According to Staffing Industry Analysts, the use of contingent labor is expected to become a more critical element in the corporate strategy. And that it will increase overall in the coming years. Couple that with complications with healthcare reform, an intensified hunt for misclassified independent contractors and the perils of the work environment — some are more risky than others — and you may have what many have called “the perfect storm.”

Some legal teams find themselves swamped addressing workforce issues and can scarcely pay attention to contingent workforce challenges (much less stay up-to-date with CW related legal requirements). And, even more important, CW risk is not confined to the legal realm.

The SIA identified six critical areas of risks related to your use of a contingent workforce. Left un-managed, these risks expose your company to a potentially significant loss of money, reputation, security, and competitive advantage, not to mention the potential loss of freedom for your company’s executives.

1. Legal/Regulatory Risk
   must comply with Federal and State laws related to your use of contingent labor.
2. Strategic Risk
   You must use contingent workers without upsetting or disrupting your customers/partners, and without divulging critical intelligence to your competitors.
3. Operational Risk
   You must ensure high productivity, deliver quality talent, and avoid business interruptions.
4. Asset and Reputational Risk
   You must protect your intellectual property and brand/reputation.
5. Security Risk
   You must control access to facilities and be prepared for threats of workplace violence or terrorism.
6. Insurance Risk
   You must have a full understanding of indemnification agreements with suppliers and how these agreements affect your own business insurance.

Companies that use contingent workers must pay close attention to the risks.  Two information sources include:

·         Collabrus (www.collabrus.com) – a subsidiary of M Squared Consulting and a leader in senior level contingent workforce management and compliance solutions

·         Also consider attending the 2010 Contingent Workforce Risk Forum (May 11-12, in the Washington DC area).  Check out their newly updated program agenda at www.CWRiskForum.com.

To find the right contingent consultant or team for your next project, contact M Squared Consulting at msquared@msquared.com or 1-888-818-2505.

For the past two days I’ve been at the Staffing Industry Analysts annual Executive Forum in Miami Beach, Florida. This years Executive Forum attendance was down but still drew more than 500 executives despite the recession that’s hitting the human capital industry particularly hard. The recession and legislation affecting the staffing industry ranked among the top topics discussed Tuesday.

While traditional staffing and management consulting are certainly not identical human capital solutions, they are at opposite ends of the same flexible workforce continuum. So, for me, this event always provides interesting insights into the future of the whole contingent workforce.

Total staffing industry revenue is expected to decline 12.5% in 2009, according to Barry Asin, chief analyst and managing executive of products at Staffing Industry Analysts, in his keynote on Tuesday. “In the short term I don’t have lots of really good news for you,” Asin said. “I do have optimism for the longer term.” Most economists and the general consensus amongst staffing executives was that the recession would be over by late 2009, provided there were no “other surprises.”

One statistic which surprised me was the unemployment rate for college graduates. It stands at 3.3% compared to the high-school level which is over 11%. Clearly the demand for knowledge workers still exists, even in this depressed market. As we enter the recovery and leading-edge Baby Boomers gain enough confidence to retire this statistic will likely become even more startling.

Many executives I’ve been speaking with are optimistic that when the economy recovers more of their clients will be inclined to use the flexible workforce as a core component of their overall workforce strategy. This trend is one that M Squared Consulting has been advocating for some time. As the workforce evolves and the nature of work changes to become more project-based, it is only natural that the workplace will adapt to accomodate the growing contingent workforce.

In another session on staffing and the law, George Reardon, VP and general counsel of Adecco Group North America, said not a lot of legislation has specifically targeted staffing firms in the past, but that may change with the election of President Obama. It’s “hard to imagine an anti-employer, anti-staffing bill he would refuse to sign,” Reardon said.

With the November 2008 release of its proposed roadmap for US domestic public companies to use International Financial Reporting Standards (IFRS), the US Securities & Exchange Commission (SEC) effectively ensured that the US path to IFRS will remain in the headlines throughout 2009.

