Author: Michael Page 5 of 9

https://www.linkedin.com/in/michael-potter-2689a94

Public company CFO.

Born in Montreal and currently living in the greater San Francisco area.

Business Entertainment

On May 29, 2016

Once I made it to the CFO rank, the offers from potential vendors for business entertainment significantly increased. This is something that happens as a matter of course with the position and it brings its own challenges with it. You also will do more entertainment for potential clients or lenders. Again, an area that you need to be careful with, especially with the FCPA and other rules to be followed (UK anti-bribery Act as an example, but most countries have their own rules. The rules on the books in China, for example, are quite strict).

I have one basic rule about accepting business entertainment. If it could influence my decision to purchase something, then I decline. The two different ways that could happen is excessive cost or something illegal. If it would be embarrassing to have the entertainment public, then it can be used to influence you.

I have a few other rules of thumb, but not influencing my decision is the main one.

When it comes to meals and bottles of wine that I would have, if the restaurant is a place I would go to and the wine is what I would feel comfortable paying for if I was personally paying for the meal, then I am ok with it. I will only accept sporting event tickets if the giver is coming with me. If the person wants to give tickets and not be there, I usually suggest that they be given to lower level staff and I would not take them. I just make it plain that I am passing the tickets on so the staff know it is coming from me.

If I get a gift basket that has food and wine that is too expensive, I just share it with people at the office. You can always send it back if it is really over the top, but it is not so easy and can be considered to be quite insulting in some countries.

All of the above is, of course, if the company policy allows it at all. I have influence over the rules and they should never be ridiculously tight (some places like Walmart have famously tough rules there), but you do need rules with fairly low limits to discourage undue influence.

It is very hard in countries like China to avoid receiving and giving gifts. Because you are likely to be governed by the FCPA, you need to be very careful to ensure you know who is receiving the gift and if they are a government officer. This is quite tricky as the government runs or owns many companies and parts of the economy. The local bank branch manager may be considered to be a government official. Same thing for hospital administrators and other businesses. Even if you think you are following the FCPA, the actual written laws in China are very strict. They are generally not enforced, unless the government decides that they now will enforce them. So make sure this is well understood and controlled.

Business entertainment does serve a vital purpose in that it allows you to spend time with key vendors like your bankers outside of formal meetings at your offices (or theirs). If you are going to be relying on their advice and work, it certainly is important that you get more information than just a rehearsed pitch in your office. A meal gives you a lot more time to get to know them and what you learn outside the office can give you some clues on if you should use or trust them. If you are reasonable and careful in the entertainment you accept, you also are sending a signal to them that it is the results and their cost that matters, not if they can get yiu Super Bowl tickets.

Business entertainment does not only have to be with external vendors. You can take your staff or key people in other departments out as well. At times you can break an internal impasse by taking the discussions out of the office. Obviously you should not abuse this (policies like the most senior person pays helps to reduce abuse), but the occasional meal with people from inside your company can help a lot more than another meeting reviewing a spreadsheet. Sporting events are harder to justify, but some beers and cheap bleacher seats at a baseball game are not expensive and a good way to reinforce the workplace bonds. Business entertainment also gives you a chance to relax the formal chain of command that many feel pressured to follow inside the office. I have received quite a few good suggestions from my staff over a meal after work. Suggestions that were not forthcoming inside a work conference room.

If you are entertaining internal staff, you need to make sure it is in a fair and professional atmosphere that does not exclude your staff of the opposite gender. Usually, I prefer a larger, mixed group in that case as it can reduce gossip, but if you treat everyone with respect and as fellow employees, not dating material, your reputation will be good and there will be less need to have public “chaperones”.

I do tend to watch how much I drink when I am out at a business entertainment event. I don’t drink that much anyways, but as the CFO you need to set an example. As fun as it may appear at the time, getting drunk just isn’t wise and you risk others drinking to excess with you and then later getting behind the wheel in a car. You are responsible for your company, do not forget that you are responsible for your staff as well.

That is not to say that you should not drink at all. Some countries like Korea, Japan and China seem to feature drinking a lot as part of the expectation of a business meal. Regardless of expectations, I always have been careful to not overdo it. You also need to be more careful when fighting jet lag as drinking really does not help and may make it worse.

Email Addresses

By Michael

On May 20, 2016

In CFO, General, Investor Relations

Like most CFO’s, I work with outside consultants, some that run their own shops. Far too often I get emailed by them from their personal email and the email itself if not reflective of the professionalism they are supposed to project. Sccrmom86 is probably descriptive of something, and I assume the 86 is your year of birth, but when you are proposing to do $50K of IT services, I bet you can do better.

I acknowledge that this is often just a matter of taste. Every once and a while, I get a comment about my Hotmail email address. One of the main reasons why I use it instead of Gmail is that it is not blocked in China and Gmail is. Some people seem to think that Hotmail is some form of “inferior” email, which I find quaint. This is partially from the viral release method that Google used and partially because Hotmail was one of the first mass public email systems. When it first came out, the web-based HTML (HoTMaiL was how they spelled their name) that was not connected to an ISP was new and bold. But because it is from an older time before the more modern Internet and because it was used by spammers and neophytes to the web, it gained an aura around it. Not quite as bad as .aol.com, but something that triggers a reaction.

I have been using a Hotmail address since 1997. I am not 100% sure if that is before or after Microsoft bought them that year.. My very first internet email address was on Genie and I can find it in the very early 1990’s via Google search. I had an @home address and a Comcast address. I had moved and lost access to my internet provider email address and that is why I decided that I wanted an address that did not link to an ISP and that is why I picked hotmail.

Google ran a very clever campaign when they introduced gmail – it was invite only at the start and each user received a limited number of invites, so it was rare to get one. The actual email system was quite robust compared to most out there because it incorporated Google search. This created extra hype around having a .gmail.com address even though it was just an address. Like Beverly Hills or other famous places to live, gmail.com took on an extra cachet. Now, of course, anyone can get a gmail.com address and Google gains so many emails to mine and search in return for providing the “free” service. Google has built a big business hosting email for companies, many no longer own their own servers, it is done by Google.

