Are You Ready for Action When Your CFO Clients Call?

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An outsourced CFO called me the other day. He said he’d heard about how easy it was do to FAS 123R equity compensation accounting in Corporate Focus—and he was anxious to get started. His high-tech client was actually being sold or refinanced the following week, and he needed to provide updated financial statements in accordance with GAAP. Because the company had not been tracking its equity compensation expense over the past few years, this involved updating the compensation line items.

This tech company had originally been using its law firm—one of the top West Coast firms—to track its stockholder records. Later, when the stock option plan was created and the company still had fewer than 50 employees, the law firm continued to track the option grants, vesting schedules and employee terminations using Corporate Focus, based on information provided by the company or based on the board minutes prepared by the law firm.

At first, I happily told the CFO that accomplishing his goal was simple—he could just log into Corporate Focus and update the valuation and amortization variables that had not been tracked by the law firm, such as volatility, interest rate, and forfeiture rate. Once the variables were updated for each batch of option grants, he could then calculate how much equity-related expense needed to be included in the income statement for each annual reporting period, because the financial statements were being recreated anyway.

However, when I looked up the law firm in our tech support system, two things became apparent: a) they were an older customer and had not yet transitioned to our hosted platform for Corporate Focus; and b) they hadn’t updated their software in over a year and were about three releases behind. Without the latest updates, the equity accounting calculations would not be the most current, meaning that the CFO would not be able to take advantage of the system’s robust equity accounting features.

When I explained this to the CFO, there was an uncomfortable lull in our conversation. He was shocked and frustrated to discover that his client’s law firm was so many versions behind in Corporate Focus—and that they would not be able to schedule an upgrade on their internal systems for at least a week. Because the transaction had to be completed in the next seven days, there was just no time to spare.

At that point, the CFO’s only option was to have the firm's paralegal provide their client’s information in the form of Excel spreadsheets. He would then have to manually move the data over to internal spreadsheets which he used for their other clients. Lastly, he would have to wade through the tedious process of determining the valuation for each grant and then the amount to expense for each reporting period.

Unfortunately for the CFO and his client, walking through the necessary calculations would take about 30 hours of work over the next seven days—instead of just a few hours if he could have used Corporate Focus to do them. The end result was a huge waste of time, not to mention the additional legal fees related to sending all of the data to the outsourced CFO—and then of course the additional accounting fees to do the actual work. In 20/20 hindsight, this all could have been easily avoided had the law firm kept its software up-to-date or if the firm had been using Two Step's hosted platform. In either case, the client’s CFO would have been able to log in and execute his FAS 123R calculations in no time at all.

Law firms can easily avoid finding themselves in this undesirable situation if they regularly upgrade their systems or move to their software provider's hosted platform, which is always on the latest release.

Will your firm be ready the next time a client calls with a request? If you’re unsure of the answer, you need to check out Corporate Hygiene: It's Like Brushing Your Teeth, But With a Different Kind of Payoff. This real-life story is a superb illustration of how intelligently managing your client data can go a long way in making a positive and lasting impression—with existing clients, potential clients and others who really matter.

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