Comments on the proposed roadmap are due in mid-February, and the number of commentators is expected to exceed almost any other proposal released by the SEC. The comment letters will likely fuel the debate over whether and how the final roadmap should be implemented, leading right up to the issuance of the final roadmap, which is now unlikely to occur until late 2009.

The SEC strategically did not set a definitive date for moving the United States to IFRS in the proposed roadmap. Instead, they established a number of milestones for moving to IFRS, and committed to revisiting in 2011 the question of mandatory IFRS adoption. They will assess in 2011 whether sufficient progress has been made toward those milestones.

Some of the more significant milestones include:

• Achieving sufficient improvements to IFRS.
• Enhancing the independence, accountability and funding of the IASB and its Trustee Organization.
• Achieving sufficient progress on the taxonomy for XBRL compatibility.
• Realizing sufficient improvement in IFRS education and training in the US.

The SEC also plans to study the consistency with which IFRS is applied globally, believing that consistent application of IFRS as issued by the IASB is critical prior to moving the US to IFRS.

The proposed roadmap suggests that a reasonable timeline for moving the largest US public companies to IFRS is 2014, with mid-size and smaller public companies moving in 2015 and 2016, respectively. First-time adopters would be required to file three years of IFRS financial statements (with two comparative years), consistent with current SEC requirements.

Included in the proposed roadmap is a proposed rule that would allow companies meeting certain eligibility criteria to adopt IFRS as early as 2009. To qualify, companies would have to be in industries where, globally, IFRS is used more than any other accounting framework. These companies would also have to fall within the largest 20 companies in their industry, as measured by market capitalization. Finally, any eligible company wishing to adopt early would need to obtain a letter of no objection from the SEC.

The SEC is also asking respondents for views on two transition alternatives by filers that elect early IFRS adoption. First, filers would provide a one-time reconciliation of US GAAP to IFRS in accordance with normal IFRS 1 transition requirements. Under an alternative, filers would have to provide an annual unaudited supplemental reconciliation from IFRS to US GAAP covering the three-year filing period.

Implications of the proposed roadmap

In the absence of a firm decision to move forward with IFRS until at least 2011, the restrictive eligibility requirements and the potentially onerous reconciliation requirements for companies who decide to convert to IFRS early are likely to dissuade virtually all US companies from early adoption. Some US companies may even put the topic of IFRS on the back burner for now. However, strategic, forward-thinking companies are expected to continue planning for IFRS adoption.

Although the path ahead for IFRS in the US is not yet clearly defined, the end-game is virtually certain: all signs point to the eventual use of IFRS by all US companies. To develop a thoughtful and strategic approach, companies should begin to learn more about IFRS and how it may impact them. Specifically, companies would benefit from performing a preliminary study now to identify business-, accounting-, investor-, systems-, controls- and workforce-related issues that could arise during an IFRS conversion. Companies should also identify key IFRS conversion considerations and incorporate them into business planning to ensure they are considered as a business changes occur over the next few years.

Management must prioritize the investment of resources and capital, especially in these difficult financial times. While a comprehensive IFRS transition program may be farther off, there are certain areas of focus that can provide benefit now. Companies should consider the most significant IFRS conversion activities, as identified in a preliminary study, and make an investment only to the extent that company or industry-specific circumstances warrant it.

Multinational companies should also consider the impact of IFRS on foreign subsidiaries and understand where the company already uses IFRS or could use IFRS in the near future, and ensure the US parent maintains control of IFRS decisions across the business.

The road ahead

Given the scrutiny around accounting and its role in the global credit crisis, it is not surprising that the SEC has chosen a cautious, measured approach to laying out the path forward for a US move to IFRS. However, the credit crisis also clearly demonstrates the interconnected nature of the global financial markets and further demonstrates the need for a single set of high-quality accounting standards.

A combination of factors will influence the direction the SEC takes related to IFRS over the next 12 months - the development of new accounting standards by both the FASB and IASB, the political implications of the new Obama administration, the comments received from constituents on the proposed roadmap, and even the level of vigor with which the EU continues to support the IASB, to name a few. Companies will need to stay tuned and monitor the timing and tenor of the developments in order to plan appropriately.

