenges if companies don’t have the bandwidth or the expertise in-house. Plus, one transaction might be the first of serial acquisitions going on into the future, which means the accounting groups need to build in expertise related to purchase accounting and integrations to prepare for future tuck-in acquisitions, and there are a lot of other potential financial reporting and tax considerations, too.”
As a business combination occurs, it is essential to make time upfront to standardize new systems and policies, as well as to validate existing data. Having conversations earlier will prevent significant delays in the future. On the accounting side, leadership will likely need to assess and establish new financial and reporting policies. In particular, companies should give attention to all aspects surrounding the transition between predecessor and successor—financial statements, accounting policies, and choice in auditors. Correspondingly, teams may need to add different expertise in order to handle new purchase accounting and financial integration skills. On the tax side, companies facing a changing operating environment need to gain a complete understanding of the new tax footprint and ensure the implementation of appropriate internal controls.
(2) Get a head start, anticipating resource constraints
Labor costs and employee retention will continue to be a challenge across all industries, and companies must continue to do more with less. This can be especially burdensome for accounting and finance professionals that may already operating on teams with fewer people than intended due to prevalent accounting workforce constraints.
“Accounting and tax teams are not immune to the labor market… getting a head start on communications with your auditors by understanding the scope of work and being able to acknowledge and focus on those one-off transactions or business combination type items will be very valuable in going into the 2022 audit cycle.”
As a result, leaders should consider shifting accounting and finance teams away from non-critical activities at year-end. Knowing that the constrained environment might bring complexity to the auditing process, companies should focus on identifying and acknowledging higher risk items. If in-house teams are able to establish a proactive cadence of communication with those performing audits, it will likely help avoid misinterpretations and delays.
(3) Build in responsive, flexible financial and operational plans
A proactive approach is also essential from an operational planning standpoint, where businesses should look to mitigate future risks through both budget and operational roadmap exercises. Companies running stress testing and working through various scenarios are responding with building flexible budgets and direct cash flow models. In doing so, leaders are planning for how they might respond quickly to an unstable marketplace.
“To make sure that they can respond quickly as things change in the marketplace, one example is a client currently working to build ‘break glass’ planning scenarios. If their EBITDA or cash flow on a trailing 12-month basis drops below a certain threshold, then the operations team will start executing different plans that they’ve already built out to make sure that they can protect cash and profitability. We’re also seeing many companies revisit 13-week cash flow models … and rightfully so in terms of understanding where daily and weekly cash is sitting.”
(4) Ensure compliance through successful adoption of new standards
For lease accounting, the practical elements of adopting the new standard ASC 842 are technical and require close attention. Leading an effective implementation requires a detailed-level understanding of the standard and the impact on financial statements, plus access to all lease agreements and members of the organization deeply familiar with those agreements. Companies with complex lease portfolios can follow three steps to ensure a sound approach: (1) compile a complete listing of all the leases as well as any pending modifications or renewals; (2) have discussions with accounting teams to identify any gaps in the lease population and gain understanding of unknowns—for instance, changes to lease definitions or necessary related procedures; and (3) create a comprehensive project plan addressing the identified gap, while including timelines for data abstraction, considering whether to select a lease software provider, and building out a future process for the accounting and finance teams to carry forward.
“We recommend discussing different lease contracts that your company might have with people from accounts payable, procurement, IT, or real estate to identify any gaps in your lease population. When adopting ASC 842, there is a silver lining so for companies with larger lease portfolios. This centralization of data and increased scrutiny on each lease agreement does tend to uncover wide variances with costs and revealing where the company could be spending less on similar types of agreements.”
Other regulations remain top of mind for this year-end cycle. CECL is another relatively new accounting standard that involves estimating allowances for credit losses and requires companies to recognize lifetime expected credit losses for various assets. In short, CECL calls for companies to incorporate a new way of forecasting. As is common with most new standards, including CECL and the revenue recognition standard ASC 606, there can be a heavy amount of documentation involved as new requirements call for expanded disclosures. Private and public companies alike should also understand and anticipate ESG and climate-related reporting matters. This includes anticipating what’s material from a reporting compliance perspective as well as how ESG frameworks can serve as a strategic differentiator for company stakeholders—including investors, customers, and employees.
Guiding year-end readiness and strength in 2023
Good project management and blameless hygiene practices go a long way for businesses, even in times of limited resources and instability. The key to a successful year-end process is to remain disciplined and proactive. The good news is that despite today’s economic complexities, the majority business leaders surveyed in the virtual discussion appear relatively optimistic about the year ahead and the ability to realize success through their audit cycles and 2023 planning season.
Note: Expert quotes may be edited for brevity and clarity.