Podcast transcript: How to navigate a remote close during COVID-19

29 min approx | 03 Apr 2020

Winna Brown

Hello and welcome to EY Next Wave Private Equity Podcast. In our series we explore the impact that private equity can have on the economy and society, capturing insights from industry thought leaders and private equity practitioners from across the globe. I’m Winna Brown from EY and I’m your host.

Hi, everyone, and welcome to the latest in EY Next Wave PE Podcast series. As we continue in our new normal with COVID-19 impacting all our lives both professionally and personally, we at the Next Wave Podcast teams wanted to bring you a number of topics and insights which we hope will be of value to you as you navigate through this time of change.

In today’s podcast we’re going to explore the reality of working from home for finance executives, asking the fundamental question: Are you ready to complete your first remote close? I’m really excited today to be joined by my fellow partners, Karim Anani from EY Financial Accounting and Advisoryservices , and Lukas Hoebarth from EY Strategy and Operationsservices . Gentlemen, welcome to the Next Wave Podcast.

Karim Anani

Thank you for having us Winna.

Lukas Hoebarth

Thank you, Winna.

Brown

Guys, I know we’re living in pretty intense times. And, I never thought I’d be recording the podcast from my attic in my office. However, I think it’s now a good time to step back and maybe consider that the remote financial close is not simply an emergency response for the times that we’re in. In fact, maybe it’s the norm for many companies. I know both of you have helped a number of companies set up offshore month end close processes before. So really, navigating through robust remote close processes is not something entirely new. I mean, I would suggest that it’s rather the circumstances we’re in and the speed with which people have had to adapt that makes this situation so unique. What do you think?

Hoebarth

Yes, this is Lukas. Winna, I think you’re absolutely right. It’s interesting. For the last couple of years we’ve seen quite a few Fortune 500 companies and other smaller private companies and privately held companies who are exploring this approach towards a virtual close, right? Which really means that the idea of this virtual close is that you basically close your books almost on a daily basis and thereby the financial information that you need to run and manage your business and make decisions is much more readily available than it is at some of these organizations today. So, we’ve certainly seen a push in that direction. Obviously, a lot of the tools and technologies that are out there have started to enable some of that.

But to your point, obviously COVID-19 has elevated that importance and probably taken quite a few companies by surprise because there are more dimensions than just the remote close. Right? I think there’s another dimension which is that you’re probably dealing with a lot of finance organizations dealing not only with a remote workforce but also with a highly distracted workforce, right, because we’re all just getting used to this environment where we work at home. We live at home. We’re taking care of our kids — making sure they get some education or schooling done at home. And then we’re trying to get some stuff organized in the house and going shopping as well for some groceries, et cetera. So, I think there are a couple of additional complexities that make this even more unique in this situation.

Brown

You’re right, Lukas, there are so many competing issues and demands on people’s times right now, both emotionally and professionally, and at the same time there’s pressure from their backers to close the books because people still want to know where things stand from a financial perspective. And, while they’re juggling all the home life aspects, they still need to do their jobs, and that means from a finance perspective they need to collaboratively work with their teams, who are equally dealing with a lot of different pressures and close their books. So, how do you help these finance leaders think through the immediate challenges that they’re facing in this new environment?

Hoebarth

Yes, absolutely, Winna. We’re seeing five complexities that will drive, you know, additional focus for this upcoming close, consolidation and reporting cycle. So, the first one is around, we do expect and from our conversations with EY clients we’re already seeing that there will likely be delays in the close process. Right? Due to an all-remote workforce that we just talked about, as well as an impact on the technology that’s available that is slightly different in the office versus what’s at home. So, that’s the first one. We do see and expect more delays, number one.

Number two, because of the macroeconomic environment, we also anticipate different and new requirements and additional analysis that will be required in order to close the books. That’s the second one. The third one is, because of the business disruptions that we’re seeing, that will probably affect a lot of companies along the supply chain which will likely result in incomplete information from upstream operational activities that will impact the preparation of the financial statements. I would say that’s the third one.