With California facing a $42 billion deficit in the current economic downturn, a gloomy Governor Arnold Schwarzenegger has warned that the Golden State is on the brink of insolvency.

According to government statisticians over the past year more people have left California than any other U.S. state. No doubt many leave because they are disenchanted with snarled traffic, scarce jobs, expensive housing, and some of the highest taxes in the nation. Add to that the prospect of still higher taxes and fewer public services, and it would appear that normally optimistic Californians have little to celebrate.

But despite these negative sentiments, many experts now say the most populous state in the U.S. (and the world’s eighth-largest economy if it were a country) is extremely well positioned to rise again. In fact, the financial crisis could spur major changes in the state economy that will pay huge dividends in the long term.

How?

Well, California is blessed with abundant natural resources, large ports and access to the Pacific Rim, a large and relatively young work force, a strong entrepreneurial culture, and a huge technology industry. Once we get past the Great Recession of 2008/09 all these factors become significant assets for California’s future.

“The prophets of doom and gloom are just not looking at the reality of California,” said Jerry Nickelsburg, senior economist at the UCLA Anderson Forecast.

“The government has created kind of a mess and that’s a problem to be solved, but the negatives are actually fairly small. I think you can expect a lot of good out of California,” he said.

We must remove the rock upon our chest

The typically positive Governor Schwarzenegger recently made headlines when, instead of delivering his usual cheery “state of the state” speech, he issued a bleak message about California’s roughly $1.5 trillion economy.

“California is in a state of emergency,” said the Governor. “Addressing this emergency is the first and greatest thing we must do for the people. The $42 billion deficit is a rock upon our chest and we cannot breathe until we get it off.”

At the heart of California’s problems, economists say, is the government’s heavy reliance on personal income taxes as a funding source. This produces wild swings in revenue as State coffers overflow in good years and then dry up in leaner times.

A big reason for the state’s reliance on income taxes is Proposition 13, a voter-approved change to the state Constitution that limits property tax increases and requires any plan to boost taxes to receive the approval of at least two-thirds of the legislature. As a result, state Legislators have responded by burdening state residents with some of the highest income and sales taxes in the U.S.

This has worked up till now because of steadily increasing employment and wages. But now unemployment rates have turned grim, with the state’s jobless rate in December rising to a 14-year high of 9.3 percent, well above the national average of 7.2 percent. This rate is approaching the same level as the recession in the early 1990s, when California’s economy suffered from the post Cold War decline of the aerospace and defense industries, and unemployment rose to nearly 10 percent.

Clearly income and sales tax revenues will come up short if more Californians aren’t working.

Time to re-set the economy

Many economists say California has long needed to fix that revenue roller-coaster ride and are hopeful that this current crisis will force state leaders to take action.

Is the problem going to be compounded by the exodus of people? Probably not, since California’s population (currently 38 million) is actually still growing thanks to immigration and births. It is misleading to compare absolute numbers with other states when California’s population is so much larger than any other state. California’s population could hit 60 million by 2050, according to some projections, six times 1950’s 10.5 million people and 60 percent more than today.

Looking ahead

Despite the recession, California remains a leader in technology, green energy, biotechnology, aerospace and other industries that are expected to fare well in the world economy and create many new job opportunities.

Demographics give California one other bit of good news: the state’s relatively young work force will certainly give it an edge as the economy recovers and baby boomers once again think of retirement.

Hard-hit by the mortgage crisis and foreclosures, home prices have dropped across California - making home ownership achievable for the first time in nearly a decade for many young families. Although this is not good news for current homeowners, it will prove to be important as the war for talent heats up and the cost of living in California potentially becomes a detriment to recruiting.

The time for industry and government to re-invent themselves is now. The sooner we stabilize things and make realistic plans for the future, the better positioned we will be to capitalize on the recovery. At M Squared Consulting we’re actively helping many clients to both weather the storm and build solid foundations for future growth.

Last month the Securities & Exchange Commission (SEC) published its “Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards (IFRS) by U.S. Issuers”. The release of this proposed Roadmap reaffirms the SEC’s focus on moving towards a single set of high quality global accounting standards.

