What's next for Accounting for the Future

Anne-Marie Henson:

For anyone who may think accounting is boring or not fun, I dare you to listen to this podcast.

Narrator:

Welcome to Accounting for the Future, a BDO Canada podcast for financial leaders to navigate change and achieve business growth. We'll uncover the challenges financial leaders may not have dealt with yesterday, but we'll definitely have to manage for the future.

Armand Capisciolto:

Hello and welcome to Accounting for the Future. I'm Armand Capisciolto, and for the last time, I'm your co-host. Today's episode is going to be a little different. Myself and Anne-Marie Henson will talk about our changing roles and some trends that are impacting both of our new roles.

Anne-Marie Henson:

So, Armand, having been a guest and then eventually co-hosting this podcast with you and now taking over has been one of the highlights of the past year. I've had so much fun speaking with you and talking to our guests about current business issues and how they impact companies from a financial perspective. It's been so much fun and really interesting for me, and your enthusiasm is always really contagious. So, I think I'm going to have big shoes to fill.

Armand Capisciolto:

Anne-Marie, very nice to say. I have to say myself this as well. I never thought I would host a podcast, let alone stop hosting a podcast, but I've also had a blast doing this. And no, this is a little bittersweet doing this for one last time, but let's get into it. Let's start talking about our changing role.

Anne-Marie, you're going to continue your client service partner, deal with private clients, deal with some public company clients, deal with a whole different range of clients. But your role is changing. You're going to have a markets leadership role and included in that role is moving the firm's strategies forward, related to how it services private equity funds and the portfolio companies, the companies owned by those private equity funds. And as you know and all of our loyal listeners know, private equity is a topic that has come up several times in previous episodes of Accounting for the Future. Could you talk a little bit about why private equity is a topic that is important to BDO and why it is important for our listeners to care about the growth of private equity?

Anne-Marie Henson:

You and I have had a lot of conversations over the past several years, you know a lot of my clients, and they do tend to have some really interesting but very complex issues to deal with. And those has always been something I found really fun and exciting about my job and the types of clients that I work with. But I think what we need to recognize is, although the business and the economic landscape is always changing and evolving throughout the years, but I'd have to say, what I've seen evolve over the past five to 10 years has just led to a massive acceleration of trends and strategies. And private equity is really one of them that stands at the top of that. I know you've probably read this yourself, and we may have even talked about this with Sunil, our forensic accounting partner, that we had to talk about private equity issues and things that we're seeing in the market that, over the next decade, there's an estimation that in Canada, 75% of small business owners are going to exit their company.

Armand Capisciolto:

That's a lot.

Anne-Marie Henson:

Yeah, it's a big number, because 50% of Canada's GDP is fueled by small, medium businesses our SMB client base. So, if you think three-quarters of those clients are going to have new owner in the next 10 years, it's a staggering number. The article referred to it as a tsunami of exits, and I think that's a right term. Because of this change in ownership, an aging population, there are less children of those owners who are able or even willing to take over the business. That's where private equity comes in to buy these companies. So, I think it's going to be really fascinating to see the change in this ownership structure that's going to happen and how that's going to impact financial reporting and accounting and the requirements of these new owners. So, I was curious how you've seen this or how you see this impact standard setting in the future.

Armand Capisciolto:

It's an interesting question, and as you know, even as I've been preparing for my transition to move to the role of chair of the Accounting Standards Board, I've still been involved in a number of things at BDO and have been very interested in the whole private equity landscape. And my interest in that has been, one, obviously, I care about the companies we service at BDO, and I will continue to care about them until the second I leave the firm. But also, it's a little selfish of me, of my interest, because I do think it has a impact on standard setting. When I look at the growth of private equity and how it's going to change the ownership of Canadian companies, and especially those small and medium-sized businesses, right? Because in Canada, and as you know, the standard setter in Canada, we set multiple standards.

We have IFRS for publicly accountable enterprises, and we have accounting standards for private enterprises, for our domestic standards for private companies. And when I look specifically at our standards for private enterprises, when those standards were set back 2010 ish time to be applicable in 2011, the primary user that the standard setters at the time considered, and that was creditors, was the traditional bank. The small businesses are reliant on banks to provide financing. So, it's not that other users were ignored, but the primary focus was on the creditors.

