Boards Rely on Accountants for Help with a Crisis
Source: Accounting Today
Author: Michael Cohn
The finance and accounting function can play a critical role in helping organizations navigate through a crisis.
For a new report, A Crisis in Confidence, Deloitte Touche Tohmatsu and Forbes Insights surveyed 317 non-executives board members at companies in different parts of the world about how their organizations respond to a crisis. It found that 76 percent of the board members polled believe their companies would respond effectively to a crisis, but only 49 percent say their companies have playbooks for likely crisis scenarios. An even smaller proportion (32 percent) said their companies engage in crisis simulations or training.
Damage to a corporate reputation is the biggest concern from a crisis, cited by 73 percent of the survey respondents, followed by cyber-crime at 70 percent and rumors at 68 percent. While those kinds of crisis might be something that many companies would prefer the public relations side to handle (or an outside crisis management expert like the character of Olivia Pope in the TV series “Scandal”), the finance and accounting people can also play a major role.
“If you think about crisis, there are obviously some crises that accountants and finance people generally will not be involved in or will play a minimal role,” said Rhoda Woo, Deloitte’s managing director for crisis management solutions. “For example, if you have a natural disaster, front and center would probably be some first responders and disaster recovery people. If there’s some workplace violence or a kidnapping, or a bad physical security situation, you might not see the finance or accounting people. But those are about it. Everything else would probably involve some interaction with finance.”
She cited the example of a supply chain interruption. “Sure, the people in operations are going to be front and center, worried about how to shift if the supply chain is broken and where to get excess product in order to get it to customers, but close behind that will be questions that finance and accounting will have to answer,” said Woo. “What will it mean in terms of sales if there are delays? How is it going to impact our revenues if we have to buy it from another place? What is it going to do to margins? You can take almost any kind of crisis, and there’s always going to be some kind of financial impact.”
The internal audit function and outside auditing firms can also play an important role in helping a board’s audit committee deal with a crisis. “These days audit committees are very intertwined with risk committees,” said Woo. “They not only look over the external auditors’ work, but more and more they’re also the risk committee.”
While investor relations and public relations will likely be called in to deal with a crisis, they will need to get the numbers from the accountants. If the crisis hurts a company’s reputation, for example, they might need to adjust goodwill.
“Goodwill measurement will make a difference to the extent it’s going to incur any kind of losses,” said Woo. “Certainly that would be an issue. The whole issue of investor relations too generally would be something where obviously you have investor relations and PR having to make statements, but the source of the information they’re going to get is strictly going to come from the finance function.”
There can be a whole series of implications from a crisis, along with questions that the accountants will need to answer. “If there is the issue of stoppage, whether in sales or supply chain or what have you, you have to think about what this is going to mean in terms of the cash flow of the company,” said Woo. “What kind of cash is it going to bleed? Would this potentially impact our earnings estimate for the next quarter? In turn, what’s going to happen to our credit rating? Is that going to be vulnerable? How are the agencies going to see us? Does it impact our bank covenants when it comes to the loans? Is it a regulatory issue? What kind of fines? Is that going to affect our P&L, our cash?”
Accountants will ultimately need to make sure the proper controls are in place to stop a future crisis from occurring. “Even if the crisis isn’t front and center a finance issue, you’ve got to think through whether there was some issue with the controls and procedures of the company,” said Woo. “Did the lack of controls in some way cause whatever failed? You might need to shore that up immediately. And when you get into recovery, you want to think through how you prevent this kind of thing from happening again.”