The key provisions of the proposed Roadmap are fundamentally consistent with those discussed at the SEC meeting on August 27, 2008 when release of the Roadmap was approved. A copy of the proposed roadmap can be found on the SEC’s webste at http://www.sec.gov/rules/proposed/2008/33-8982.pdf.

Following is a brief summary of the significant provisions of the proposed Roadmap:

The SEC will reconvene in 2011 to make a decision on the mandatory use of IFRS by US issuers. In making that decision, the SEC will evaluate progress against several specified milestones. These milestones include:

• Improvements in accounting standards (including progress under the Memorandum of Understanding between the FASB and IASB)
• Accountability and funding of the IASC Foundation, which oversees the IASB
• Improvement in the ability to use interactive data for IFRS reporting (XBRL)
• IFRS education and training in the US (including accountants, investors, regulators, and other financial statement users)
• Experience of eligible IFRS early adopters

Assuming a decision in 2011 to mandate IFRS for US issuers, the proposed Roadmap contemplates a phased transition to IFRS beginning in 2014 for large accelerated filers, 2015 for accelerated filers, and 2016 for remaining public companies. As a result, calendar year-end companies subject to the 2014 mandatory date would have an IFRS transition date of January 1, 2012. Best practice companies will have their internal accounting processes enabled to dual report under both US GAAP and IFRS as of this date.

An issuer that either elects or is required to file IFRS financial statements may only begin reporting using IFRS in an annual report on Form 10-K containing three years of audited financial statements. As currently proposed, an issuer would not be able to file IFRS financial statements with the SEC for the first time in a quarterly report, Securities Act or Exchange Act registration statement, or proxy or information statement. This provision could end up being amended to reduce the requirement to two years of audited IFRS statements so long as the annual report also included three years of US GAAP financials.

The proposed Roadmap provides an opportunity for certain qualifying issuers to adopt IFRS as early as fiscal years ending on or after December 15, 2009. To qualify for this option, a company must be one of the 20 largest companies within its industry (as measured by market capitalization) and IFRS must be used more than any other basis of accounting among those 20 largest companies. Issuers that satisfy both these criteria and wish to early adopt must apply for and receive a ‘Letter of No Objection’ from the SEC.

As part of the SEC’s 2011 evaluation of progress made against the outlined milestones, the SEC may expand the eligibility criteria to allow additional issuers to use IFRS prior to the mandatory transition date.

The proposed Roadmap includes two possible alternatives with respect to the disclosure of US GAAP information by issuers that choose to early adopt IFRS. The SEC is soliciting comment on these alternative proposals.

• Proposal A: Issuers must comply with IFRS 1, First-time Adoption of International Financial Reporting Standards, and include a one-time reconciliation from IFRS to US GAAP in their first set of IFRS financial statements.
• Proposal B: Issuers must comply with IFRS 1, and also disclose on an annual basis certain unaudited supplemental information reconciling IFRS to US GAAP for the three years of financial information included in their Form 10-K.

One outcome of turbulent markets is an increased interest in mergers and acquisitions. While the U.S. government is taking unprecedented market actions on an almost daily basis in an attempt to add stability, a new piece of legislation has now likely made these transactions more complicated.

Financial Accounting Standard 141 R, which becomes effective today (Dec. 15, 2008) will make it more difficult to place a value on acquisitions and could end up adding volatility to the earnings of the buyer, according to many accountants and merger attorneys.

The new rules, which bring U.S. accounting practices more closely in line with international financial reporting standards (IFRS), will affect the planning and execution of merger agreements, and the disclosure of costs and fees related to these deals.

The biggest change requires that any assets and liabilities being acquired must be accounted for at fair market value on the date of acquisition. The current accounting rules call for values to be based on assumptions or estimates. Executives, M&A teams, Boards of Directors, and their advisors, are now in for a lot more work to make a deal happen.

The challenge here is coming up with a realistic valuation. This is complex in the best of situations, in a volatile market environment like we’re in now it becomes extremely challenging. Fair market valuations are a moving target, which could end up adding a lot of time to due diligence and deal negotiations.