And, when I hear that 75% of businesses are going to change hands, that makes me think, well, the creditors, yes, they will continue to be users of financial statements, but the potential future owners are now going to be the users of those financial statements. As we know, financial statements, having GAAP financial statements, preferably audited financial statements, help a purchaser assess the value of the company that they're investing in. So when I hear you talk about the number of businesses that are going to change hands, that just tells me that that's going to be a whole bunch of new users to the financial statements, it's going to be potential owners that are looking at these financial themes, not to make a credit decision but to make an investment decision.

And then, when I think about private equity as being one of those potential owners, being these very sophisticated users of financial information, we need to think about how private equity is going to use those financial statements. And for me, this is one of the things that I really want to do, is when I think about the people we engage in the standard-setting process, we reach out to the firms, we reach out to investment analysts, we reach out to bankers. Traditionally, we haven't had a whole lot of contact with the private equity community. So, for me, if anybody's listening, if we have any listeners who are in the private equity space, I really want to hear from you, from an accounting standard-setting standpoint, because I think we need to engage, we need to understand their needs. And that, to me, is one of the things I'm very much focused on as I move into the new role.

Anne-Marie Henson:

Oh, I love that. That's really interesting and great to know that we're continuing to think about these changing landscapes and adapting as need be, adapting our standards, adapting the way that we look at what's important ultimately is what's important to the users. So, it's great to know that that's an area of focus. I think we're all agreed that private equity typically tends to be a little bit more sort of diligent or demanding in how they approach their financial reporting process. That's the same in the pre-acquisition or due diligence phase as well as post because private equity have reporting obligations themselves. So, it's not just a question of having good financial reporting and GAAP-compliant financial statements to sell your company, but after the company is sold, that private equity is responsible to its own users, which typically includes a higher standard of financial reporting.

I know you touched on it a little bit, your role at the Accounting Standards Board and looking out to reach out to these newer users of financial statements and make sure we're considering their needs. So, are there any other things that you think you might be focused on as the incoming chair of the Accounting Standards board?

Armand Capisciolto:

Definitely, lot of things to focus on, and I think anybody who's listened to any of our episodes of Accounting for the Future knows that I think financial statements are critically important. They're an important piece of information that investors, creditors use in making their capital allocation decisions, and therefore, I think they're critical for a company to have appropriate financial statements to attract investors into their business. But one of the things that we are aware of is that many companies do not prepare GAAP financial statements. We see this at BDO; we have a significant number of our clients that they get a notice-to-reader compilation. Those financial statements are not GAAP financial statements. That's actually the vast majority of companies in Canada. If we think of the million-plus companies that exist in Canada, most are small, most have less than ten employees, and many of those do not prepare GAAP.

Then, when we look at the other end of the spectrum, and we look at public companies and larger companies, they often spend more time talking about what I'll call their non-GAAP measures than the measures in their financial statements. So, when I look at both ends of the spectrum, small companies and large companies, and one's not applying GAAP at all, one applies GAAP but talks more about their non-GAAP, I want to ask the question why. Is GAAP not meeting their needs?

As a result of that, one of our strategic priorities as a board, and one that I am very focused on, is relevance. And when I think about relevance, I think about it not am I providing relevant information, but in those that are applying GAAP, but looking at relevance and saying, if there are companies not following our standards or they're not meeting their needs, is what we're doing as a standard setting board relevant? And just so you're aware, I strongly believe what we were doing is very, very relevant. However, I believe there's room for improvement. And, like in anything, if you're not improving, you're not even maintaining the current status. Although I think we're relevant, we do set relevant accounting standards, I do think we need to improve, to maintain, and enhance that relevance.

Anne-Marie Henson:

Well, it's funny you talk about the importance of relevance and people making decisions based on a bunch of different types of information that are out there. It reminds me of a recent episode you had with Mr. Anthony Scilipoti about non-GAAP measures and finding those magic numbers. So, I'm happy to hear you're bringing up relevance. It's so important to evolve that definition, I guess, because what was relevant 10, 15, 20 years ago may not be what's relevant today. So, it's great to hear that that's actually part of one of your strategic initiatives. And I guess a very open-ended question for you that could take two minutes or two hours to answer, but what does relevance mean today in this environment?