I have a Gmail address and was in the process of switching over to it as my main email with my Hotmail being used to sign up for things on the web (to steer spam that way) when Google stood firm against the Chinese government and started to get blocked by them. Today, if you do not turn on a VPN, it is hard to get Gmail inside China.

I also had discovered something interesting. I had used my Hotmail address for years to sign up for every drawing or other registration that was out there. I had thought that the email would get flooded by spam and what I have discovered is that Hotmail has a very good background system to filter out the spam. I had to use my Hotmail email address as my personal one inside China if I wanted to consistently receive emails when they were sent instead of time shifted to when I turned a VPN on. Microsoft has also rebranded Hotmail to Outlook.com to match with their email client.

What this experience taught me is to disregard the immediate reaction I feel towards the domain. Silly or inappropriate addresses still trigger a reaction, but the domain not so much. AOL.com means that the person used dial-up Internet and maybe was the real person behind Sleepless in Seattle (you got mail). Dial-up means they were early to using the Internet and have a long history behind them.

It also has caused me to recognize the power of brands and their reputation. The fact that the domain name in an email address, which is a pretty pedantic item, can still cause an emotional reaction is a sign of the power of branding and the importance of your reputation.

Finally, I much prefer emails from businesses that tie into the name of the person. It makes it much easier to remember and use than initials or some description. You can tag your title and address in the signature block of your emails, no need to make it part of the actual address. If your address is just your initials, it might be shorter but it makes it harder to remember.

All of this advice is for business related emails. Personal email addresses are different and can and should reflect your personality. Be careful if you use several aliases that actually go into your personal email box, as you don’t want to accidentally send out a personal email address to a business contact. Also be aware that applying for a job is not personal and I suggest using a more professional email address.

How to say goodbye

By Michael

On May 12, 2016

In CFO, Investor Relations

“We’re gonna teach ‘em how to
Say goodbye!” – Hamilton “One Last Time”

Every CFO job has its beginning and every CFO job has its ending. There are important things to consider when starting in a new role, but often little thought is given to how to end your role when you move on to your next job.

There are two circumstances in which you leave your job – voluntarily and involuntarily. As a fact of life, better opportunities may come along and you may decide to take them. Or you may simply decide to retire or take a break. Or maybe personal or family issues will come up and you can no longer do the job in the way you think it should be done. All of these will result in you leaving your job.

Another simple fact of life as a CFO is that you are vulnerable. If there is a change of control there is a high chance you will be let go. If the CEO changes, you can easily be let go. If any one of the thousand mistakes that could happen in your financial statements happens and you do not catch it before it goes public, you probably will be let go. If the business struggles and targets are missed and your boss is under pressure to do something, you can get let go.

No matter what, leaving is one of the main reasons why you have an employment contract. Your rights and pay over termination should be well spelled out. Norms different by country and industry, but you can probably find example employment agreements in SEC filings around the time the CFO was hired and you probably should have a lawyer review your agreement and they can give you advice.

Leaving is always emotional. Even if leaving on your own terms, you may feel that you are owed something more. If you are being let go, it takes a will of iron not to let emotions get to you and even then you are probably just masking your feelings. You need to let that emotion go. You are a businessperson, and you have a responsibility to all the employees in the company.

Now if you discover fraud or some egregious issue and after you out the problem they fire you, then maybe you can sue. The unfortunate fact is that even if you win, you are unlikely to be hired by another company. The CFO is supposed to protect the company, not sue it. If you are getting what is in your contract, then you don’t really deserve something else, and you need to be mature and accept it.

In my career, I was only impacted in a way that was not mutual once, and that was via a CEO change. The CEO needs to have the CFO they want, the partnership is too important and that is why the contract exists.

Normally you are leaving on your own terms because you want to, but you still have a responsibility to where you are leaving. You do not want to do it poorly and hurt the staff that has been loyally working for you. You don’t want to hurt the company as it only reflects back on you.

Give your boss as much warning and time as is reasonable. It can be dangerous to tell them before you have accepted another offer, but be fair about your start date. If you are just wanting to step down and pursue other things, then you may even be able to set a date further into the future with the provision that if they find someone sooner they bridge your pay until the original agreed upon day.

Be positive in your discussions with your staff. Many of them may be emotional about you leaving. You are still their CFO, even if you are emotional you need to tell them to think with their heads and give it a few months and judge on the new CFO, not their feelings for you. You would not want to start a new job and then have your new staff quit immediately. Of course, they are all adults and can make their own decisions, but try not to inflame their feelings. I have tried to model the excellent bosses I worked for early in my career and genuinely care about my staff, even if I have high performance expectations. Make sure you say a proper goodbye, you never know when your paths might cross again.

Wrap up and hand over the projects you are working on. Clean out your office so the new CFO does not move into a mess.

When talking to outside investors and the press, be professional and positive. Even if they are letting you go, there is no advantage to disparaging your old place you worked as it reflects poorly on you. It is easier when you are leaving on your own terms, but make sure you praise your staff and their ability to execute. They are the people that actually were doing the work for you, so it is right that you express gratitude when you leave. Reassure outside investors that the business is as strong and valuable as the company has been expressing. The CFO leaving does cause some concern and if there is no real cause for alarm make sure that message is delivered.

Finally, leave on the best terms you can with your former boss. There are a bunch of selfish reasons to do that, like good reference responses in the future, but this is another place where you should reflect on the opportunity you were given. They trusted you enough to hire you and you probably worked long and hard on key projects together. You faced investors as a team and answered your Board’s tough questions. I don’t think it will be hard to say thank you.

Saying goodbye is hard. I hope I don’t have to do it many more times in my career.

Playoff Hockey

By Michael

On May 5, 2016

In General, Sports

Anyone on my Facebook or wechat feed knows that I am a long time ice hockey fan. I grew up in Montreal and have been a Montreal Canadiens (Habs) fan all my life. I live near San Jose and also cheer for the San Jose Sharks as my local team. I have quite a few acquaintances that are not Canadian or from areas where hockey is popular and I thought that I would write this blog entry to talk about why I love hockey and play-off hockey in particular.

Like many professional sports, the hockey season is divided into a preseason, regular season and playoffs format. The intensity and quality of play varies. The preseason games are the most random. The players are coming off a several month layoff and the team management tries out new, younger players. Other than the players trying out, there is no real incentive to play extremely hard and win. For a true fan of the team and the game, getting to see the prospects play and the chance to evaluate them is fun. For someone newer to the game I have a hard time recommending that you pay any attention to the preseason games at all.