For stock transactions, there will be additional challenges. The value of the buyer’s stock to be used in a transaction will now be measured on the closing date, not on the date of a deal’s announcement. This means that any fluctuation in the buyer’s stock price will also change the value of the deal. With the wild weekly swings in many firms’ share prices this presents obvious concerns.

Another major change affects fees paid to bankers, attorneys or accountants. These costs must now be expensed in the quarter in which they occur, even if the costs precede the announcement of a deal. Expensing these fees will weigh on earnings in the quarters they occur. An industry fear is that recording these fees will also signal to shareholders and rivals that a company is involved in deal negotiations.

One final change makes buying companies with heavy research and development budgets more challenging. FAS 141(R) requires the cost of in-process R&D acquired in a merger to be spread over the life of the project. The previous rules let companies book the expected fees up front and write them off as part of the cost of the merger.

An unintended outcome of this new legislation: As companies interpret and react to these new accounting rules, they could end up moving slowly in deal negotiations to make sure they adhere to the new requirements.

While these new rules are onerous, at the end of the day the fundamentals of mergers and acquisitions still apply. Purchasers must be able to finance the deals, and the acquired companies must have solid underlying cash flow.

M Squared Consulting provides clients with a broad level of M&A support services. Over the years we’ve helped clients through all facets of M&A deals, from pre-merger evaluation to due diligence and post-merger integration. Our on-demand consulting model allows clients to stay focused on their daily business while executing on new projects and initiatives, and allows them to effectively deal with unforeseen additional project requirements like those brought on by FAS 141(R).

The Sarbanes-Oxley Act (SOX) was enacted on July 30, 2002 in a reaction to the last financial crisis we faced in the United States. It was a classic case of a knee-jerk government action that, in the final analysis, probably did more harm than it did good. The goal was to reform public company accounting rules to avoid future scandals like those which had played out at Enron, Tyco, Adelphia, Peregrine Systems and WorldCom.

Unfortunately, despite its good intentions, one practical effect of SOX was to severely wound the initial public offering market in the U.S.

Former Speaker of the House Newt Gingrich and David Kralik are now calling for the repeal of Sarbanes Oxley. In an Op-ed piece the San Francisco Chronicle, they outline the many problems created by SOX:

• It didn’t prevent insolvencies and accounting shortfalls in companies such as Bear Sterns, Lehman Brothers, American International Group (AIG) and Merrill Lynch.
• The average company will now take 12 years before it can successfully issue an initial public offering (IPO) (up from 5 years pre-Sarbanes-Oxley) because they do not have enough capital to cover the estimated $4.36 million hidden tax in yearly compliance costs (The initial estimate from the Securities and Exchange Commission was approximately $91,000 per company on average).
• Many smaller public companies went private or merged: “In 2006, the law firm Foley & Lardner LLP conducted a survey of 114 public companies on the effects of Sarbanes-Oxley. Twenty-one percent of companies were considering going private, 10 percent were considering selling the company, and 8 percent were considering merging with another company”
• U.S. companies are going public on foreign exchanges to avoid the Act: “In 2005, a report by the London Stock Exchange cited that about 38 percent of the international companies surveyed said they had considered issuing securities in the United States. Of those, 90 percent said the onerous demands of the new Sarbanes-Oxley corporate governance law had made a London listing more attractive.”
• They also quote Representative Michael Oxley, one of the original sponsors of the bill, who said “Frankly, I would have written it differently…Everyone felt like Rome was burning.”

This is particularly relevant to California because Silicon Valley may be the hardest hit region by the above mentioned effects. In the second quarter of 2008, there were no public offerings of Silicon Valley venture capital-backed companies, a phenomenon not seen since 1978. In the third quarter there was only one. Although the meltdown in the financial services industry did not help matters, it is clear that Sarbanes-Oxley has negatively impacted many companies. It has also had a direct effect on venture capital. Gingrich and Kralik argue that, if Sarbanes-Oxley is not repealed, we could see Silicon Valley’s status as a hot-bed of innovation erode and begin to see more and more of the future invented outside of the United States.

