INTERNAL AUDIT S ROLE IN HIGHLY AQUISITIVE ORGANIZATIONS

Transcription

1 INTERNAL AUDIT S ROLE IN HIGHLY AQUISITIVE ORGANIZATIONS JUNE 27, 2017 Jeff Hemphill Central Region Risk Advisory Services Practice Leader Chris Alger Management Advisory Services Managing Director

2 CPE AND SUPPORT CPE Participation Requirements To receive CPE credit for this webcast: You ll need to actively participate throughout the program. Be responsive to at least 75% of the participation pop-ups. Please refer the CPE & Support Handout in the Handouts section for more information about group participation and CPE certificates. Q&A Submit all questions using the Q&A feature on the lower right corner of the screen. Presenter(s) will review and answer questions submitted as time allows. *Please note that questions and answers submitted/provided via the Q&A feature are visible to all participants as well as the presenters. Technical Support If you should have technical issues, please contact LearnLive: Click on the Live Chat icon under the Support tab, OR call: Audio Audio will be streamed through your computer speakers. If you experience audio issues during today s presentation, please dial into the teleconference: , and use teleconference code: # 2

3 JEFF HEMPHILL CENTRAL REGION LEADER RISK ADVISORY SERVICES Jeff is a leader in BDO s Risk Advisory Services practice with more than 25 years of public accounting and industry experience including 20 years of risk, governance, and internal controls engagements. His practice emphasis is in risk management, internal audit, Sarbanes-Oxley readiness and compliance, fraud program development, IT audit, and quality assurance for private and publicly held companies. Much of that work involves collaborating with management teams on growth strategies and board of directors matters, as well as working with audit committees involving governance and with private equity firms to coordinate strengthening management activities as new requirements are undertaken. PROFESSIONAL AFFILIATIONS NACD CIA IIA Dallas Chapter University of North Texas Accounting Department Board EDUCATION M.S., Accounting, University of North Texas B.S., Accounting, University of North Texas He joined BDO with Big Four experience, previously with KPMG and Deloitte. In addition, Jeff has experience developing and managing compliance programs with responsibility for North America, Europe and Asia. Jeff is a frequent, sought-after speaker on advisory matters for professional and civic audiences. As an active member of the Institute of Internal Auditors, Jeff remains on the forefront of industry regulations and changes. He serves on many community boards and civic committees. 3

4 CHRIS ALGER MANAGING DIRECTOR MANAGEMENT ADVISORY SERVICES EDUCATION M.B.A., Katz Business School, University of Pittsburgh M.S., Geology, West Virginia University B.A., Geology and Economics, Ohio Wesleyan University Chris Alger is a Managing Director of our Business Performance Improvement practice, located in the Pittsburgh, PA office of BDO USA. He has more than 30 years of practical solution deployment experience focusing on the planning, design and delivery of growth-oriented, performance improvement, synergy realization solutions as well as focusing on operationalizing business strategies. Mr. Alger commonly works with client leadership who has aggressive growth or performance agendas commonly triggered by marketplace disruptions, by a shift in strategic priorities or by the demands of growth expectations. He is actively working with the BDO Transaction Advisory Services leadership to leverage management consulting skills and PMI experience to deliver PMI planning and support services to our TAS clients geared to mitigating stabilization risk and enhancing speed to value. Additionally, Mr. Alger leads efforts around finance, operations and value chain performance improvement linked to integrated planning, forecasting and performance management. Prior to BDO, Mr. Alger was a Management Consulting Partner with Accenture LLP. Throughout his career, Mr. Alger has worked with medium to large Fortune 1000 companies and global multinationals to drive material bottom line business value and improved returns to shareholders. He has led and managed several small, medium and large business change teams through the full project lifecycle from due diligence and feasibility to support design and benefits realization efforts. He has provided guidance and coaching to executives seeking to undertake aggressive performance improvement change programs across multiple disciplines. Mr. Alger provides business advisory and management consulting services to clients across multiple industries. 4

5 TODAY S LEARNING OBJECTIVES At the conclusion of this course, participants will be able to: Discuss the key considerations associated with internal audit s role in M&A activities; Discuss practical examples of internal audit projects related to acquisitions; and Identify benefits and pitfalls for internal audit in highly acquisitive organizations. 5