The fourth one is around there’s a lot of data that’s now being shared as it relates to the close. Right? A lot of data, sensitive financial data that’s being shared both within the close process, as well as with the audit function afterwards that will drive an increased need for cybersecurity in this environment. So, I would say that’s four, and the fifth complexity is really around you have to do all of these activities I just mentioned with all of these complexities while still making sure that your controls environment is sufficient so at that at the end of the day, you know, when the CFO, when the CEO, when the Board signs off on these financial statements, everybody feels comfortable that the way that they’re developed, you know, led to accurate financial statements.

Brown

And all of this without any warning. Right? I mean, usually companies, if they’re going to do a remote close, I imagine they’re planning for months to be able to have all of those elements that you described come together to diminish the risk and be able to execute effectively. But now, with little or no planning, they’ve had to deal with this new environment and there are these additional risk factors that they need to think about. So, why don’t we dive into this in a little bit more detail? What are some of the key areas that you think the current business disruptions will cause some real concern for finance executives? Maybe we can just start from the technical accounting perspective.

Anani

Winna, I think there’s a number of things that come into play here, both from an accounting and reporting perspective that companies have to consider, whether they’re privately held or publicly traded. For publicly traded companies, the upcoming either interim or fiscal yearend periods in the near future, i.e., the March close or the April close depending on when companies’ fiscal periods end, the finance organization chief accounting officer, CFO, and their respective team members, need to contend with SEC reporting requirements. As of today, which we’re recording this in late March, the SEC has some guidance out there around relief to periods that exist prior to April 30th.

What the SEC is going to do in the near term is yet to be determined, and I think companies, the management teams of those companies, kind of need to monitor, you know, updates and asks coming from the SEC as to whether they’re going to delay filing requirement dates, push it out, extend them. We don’t know for sure, but there might be something there that takes place. Furthermore, the type of disclosures and the content not only in the companies’ financial statements but in its MD&A and risk factors, as well as footnotes to the financial statements may need to be expanded and explored further than in periods past.

There are other areas that management teams and finance executives need to focus in on, such as impairment of goodwill, intangible assets, inventory, accounts receivable, equity investments, long-lived assts and the like. There’s a specific structure that you need to go through to evaluate some of these components of a balance sheet that I just discussed. There are tax considerations as well that come into date. Forecasts used to estimate companies’ effective tax rate, for example, may need to be updated. You need to evaluate if you have indicators of impairment and what that means to the company. Are they temporary? Are they long term?

Last but not least, although not an accounting and reporting concept, there is a requirement that management teams as well as their auditors think about the ability of the company to continue as a going concern for one year from a period end. Are there sufficient cashflows to kind of operate the business, continue with the debt maintenance load if it exists at the company? So, there are a lot of one-off items that need to be considered that you typically wouldn’t see in a normal close that further impacts the complexity of the remote close that Lukas just took us through.

Brown

Well, that’s definitely a long list of very serious concerns and matters that companies need to think through, and I guess as I think through this, if you happen to be listed, you probably have to think about the controls and processes. How are you going to effectively use these processes and controls when you’re managing everything remotely? How do you instill or implement a SOX control remotely? That’s got to add some pressure and maybe some changes in the way of how you approach or implement that control through your close process. So any thoughts on what you’re seeing out there?

Anani

I think a little bit too early to tell. However, you cannot underemphasize the importance of a company’s control environment and ensuring that all the information is flowing, it’s accurate, it’s complete and that the relative key controls associated with the different processes within the company are functioning. And they may not be functioning in the normal environment, but how have these controls needed to adapt, or how are they pivoted to ensure that they cover the intended risk mitigation that they were designed for?

Each company is going to have a different set of controls and different complexity within their internal control system and environment I should say, and that needs to be thought of and applied in a manner that gives the management team and the CFO and CAO the ability to rely on ultimately the numbers that they will include in their interim and/or year-round financial statements.

Brown

So that’s yet another layer that they need to think through as they try and execute on the close. Making sure they’ve got the right controls across the board is really tricky. Then Lukas, you mentioned cyber as well. If everything is happening remotely and there’s an even greater increased reliance on technology, I’m kind of thinking that’s got to open opportunity out there in the sense that there’s a heightened risk around cyberattacks as you’re effectively trying to run a process in a remote, different, unusual way. What are we seeing on that front?

