Economic Outlook Remains Uncertain

CPA financial executives share insights on credit, collections, staffing and customer demand.

Recessions—roughly two per decade—have occurred quite regularly since World War II. Most last less than four quarters, according to International Monetary Fund data. But the depth and breadth of recessions are notoriously difficult to predict.


This article focuses on what CPA financial executives have experienced in the current recession, using data from the first quarter Business and Industry Economic Outlook Survey ( conducted by the AICPA and the University of North Carolina’s Kenan-Flagler Business School. The JofA supplemented this data by interviewing CPA financial executives in multiple industries and regions of the country (read profiles of the CPA executive participants here).



The executives, interviewed in March, shared experiences correlating with survey results that indicated 23% of executives had experienced higher credit costs and tighter restrictions.


For Manship Media Group in Baton Rouge, La., credit is a top concern. The 100-year-old family-owned business operates the daily newspaper The Advocate and two ABC-affiliated television stations. CFO Ralph Bender, CPA, explains that the company has substantial fixed costs and debt related to printing and broadcast equipment. “As the business has significantly retreated in terms of revenue, that’s put some strains on our ratios and caused some increases in the cost of credit,” he says.


Chicago-based CPA John Walles, who is CEO of the technology consulting firm Walles & Associates Inc., also has seen credit tightening. “Looking to expand [credit lines] is impossible,” he said. “If you have a solid line in place, then you can maintain it.”


However, banking executives, though not denying that they’re being more careful, say they are lending. “Credit is certainly still available for good companies with quality collateral and good management,” said Justin Horst, CPA, vice president and CFO of Omaha, Neb.-based Pinnacle Bancorp Inc. He adds that housing credit is tighter because of the dry up of the secondary market for mortgages and the imposition of stricter underwriting guidelines by Fannie Mae and Freddie Mac.


Ed Lette, chairman and CEO of Austin-based Business Bank of Texas, says bankers are followers and got too caught up in real estate values without looking at cash flows. He says he’s not afraid of real estate, just “speculative” real estate. But he thinks his colleagues are likely now to push the pendulum back the other way—requiring more personal guarantees and other types of covenant restrictions (see “Checklist: Loan Covenants Tighten Up,” page 20).



Employment prospects have continued to drop. Less than half (47%) of survey respondents expected to maintain or increase their employee head counts. In the previous quarter, 57% expected to do so. Nearly one-third (32%) expected to reduce staffing by more than 5%. Technology and health care providers showed the best employment prospects with just under one-third expecting to increase the number of employees; but even for those industries the number of respondents expecting decreases exceeded the number expecting increases.


“I think it’s turning into a little bit of a vicious cycle, so it’s very difficult to predict when unemployment’s going to peak,” says Kenan-Flagler’s Mark Lang, CPA, Ph.D., who analyzed the survey’s results. He said companies are facing a downturn with respect to their demand, and as a consequence, they’re rolling back spending.


Although Manship Media had not reduced staff other than by attrition, as of this writing, Bender pointed out there’s hardly a newspaper in the country that hasn’t reduced staff by at least 10%.



In the first quarter, more than 50% of the financial executives surveyed had implemented compensation freezes in their organizations. However, follow-up with a limited number of participants indicated that compensation freezes are not uniform.


“We do have a compensation freeze, but it’s not totally restrictive,” said Sanford (Sandy) Weinstein, the CFO and senior vice president–finance of Goodwill Industries of Greater New York and Northern New Jersey Inc. “In critical areas such as in IT, if we feel someone will leave if they don’t get more money, we might make some changes.”


“We’ve made some minor changes in benefits and otherwise have been real cautious but have not had formal hiring or compensation freezes,” says Horst of Pinnacle Bancorp. “But we’ve been very mindful obviously of the level of pay increases.”



The cost of employee health care is now the second greatest concern of financial executives. But the consensus among those interviewed is that it’s not as much a matter of increasing costs as it is an ongoing burden that’s coming under more scrutiny in the current economic climate.


“We’ve been able to hold the line on health care costs,” said Weinstein. “The overall cost is obviously a great expense. … If we found ourselves getting operationally closer to being in the red, I think that’s something we would look at.”


“We’ve had a self-funded plan, and we’ve actually been able to manage our costs pretty well,” said Horst. “We’ve had around a 3% increase each of the past few years.”