6 INTRODUCTION TO BDO ABOUT BDO INTERNATIONALLY ABOUT BDO NATIONALLY Accounting and Audit 57% Accounting and Audit 50% Tax 22% Consulting / Advisory 21% $7.6 billion revenues Tax 33% Consulting / Advisory 17% $1.29 billion revenues 158 Countries 1,400+* offices 67,000+ Total personnel 60+ offices 500+ Alliance firm locations 6,057+ Total personnel * Including exclusive alliances of BDO Member Firms Statistics as of year ended 9/30/16. Statistics as of year ended 6/30/16. 6

7 OVERVIEW OF RMTAS BDO s Risk Advisory practice works closely with clients to assist in the management of risk and the achievement of strategic business objectives through proper internal control systems. Our professionals provide the value-added risk management capabilities needed to mitigate business risk, support business strategies and continuously improve operational performance. CORPORATE GOVERNANCE/ ORGANIZATION DESIGN ACCOUNTING AND BUSINESS SERVICES COMPLIANCE STREAMLINE OPERATIONS? WE HELP CLIENTS ACHIEVE STRATEGIC BUSINESS OBJECTIVE THROUGH PROPER INTERNAL CONTROL SYSTEMS BUSINESS PERFORMANCE IMPROVEMENT ENTERPRISE RISK MANAGEMENT & INTERNAL AUDIT TECHNOLOGY ADVISORY FRAUD PREVENTION 7

8 KEY CONSIDERATIONS ASSOCIATED WITH INTERNAL AUDIT S ROLE IN M&A ACTIVITIES 8

9 POST MERGER INTEGRATION OVERVIEW Why is Post Merger Integration important? Companies rely on mergers and acquisitions (M&A) to build critical mass, expand markets, and acquire new skills and technologies; however, the reality is a majority of today s mergers will fail to achieve desired objectives. In the past, executive management often assumed business synergies would naturally evolve once the M&A transaction closed; however, opportunity for a M&A failure is greatest after the deal is closed without deliberate focus. Companies and investors now view M&A integration plans as one of the most important parts of the deal. 9

10 INTEGRATION SUCCESS FACTORS 10

11 INTEGRATION - SOME KEY QUESTIONS Strategic considerations Why this deal? If there are synergies, what hard evidence indicates they will materialize? What is our integration strategy? What is the definition of success? Operations What changes are needed to the current operating structure and logistics following the merger? Will the supply chain be affected? Talent As we blend the human resources from the companies, will we retain the right talent for success? Technology Culture Monitoring progress Is the company s technology infrastructure capable of supporting the planned merger? How will the acquired company s technology be treated post-merger? Will the merger involve a blending of different cultures? What are our plans for resolving conflicts? Will there be a new post-merger culture? How can we ensure all employees thrive? What are the dashboard components? What elements will management monitor? How frequently? What metrics will the board use to measure overall success? *Reference: National Association of Corporate Directors, NACD Blue Ribbon Commission Report on Strategy Development,

12 INTEGRATION - PLANNING CONSIDERATIONS Long Term Medium Term Short Term Day One Readiness Transition and Stability Ensure issue-free operational Day One People: Interim reporting structure, retention & communication plans Process: Key interim processes transitioned/harmonized (e.g., payroll & benefits, business development) Technology: , phone, expenses Combine with minimal operational disruption People: Robust communication, reinforcement of roles & responsibilities, align compensation & benefits Process: Teams rapidly plan & execute back-office integration (programs & operating units addressed later) Technology: Complete system integration/alignment Strategic End- State Operating Model Realize full potential of expertise & competencies People: Define strategy for combined organization Process: Consolidate program operations, ensure processes & policies support objectives Technology: System standardization & optimization First things, first. Prioritize initiatives by importance & urgency

13 INTEGRATION HIGH-LEVEL COMPONENTS ILLUSTRATIVE ACTIVITIES REPRESENTATIVE TIMING Strategy/ Planning PMI Phases Stabilization (First 100 Days) Integration (Synergies) 13

14 INTEGRATION TYPICAL TIMELINE PMI Metrics and Tracking PMI Process PMI Planning Kick off Start detailed PMI planning Project plan Schedule and timelines Risk plan Stakeholder plan Communication plan Initial stabilization plan Execute pre-announcement tasks Tracking and reporting PMI performance tracking Reports Updates PMI Kick off Target involvement as necessary Refine Project plan Schedule and timelines Risk plan Stakeholder plan Communication plan Stabilization plan Day 1 checklists Execute Day 1 Tasks Tracking and reporting Reports Updates Week Announcement Closing/Day 1 Today CLIENT EXAMPLE

