By Tom Hanlon
7 November 2012
In little over an hour on a recent Thursday afternoon at Deloitte Auditorium, accounting students were afforded a look back at the past, an analysis of the present, and a glimpse into the future of the world of accounting and investor relations.
Those views were presented by Jim Cook, a retired partner at Ernst & Young LLP, his daughter Pam Cook, a finance supervisor at McDonald’s Corporation, and Chris Stent, senior director in investor relations at McDonald’s Corporation.
“By the time I left Champaign, laptops, voicemail, and cellphones were all at least 15 years away,” said Jim Cook, a ’71 graduate of Illinois. “As I started my career, it was very much pencil and eraser and adding machines. What came along with that was a level of drudgery that we don’t have to deal with today because there was a lot more manual effort invested in business processes.”
In the spring of 1970, Cook said, “The university shut down a month early and sent everyone home because things were so tense here” over the Vietnam War. “Now, of course, everything is idyllic on campus,” he added, eliciting more than a few chuckles.
Major trends since 1970
Cook spoke on some major trends that have taken place in the accounting world and beyond since 1970, including:
- Flexible work arrangements and two-career households
- The impact of technology, which has opened up the traditional work environment and freed people to be more mobile and access information more readily
- Capital markets, which have become much more complex and customized
- The auditing world itself, which has mirrored that complexity
- The globalization of business
- The increase and impact of regulations and litigation
- The mergers in the ‘80s and ‘90s, which resulted in the Big Eight accounting firms becoming the Big Four
Pam Cook, who earned her BS in 2007 and her MAS in 2008 from Illinois, mentioned the demise of Enron, WorldCom, and Arthur Andersen, and the advent of the Sarbanes-Oxley Act, which set new standards for public company boards, management, and accounting firms, and of the PCAOB, created to oversee the audits of public companies.
Another change, she noted, occurred in financial reporting. Today there is much greater emphasis on balance sheet accounting, future impairment, and management discussion and analysis (MD&A). In 1970, for example, McDonald’s annual report was 31 pages – “and many of those pages were just pictures!” Pam added. In 2011, McDonald’s put out a 48-page annual report. Similarly, Ford’s annual report grew from 36 to 171 pages from 1970 to 2009.An insider’s view of McDonald’s
Chris Stent, who assumed his senior director in investor relations role for McDonald’s in 2008, gave students some background on the McDonalds’ Corporation: 69 million customers served each day in 34,000 restaurants in 119 countries, with 20,000 restaurants outside of the US.
“And 80 percent of our restaurants are run by franchisees,” he said. “It colors a lot of what we do, how we are structured, how we are financed and how we manage our balance sheet.”
Stent spoke of the competitive strengths that McDonald’s possesses:
- Size and scale
- Stable cash flow (gained through collecting rent and royalties from its franchisees)
- Real estate (“We either own the land or have a long-term lease on it, and we tend to own the building”)
- Supply chain (“Our supply chain network affords us an advantage in pricing, consistency and quality of product. A Big Mac in Champaign will taste the same as it does in London or Tokyo or New York.”)
- Predictability of cost (“We utilize forward-buying, hedging, and fixed-price contracts so we can get stable and predictable pricing so our marketing messages don’t have to vary from year to year”)
- Conservative balance sheet (“We believe that a strong balance sheet creates a halo for us, our franchisees, and our suppliers”)
During a panel discussion, Stent said that McDonald’s does a lot of research on investors before meeting with them to determine how much to disclose. “Hedge funds tend to be short-term focused,” he said. “Long-run investors vary – some are more growth-oriented so they might be interested in new unit growth. Other investors are more income-oriented and are probably going to ask us about our dividend and our cash allocation philosophy. A third group might be more sensitive to valuation, so they evaluate our P/E multiple relative to other companies.”
He added that McDonald’s stopped disclosing earnings guidance in the early 2000s. “The way guidance often works is if you provide a range, Wall Street expects that you’re going to come in on the upper end of that range,” he explained. “If you come in at the bottom end, you’re going to get penalized. And if you come in outside of that range, above or below, then they get upset because you’re not giving accurate guidance.”
Stent noted that in preparing to talk to analysts, McDonald’s is very scripted – “down to words, down to adjectives. We script the exact words so that during a conference call we are diligent about what precisely is said and in what order. We’re very diligent about that.”Client relationships
Jim Cook spoke of the opportunities that auditors have today that they didn’t have previously, thanks to technology. “You’re using the company’s electronic media and whatever else you can find to get a sense of whether that’s a company you want to associate with,” he said.
And if you do choose to work with a company, the use of electronic media can help you come up to speed quickly. “As that relationship with a client develops,” he said, “you are looking at the same resources to make sure you see a consistency among what a company is disclosing about itself in the media and what you’re hearing from the company about their operations.”
In addition, he added, “It’s very helpful to gain an understanding of a client’s competitors or the industry that they’re operating in, or the key players in the supply chain, either the suppliers or the customers. Those are all opportunities to gain further knowledge about the environment that your client is operating in.”
Cook was also asked about how to choose between being an auditor or advisor for a client.
“There are many ways for the professional service firm to bring value,” he said. “Tax consultation, information technology security, various operational efficiency ideas, and so on. You need to look at what the client’s needs are and be very thoughtful of what you are able to deliver and that will help you decide whether that relationship will tilt toward that independent relationship or a relationship that doesn’t require independence, but would be more in the consultant or advisory area.”
“The bottom line is where is the greatest value? By choosing that direction, you’re going to maximize what you can do for the client. But it will also ultimately maximize economically and professionally what that relationship means to you.”Final thoughts
Jim and Pam Cook and Chris Stent each had parting thoughts for the students.
“This program at the U of I really prepared me well for the start of my career,” Pam said. “Certain skills that were emphasized in the program, such as learning how to work effectively in teams and understanding the importance of developing a strong network, have really helped me so far. You’ll be very well prepared, so be confident in yourself and your abilities.”
“When I went to college,” Stent said, “my grandfather told me, don’t let your studies get in the way of your education. In many ways I think the same thing can apply to your business life. Your desk is a very dangerous place to spend your career. As you get out into the working environment, make sure that you maintain and build your relationships, because that’s ultimately what will define your success. Being proficient in whatever you go into is important, but what can differentiate you will be your ability to work with people, your effectiveness in teams, and having that strong emotional intelligence that helps you as you work with people.”
“Anticipate and welcome significant change in your own career and the environment that you’ll be working in,” Jim Cook said. “You should expect the unexpected. The things that I shared with you, many could not have foreseen. But I guarantee you that 40 years from now when one of you is sitting up here, you’re going to be talking about an accounting environment that is drastically different from what it is today.”