Archive for December, 2009

Alternatives to Reality

Ladies and gentleman I have lost my sanity.

I no longer understand reality.  As I look back over the events of this past year, I am saddened to say that I cannot comprehend what is self evident to so many people.  

Perhaps my frame of reference is distorted or maybe I continue to believe in outdated notions of cause and effect. 

I hereby make a passionate plea to the Readers of the Weekly Recon to help me understand our world, show me the errors of my ways and introduce me to the new ways of thinking.  

2009 has been a particularly difficult year for me, as my simple mind has been dwarfed by the impressive ability of the intelligentsia to present seemingly contradictory notions in the same thought.  I respectfully submit the following list of items from 2009 that baffle me: 

  • A President that is currently prosecuting two wars wins the Nobel Peace Prize, even as he intensifies the conflict in one of them
  • The Federal Reserve and Treasury say they are committed to a strong dollar policy, while desperately issuing liquidity in an attempt to create inflation
  • Healthcare is too expensive, so we must tax, borrow and spend trillions to make it “free” 
  • The planet is suffering from too much pollution so we are going to limit pollution by some, so that those with money can pollute more (Cap and Trade)
  • Unemployment is at 10%, another 10% of the population is on food stamps, tent cities have sprung up and we are in an economic recovery 

No my friends, I am far from being crazy.  What we have here is a series of illogical policy choices and a widespread case of cognitive dissonance.  

Cognitive dissonance is a term from the field of psychology and is used to describe conflicting thoughts and behavior.  The Wikipedia definition follows: 

Cognitive dissonance is an uncomfortable feeling caused by holding two contradictory ideas simultaneously. The “ideas” or “cognitions” in question may include attitudes and beliefs, the awareness of one’s behavior, and facts. The theory of cognitive dissonance proposes that people have a motivational drive to reduce dissonance by changing their attitudes, beliefs, and behaviors, or by justifying or rationalizing their attitudes, beliefs, and behaviors.[1] Cognitive dissonance theory is one of the most influential and extensively studied theories in social psychology. 

A more colloquial term for cognitive dissonance is “fooling yourself.” 

We have all seen this concept at play.  When a child tells you they are “studying” in front of the TV, when someone at a fast food joint tells you they are on a diet or when a investment banker tells you they are “doing God’s work” you know that they are not being honest with themselves.  

Right about now the folks in the back row are saying, “That’s it?  Bechara wrote this post to tell us about “little white lies?” 

Well, studying in front of the TV is one thing, but can an entire nation continue lying to itself? For example, will healthcare really be free?  Are we on our way toward peace?  Has the economy recovered? 

We don’t know about the short term.  Anything is possible.  

We do know; however, that in the long term the charade always ends.  We can fool ourselves for as long as it takes for reality to catch up with us.  You see, reality doesn’t need a public relations agent, an analyst or a pundit.  Reality is very effective in asserting itself on its own.  

In the long term we will really find out if healthcare can be free, if trading carbon credits will improve the environment or if “monetizing the debt” results in economic prosperity. 

Unfortunately by that time it’s usually too late to do anything.  

When will reality hit? 

For now it’s quietly positioning itself behind the scenes.  No one seems to be paying much attention to some significant events.  Here is a small sampling: 

  • The Arab Gulf States have moved to form their own currency called the “Gulfo.”  The intent is to have oil priced in this new currency instead of the dollar.  Whether they will be successful or not can be debated, but it’s clear that America’s protectorates are showing their disdain.  ”The US dollar has failed. We need to delink,” said Nahed Taher, chief executive of Bahrain’s Gulf One Investment Bank.
  • Moody’s is warning countries with high debt loads and tax increases that they may face political and social “unrest.”  Britain and other countries with fast-rising government debts must steel themselves for a year in which “social and political cohesiveness” is tested, Moody’s warned.  Anyone know another country with fast rising debts and looming tax increases?
  • China is publically questioning who will buy all the debt the US Government is planning to issue to fund its various “activities.”  Chinese doubts about the value of US Treasury bonds highlight a crucial question: who will buy the estimated $2.7 trillion (£1.9 trillion) to $4.2 trillion of debt expected to be issued over the next two years?  Are they sending a signal that they have had enough? 

So this is where we stand as we close out 2009.  Merrily deluding ourselves about where we are and where we are going.  Telling ourselves sweet lies that our economy is fine, we can spend all the money we want and hell, even a few more wars won’t be that bad.  

Everything is fine, and even if it’s not, thinking “positively” makes us feel better.  Right? 

I left out one key factor about cognitive dissonance.  It’s very stressful and damaging on those who engage in it.     

Thinking positively can help greatly, but only when your mind is grounded in reality.  For example, the experiences of those who have survived POW camps have been well documented.  Their situation was near hopeless but their mental attitude helped them to survive. 

On the other hand, there is an enormous amount of anxiety that people experience when dangers are recognized by the brain but the body’s actions do not remove or mitigate the danger.  

Scientists may say this is caused by cognitive dissonance attempting to override the human being’s natural fight or flight response.  

It may be simpler than that.  When you fool yourself, the brain realizes that you are hurting yourself most of all.  

Merry Christmas, 


Michael Bechara

Managing Director

Granite Consulting Group Inc.


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Interview with Morgan International

Well, I guess we must be doing something right.

The Weekly Recon continues to gain attention.  Below please find an interview we granted to Morgan International, an professional training company in Europe and the Middle East.

You can find the full text of the interview at:

We have reproduced the complete interview below for your convenience.  Please enjoy and have a great week.