15 INTEGRATION KEY CONSIDERATIONS ALIGN PLAN TO STRATEGY MEASURE TWICE, CUT ONCE Articulate Strategic Objectives Acquisition Scenario Planning & Alignment Agility Stabilization/Integration Playbook Power Detailed Integration Planning Stabilization Plans Integration Plan Speed Serial acquirers, who are committed to an inorganic growth strategy, develop aligned core competencies of acquisition readiness and integration planning and preparedness capability 15

16 INTEGRATION KEY CONSIDERATIONS STABILIZE BEFORE YOU INTEGRATE FIRST THINGS FIRST GOAL Control and minimize the depth and duration of adverse performance impacts during stabilizations. Importance of First 100 Days Stabilization should be closely managed/monitored to ensure solid foundation for integration is established Plan stabilization early Establish a stabilization war room Establish targets/monitor performance One Plan, Multiple Dimensions 16

17 Identify the right leader/team Best leader, not just the available one Rotational programs build skills Budget accordingly Too much is at stake to have leadership and integrators distracted by other mission critical operational and/or strategic issues. Accountability for results is essential. 17

18 BDO S HIGH-LEVEL METHODOLOGY ILLUSTRATIVE ACTIVITIES REPRESENTATIVE TIMING LOI PHASE 1 PHASE 2a PHASE 2b PHASE 3 PHASE 4-n Value First 100 Days Integration Diagnostic & Integration Due Diligence Execution Support Integration Planning Management Services Strategy Begin with the End In Mind Measure Twice, Cut Once Priorities, Financial Data, Operational Data & Insights/ Risks 2-3 Weeks 5 6 Weeks tbd Review Deal Business Case (Validate Rationale) Develop/Confirm Integration Strategy & Validate Synergy Assumptions Conduct High-Spot Opportunity Review Interviews (as appropriate) Finance and Accounting HR/Comp/Benefits Information Technology Procurement Supply Chain/Distribution Etc. Build Risk Assessment Establish Prioritized Highlevel Road Map Pre-close DD & Integration Planning Planning First 100 Days Integration Finalize Integration Strategy Define Executive Priorities Create Inventory/Action Plan For: Critical Processes Critical People Critical Technology Develop Transition Plan Formalize Communications Formalize Day Planning & Checklists Define Synergy Realization Projects Review Deal Rationale Prioritize Opportunities Develop Business Case Develop Integration Roadmap Formalize & Communicate Source Work Stream Teams Deal Finalized Post-close Integration Support Execute Day 1 Plan Communication Plan Execute Transition Plan Monitor Stability Manage/Escalate Issues Sanction Stabilization Projects (Swat Teams) Communicate Progress Finalize Synergy Realization Plan Communicate Execution Sanction Special Projects Mobilize Teams Execute Projects Monitor Performance Reassess Business Case Source Integration Work Stream Teams Program /Change Management Stakeholder Management Communication Planning Resource Retention Planning Organization Design Culture Gap Assessment/ Alignment Manage Integration/Synergy Realization Teams Finance HR/Comp/Benefits IT Etc. 18

19 BDO S HIGH-LEVEL VALUE DRIVERS SOURCES OF VALUE FALL INTO THREE PRIMARY CATEGORIES Risk Management/ Mitigation Today s Focus Value Levers Revenue Enhancement Cost/Operating Synergies 19

20 KEY CONSIDERATIONS ASSOCIATED WITH INTERNAL AUDIT S ROLE IN M&A ACTIVITIES Risk management considerations 20

21 BDO S RISK APPROACH TO INTEGRATION RISK APPROACH ALIGNS WITH BROADER INTEGRATION METHODOLOGY Post Acquisition Integration LOI PHASE 1 PHASE 2a PHASE 2b PHASE 3 PHASE 4-n Value First 100 Days Integration Diagnostic & Integration Due Diligence Execution Support Integration Planning Management Services Strategy Begin with the End In Mind Measure Twice, Cut Once Deal Finalized Planning Execution Monitor Risk Management Integration Assessment 21

22 BDO S RISK APPROACH TO INTEGRATION COSO ERM RISK MANAGEMENT FRAMEWORK FOCUS EXAMPLES Strategic Operations Reporting Compliance Synergies Reporting Lines Financial Regulatory COSO ERM Framework, 2004 Change Management Efficiencies Managerial Policies and Procedures 22

23 BDO S RISK APPROACH TO INTEGRATION BDO s approach to Post Acquisition Integration is a phased approach which includes a roadmap for the new acquisition s first 100 days and beyond: Planning Execution Monitor Planning Phase Considerations Teams/Committees Tools/Systems Communications Synergies Facilities Stakeholders Skills Standards Governance Culture Leverage Best/Better Practices 23