Armand Capisciolto:

Things have changed over the years. Investors, customers, every employees, anyone who's potentially looking at financial statements they're not just looking at those financial statements in isolation. There's a whole bunch of other information that is being used to make decisions. And I think that doesn't mean financial statements aren't still important; they are still important, but they're only one piece of the puzzle. And I think, as the standard said, we can't ignore that this other information is being used for capital allocation decisions, whether it's sustainability reporting, a topic we've talked about a lot on this podcast, whether it's non-GAAP measures, whether it is just other information that's available in the public domain that people are using to make decisions. We can't ignore that they're using those.

So, when I think about financial statements and making sure the financial information is relevant, how does it fit in with all of those other pieces? Even when we talk about non-GAAP measures, to be non-GAAP, to have non-GAAP measures, you still need GAAP measures because the GAAP is the base. You can't have non-GAAP without GAAP. And when I think about sustainability reporting, and I think about some of the risk's companies will talk about when they talk about sustainability reporting, a lot of those risks have a financial reporting impact. So, when I think about all of this and what it means to be relevant, it's, how does it fit in with that overall reporting ecosystem, and is the company presenting a consistent and transparent message? To me, that's the key. And do our standards allow them to provide that consistent and transparent message? That's how I look at it. I'm going to turn the question around on you now and say, again, if financial statements are just one piece of the puzzle and you're advising companies, how does this trend impact the services you provide to those companies?

Anne-Marie Henson:

Yeah, no, it's a really great question. I think that accountants, auditors were going to have to just get used to continuously evolving in what we do and how we help or advise our support companies. You and I, as much as we may love talking about accounting issues and complexities, I think we both know that when we're talking about auditing companies' specific transaction, something really important or complex that happened during the year and they're trying to file their financial statements 90 days after year-end, by the time we're done looking at the transaction and issuing our audit, those financial statements, that information is almost stale for users.

So, when you talk about relevance, a big part of that is how quickly you can access that information. What I found myself doing more and more these days with a lot of my clients, and a lot of my other partners are doing the same thing, is we're continuously speaking to our clients throughout the year, not just to find out what's going on and advise them, but really to understand what they're doing, what types of transactions they're entering to or proposing to, talking through issues or options as they arise rather than waiting for the end of the year to come around to deal with those. We're not quite there yet. And I think in the future, a few years down the road, continuous auditing, which is a term we've heard a lot more these days with the use of technology, is something that I see happening more and more because that information is more relevant to someone today or in the past few weeks when that transaction occurred than it is six, nine, 10 months from now.

I think that's the same for everybody, not just accountants. I've been speaking to some contacts and friends that are in other areas, say in the lending space, and they're looking to have conversations with their clients, not just to solve a problem today that they have with, let's say a cashflow issue, but it's a very specific problem and it'll resolve itself in a couple of years. They're looking to provide solutions, lending solutions today to help clients where they want to be in a few years. And I think we need to start looking at that as well.

Obviously, as auditors, we have to remain independent and not provide so much advice that we're doing the work. But the other side of it is really the importance of having conversations with our clients, with companies about where do you want to be. Is what you're doing today really relevant? Should you be using Canadian private standards if you're interested by a private equity acquisition? Or what are you looking to do in the future? So, I think we'll see more and more of that in what we do in our day-to-day jobs, which to me is really exciting, and using technology as well as part of that to help us be able to provide information on a more timely basis.

Armand Capisciolto:

Yeah, it's so interesting and such a great answer, Anne-Marie, because we didn't get into this profession. We didn't become accountants because we're really passionate about which account to debit and which account to credit. Right? We get into it because we care about the businesses that our clients operate in. We want to learn about business. And even in the county standard setting, the thing that I find interesting is, I get to see a broad range of issues in talking to companies about where they want to go. That's what really makes our job as accountants exciting to me and interesting.

Before we do a couple of other just blatant plugs for past episodes, just talking about the companies looking where to go, we did a great episode earlier this year on choosing the right GAAP. And it was exactly about what you're talking about, where does the company want to be in the future and which financial reporting standards they need to apply. So, it's like thinking about where they want to go and giving them that structure to start and helping them with that. So, I love that answer because it allows me to plug a previous episode.