Hoebarth

Yes, absolutely right, Winna. And that’s why when we talk to CFOs, when we talk to controllers, one of the things that we advise them on and one of the things that a lot of controllers and CFOs have already started doing is just to start mapping out. Right? Looking at the close calendar that every organization has documented somehow. Right? Looking at the close calendar and identifying, one, the timeline, but then, two, to your point, figuring out what are the different systems that are involved in the close process, and how and what data is flowing at what point in time? Right? Then figuring out, okay, this is kind of how it worked the last couple of quarters, but how will this change this time given everything is remote? Because in some cases there might be a manual step or an email instead of a different workflow that was used in the office. Right? So, that is really what we’re seeing where a company is performing an assessment on, hey, how have we done it in the past? How is it different this time? And what could be a potential exposure from a financial data, from a, you know, sensitive data risk perspective that is out there. So, that’s really kind of the first step.

Now, what we’re seeing for sure is that there are certain companies that have implemented more robust, end-to-end workflow tools and end-to-end processes that are supported by a system. Obviously, in this case it’s probably a little bit less likely that there might be a big change in the process, versus if companies that are just growing quickly and growing their finance processes as they grow, they might be a little bit more receptive to some of these impacts.

Brown

So, if I summed up what we talked about, there are additional reporting and disclosure considerations that need to be taken into account. The SEC has obviously been quite vocal about what they’re expecting to see. We talked about the additional controls that finance executives are going to have to think about as they try and bring together the information to be able to prepare reliable financial statements and have the proper controls around these.

We talked about the pressure on IT and the potential vulnerability around cyber. We talked about the macroeconomic environment and how that’s impacting things such as thinking about your future cash flows and your asset impairments, and how maybe your revenue recognition cycle may be different because the environment’s different. What was six months ago is not what is today. It might impact your ability to collect on your AR.

But what we haven’t really focused on though is what’s the glue that brings all this together? It’s the workforce, you know, and it’s the team. It’s the CFO, the CAO, the entire finance team who has to deal with all of these constraints and new pressures and new considerations, all the while dealing with all of these, you know, personal pressures and different personal circumstances. I would imagine all of this impacts people in a variety of ways, but if we kind of bring it back to the finance function and the close, it’s got to slow down the process, you know, at a bare minimum. How are you finding people are dealing with this? Because it’s a lot to deal with, and on top of that you’re trying to bring everyone together on a timeline to get reliable financial information. How are you finding people are really tackling this?

Anani

Yes. Winna, that’s a very accurate kind of observation, and I think there are some tactical versus strategic items that a finance team should think through. You have to kind of look at the business forecast and liquidity needs. I touched on taxes. Are there any plans to repatriate and cash from overseas companies within the consolidated group structure? Your SEC reporting requirements are no doubt going to be incremental what was in the past. That’s on the strategic side.

Also, what kind of guidance you have out there. Do you want to keep the guidance that you shared with the Street if you’re a public company? Do you want to withdraw that guidance? Do you want to give updated guidance or stay kind of quiet about it because you don’t know what’s going to come? Then on the tactical side of things, how to communicate with your finance team, speaking to them daily in a virtual environment. Do any of your folks have difficulty accessing the different technology tools to allow for the close? These are tactical items you have to think about more to access system support.

And then finally, how are you going to go through your interim reviews with your auditors? Or if this a yearend period, how are you going to complete your yearend audit on a timely basis, and how are you going to communicate with the audit committee, and what is the audit’s committee role in a time like this? Those are tactical items that have to be thought about just as carefully as the strategic items that I mentioned a short while back.

Brown

Absolutely. And you can’t really overestimate how bringing all that together will take its toll and will be challenging for the finance executives that are leading this charge. Interestingly, I imagine as we talked a lot about reporting and we talked a lot about pulling all this information together and the outside macroeconomic forces and the personal challenges that people are going through, but as I sit back and think about it, what about PE portfolio company operating partners? You know, you’ve got the PE houses, and they’ve got their deal teams and their operating partners who are sitting down, and they’re going across their entire portfolio, and they’re thinking I’ve got so many companies that need my assistance, and they’re all going through this change.

They’re probably wondering, how do I focus and determine which ones I need to kind of dive into and really help drive the process with? And which are the ones that are potentially doing well? Are there perhaps some telltale signs for those that need more help than others? And, you know, how can we point people in the right direction?

