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How can one ensure an objective financial reporting function after an acquisition?

Who gets to carry out the financial reporting of a firm that has recently been acquired by a majority shareholder and is still being managed by the minority shareholder? There are different answers to this question and each of them has its own luggage. One might think that an accurate and mutually agreed upon financial reporting of a partnership may be down the line on the things to do after an acquisition list but in some instances, such a reporting may have major economic effects to all shareholders in terms of future pay-outs and/or exit valuation models.

After certain transactions, a timely financial reporting may not be just a contribution to the consolidation package of the majority shareholder but may be a basis for a tailored calculations of a set of KPIs that tie up to the Share Transfer and/or Shareholders' Agreements. In Turkey, for the past few decades we have seen partners tackling with this issue in different ways, which can be shortlisted as follows:

• Assigning a trusted expatriate from the head office,
• Hiring of a local CFO appointed by the majority shareholder (acquirer),
• Leaving things as they are and implementing an independent audit,
• Outsourcing of an independent reporting service.

An Expatriate from Head Office

This usually is the most expensive and unproductive alternative. An expatriate is usually an expensive item for especially small- and medium-sized Turkish partnerships. It also takes a lot of time for the expatriate to get used to the local culture, standards and regulations.

Hiring a Local CFO

In this scenario, the acquirer, usually being the new majority shareholder, appoints a new CFO with the approval of the minority local shareholders. The newly appointed person is actually appointed by one of the parties but has to deal with the local shareholders on a daily basis as they represent the management. This alone creates a challenging conflict which may make the life of the newly appointed professional a struggle on a daily basis. If this person turns out to be not cut out for such an appointment, you can be sure that the memories of such a person may easily be the plot for a thriller novel or a movie script.

Implementing Independent Audit

Following some M&A transactions, parties do not appoint anyone new to the partnership and they simply decide to strengthen, or if it is not in place at all, to introduce the independent audit process of the company. There are just many advantages of a first time independent audit to a small- and medium-sized Turkish company: it introduces a new discipline, a new culture, a new documentation standard, thereby creating a basis for accountability. However, an independent audit falls short for being a basis for an accurate and timely financial reporting that fits the custom-tailored requirements of the partnership and its relevant agreements.

Outsourcing of Financial Reporting

Such a service guarantees as much as possible the fairness and the validity of the financial reporting. An outsourced party can and should stand behind their output in front of all of the shareholders, foreign and local alike. A third party firm will not be threatened by the internal conflicts that may arise between the shareholders. The service provider in such instances should have a good understanding of the business and requirements of the reporting so that its deliverables are effectively utilized by the shareholders to:

• Assess the performance of the company,
• Make timely decisions based on accurate data, and
• Avoid major conflicts between shareholders when dealing with the performance-based pay-outs and exit valuation processes.

We, as Cerebra, encourage our customers and their transaction advisors to have an open communication with us when we carry out financial and tax due diligence. It is crucial for them to receive feedback as to whether the valuation method or their definition of profit, which they intend to incorporate into the related agreements, is realistically compatible with the financial data infrastructure of the target company. As Cerebra, we also offer high-quality outsourced financial reporting services following an M&A transaction to partnerships that have sensitive pay-out and valuation mechanisms which will be enforceable in the coming years as part of their Share Transfer or Shareholders' Agreements.

Ömer Tunabas