Establishing Confidence in Financial Reporting
The Challenge
An Environmental Services company working with Oil & Gas refineries had experienced major fluctuations in their gross margins, with concerns arising that they were leaving revenue on the table due to process breakdowns across the organization. On top of that, the Company had lender reporting obligations, and were in danger of breaching covenants. Management had asked Accordion to help determine the cause of these fluctuations and to instill confidence in the Company’s financial reporting to support the Sponsor’s request for a waiver from the lender.
Services
Process & Controls Implementation
Accounting Policies & Procedures
Financial Statement Preparation & Analysis
The Execution
Accordion worked with the Accounting team to investigate areas of concern, and to determine the underlying causes of financial statement fluctuations. These included:
- Intercompany balances – were not being properly eliminated, resulting in an overstatement of revenue in prior months.
- Accrued expenses – were being accrued based off of purchase orders, as opposed to expenses which had actually been incurred. This resulted in an overstatement of expenses, which partially offset/disguised the overstatement of intercompany revenue.
- Job costing/project accounting – was not being performed appropriately, with Operations being responsible for tasks with little guidance/accountability assigned to them.
- Disparate systems – the company was utilizing a poorly implemented ERP system, along with a version of Power BI which was not meeting their reporting needs.
Following detection of the fundamental issues, we were able to help reconcile Intercompany balances, true-up the accrued expense balance based on a review of accrued expenses (>4,000 items) and to gain confidence around key account balances. Based on our review of key revenue streams, instances of billable materials/equipment not being charged through to customers were identified. Additionally, for certain services where a fixed fee was charged, we provided visibility into the true margin of these services, demonstrating that services they thought were cash cows, were actually dragging down the overall gross margins.
The Results
Our team was able to assist the company in attaining a waiver for breach of covenants, by providing the lender with a degree of confidence that the financial statements being presented were reflective of the business’s true situation. In addition, we provided the incoming CFO with a detailed report, outlining our key recommendations in order to help remediate many of the issues and breakdowns across the organization.