Part 2: Why Public Companies Need Second Professional Advisor in New Normal

Note: This blog post is part two of a two-part series. Read the first part here.

Beyond financial statement audits, there are many ways professional service providers add value for public companies navigating the challenges, changes and continued uncertainty facing organizations today.

As the pandemic persists, many organizations will consider making transformative changes to their organizational strategy, internal controls, business processes, technology, tax structuring, cash flow and liquidity management, M&A strategy or other business areas. Successful transformation – and even survival through the uncertainty of the coming months – will require the right team of service providers and trusted advisors.

Now, more than ever, public companies can benefit from collaborating with advisors to manage an increasingly complex business and regulatory environment. An independent advisor can offer significant expertise and resources which may not be available in-house – and may not be able to be provided by the company’s auditor, due to independence requirements.

Read on to learn about a few key areas where public companies can leverage a second professional services provider for value-added services and solutions.

1. Business process optimization and redesign

The “new normal” or “no normal” will require a significantly different approach from the traditional ways business processes were designed and implemented. This is a great opportunity for public companies to question their methods of working, align themselves with the new reality by redesigning processes, change control objectives and emerge lean and mean. Design disruption, intelligent automation, and remote working are examples of strategies which, when properly implemented, can enable companies to extract ‘more from less’ as they stabilize and scale their businesses.

Enhanced risks related to supply chain disruption, employee health and welfare, liquidity, regulatory changes, operational gaps, increased cyber vulnerabilities and economic setbacks can be reasonably mitigated through proactive risk management.

When selecting a firm to complement your internal resources in optimizing your processes, makes sure the team has experience partnering with senior leadership to optimize the efficacy of business processes objectively and leverage emerging opportunities.

2. Internal audit and SOX-related compliance

Public companies must be proactive in anticipating risk. It is increasingly important for internal auditors to cultivate long-term vision and develop forward-looking approaches. As uncertainty is likely to be a constant in the foreseeable future, the internal audit function must adapt continuously while focusing on enhancing stakeholder values and eliminating board concerns about management of existing and emergent risks.

Public companies are specifically required to comply with the Sarbanes-Oxley Act of 2002 (SOX), which includes the need to make periodic:

• assessments of the effectiveness of internal controls over financial reporting; and
• evaluations of the effectiveness of the company’ disclosure controls and procedures.

In addition to ensuring completeness, accuracy and timeliness of the company’s financial reports, sound internal controls designed and implemented by management lead to financial statements that are free of material misstatement. By contrast, failing to have effective internal controls over financial reporting could result in the company having to report to investors the existence of material weaknesses in their internal controls over financial reporting. Such a situation invariably leads to a restatement of the company’s financial statements, which can undermine the company’s reputation. Moreover, public companies’ charters and corporate governance requirements require board committees to take action throughout the year, exercising their oversight responsibilities.

A public company benefits from partnering with independent professionals with the requisite social, critical reasoning, thinking and analytical skills, intellectual curiosity, and rigor to delve deeply into internal audit activities, providing assurance to audit committees in a value-adding manner.

3. Risk assessment and validation

The pandemic has brought about a paradigm shift in the way public companies perceive and deal with risk. Traditional notions of risk appetite and risk exposures are changing. as previously unimaginable catastrophic risks add a heightened layer of concern. Management has to plan proactively to mitigate the impact of such risks.

In consideration of this new but inevitable reality, risk assessment processes have to be agile and consider the environment both at the macro and micro levels. Public companies need to continuously re-evaluate risks and re-formulate audit plans. The potential for any form of disaster – natural, systems, or by human error – has to be thought out with well-defined recovery time objectives, business continuity planning and sound disaster recovery measures in place.

Enhanced risks related to supply chain disruption, employee health and welfare, liquidity, regulatory changes, operational gaps, increased cyber vulnerabilities and economic setbacks can be reasonably mitigated through proactive risk management, continuous monitoring and testing of the underlying controls.

Professional service providers with a deep understanding of the industrial and competitive landscape, business conditions, existing and emergent risks can assist public companies in defining their risk appetite, identifying, assessing and managing risks proactively. This will be a key value-adding activity, enabling public companies to leverage opportunity amid uncertainty, and creating value in a controlled manner.

4. Accounting and financial reporting advisory

Public companies deal regularly with complex accounting matters that could have long-lasting financial statement impact. These can include mergers and acquisitions, carve outs, discontinuance of business lines, or emergence from bankruptcy. The accounting ramifications of corporate events like these call for a detailed evaluation and documentation of the financial impact, disclosure requirements, and accounting. Accounting standards and pronouncements also pose challenges for companies, including evaluating their applicability, date of adoption and their materiality impact on the financial statements. An outside advisor can provide the CFO with valuable guidance on complex accounting issues.

For public companies going through a merger or acquisition, for example, a second professional services provider can assist with valuing intangible assets in relation to a business combination for their purchase price allocation and help with accounting entries for business combinations. Many companies are also looking to create continuous improvement in their financial reporting and closing processes. Key to the success of these initiatives is collaboration with advisors who have deep knowledge of U.S. Generally Accepted Accounting Principles (GAAP).