The regular season is long – 82 games. The entire purpose of the regular season is to narrow down the 30 teams to 16 for the playoffs. These games actually count for something. Any individual game may not make as much a difference, but the points scored by the players do count for their statistics and the hunt for playoffs spots makes some games at the end of the season even more intense. Teams play the teams in their own division more often than teams in the other divisions. The additional games help build intensity and rivalries as hockey is a physical game that allows for one player to body check (hit) other players.

Regular season games are much more entertaining than preseason games because they do matter. You can see emotions from prior seasons carried over and new emotions grow from the current games. For the teams that are further away, you at least get to see them for a game and may only see them again playing against your team in the Stanley Cup finals. For someone like me that has moved across the continent, the Habs only play the Sharks twice a year so if I want to see them close to my current home I can only see them once. So even if that game is not particularly important to either team, it is important to me and I try and attend the game if possible.

If you are new to hockey and want to see a game live, in the arena, regular season games are much less expensive to get tickets for and you can often find tickets available or find tickets via a brokerage service like Stubhub.com or Ticketmaster’s resale service. The selection of available seats is better and you will have a better chance to pick where you sit. My general recommendation is to sit around the blue line where the team you will be cheering will be attacking twice. You want to sit further away from the ice rather than closer. The closer you sit to the ice, the harder it is to follow the game if you are not used to it. The seats also go down in price the further you are from the ice. You probably do not want to sit as high up as you can as the players will seem a lot smaller, but seats in the top section near the bottom (closer to the ice) of that section can be quite good. The other advantage to sitting further away is that it is easier to see play in all corners. If you sit close to the ice you’ll have difficulty in seeing into every corner.

Most regular season games are played hard by each team and you’ll see the regular players, the “top talent” in the games because they do count. If you watch the game live, you’ll also get to see what the fans are like, how loud they are, what players get cheered for more and how they feel about the team them are playing against. In my case, the Habs are a very popular team that has been around since the National Hockey League started, so no matter where I am when I go see them play, there will be other fans like me wearing their jersey and cheering them on. I really like the fans in the “Shark Tank”. They are excellent hockey fans and are good proof that even a team in California can attract a local and knowledgeable fan base.

Once the regular season is over and the playoffs begin, the intensity rises to an even higher level. Everything is reset. Other than home ice advantage, the regular season results no longer matter. Each series is best of seven (need to win 4 games and the series ends once 4 games are won by one team). The regular season overtime rules are no longer used. In the regular season, overtime is a maximum of 5 minutes and 3 on 3 hockey with a shoot-out afterwards if a goal is not scored. In playoff hockey, the overtime is 20 minutes, 5 on 5 hockey, and the game continues with as many overtime periods as needed until a goal is scored. In hockey, a “golden goal” rule is used and the team that scores the first goal in overtime wins the game.

With the best of seven format, your team is playing the other team over and over and the first few sets of matches are with teams you have already played a lot during the season. With a higher emotional level, and the higher intensity of play, each team will hit the other more and harder. That means players will remember from game to game who hit them and if a hit was questionable or illegal under the rules, it will reflect in an emotional response. There are plenty of cases where the lowest ranked team (ranked 8 as the 16 are divided in half by league) have beaten the top rated team in the playoffs. There are also plenty of cases where a team that is behind 0-3 in a series has come back and won 4-3. A game 7 is usually the most intense as the whole series rests on one game.

One tradition for hockey players is to stop shaving during the playoffs. So as a team goes deeper and deeper into the playoffs, beards get longer. Hockey is very physical and players often get hit in the face. The deeper the team goes into the playoffs, the more damage you can see on the faces of your team’s players. Hockey players are always tough and play injured, but the playoffs bring this out even more. I have seen countless cases where a player is cut on their face and needs multiple stiches to close the cut but they do not miss a shift.

Another great tradition in hockey is at the conclusion of the series, as intense and as nasty as the games might have been, the players all line-up and shake each other’s hands. The losers congratulate the winners and wish them luck the next round. They do not forget and some of the emotion will carry over to the next season, but they are sportsmen and end the series with a handshake.

I am a hockey fan and I think it is a fun sport to watch, but even if you are not as interested, playoffs hockey is special. If you have never seen a playoff game before, try and watch a game on TV and see if you like it. You might even find yourself writing your team’s name as a status update when they win like I do.

Work / Life Balance

By Michael

On May 3, 2016

In CFO

I wish I had better news, but if you are wanting to be a CFO of any sort of larger company, it will be next to impossible to maintain any sort of reasonable work/life balance. It actually does get better in the sense that you have more control over your schedule and can plan around important family dates, but that really does not help as much as you would hope it would.

The primary accounting schedule that focuses on quarter ends is the same even as CFO. Your intensive work is delayed about a week from earlier in your career as you probably are not directly involved in the preparation of the first draft of the numbers, but once they are available you will be reviewing them and working on the earnings release. This also activates the forecast refresh cycle as you try and dial in the guidance you will release with the earnings release.

The quarter end crunch tends to be even more condensed because of prepping for the Board meeting. You will be a key presenter at the meeting and quite often you are explaining proposed company action with the need for aboard approval. As much as you may think that you are saving time by not preparing the raw numbers, reviewing them to ensure there are no errors and preparing the explanations and message is actually more time consuming and you also need the fairly final numbers before you can close it off which means you get even more crunched by any delays.

The quarterly reporting cycle in intense, but at least it happens with the same timing from year to year. If you are just having a normal year, the only other time pressure that will push your work over the top is travel. Very often you will fly on a weekend day so you can arrive on or before the Monday start of your work week. Phone calls and emails help, but you’ll be traveling to your major sites at least once a year to meet your staff there and do business reviews. You’ll also be traveling for investor relation events and non-deal roadshows. These are more instances where you will have an illusion of control over timing but actually less ability to control it than you would like.

You have to plan travel around your quarterly earnings releases and Board meetings, so the window is more condensed. Although you can pick and choose which IR events you attend, there will be major events that you really should be at with fixed dates so you do not have as much flexibility on them. Major overseas travel takes even more time on planes and causes jet lag issues as well. You are likely to be less effective in the first few days you are back and often that means going to bed earlier which takes away family time.

