Boards of Directors don’t like being left in the dark, and there is nothing worse than feeling the repercussions of a board surprised by a significant issue just before you are about to release your quarterly or year-end financial statements, enter into a key transaction or hit the road on a fund-raising endeavor. In my more than 30 years working with private and public companies, and my own experience serving on boards, I have not yet found a board that reacts well when they realize they have not been informed or worse, they have been misinformed, about critical issues. While public companies are required to have boards, many private companies have recognized the benefits of having a group of advisors engaged in ensuring the overall success of the entity. Generally, these boards are all in place to provide expertise so that the company will reach their growth and profit potential. They have a legal responsibility to give you their best advice and guidance, but it is all based on the information you provide them.
Communication is the simple heart of the matter. Boards and the CEOs/CFOs who report to them should establish clear expectations of the nature of the interactions that should occur, the related lines of communication and the frequency/regularity.
At the time of this writing, there are no less than three significant tax and accounting changes that are affecting every company either currently or in the very near-term. These include the Tax Cuts and Jobs Act of 2017 (TCJA), as well as new accounting pronouncements for recording transactions for Revenues from Contracts with Customers and Leases. The TCJA is affecting not only the calculation of income taxes that will be payable by taxpayers for 2018 and beyond, but it is also affecting many calculations and disclosures in financial reports. New standards for revenue and lease accounting are rolling into financial reporting requirements of 2018 through 2020 and will likely cause significant changes in what stakeholders will read in a company’s financial statements. When they see differences, will they be able to evaluate what’s different and why, and how will they measure the health of the company if the numbers reported are quite different than what one is used to seeing.
Given the complexity of the new accounting standards for revenue and leases, and the TCJA, each company will need to evaluate their particular circumstances. In many cases, these three regulations will result in dramatic changes to the accounting and disclosures that will affect every company in the United States that prepares financial information for public dissemination or in connection with bank financing or other transactional matters.
So what should the CEO and CFO be prepared to do? I recommend the following:
Identify issues early; keep abreast of items that are affecting your business both internally and externally
Brief the board with the preliminary understanding of the problem as soon as possible; it may not be appropriate to wait until the next scheduled board meeting
Seek counsel from the board and other advisors to the company (legal, accounting, etc.)
Invite your professional advisors to present complex legal and accounting matters at board meetings
Prepare detailed analyses that reflect an understanding of the issue(s) and the effects expected,
Present these findings to the board and keep the board engaged through the implementation of any resulting changes
Wayne R. Pinnell, CPA, is a founding member and serves on the advisory board for the Center for Business Growth. Wayne has over 30 years serving business owners in his public accounting career. He is managing partner of Haskell & White, LLP, one of the largest independently owned accounting, auditing and tax consulting firms in Southern California, servicing public and private middle-market companies. Wayne consults with a number of companies on their general business operations including workflow, waste reduction, strategy, and growth/profit initiatives. He can be reached at WPinnell@hwcpa.com or 949-450-6200.