Corporate governance is impacted by the Board of Directors, effectiveness of the firm’s internal controls, incentive systems and corporate culture and values. In addition to these internal factors, external factors such as federal and state legislation, the court system, regulators, and institutional activists all play an important role in the maintenance of good corporate governance practices.
How We Can Help
Freed Maxick can review a company’s level of corporate governance when performing internal control studies. As part of this process we review:
- Management incentive systems
- Compliance with regulations
- Corporate culture and values
- Board of Directors oversight
- Control and ownership structures
- Corporate strategy
- Objective setting, planning and budgeting
Companies are constantly reviewing ways they can enhance value by changing the composition of assets, liabilities, equity, and operations. Restructuring may embody both growth and exit strategies. Growth strategies may include acquisitions to expand shareholder value and help increase a company’s market share while achieving economies of scale or a refinancing or recapitalization of a company’s capital structure to lower its costs and result in improved profitability. Exit strategies allow a firm to maximize shareholder value by redeploying assets through downsizing or refocusing on the operational efficiency of a business.
Freed Maxick can assist companies in understanding how restructurings can help advance firm business goals, gain competitive advantage, and create value for shareholders.
We work with a wide range of clients including corporations, secured lenders, bondholders, unsecured creditors, debtors, stockholders, private equity firms and other investors, with matters involving:
- Value creation and maintenance
- Turnaround management
- Bankruptcy and reorganization
- Out-of-court workouts
- Litigation support
Our goal is to help clients improve their business performance and to ensure the success of all stakeholders.
Internal Control Studies
Organizations engage Freed Maxick to develop procedures that allow them to assess existing internal financial controls. The scope of these projects includes a review of implementation to ensure their effectiveness. As part of our work, we develop a tailored self-assessment questionnaire, consult with appropriate personnel, create a variety of review and evaluation procedures and conduct numerous walk-through tests to confirm understanding of the financial controls. The end result is new procedures for self-assessments and formal documentation of controls that can be included in a Policies and Procedures manual. We review:
- Information systems (design and implementation)
- Record retention
- Financial reporting controls
- Supervision and monitoring of operations
- Accounting policies and procedures
- Physical safeguards and security
- Prevention and detection of fraud
Quality of Earnings
Investors and creditors can call upon Freed Maxick to perform thorough, independent, third-party Quality of Earnings study.
Potential targets may take a variety of steps to try to disguise negative trends and poor results. A disciplined due diligence process is more important than ever. Take a close look at the following areas if you are considering a deal:
Last twelve month (LTM) results
In a difficult economy, trends may be more important than raw numbers. LTM EDITDA may be falling, so a close review of the most current results and a comparison to historical results is vital.
Backlogs can be a leading indicator of declining financial performance. Be sure to look at comparative backlogs over time so you will know which way this indicator is trending.
In a declining market, effective due diligence not only of the amount of sales and revenue, but also of their quality is vital. Take a close look at recent lost customers, or at customers who have stated an intention to move their business. Look for increases in barter activity, changes in return policies and increases in customer concentration – all could be bad signs.
A target company may take a variety of steps in a declining market that could adversely affect margins. For example, companies often discontinue less profitable or unprofitable product lines in tight markets – but that could mean that a higher percentage of overhead will be allocated to the remaining product lines, adversely affecting their margins.
Accounts receivable and bad debts
Look at the target’s receivables aging to see if collections are slowing. Remember, deteriorations in receivables will affect the company’s borrowing base and loan structure.
Accounts payable and purchasing
Targets may adjust their purchasing and accounts payable practices in ways that could affect their value. The target may be slowing payments to vendors and suppliers to conserve cash, or may have be having more disputes with vendors as it tries to return merchandise in an effort to control inventories and preserve cash. Even if the target itself is healthy, the failure of a key vendor could lead to interruptions and higher costs as the company scrambles to find a replacement, so you also must assess the health of the company’s key suppliers.
If sales are falling, a company’s inventories often will creep up, which creates a higher risk of excess and obsolete inventory and related write-downs. If the target’s customers are experiencing slower sales or other issues, then returns are likely to increase, which also can cause inventory to increase. The target also could be allocating idle costs to inventory. All of this puts a drain on cash as increased inventory costs push working capital requirements higher.
Compensation and staffing
Payroll is usually the largest expense for an employer, so it’s no surprise that a company make take steps to reduce its personnel costs. Be sure to consider the likely effects on morale and retention of key personnel, as well as potential costs to make up for skipped or delayed payments.
If the company has laid off workers to save money, make sure that those cuts are sustainable.