Again, this is somewhat manageable as you can usually control the dates of internal meetings and move them to a time that is more convenient for you. It still takes time for the travel and the follow-up, but if there is an important birthday or school event, you can plan around it.

The other time requirement is staff coaching and development. I personally never encourage too much socializing in the office and I think that professional relationships can be damaged if overdone, but you absolutely need to spend some time getting to know your staff. So even if you are home, you can be sure that there will be so,e evenings where you get home later because of this.

The real time devourers are M&A activity and capital market deals and other major financings. There is no escaping the central position for the CFO in those deals, and you have little control over when they happen. Capital market deals normally happen after you report and before it is too close to the next reporting period. So that spacing between the major reporting deadlines can be eaten up by a deal. If your company is active in the capital markets (one deal a year), then you can expect to lose a lot of personal time in one quarter. Again, you are not the junior associate lawyer, the manager at the auditor firm or the junior investment bankers that really get slammed with the detail work, but you will still be quite busy, as the documentation gets more final you will be the go to person for most final decisions and you’ll probably be running the deal. If the deal is a rated deal, then the rating companies are going to want to hear from the CFO and probably meet them in person. That means you.

Major financings like in the project world or bank debt also take a lot of the CFO’s time. They also tend to require more internal effort as the division of labor is quite different for those types of deals than one driven by an investment bank. So you are not quite so tied to the markets and probably do not have to do a deal roadshow but you will have to do a lot more review of the internal work performed.

The final and uncontrollable work demand that is likely to swing your balance quite a bit towards work is M&A activity. Even if you are the acquirer, you will not have that much control over when it starts and once the process is kicked off, you will likely be the center of it. You not only need to do due diligence, you probably will have to raise funds in a financing as well. So you will not only have to run the buying process, you will be running the funding process as well. M&A always has extra time pressure and you have to expect the unexpected. As a public company CFO you will be filing SEC documents as well if the purchase is large, so that is another task on your shoulder.

On top of all these additional activities, you will have your day job of leadership and managing the areas you are in charge of and where the company needs your attention.

You will not have good work life balance, but you need to manage it to make the most of the opportunities you do have. You need to be able to prioritize, schedule and take more add=vantage of the friend and family time you do have.

I have emphasized the importance of communication in many of my blog posts and it is even more important outside of work. You need to know what is coming up with your family and friends and you have to know what is important. When traveling, Facebook and similar social media (I recommend keeping a smaller and more personal friends list while serving as a CFO) can be used to keep up with the activities of your social circle and to let people know where you are and what is going on with you. It does sound a little sad, but you cannot spend as much time chit chatting to catch up, so social media can be helpful.

You also need to have frank conversations with your family about what is coming up or happening with work. They can also work with you to move around some activities so you can be there.

Finally, you will have to make a choice about some friends. You will only have so much time you can spend and you will be spending it a lot with your family. Maybe use this process to shed some friends that have turned out to be a negative source of energy for you. I also find that friends that also are as busy as you are more understanding.

As I said when I started, I wish I had better news, but you will struggle with this your whole career and you will not be alone.

Situational Awareness – Zion National Park

By Michael

On April 28, 2016

In General, Travel

Part of traveling on business is knowing what is around where you are going. You spend hours on planes getting from place to place and it is a waste to not take advantage of the travels you do take. Las Vegas is a perfect example. It is a constant destination for business travel. If you do think of a side trek out of Vegas, you usually would think of the Grand Canyon (which is well worth a trip). However, only 3 hours drive north of Las Vegas is one of the highest rated national Parks in the USA – Zion National Park. If you don’t do a little research in advance, you probably will enjoy Vegas and the casinos and other entertainment, but you might miss a chance to visit a truly unique and beautiful National Park.

I’ll cover the logistics on getting there first. Rent a car and drive 3 hours north on Interstate 15. You’ll go from Nevada to Arizona and end up in Utah. Drive past St. George Utah and take the exit for Rt 9 – Hurricane. Continue through Hurricane to Springdale, Utah and you are at the part entrance. It costs $30 per car for one week admission to the park. Make sure you check the weather. It can rain or snow there, so make sure you have the right outer clothes and at least shoes you can walk in. There is a very nice hiking train called the River Walk that is paved the whole way, so you can enjoy the park without needed hiking gear. If you are a good rock climber, the canyon walls are home to some very tough climbs.

The park is set in Zion Canyon with the Virgin River still slowly cutting the canyon deeper. There is a wide variety of hikes available, from easy to more difficult. Some are along the canyon floor and others snake upwards using switchbacks and walks besides sheer cliff sides.

I recently visited and did two different hikes over two days. The first day I did the Emerald Pools trail. This trail is moderate in difficulty with some fairly steep sections and some is scrambling along rocks. There are three pools you can see and several waterfalls you can walk under. The second day I did the Riverwalk trail which goes along the bank of the Virgin River and is paved. I saw several people being pushed on wheel chairs on that trail. It was not a tough walk, but walking along the canyon floor resulted in spectacular views. There are even tougher and longer trails available that involve going cross country, but these require a special permit.

I think the pictures I have been interspersing into the post tell the story far better than more words could. I have provided two links below, one to the Wikipedia and one to the National Park site. I hope that you can not only enjoy this park but that you remember to do a little more research next time you travel and see what else there is to do around where you are going.

https://en.wikipedia.org/wiki/Zion_National_Park

https://www.nps.gov/zion/index.htm

Annual Reports – SEC filings

By Michael

On April 26, 2016

In Accounting and Reporting, CFO

I started long enough ago that an annual report used to mean the nice marketing annual summary with pictures and a letter to the shareholder and the financials summarized with some graphs and commentary. Very few companies do that anymore as the Internet allows for a much more direct and continuous medium for communication. Today, the annual report means the SEC filing – the 10-K or the 20-F (for foreign private issuers). I have prepared and filed both and there is not much difference between them.

