Brad Feld

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The Accountants Strike Back

Aug 21, 2006

(cue “Imperial March” from the Star Wars Trilogy)

Jason and I keep finding ourselves in discussions about how tired we are dealing with accountants, especially the Big Four.  Whether it’s regarding our own fund, or that of our portfolio companies, we spend an inordinate amount of time going “huh?” when the subject matter is accounting, accountants, and auditors.  Today, Jason and I were chatting via email when I sent him the link to a Business Week article that I was quoted in – he particularly liked it when I called the Big Four “arrogant, lazy, ineffective, and non responsive to entrepreneurial companies.”  Then again, maybe he was just kidding, as he will have to smile a lot and be nice to them when they audit us for 2006.

Now, some of my best friends are accountants, but it’s been really frustrating lately.  We’ve got a nice list of “accounting is the only profession …”

Accounting is the only profession where you can completely screw everything up (see Enron, WorldCom, Kmart, etc..) and your “punishment” (so long as you aren’t Arthur Andersen) is that the “powers that be” enact all sorts of legislation (SOX, Option Expensing, 409A, FASB 123, etc.), that create a full employment act for your profession, radically increase your fee structures, and make everyone in your profession better off than when everyone thought you were doing a good job and maintaining the public trust.

Accounting is the only profession where every “answer” comes from some dark / covert room in the New York “Death Star” office of the national firm and no one you actually talk to will admit to making a decision.  Instead, someone in their national office says “we have to do it this way, so regardless of how crazy it sounds, we have to do it this way because they told me so.”  It’s like your parents saying “because I said so” except here you get to pay them six or seven figures a year to treat you like a four year old.  

Accounting is the only profession that actively tries to get rid of most of its clients, but at the same time tries to bleed every last cent out of them on their way to being fired.  We’ve had a hell of a time getting any of the Big Four to want to work with our portfolio companies and those that do are paying a very high price.  It isn’t like the 1990’s where they were all fighting over our companies hoping they’d go public.  Right now they have so much work to do in the public sector that they can’t make enough money on the private companies.  That being said, on their way out the door, they’ll try to recoup any discounts they gave you while you were a client while giving you a big smile in the hope that you’ll come back to them one day if you are successful enough to go public.

Accounting is the only profession that refuses to opine on the “other side of the house” (audit guys won’t go near tax and tax won’t go near audit) unless it makes one of their lives easier and then they’ll do whatever they want.  Case in point:  409A .  If you’ve read our posts, you’ll note that many venture backed companies are getting formal, third-party valuations in order to comply with 409A.  This a tax regulation, so don’t ask your auditors, they’ll turn you over to the tax guys.  There is this other accounting issuance called FASB 123, which in short is the “fair value” proclamation that affects venture firms by forcing them to “fairly value” each of their portfolio companies for their financial statements.  This is an audit issue, so don’t ask your tax guys.  Now this sounds all fine and good: “Why shouldn’t a venture firm keep fairly valued books for its limited partners?”  The problem is most venture funds negotiated a way to value their portfolio for their investors at the time the fund was formed.  There are very strict policies regarding how portfolio companies are valued and when they can be marked up or down.  Let’s call this the “LP accepted method.”  Now, we have FASB 123 that says we must “fairly value” the companies which may or may not reflect the same answer as one would get if you use the LP accepted method.  Let’s not bash the accountants for FASB 123, they didn’t enact it, but how do they decide to fairly value the companies?  Simple, they jump over to the tax side of the house, grab the 409A valuation and say “here is the value.”  Hey, you aren’t supposed to look over there!   (Note:  this is a completely stupid result.  The 409A valuations are done for a completely different purpose.  Also, you’ll find many reasonable auditors willing to say offline this is stupid, but someone in a windowless room in New York is suggesting that they have to do it this way.)

Accounting is the only profession that doesn’t care if their processes negatively impact your business, what your opinion of them is, or whether or not you are a happy customer.  They know there aren’t many of them, you have to get an audit, and you’ll shut up and like it.  If you have to turn your operations upside down to comply with their desires, that’s your problem, because you are a captive audience.  The only other profession that might be close would be the customer service representatives of most major airlines (excluding – of course – Southwest.)

Accounting in the only profession whereby a new regulation comes down, a client alert is sent out and not a single client can understand anything that is on the printed page.  And – we’d like to give special honorable mention to law firm tax departments for being equally skillful with their alerts.  I’m sure glad that I have Jason to figure all of this out for me, although he claims that his brain is completely full and is accepting no more accounting knowledge for the foreseeable future.

And that’s okay, because we have good accountants to tell us what to do (at least until they read this blog post.)