5. Fair value estimates

Many important accounting pronouncements, including ASC 805, Business Combinations, and ASC 350, Goodwill and Other Intangible Assets, require the use of fair value estimates. While GAAP does not require management to engage an outside specialist to perform fair value measurements, many entities do so either because they do not have employees who can perform high-quality fair value measurements or because they want the objectivity, professional experience and skills of an outside specialist. A valuation professional can provide valuable support to the determination of fair value to acquired intangible assets, contingent earnout, and the overall entity.

6. M&A due diligence and transaction advisory

Uncertain conditions are likely to prevail after this pandemic is behind us. Selling non-contributing assets, putting liquidity and available lines of credit to the best use possible, making processes agile, sound merger-related tax planning, and entering into strategic alliances with ecosystem partners could all play a significant role in a company’s recovery.

Growth for public companies will increasingly be inorganic, through deals designed to maximize synergies. Identifying, planning, executing and transitioning deals to smooth integration of the entities, is critical. The proper planning and execution of merger and acquisition strategies can help companies recover; it can also give them a competitive advantage.

Look for consultants with deep M&A and industry experience who have demonstrated success working collaboratively with public company leadership to identify, plan, execute and transition deals.

7. Tax planning

Public companies have complex tax reporting requirements, including accounting for income taxes (ASC 740), which – for CFOs without an internal tax department – is one of the more intense and burdensome tax-related tasks.

Third-party tax professionals experienced in sophisticated tax planning can help public companies to:

• Calculate and prepare their global income tax provision; analyze uncertain tax positions; and prepare the related footnote disclosures in the company’s financial statements in accordance with ASC 740 and U.S. GAAP
• Timely and completely claim all deductions, exemptions, refunds or reliefs due from the tax authorities in various jurisdictions
• Judiciously use all carry-forward Net Operating Losses (NOLs) available for set-off
• Correctly use transfer pricing and profit allocation among subsidiaries
• Evaluate and choose the best available tax treatment for increasing or rescheduling debt, having due regard to deductibility of interest
• Determine the tax implications of every balance sheet component and leverage these items for recovery and growth

8. Cybersecurity risk mitigation, preparedness and resiliency

Data is one of the biggest vulnerabilities for any company, and public companies make tempting targets. In an increasingly data and transaction-driven world, public companies must be well prepared to prevent and detect cyber risks that threaten their reputation, pose major financial risks, and could cripple their operations. It’s critical for companies to protect their assets, employees, intellectual property, brands, and data, including personally identifiable information of customers and other stakeholders.

A comprehensive approach includes developing and implementing cybersecurity policies and procedures, instituting measures to thwart cyber-attacks, and developing response and recovery measures to deploy in the event of any such attacks.

Your advisory team should include cybersecurity professionals with experience developing customized plans for public company clients, assisting in implementation of these plans, and helping public companies to become more cyber resilient.

9. Intelligent automation (aka robotic process automation)

Even in extraordinary circumstances such as the current pandemic crisis, technology can play a major role. Technology-driven processes act as catalysts driving sustainability for businesses in the near term and scalability in the long run. Intelligent automation (aka robotic process automation or RPA) is a great example.

RPA is an approach to automation enabled by software that mimics computer activities performed by people – and performs those tasks many times faster. When properly designed, RPA not only improves productivity, accuracy and efficiency, facilitating faster turnaround of information across an organization. It also makes it possible to use technology for some controls, requiring fewer man hours to test underlying controls for operational effectiveness. It becomes possible for the organization to redirect time, effort and resources to other activities that can add more value to the business, its shareholders and its clients.

Select automation specialists who have a track record developing intelligent automation tools that help streamline processes, improve controls and meet compliance requirements, freeing up resources for other value-adding activities.

10. Remote work strategies

Today’s changing work environment means, for many companies, success will be driven by employees working well remotely, both individually and in teams. A major shift to working from home has become a productivity-enhancing and cost-saving proposition for many companies.

Engaging outside professionals to advise on remote work strategies can help public companies realize added value and mitigate risk related to these new arrangements.

11. Environmental, social and governance (ESG)

Public companies have embraced ESG criteria to make their businesses more purposeful and sustainable in the long run, and investors are demanding more from companies in these areas. Investors now want companies to:

• Duly consider environmental risks and challenges
• Take continuous measures to reduce adverse impact of their operations on the environment, climate and depletion of resources
• Be mindful of workers, other stakeholders, and society in their health and safety practices
• Assess and adapt corporate governance policies and procedures, business conduct and ethical dealings

Public companies need advisors who can help them formulate an appropriate sustainability intelligence strategy and assist in tactical execution of the industry and company-specific measures to help drive the sustainability metrics.

Going forward together

The significant challenges and changes facing public companies today will undoubtedly lead many organizations to undertake significant transformation in their organizational strategy, processes, technology, business model, supply chain, target market and other areas. Strong executive and board commitment, supplemented by effective collaboration with experienced advisors, can help them attain their purpose, realize their corporate objectives and enhance stakeholder value.