Miller & Bahnson get it right

Kudos to Messrs. Miller and Bahnson fortheir excellent op-ed piece, "IFRS 'non-vergence' and the CPA Exam: Calling the AICPA to account" (Accounting Today, March, page 19).

While the American Institute of CPAs has amassed an arsenal of testimonials about the virtues of International Financial Reporting Standards, the basis of it smacks of a push by major accounting firms and their clients to allow any form of financial reporting that makes both look good.

For those of us with just a little memory, IFRS seems like the AICPA's last misguided effort, "XYZ" (if you've forgotten that one, it's a hoot). Unfortunately, CPA candidates are the innocent pawns in this game.

Frank P. Daroca, Ph.D, CPA

Professor of Accounting

Loyola Marymount University

Los Angeles

 

More on credit scores

I received the March edition of Accounting Today and read it cover to cover. In particular I focused on the Opinion article "Know the score on credit scores" (page 12). My background is in working with community banks serving one-county to multinational banks. I wanted to give a bit more background on this from a commercial lending aspect.

The article was written for hard-to-get loans and credit. This mentions the Dun & Bradstreet reports and how the "credit scores play a big part in determining business credit" and a low score would "immediately place a business in the high-risk category."

From what I have worked with, the D&B may be more meant for credit with suppliers.

In commercial lending, we may generally check the report. This provides good background information on the company, giving, as of the last interview or date of the latest data gathering, the number of employees and a list of information on the company's vendors. This may be used for more of the general information. In my humble experience, the banks use more, and place more weight on, the five Cs of credit underwriting. In particular, a company's cash flow, using any of the three methods, is fully reviewed and analyzed. This, in conjunction with the traditional ratio, gives a full picture of the company's ability to make payments on loans to banks (my focus) and also suppliers.

I am not diminishing the role or function of the D&B reports or the data these provide. The banks also use other financial information, which is reviewed in a specific manner. This information and its analysis indicatively and intuitively provide the same information as the D&B as it relates to payments. For instance, if a cash flow is 1x (the cash flow available for the debt service is the same or relatively the same), then there may be issues seasonally through the year as it concerns payments to vendors. If the cash flow is much less than the amount needed for debt flow service, this assuredly would be reflected with the company's other suppliers' payment histories. This would indeed place the company in a high-risk category. The less the cash flow coverage, the greater the risk, and subsequently the interest rate. Thus, the underwriting review of the company not only provides the quantitative information on the company's ability to make payments to the banks and lenders, but also allows the banks to analyze the company and its financial operations and trends.

I hope this expands on the article and how at least banks review the situation.

Charles Parker

Via e-mail

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