The annual report as filed with the SEC has several main sections. These are the business description, the risk factors, the management discussion and analysis and the financial statements themselves (which includes the auditor’s report). As the CFO, you are the person most responsible for the accuracy of the annual report and when you sign and file it, you will be taking significant personal responsibility should it be wrong. In a larger company you probably will not be preparing the bulk of the report yourself, but you will be reading every page and making changes where relevant.

As an individual shareholder, if you consider yourself to be a fundamental investor, you really should read the annual reports of the companies you invest in or want to invest in. You don’t have to read every page in detail looking for errors like the CFO has to, but I recommend at least skimming through all the sections. As I give advice throughout this blog entry to my fellow CFOs, I’ll also have an aside or two on how individual investors can use the information as well.

My first CFO advice is that there are no copyrights on other filings. WWW.SEC.GOV has the filings from other companies, both in your industry and outside of it. If you want to see how others word common accounting items or risk factors, you can find it there. Do not be ashamed to steal shamelessly. My second CFO advice is that the annual report is not just a required disclosure document, it is a marketing document as well. It is your chance to clearly explain your strategy, what risks you face, and to clearly present your financial results and what information you think is needed. You need to get the SEC and legal details right, but the annual report is going to be incorporated by reference into any capital market deal you do and will be read by the counterparts in any private deal you propose, so you might as well get it right.

A typical division of effort of the 4 sections is this: 1) Business section is senior management, investor relations and maybe the marketing department. 2) Risk factors is Legal with senior management review and 3) and 4) MD&A and Financial statements are Finance, mainly the Controller. You’ll be project managing the preparation and you’ll do the final quality control but you should have a fair amount of help on this. In a smaller company you can expect to do a lot of this yourself, but this is a company filling and your boss and other senior management should help somewhat. You should have prior year filings to act as the template for this year. Even if this is your first annual report, you should have the S-1 from the IPO to be the starter for the annual report.

I came up to CFO from a Corporate Controller role, and I had previous experience at preparing the financial statement part of the annual report plus some experience in the business section in previous jobs. So reviewing the report as CFO came naturally to me, but all CFOs should pay a lot of attention to the report. It is easy to delegate the report down to your reporting staff and there are outside lawyers and accountants that review the report as well. This makes it even easier to assume that all is well with the report. However, the outside parties tend to be ignorant of the business conditions you are operating under and they will not necessarily have only your interest at heart when they word certain sections. In particular they will be very conservative on sections like the liquidity section. Make sure you are comfortable with the wording.

What I do when I review the annual report is sign and date the front page and then initial each page even if I make no other changes. I handwrite edits unless they are long in which case I type up a rider. Version control is important and I find that handwritten edits make it easier for my controller to maintain control of the master copy. The signed report and initialed pages and handwritten comments are also good proof that the report was reviewed. Some lawyers want all working copies to be destroyed after the annual report is filed, but I think they are good to keep in case there are questions later.

When I review all sections, I look for grammar and spacing or missing words mistakes. Even with a lot of eyes looking at it, it is surprising what will slip through. I try and read important sections backwards one by one as that helps isolate words and aids in proofreading.

I also review for meaning and to ensure the English is smooth and natural. Even in the USA, many people on your staff might speak English as a second language. It is quite possible that people reading this blog speak English as a second language. If you don’t consider yourself to be very strong, have a native speaker read the business section and see if they have any suggestions. We circulate the business section within the different functional areas to see if they have any suggested changes. Usually we get a good edit or two just by doing that.

The risk section is useful in two ways. First is the ranking process. You should have the most serious and relevant risks first in your list and they should be listed in descending order of importance. The very act of ranking risks often leads to additional risks being identified and included. The second value to the risk section as it gives you a list of threats that you need to ensure you have countermeasures to. Look at the top risks that you and the management team think are the most serious and ask if you have any countermeasures in place. If you cannot think of a credible solution to reduce or eliminate the main risks identified in your filing, then you have a critical issue that needs to be addressed by the management team.

As an individual investor, the business section can be interesting, but the descriptions tend to be somewhat top level. You usually can find employment numbers, including by function and some geographic and segment information on their business, but I normally do not get all that much purely from the business section. If you are brand new to the company or the industry it certainly helps. One test that I do when looking at a new company is ask myself if I understand what they are selling and what their strategy and strengths are. If I can’t articulate it after reading the business section then I need to test my assumption that I understand their business well enough to invest long term in them.

The risk factors are more interesting to me. The can be boring legal boilerplate, but the order the company lists the risks and the way it is worded can provide valuable clues. What is extra valuable are new risks added compared to the prior years and/or changes in risk order. This is the section where management is trying to warn you about what might go wrong. It is pretty much the only section where what might go wrong is discussed. I find it valuable to weigh how likely the risks are and what a reasonably prepared management team can do to prevent the problems. If the risk seems likely and there is not much that can be done about it, then I worry about investing. I also try and think of what risks are not listed. If I can come up with some that are reasonable and management does not address them in the risk factors, then I worry.

I find the MD&A section the least useful. For years the SEC has tried to make it better, including insisting on more detail and better use of plain English, but almost all MD&A are a dry recitation of this year versus last year with one or two top level reasons given for the change. The liquidity section can be interesting, and this is an area that I try and watch my outside service providers closely. They like to make it sound conservative and more risky than it actually is. I have worked at companies with large cash balances and virtually no conceivable liquidity risks and the auditors are still trying to change the language to something that implies that there are real risks of a crisis. If you are working for a company that needs access to the debt market and the capital markets, then you don’t want an overly conservative section here. Obviously you need to accurately portray your true situation, but the auditors stress test going concern assuming lots of bad things that are unlikely to happen occur, and then want to reflect those tests in the liquidity section. Those risks belong in the risk section, not in MD&A. The commercial paper market crashing like in 2008/2009 is a risk, not something that needs to be discussed in detail in the liquidity section, for example.

As an individual investor, I find MD&A to be dry and not that useful as well. If I am trying to build a top level model, then sometimes I can find explanations of one time items to exclude, but normally I just skim read that area and check to see if there are any time bombs in the liquidity section. I don’t find income statement models all that useful as an investor and tend to concentrate on the balance sheet and the cash flow statements anyways.

The last section is the financial statements and if there is any section that is the “CFO” section, this is it. The three main areas here are the auditor’s report, the financial statement tables and the notes to the financial statements. Sometimes Sarbanes-Oxley matters as well, but only if there are a failure.