Anne-Marie Henson:

And it's so a very apt in terms of the name of the podcast, Accounting for the Future, that's where we provide the most value. And it's most relevant, is when you're thinking forward rather than looking back.

Armand Capisciolto:

But we're going to look back now because we're going to reminisce a little bit about some previous episodes. And I still say my favourite episode, and it actually could have been better, is Accounting for Scale Up. It was our first episode; you were my guest on it. Why I say it could have been better is we had this great little discussion about Silicon Valley and succession because we were talking about the stage of companies. I was talking about Silicon Valley being the startup; you were talking about succession as being the mature company. And that got edited out. And I still look back and say, "Why did they cut that out? I love talking about popular culture. Get to talk about some television shows that I love in this episode." So, it was an absolutely fabulous episode, but it could have been better if that didn't get cut.

The other one that I really like to talk to people about because I think it's critically important, is we had an episode recently on director responsibility for climate risk. Nothing to do with sustainability reporting, nothing to do with the impact on financial statements, but if you're a director of a company, your obligations are with climate risk. And I think that episode is a must-listen to anybody who's listening, who's a board member, because this is not a public company thing, it's not a public sector thing. It is, if you are a director of a company, you have responsibilities, and one of those responsibilities is addressing risks, one of those risks being climate risk. So really great episode that I highly recommend people listen to. Do you have any episodes you would like to suggest our listeners to revisit? And I say revisit because they've listened to them all, of course.

Anne-Marie Henson:

Exactly. That's it. No, I agree with the ones you mentioned. I mean, doing the first one, the Accounting for Scale Up with you was so much fun. Really nerve wracking I remember, but a lot of fun to do. It got me excited about doing more podcasts. And really, it's hard to pick my favorite one, but definitely the ones that stand out to me, and I mentioned it just before, but the one you did recently about non-GAAP measures with Anthony Scilipoti. I mean, what a fascinating individual, so smart, so much experience and really funny, but such poignant important information in that session, in that podcast that you did with him.

For anyone who may think accounting is boring or not fun, I dare you to listen to this podcast and tell me otherwise. What I loved about it is that it wasn't just about non-GAAP measures and the importance of disclosing them and explaining why the company is using them, but the risks on the side of the investors or users or people who rely on this information without necessarily understanding the basis behind it. So, I thought that one was really, really informative and I really enjoyed it.

Armand Capisciolto:

Yeah, Anthony was wild. Just a great episode as well. But this is it. I've had so much fun hosting this podcast. I look forward to transitioning to a loyal listener, Anne-Marie. I know you're going to be a great host, and hopefully at some point you will bring me back as a guest.

Anne-Marie Henson:

Yes, I absolutely will. I can't wait. I don't often get a platform where I can just say what I want for a couple minutes, so I wanted to just highlight something that you did for me in my career, and it really has stuck with me the whole time. You referred to 2009 and 2010, those critical years where there was big changes in accounting and there was the adoption of these new standards, IFRS, or private company standards.

I don't know if you remember flying out to our office in Montreal for two full days with our Scottish colleague, who was also fantastic, and we had printed back then, because we still did, a big binder of all our clients that were going to convert to IFRS. And you went through every single one of those. You were so enthusiastic and took the time to explain to us around the boardroom what the implications were and what we should be mindful about. And it really got me excited about working on clients who were public companies or complexities or IFRS, and then ultimately working with you quite closely in a technical role. I just wanted to say thank you so much for that enthusiasm. It's been absolutely wonderful, and just wanted to highlight the big impact you had on my career and a lot of other people as well.

Armand Capisciolto:

Thank you, Anne-Marie. You're going to make me tear up a little. Anne-Marie, I hope our audience appreciated this discussion on our changing roles. I'd also like to thank you, our listeners, for tuning in today and to all of our episodes. I'm Armand Capisciolto, and this has been BDO's Accounting for the Future. Please let us know if you've found this topic interesting and useful and remember to subscribe if you liked it. Anne-Marie will see you next time.

Anne-Marie Henson:

Thanks.