But other self-insured plans have not been so fortunate. Utilization of health care services adds more volatility into the cost of a self-insured plan, Manship Media’s Bender explains. “Our utilization numbers have not been good over the last year,” he said.


Lang pointed out that reducing the burden of employee health care costs on employers would be a welcome economic stimulant. “I think the single-payer sort of a model that’s out there could potentially take a lot of the burden off of companies.” he said. “The question is how that would actually be financed given the current deficit, Social Security, and a variety of other factors.”



Customer demand has been the lead concern in the survey for the past five quarters. Bender acknowledges that the newspaper industry was in a state of transition prior to the recession. But he points out that some of the larger segments of a newspaper’s advertising dollars come from automotive sales, real estate, and employment—all three of which have been hit hard by the recession. Bender says the impact of the decline in these sectors was delayed for television because of additional ad spending for the 2008 elections.


“In the break-fix business, which is maintenance contracts for computers and servers, clarity going forward is a little difficult right now,” said technology consultant Walles. “We are seeing significant drops in renewals of previous contracts.”


But all is not bleak even in the banking sector. “I think on the community banking side, customers are actually appreciating us more because of the perceived or actual credit crunch that’s going on,” said Pinnacle Bancorp’s Horst. “I think we’ll continue to have good customer demand for the product that we have—at this point.”



Federal Reserve Chairman Ben Bernanke testified to Congress in February that, if the government’s stimulus measures are effective, he expects the recession to end in 2009. On a conference call among select survey participants, CPAs, in line with survey results, were more pessimistic.


“I think last year, in December, I would have said the end of 2009,” Goodwill Industries’ Weinstein said. “Now I’d say the numbers aren’t getting better. … I’d push it back into 2010, which is later than I originally thought.”


“We have to find the bottom before we can find the recovery,” said Horst. “I would have thought we were there last fall, but clearly we’ve found a new low.”


Walles agreed. “Based on everything that I’m seeing, I’m thinking more like mid-2010,” he said.



CPAs, like the financial markets, were not particularly enthusiastic about the $787 billion stimulus bill passed in February.


“I think most [business] interests would have argued that it would be better for the economy on the whole if we cut back on taxes and tried to stimulate the economy in that way,” says Lang. “Certainly the tax rebates will hopefully stimulate spending, and some of that will flow through to the smaller businesses, but it’s more difficult ... to see how they’re going to benefit more directly from the plan.”


Horst said the impact of the stimulus will be “marginal at best.”


“I would have preferred to see more tax cut stimulus as compared to spending stimulus and something that would have maybe changed the depreciation rates,” said Walles. “Some kind of a one-year depreciation on capital expenditures for 2009 and two years for 2010 would have driven a lot more business.”



CPAs didn’t appear to have any magic indicators that would be early signals of a recovery.


“I would always look to the stock market, because the stock market is inherently forward-looking,” says Lang. He would also look for credit to loosen up a little bit more. “I think once people have more confidence in the economy, credit will naturally loosen up, and I think that will be a sign that the economy is likely to turn around.”


“One of the things that concerns me in the survey is that I see people making choices about spending that have long-term consequences,” he says. “There may be good reasons to cut back on things like research and development, employee training, but what concerns me is I think it’s easy to pull some of those levers because they can boost your bottom line in the short term. I do think the economy will rebound, and it won’t be too far in the future, and it’s easy to make choices today that’ll hurt the firm in the long term.”


Matthew G. Lamoreaux is a JofA senior editor. His e-mail address is




The Business and Industry Economic Outlook Survey ( is conducted quarterly by the AICPA and the University of North Carolina’s Kenan-Flagler Business School. Participants in the first quarter 2009 survey included 1,183 AICPA members employed as financial executives in industry. Sixty percent were CFOs, 26% were controllers, and 5% were CEOs or COOs. Responses were collected between Jan. 28 and Feb. 12. Sixty-four percent of respondents came from private entities, 16% from public companies, 13% from government, education and not-for-profits, and 6% from foreign-owned companies.


The full results of previous surveys are available for free at under the “Resources” tab.




JofA articles

Checklist: Loan Covenants Tighten Up,” May 09, page 20

Weathering the ‘Other-Than-Temporary’ Impairment Storm,” March 09, page 48



Current Economic Crisis—Accounting and Auditing Considerations (#0223308)


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UNC professor analyzes survey results,


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Economic Crisis Resource Center,



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