The audit report is simple. Either it is a standard report or there is a big issue. If the auditors have to modify their report, then there is a problem. If your auditors tell you that they have to modify their standard report, then you know you have a major problem.

The financial tables should be the same as and your earnings release, albeit more detailed. They were already checked by the auditors before they were released. It is not unknown to have something change but it is a little embarrassing. It has never happened to me so I am not 100% sure what I would do if it did happen. When I have seen it happen, it is either a subsequent event that accrues back to the already reported quarter or a balance sheet reclass from long term to short term.

The notes to the financial statements are where the real detail is. You need to describe your main accounting policies and then give a fair amount of detail, including segment reporting, for the different balance sheet and income statement accounts. The rules for segment reporting are straight forward, if management runs the business as different segments and uses internal reports that do it and the numbers are material, then you need to segment report.

I think the income tax note is the one that can cause the most issues, especially the disclosure on uncertain tax positions. Make sure you have the right technical help here and try not to paint a target on your back with your disclosure.

As a CFO, this is just another technical section and I mainly worry about getting the accounting and disclosure right. I do focus on the actual wording, but a lot can be found in other filings and is dictated by GAAP anyways. As an individual investor, the notes are a goldmine of information. All the detail that is glossed over in the earnings releases and calls is there. If there is a “smoking gun”, the notes will have it. Read that section very carefully.

As a closing note, I have written something 2-3 times a week for the past few months. I had a few people message me and ask about last week. One key skill in being a successful CFO is balance. My youngest daughter was home from school last week and I spent it with her. I should be on schedule again for a while at least.

In the name of the ocelot – benefits of role playing

By Michael

On April 14, 2016

In Gaming, RPG

I wrote a while ago about starting the play D&D again after many years away from the game. I am using a virtual table top program called Fantasy Grounds (www.fantasygrounds.com) to play with Teamspeak running on my NAS in order to have the voice component (the company provides their own public Teamspeak server but I prefer to have a private server). My group has been playing pretty much every week for the past few months. It is a little rough with my time in Asia to make the games work but luckily I have a lot of control over my schedule.

The group I play in features three of my old friends from Montreal, including my cousin Mark who introduced me to the game when I was in high school. One is a friend I made when I started playing Magic. The final of five is my daughter Sarah who is 19 at the time of writing this blog. Sarah has heard me talk about roleplaying games (RPG) for all her life and she has been a gamer since she was a kid. She never really got a chance to play D&D except for one year in a boarding school where there was a gaming group. Since we have been back in the San Francisco area she has been unable to play. My friends were happy to include her in the group.

We are almost done with the Lost Mines of Phandelver and I have been very happy with both that module and Fantasy Grounds itself. The module is a good balance of a sandbox and a linear story and has memorable characters and a good story to run through. Fantasy Grounds is simply superior as a way to play the game if you need to play remotely. The automation makes combat much faster than what you would have sitting at a table playing with paper and dice and this is important when playing online as the social experience is different when sitting around a table.

Some of the features that makes Fantasy Grounds good are things like automating the Turn Undead feature for clerics. In open room the players were being attacked by almost three times their number in zombies and the cleric (Ed) raised his holy symbol high and turned the undead. It was very quick to target the zombies and resolve it all at once instead of saving throw after savings throw manually rolled. In combat, if a monster has a resistance to a certain amount of damage there it is automatically matched against what the characters are using against it.

Nothing is perfect, zombies do not automatically save when they go below zero from damage, Sleep spell is not automatically resolved and you need to be careful to target within the system or else you can waste a roll. You can draw on the map, but area of effect spells like Web do not trigger just because someone walks into where they are. There was one evening when the fantasy grounds server was down and we could not get the game up and running because we could not authenticate the licenses. However, the whole group is getting more familiar with the interface and the games run very smoothly now.

In fact, the games are running so smoothly using the VTT, that the immersion is very much like playing in the same room. We laugh laugh and joke and talk about our week at work or old war stories or whatever comes to mind. If someone can’t make it one week, I have the character sheet right there and I can easily run their character for them. It is a little dangerous to skip a session as something unfortunate like the rogue being used as a battering ram to open doors might happen, but at least it is easier to do and bookkeep compared to a pure paper game.

I often get questions from people that know. about RPG like D&D about why I like to play and what the benefit is. The only real answer is that they are social games and an excuse to get people together and talk and live through a story that they make together. This is nothing different than a regular poker game or golf game that brings friends together for the enjoyment of each other’s company.

Games can also be a good way to try out ideas or emotions that you will need to use outside the game in a safer environment. Corporate trainers use games all the time in training sessions. Games can teach real world examples much better than just showing a PowerPoint slide and lecturing. My favorite example is the beer game at the beginning of the book The Fifth Discipline in which the object is to react to external demand signals while running a factor that makes a specific brand of beer. The game teaches several important lessons about understanding demand drivers and how to react to them and playing the game teaches the lesson a lot better than just reading about it.

Same as well for the different team puzzle solving games that are the favorite of corporate trainers. One of the goals of such games is for participants to role play different roles, and that includes being the leader of the team. Often each participant will get their chance to assume command of the team, and the personal interaction to think through and solve the puzzle comes from how will the new leader can marshal team resources, including the ingenuity of the team members.

When playing D&D, the character classes alone lead to different roles. Some classes are better at physical combat and those will tend to be in front and the first to engage. Some are good at sneaking around and often tend to play the role of scout, sometimes indoors where one class is better and sometimes outdoors where another class can take over those duties. Other classes are best at a supporting role or are quite powerful but much less armored and thus need the stinger fighters to be in front of them to protect them.

Those are just the base attributes of the classes (fighter, wizard, cleric and thief being the main archetypes). D&D has different races, each with their own set personalities. You can play any gender you want for your characters, you are not restricted to playing a character of your actual gender. You get to invent the backstory for your character and react on the fly. You can even role play romance or other adult topics if your group wants to. My much older players are not really interested in such things, but pretty much any topic is open when playing. I always caution people that once you more into those areas you run a very high risk of offending a player, even if you are not trying to, so make absolutely sure you understand what your players want before you go down that path. I also caution people when playing in a group you do not know to tone down comments and stay away from religion and politics, but that is normal advice when doing any activity with strangers.