Hoebarth

Yes, Winna, this is Lukas. The way I would address this very important prioritization exercise, if you will, I think one of the activities that is happening across any finance organization, across any company we are talking to is what Karim mentioned earlier, which is really all of the CFOs that we’re talking to, they’re looking at a vast variety of their forecasts. Right? They’re looking at their short-term liquidity forecast. They’re looking at their business plan for the year. They’re looking at, hey, what impact does this have on my investment decisions? They’re looking at what does my business forecast look like in order to calculate my tax provisions? What does it mean for my going concern assessment? Right?

So, therefore, the forecast of the business as well as the liquidity is extremely important that everybody’s focused on right now. The outcome of these forecasts and how much each company believes will be impacted by the current situation, there will certainly be one factor as you think about where you need to prioritize your time and where you think there might be more short-term needs. For example, liquidity versus we expect other companies that might be, you know, fine in the short term from a liquidity perspective but might be a little bit more heavily impacted in a medium or long term as it relates to revenue impact. And obviously, the variety of forecasts and updated guidance that’s been provided by the CFOs would provide a good picture into where to focus on.

Brown

It all comes back to getting good information, reliable information, being able to make sure that you’re bringing that all together in a timely fashion to be able to really assess your picture and the path forward, so a lot of pressure on the CFO and the finance teams.

Hoebarth

I agree in that I think there’s pressure. I also do believe there’s opportunity. When we look back after the 2008 financial crisis, what we saw following the financial crisis was that really the CFO in a lot of organizations had over a couple of years elevated their role to be certainly one of the top lieutenants to the CEO. And it was different than before in most organizations. Right? Before 2008. And the reason was that the CFO was so instrumental in being able to connect all the dots on what is going on in the organization, what it means from a short- and long-term forecast and outlook.

And therefore, we do believe probably in the couple of weeks, in the next couple of months, there will be another wave where people will be looking more increasingly towards the CFO and towards the finance function as they’re not only the stewards of the organization and the stewards of the assets, but also I think more importantly and increasingly becoming kind of the business partner to the business as well as to the CEO. Yes, absolutely. There’s certainly a short-term high demand and increased focus that will be required from the finance function, but we also believe in the mid-term there’s probably an opportunity for the finance function to further elevate their role in the organization.

Brown

That makes a lot of sense. I had a conversation earlier today with a CFO, and one of the challenges they were saying to me is, you know, how to keep your finger on the pulse and being able to bring the information together and have that seat at the table to be able to inform the direction of the company and really be, as you say, one of those top lieutenants. That takes effort. That takes insight, and it takes really being actively engaged. They were saying to me that when they are going through a close process or during a forecasting process, they get so much information and insight by just simply walking from their office to the kitchen to get a glass of water because during that time they actually pop into people’s offices. They get questions answered. They understand how something’s developing, and they get this human element to the close which helps, you know, get through issues faster. It helps identify potential risks faster, and it helps people rally around the next steps. So, it’s really that personal insight that you’re missing.

Now you don’t have that ad hoc interaction. You really do need to do everything through emails or phone, or maybe you’re doing it on Skype or video, but you just don’t have that same face-to-face context. So, what are some tips that you would give that CFO out there around how they can build an environment in these unusual circumstances to be able to deliver that fantastic outcome, that insightful information and, again, in real time of a very high quality? Do you have some tips that they can implement in the short and medium term to really help them get this process into place?

Anani

It’s a combination of everything both Lukas and I have been discussing over the course of the past half hour plus. In short, number one, you got to check in on the health of your team and make sure your team is kind of situated and mentally focused at the task at hand and what is to come. Make sure that the communication and expectations on both sides from the executives at the company to the employees. What are the expectations of both sides? Lay it out.
You don’t have the ability to just stop by somebody’s desk and have a quick chat, or you’d have to ring them. They might be at home with their kids. You have to respect their personal space. You don’t know what’s happening in each person’s household that’s on your team. There’s going to be additional kind of pressures that come with this. So, having a clear roadmap and an understanding of, okay, here’s what we need to accomplish. Here’s the goals that we’d like to accomplish, and here’s the needs that folks have.