24 BDO S RISK APPROACH TO INTEGRATION Planning Execution Monitor The Vision Sets Targets Risk Mitigation Value Stream Integration Strategy & Priorities Integration Goals Expand product line Enter new market Rationalize/standardize salesforce Combine overhead Shared Services Optimize supply chain Optimize debt/equity ratios Revenue Enhancement Attract new customer Rationalize & strengthen brands Establish processes & disciplines Cost Reduction (Synergies) Risk Mitigation Rationalize assets/portfolio Leverage spend base Leverage/share best practices Diversify revenue sources Competitive pre-emption Extend life cycles (Product/Technology) Sourcing diversity Supply chain diversification Regulatory risk management Structure Execution Plans Minimum Requirements Aspirations Stretch Goals 24

25 BDO S RISK APPROACH TO INTEGRATION Planning Execution Monitor Evaluate major objectives Integrate Risk Mitigation Communications Into Broader Communication Strategy & Plans Messaging Review the communications plan Schedule of Communications Timely Feedback and Resolution 25

26 BDO S RISK APPROACH TO INTEGRATION BDO s approach to Post Merger Integration is a phased approach which includes a roadmap for the new acquisition s first 100 days and beyond: Planning Execution Monitor Execution Phase Business Considerations Key Business Cycles Monitoring / KPI Customers Continuity Business Continuity Procedural Consistency Vendors Management Employee Retention Brand Rationalization Asset Rationalization Policy Alignment Skill Drain Public Relations 26

27 BDO S RISK APPROACH TO INTEGRATION Planning Execution Monitor Integration Execution Considerations 27

28 BDO S RISK APPROACH TO INTEGRATION BDO s approach to Post Merger Integration is a phased approach which includes a roadmap for the new acquisition s first 100 days and beyond: Planning Execution Monitor Assessment Phase Considerations Support / Monitoring Change Management Reporting Resource Retention Process Improvement Results 28

29 BDO S RISK APPROACH TO INTEGRATION Planning Execution Monitor Reassess the execution of the plan and consider process improvement opportunities Execution Results Opportunities Process Improvement 29

30 PRACTICAL EXAMPLES OF INTERNAL AUDIT PROJECTS RELATED TO ACQUISITIONS 30

31 ACQUISITION PROJECTS FOR INTERNAL AUDIT Acquired/Target Risk Assessment Strategy, Operations, Reporting, Compliance Acquired/Target Controls Assessment Acquired/Target Governance Assessment Acquired/Target IT Assessment Facilitate risk based planning of acquisition with business units Audit organization target identification process Audit Due Diligence Process Audit the integration process Post Acquisition Review / Merger Objectives Assessment Evaluate Project Management, Planning & Escalation Evaluate assumptions for synergies 31

32 BENEFITS AND PITFALLS FOR INTERNAL AUDIT IN HIGHLY ACQUISITIVE ORGANIZATIONS 32

33 RECAP: BE AWARE OF INTEGRATION PITFALLS Treating all acquisitions alike with no tailored strategy Not planning the integration early enough Put too much emphasis on being fast and keeping the deal a secret Not focusing enough time on employees and culture alignment while over focusing on external media and investment community Not considering Risk Mitigation a source of business value Not tailoring communication to meet the various audiences Understaffing integration effort (insufficient leadership) Discounting the role of professional communicators Not performing cultural or system audits; instead relying only on due diligence output Not getting the right resources to the table at the right time 33

34 INTEGRATION BENEFITS: INTERNAL AUDIT Focus on merger and acquisition objectives yields a strategic assessment of synergy opportunities Internal Audit offers an independent and objective lens by which to evaluate acquisition effectiveness and efficiency Internal Audit is uniquely qualified to assess and consult on critical aspects of acquisitions: Risk Management Internal Control Corporate Governance Corporate Culture Systems and IT Infrastructure Human Capital Integration 34

35 QUESTIONS Jeff Hemphill Chris Alger

36 COMING SOON Internal Audit Webinar Series, Course #4: September 26, 2017 Harnessing the Power of Data Analytics and Continuous Monitoring 36

37 CONCLUSION THANK YOU FOR YOUR PARTICIPATION! Certificate Availability If you participated the entire time and responded to at least 75% of the participation pop-up questions, you may click the Participation tab to access the print certificate button. Exit Please exit the interface by clicking the red X in the upperright-hand corner of your screen. 37