I recently had a reminder of how emotionally invested a player can get in to game. In a good game, there will be even more emotional investment. My daughter Sarah is playing a ranger in my game and she has an ocelot as an animal companion. Last week a monster called flaming skull casually launched a fireball at the group of party members away from the zombies they were fighting. I targeted everyone, and then Fantasy Grounds rolled the saves and then rolled damage (which was above average). Everyone saved except for the brave and cunning ocelot and the damage was enough for instant death to the poor cat.

The game speeds things up a lot, but by rolling saves it does remove a little of the sense of ownership you get when you have to save or die. It all happened very quickly, in the very first round of combat. No one had even seen a flaming skull as a monster (me included) and the party had already defeated large numbers of zombies in the recent past so no one was very concerned.

I also found out that Sarah has never lost a character that she was attached to before. All the rest of us are experienced and have lived through it, and an animal companion is easily replaceable now. However, the ocelot was well loved by the party and we forget playing online that Sarah is much younger than us (30 years younger in some cases) and the ocelot is a sign of our complete acceptance of her in the group. That and not sending her killer viruses for rolling record numbers of 1 in a row.

The ocelot had worked itself into the lore of the group. In a few encounters in earlier sessions, the player characters ran into a streak for bad luck but the ocelot hit over and over again and mowed the monsters they were fighting down. An encounter with a green dragon had gone south and Mark lost his magic user because he failed his save. The session before that the group had uncharacteristically not searched one room carefully and missed a Revivify scroll that could have saved him. I had the ocelot bound over to the party with the scroll tied around its neck (DM intervention) and Sarah basked in the glow from hero heroic cat. Sonny was so impressed with the ability of the ocelot to hit monsters that he started chanting “in the name of the ocelot” before key die rolls he had to make.

So Sarah was a little shocked that something went so south so fast. Just a normal encounter with some zombie. And suddenly the loyal ocelot was gone. It shook her pretty badly when it happened, especially since voice only does mean you miss the cues. She is a true gamer, once she rallied a little bit, the first two things she did was to ensure that I applied her save bonus to the animal companion and that it started off with full hit points for the first hit die. Even with her bonus the save was still missed and the ocelot did die. She was still a little shocked and only mechanically did the next round of combat and even ended up being the character that put the killing damage onto the flaming skull. We talked after the session and she agreed that the monster did the right thing. She is well along the normal path of grief, but the fact that there was grief shows the power of playing a RPG.

The ocelot itself can be replaced. It has brothers and sisters that will come to serve when the Ranger calls. I even have to double check the map to make sure the radius would have got everyone (I think it would have). I can do a DM intervention and save the loyal and fierce ocelot even though it dying and a sibling being called to serve is a good role playing story element. Sarah has gravitated towards that as the resolution.

The fact that we have stories like the ocelot and the fun and jokes around it is why I play D&D and why I like to DM. It is also why games and role playing for corporate training are good, but you need to watch the reaction of the people participating closely.

In the name of the ocelot I thank you for reading my blog this week and I hope you have similar stories to tell if we meet in person.

Player’s Handbook (Dungeons & Dragons)

Monster Manual (D&D Core Rulebook)

Dungeon Master’s Guide (D&D Core Rulebook)

The Fifth Discipline: The Art & Practice of The Learning Organization

A simple but career destroying problem

By Michael

On April 12, 2016

In Accounting and Reporting, CFO, Finance

The number one fundamental error that causes material errors and misstatements in SEC reporting is spreadsheet errors. There are plenty of technical errors you can make and there always is the risk of management override and deliberate misstatement but the number one way is to shot yourself in the foot because you make a basic spreadsheet error.

Spreadsheets are used by all accountants, and it is impossible to operate without them. We all know that they cause problems, but we use them anyways because there is nothing better. Here are some recent examples of reporting errors (taken from the link below, I have not used the product they advertise and the cases cited are public and in other articles)

http://www.audinator.com/Horror_Stories.html

Fannie Mae makes billion dollar spreadsheet error overstating gains
Fannie Mae filed a Form 8-K/A with the SEC amending their third quarter press release to correct computational errors in that release. “There were honest mistakes made in a spreadsheet used in the implementation of a new accounting standard…which resulted in increases to unrealized gains on securities, accumulated other comprehensive income, and total shareholder equity (of $1.279 billion, $1.136 billion, and $1.136 billion, respectively)”

Share price drops by a third, CEO resigns due to spreadsheet error
UK support-services group Mouchel discovered an accounting error in one of its key spreadsheets that led to a £8.6m downgrade of its profits. The company pension-fund deficit had been wrongly valued as a result of the spreadsheet error.

Shares of RedEnvelope fall more than 25 percent due to spreadsheet error
The online retailer of specialty gifts drastically reduced its fourth-quarter outlook and said its chief financial officer will resign. “They were underestimating the cost of goods sold”, said Stanford Group analyst Rebecca Jones Kujawa. “It is likely CFO Eric Wong is being pushed out because of this error, which could demonstrate a material weakness in controls over financial reporting.” RedEnvelope spokeswoman Jordan Goldstein said the budgeting error was due to a mistake in one cell of a spreadsheet that threw off the entire cost forecast.

Kodak restates income downward by $11 million due to spreadsheet error
$11 million severance error traced to a faulty spreadsheet. Kodak spokesman Gerard Meuchner said “There were too many zeros added to the employee’s accrued severance.” Robert Brust, Kodak’s chief financial officer, called it “an internal control deficiency that constitutes a material weakness that impacted the accounting for restructurings.”

AstraZeneca forced to reiterate earnings forecast after spreadsheet error
Britain’s second largest drugmaker AstraZeneca scrambled to reaffirm earnings forecasts after an embarassing spreadsheet error left investor confidence sorely shaken. The behemoth drug manufacturer said the spreadsheet gaffe occurred during “a routine consensus collection process.”

I can also give a personal story about a spreadsheet error that certainly caused embarrassment and could have been worse. Earlier in my career, when I was Controller of a company, we were being bought by another company and we had bankers advising us. At the last minute, right before we filed our last 10Q as a public company, our lawyers decided we should disclose the banking fee we would be paying to our advisors. We had hired the bankers in the past for the same potential deal and the letter from the earlier, failed deal had been updated to a current date and signed again by our CEO without being reviewed.