For business leaders it will be interesting to see if the next adminstration agrees with this assessment and chooses to pursue deregulation or if, after the latest financial crisis, they instead choose to tighten financial reporting and add more government oversight.

In late August, the U.S. Securities & Exchange Commission (SEC) approved a proposed “roadmap” that will eventually lead to U.S. firms switching from the U.S. Generally Accepted Accounting Principles (GAAP) to the International Financial Reporting Standard (IFRS).

Given that we are one of the last countries in the world not using IFRS it is not a question of if, but rather when U.S. companies must convert their financial reporting from GAAP to IFRS. This is the price we must pay for participating in a global economy.

The problem is that, up until now, very few business schools have taught IFRS. Furthermore, only multinational U.S. companies have had any practical experience with it. As a result, many finance and accounting professionals will need to quickly come up to speed on the topic.

Like all early markets, at this stage there is much uncertainty about what it all means and how best to implement IFRS. Frankly, it is catching the financial profession a bit flat-footed. In some ways, IFRS is like Sarbanes-Oxley was 10 years ago. Industry will be forced to quickly learn the basics, then apply it to their unique business situation.

This dynamic is creating its own cottage training industry. Accounting firms, universities, self-help advisers, and magazines are pitching a variety of courses on how to deal with IFRS.

There is no question that in addition to training, companies will be in need of seasoned experts with practical knowledge of IFRS who can come in on a project or interim basis to help make the conversion.

Many corporate finance and accounting professionals still have fresh, and not too pleasant, memories of implementing the provisions of the 2002 Sarbanes-Oxley (SOX) legislation.

As we now face the upcoming movement to International Financial Reporting Standards (IFRS) there are some important lessons we can glean from the SOX experience.

Businesses that start planning now will have a competitive advantage. There is no question that being proactive will save money and reduce headaches in the long-run. A few tips:

• IFRS is driven by principles. Rather than the rules and clear checklists of GAAP, it outlines standards and offers guidance, but ultimately companies will have the flexibility and obligation to deal with new situations as they arise. This will put more pressure on auditors. Executives should therefore take time now to consider the judgment calls they might have to make once IFRS takes effect - this will help their future decision making and ease the burden of implementation.
• Assess your current skills. In order to effectively make the transition to IFRS, the starting point is a solid working knowledge of GAAP. Many accounting firms and specialized training companies are now beginning to offer IFRS training. This training typically focuses on the differences between the two systems.
• Examine your information systems. Given that most U.S. organizations have financial systems that are designed to facilitate GAAP there will need to be a thorough examination of your operational and accounting systems. At a minimum, those systems will likely have to be modified to deliver the right data for IFRS. In some cases the systems will need to be upgraded, and in more extreme cases, completely replaced. Time is definitely your friend when it comes to updating systems.
• Examine the whole financial reporting value chain. In today’s integrated business environment there are many different constituencies who rely on a company’s financial statements. Follow the data trail to examine IFRS impacts on your compensation systems, credit reporting, banking, dashboards, etc. which today may rely on GAAP-based data-feeds.

Many finance executives still have painful memories of Sarbanes-Oxley, and how they needed to lean on their IT counterparts to decipher and support its requirements on the enterprise. Today’s CFO’s are facing this same challenge again, this time to figure out the financial reporting impacts of International Financial Reporting Standards (IFRS).

As the Securities and Exchange Commission continues down the path of mandating IFRS for all U.S. publicly traded companies, most accounting experts highly recommend that those conversations begin now. IFRS adoption will require changes and updates to corporate IT systems, too.

Some vital questions for the CIO and CFO to ask include: How will running IFRS and GAAP in parallel affect the updating their general ledger and chart of accounts? What metrics need to be added or revised? Should any budgeting and forecasting applications be changed?

Experts agree that it is a good idea for organizations to conduct a high-level review of how their financial statements would change under IFRS. This would allow them to discover major issues, including IT systems, to be resolved before migrating.

The good news is that there is plenty of time to figure this out. The latest SEC roadmap provides most companies with 8 years before they have to generate IFRS financials.