Hold regular meetings telephonically or virtually. Videoconferencing is quite widespread in this day and age, and also produce a checklist. If you’re short people or kind of getting this organized, turn to a preferred service provider that understands you and your company, and look for them to help set up a project management office that goes through all the tasks and makes sure things are on plan. Should you hit a road bump or should you come to a juncture in the road where, what do I do next or this is so unusual, well, how are you going to resolve that? Discuss scenarios of, okay, if you can’t progress it, raise your hand.

What does raise your hand mean in a virtual world? How do you bring this to the forefront, and who’s going to work on resolving this issue so that the close, the issues that we talked about all remain on course? And you’re capable of sharing information not only with the Street if you’re a public company and the like but, even more importantly, with the management team inside the company that are going to be looking at results, looking at liquidity needs, looking to make decisions based on the results and the impacts of COVID-19 not only today but in the future. So, staying on task, staying focused and communicating at all times and having a mechanism to allow for that with folks in different time zones and at home is going to be critical.

Hoebarth

Right. And the one thing I would add to that list would be I think now is the time for CFOs and for controllers to address this topic proactively. We talked about it a little bit at the beginning of the podcast. We said, hey, look at your checklist. Look at the timeline. See what could be impacted. Look at your processes. Look at what systems are being used. Make sure you have an IT resource on standby when a critical data feed is happening. So, now is the time to proactively think about the close process. Think about who is responsible for which task? Where are the handoffs? Where might we need estimates? Right? And proactively address this. Where might we have to push out the timeline a little bit, and where can we make up the timeline again?

And what we see companies do that are probably addressing this proactively is going about it exactly that way. Right? There are a lot of other topics, like how are we going to make decisions. Right? If we don’t receive data from a country, from a vendor, how are we going to make estimates? Right? How are we going to make accruals? In our regular office environment, we know how to make decisions. How do we make this in a more remote context?

So, it’s all about thinking ahead over the next, you know, four to five weeks as you start to close your books, to consolidate, perform the reporting. Review it with the board. Leverage it for important decisions in the business. It’s all about looking ahead, proactively addressing these kind of important steps that are coming up in the close process.

Brown

So, what I’m hearing is it’s all about collaboration. It’s about communication and respect, and it’s about proactively planning. You know, I’m thinking that if there are bumps in the road, what are you going to do and how are you going to get across that? And the way to do that is to brainstorm and actively manage your close process with your team and to make sure that it’s, in that way, efficient and timely. So, now we might be dealing with things virtually right now, but I think at the same time to both your points, there’s videoconferencing. There’s emails. There are team interactions that you can do on the phone. So there’s really no reason to stop communication. It’s a slightly different form of communication, and keeping everyone’s spirits up and connected is going to be, you know, challenging, but it really is the cornerstone to a successful remote process.

Anani

That’s correct. Couldn’t have said it better myself.

Brown

Guys, anything else that you’d like to share with our audience today about what they should be thinking about?

Anani

Winna, I think the most important thing here outside of all the content we covered – and it was varied – was really keeping spirits high, really thinking about the future. Keeping your team motivated, reminding them that this is only temporary. Everything we hear from the different governmental agencies around the world is this is a two-week, three-week, four-week thing. Who knows? But it’s not going to be much longer.

Life is going to return back to normal, and having something to look forward to and something and keeping the team positive will go a very long way not only now but in the future, and you’ll probably get the team to become a little closer. They’re going to learn things about one another they didn’t know. It should drive further collaboration and make the company and its constituents stronger, hopefully.

Brown

Excellent. That’s great advice or, as I like to say: people, just keep smiling. Karim, Lukas, thank you so much for joining the show today and for sharing your insights and tips to help so many of our financial experts and private equity operating partners who are listening today as they navigate through executing a remote close under probably what’s pretty extenuating circumstances. I really appreciate you taking the time to join us today.

Anani

Thank you.

Hoebarth

Our pleasure.

Brown

To our audience, I hope you enjoyed this episode of the Next Wave Private Equity Podcast, and I hope you found it informative and valuable as you navigate these unusual times. Please subscribe, review and, of course, share it with your colleagues and friends. To find out more about the topic we discussed, check out EY.com/privateequity. I’ll see you on the next episode and, in the meantime, please stay safe and healthy.

Disclaimer: The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.