The formula for payment was based on a certain definition of enterprise value and the fee jumped as each major valuation range was cleared. I built a quick spreadsheet model off of the balance sheet spreadsheet that had been checked by us and the auditors so I knew all the base numbers were right. I entered the formula for the fees, all in one cell instead of stacking the different ranges in a cell for each of them. The number that came out was in the low double digits of $ millions, and I thought it was high looking but the bank had been working a long time and had not been paid for any work yet on previous, failed deals, so I used that figure in the disclosure. My boss did take a quick look at the number, but no one checked my spreadsheet.

I had made a formula error. For the very last range, I was off one decimal place in the formula and the spreadsheet understated the amount due by 50%. The actual amount was a surprise to everyone and had the CEO actually done a calculation, he probably never would have signed the letter. It ended up being an issue for me because I stayed on and the acquiring company was concerned that the fee was being hidden on purpose. Once I showed them my error, I then ended up in the middle of a large investment bank’s M&A group fighting with their country office overseas that was being pressured over the fee. It eventually was resolved, but I didn’t get as smooth a start as I had hoped in my new role and it was a big distraction for a while.

After that narrow escape, I became much more careful about the base spreadsheets me and my team use in SEC reporting. Careful review for errors has caught several that would have ended up being material misstatements. Two common places where I have found errors is in the tax provision spreadsheet and the inter company accounts reconciliation spreadsheet. Both are updated quarterly, the number of rows often changes as items are added or subtracted and both have multiple people inputting data into them.

The first and still main formal study I know of on spreadsheet errors is by Raymond Panko of the University of Hawaii. I have provided a link this site below. The conclusion of his initial study was that spreadsheets are large and complicated and almost never follow a formal software development process designed to eliminate or reduce errors. Therefore it was not a matter of if there is an error, but how many.

His site lists the common errors he found in his study and how to find them. He also describes a standard development process designed to reduce errors and find any that are created. He also reviews the results of several studies that were done around 2004 after Sarbanes-Oxely became the new standard for companies to follow. Control over spreadsheets is a key internal control that all public companies need to address.

http://panko.shidler.hawaii.edu/SSR/

This problem is pretty well known and it is not hard to find newer articles on finding errors in spreadsheets. For example, this one: http://www.journalofaccountancy.com/issues/2015/nov/how-to-debug-excel-spreadsheets.html . Even with the recognition that there is a problem, CFOs are still losing their job because of simple spreadsheet errors leading to material reporting errors, misbid contracts, improper internal reporting and analysis and other embarrassing issues. It does not inspire Audit Committee confidence if you present to them and they find an error.

I suggest that you take a look at the Planko articles and do a little search for more articles on what can be done to reduce errors. Call a meeting with your staff and review this issue and discuss what they are doing to make sure they are getting their spreadsheets right. Hopefully they all know about the danger already and you already have a robust process. If not, get one in place ASAP. Even if you do, spot check a couple of the more complex spreadsheets they use and make sure you cannot find any errors.

An ounce of prevention now can save you from a $25M fine later after an error is found and you have to restate your results.

Book review – Dragonflight by Anne McCaffery

By Michael

On April 10, 2016

In Book review, General

As always for my Sunday book reviews, I am reviewing a book meant to help base time while traveling. The idea is that you are at the airport and want something to entertain you on the flight. I provide a link at the bottom to purchase a kindle version of the book so you can download it and read if you want (or sign up for Audible.com and download a spoken version of the book to enjoy it that way).

This week I will review the book Dragonflight, by Anne McCaffery. It is book one of the Dragonriders of Pern series. In the many years since this book first came out, she has written many sequels and some prequels as well, but Dragonflight is the book that started the series. It is now called number 16, but it really is the first book.

Despite having dragons in the stories, the book is a SF story, not a fantasy story. It is set on a planet called Pern. The inhabitants are colonists that settled into a pretty hospitable place to live, but one that has a planet or moon that passes close enough every several hundred years for a type of spore called Thread to pass from that moon to Pern. Thread multiplies quickly into something that devours the land where it grows and which is inimitable to life. The only space that is safe is bare rock with nothing organic for the spores to feed on. Every time the other planet gets close enough for the spores to travel from planet to planet is called a “Pass” and the story begins after the last regular pass did not happen and Pern has almost forgotten why the dragon riders are needed.

The dragons telepathically bond with their riders. The only viable dragons that can lay eggs are the female, golden dragons and the last one is dying with only one queen egg left. Lessa is a scullery maid and drudge at a holding and is noticed by a group of dragon riders out searching for women that have the telepathic potential to bond with a dragon.

The story is both a straight forward romance between a strong dragon rider named F’lar who is bonded to a bronze dragon and Lessa. The spores missed a Pass and the Holds and the people have forgotten the dangers of the thread and why they need to support and help the small group of dragon riders that help them. The dragons can, after digesting the right rocks, breath fire and kill most of the thread before it reaches the ground. There always are some thread that make it to the ground and teams on the ground use flamethrowers to burn out the infestation.

The story is also one of political struggle between the Holders who no longer want to support the dragon riders via tithes and men and women to bond with the dragons and the leader of the dragon riders F’lar . Lessa bonds with the last golden dragon and whatever bronze rider’s dragon can catch her dragon on a mating flight forms the ruling pair with her.

Finally, the story is one of discovery as the people of Pern have lost hold of their history and do not know that they are colonists and not originally from Pern, even though they have legends and oral history that says they are. You discover more about the planet and the dragons and their powers and origin as you read through the books in the series.
I recommend the series as a fun, escapist way to pass time. The writing is good, the characters interesting the the villains and the heroes are not one dimensional. The love story between Lessa and F’lar is a classic boy meets girl, girl does not like him, but boy wins her over story. Simple, but still works well when written well with a good story behind it with good characters. Anne McCaffrey certainly delivers that.

I recommend the series and have read all of the books in it. Some are better than others, I find the first three to be some of the best and the prequels not as good as the original timeline books, but still ok. I hope you enjoy them as much as I did when I first read them.

Dragonflight (Pern Book 16)

Author: Michael Page 5 of 9

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