Dear CFO,

Have you ever wondered what you’re doing right (or wrong) in your company? Ever needed an expert consultant to tell you what to do (or not to do) to get it right? Well, read on for some expert advice from Granite Consulting’s Managing Director Michael Bechara.

By the way, you might also want to train your staff on IFRS in the wake of the New Year… Richard Glover, Chief Executive of ATC International gives us regional insights on International Financial Reporting and an exclusive preview on the DipIFR program (Diploma in International Financial Reporting) to be launched in Beirut in 2010.

Wishing you a wonderful holiday season!

Interview with Michael Bechara, CPA, Managing Director – Granite Consulting Group Inc.

What’s the biggest mistake a CFO can make? What is the number one skill a treasurer should possess? What can companies do to prosper in this new environment?

Michael Bechara, CPA, and Managing Director of New York-based Granite Consulting Group Inc. answers this and much more in our special interview.

Mi: Can you tell us more about your company and what you do?

MB: Granite Consulting Group is a Corporate Governance and Financial Management Consultancy. We are a team of former finance executives (CFOs, Heads of Internal Audit and Controllers) and are well known for helping our clients achieve tangible results.

Most of our work centers on improving our client’s internal audit, financial management and treasury processes.

Mi: What makes Granite different from other firms?

MB: All of our consultants are former executives. Much of our success in serving our clients stems from the fact that a short time ago we were sitting across the table in our client’s position ourselves. As we like to say, we understand the client because we were the client.

We also perform our work fixed fee. This presents a real value proposition to our clients as there is no financial risk when using our services. Our clients receive hard results rather than simply paying for time.

Mi: What industries do you cover?

MB: We have a diverse client base across many industries consisting of companies from the Fortune 250 to smaller entrepreneurial firms.

We do have significant experience with engineering and technology driven companies that design and manufacture complex products. We are accustomed to operating in environments where the accounting is complex and the regulation is strict.

Mi: How, in your opinion, have the recent events changed the way companies think about Corporate Governance & Risk and Financial Management ?

MB: Being based in New York, we had a front row seat to the economic crisis. As the crisis began we witnessed the death of many commonly accepted beliefs.

Governance and control processes that center around documentation have largely failed. Many of our clients have come to us for help in moving towards sustainable and meaningful control structures that consist of three parts: good people, solid processes and well designed systems.

In the financial management arena the idea that continuous top line growth through merger & acquisitions (M&A) would solve everything was shattered. We are currently seeing a shift from M&A activity to a greater focus on business forecasting, cost cutting and cash management.

Finally, there was a “name brand” approach toward selecting bankers, suppliers and professional services firms that just didn’t generate the return that most companies expected.

Mi: What can companies do to prosper in this new environment?

MB: In the USA we have seen a return to value and basic financial common sense for both consumers and companies.
There is a clear eyed evaluation going on in many boardrooms. Board and Senior Executives are very much focused on identifying and controlling their risks, managing their cash and monitoring/forecasting the business.
Prudence and value in are definitely back in fashion. We are in a very uncertain economic environment where a steady and realistic hand needs to guide the wheel.

Mi: What, in your opinion, does the future hold for the Corporate Governance & Risk in the Middle East region?

MB: I believe the Middle East has a huge advantage in developing their governance structures at this time. Middle Eastern companies have an opportunity to avoid many of the governance processes and systems that have failed in other parts of the world. The biggest mistake other regions have made has been to take a form over substance approach to governance and control.

The Middle East, and any region for that matter, should capitalize on their comparative advantages when looking to implement new practices. In the classic paradigm of people, processes and systems I think the Middle East has a distinct advantage in the people aspect. There is a lot of social pressure in the Middle East to “do the right thing.” This is an aspect that can be built in to local approaches to governance and control.

Mi: What are the emerging challenges and opportunities for internal auditors?

MB: The global challenge is the identification of risk and the interpretation of what that means for their company. Internal Auditors who can view risk multi dimensionally and recognize patterns in the data will best be able to help their companies navigate through some very difficult challenges.
In the Middle East region, the interpersonal part of the job takes on increased significance. The culture is based on respect for one another’s dignity and if internal auditors are not careful they can quickly stumble over this very important point.

Professionals from outside the Middle East who do not have an understanding and appreciation for the local culture often make this mistake.

Mi: What is the most difficult job of a Chief Internal Auditor?

MB: Most Chief Internal Auditors agree that the most difficult aspect of the job is planning. There is almost no other job in a company where the tasks are not predetermined. The Chief Internal Auditor must decide what his activities will be for the year by identifying the risks and then addressing them.

Many internal audit departments plan using simple intuition, unfocused discussions or some randomly determined rotational schedule. Even if spreadsheets are used the risks are evaluated linearly rather than in aggregate.
We develop internal audit plans by using a disciplined process supported by our proprietary risk assessment tool based on neural networks. Our model uses artificially intelligence that mimics the human brain. Specifically it is able to recognize patterns in the data and it can assimilate past experiences in making an evaluation about risk.

Mi: Given your expertise in the market, how has the treasury profession evolved in the past 10 years and what does the future hold?

MB: Treasury is a role that has great diversity amongst companies. Typically there is some mixture of cash management, investing, and risk management assigned to the function.

In general, Treasury has a tough job. They increasingly cannot do their job without understanding the macroeconomic landscape around them and these days that landscape is rapidly shifting.

Mi: Can you give us an example?

MB: There was a case in where companies were investing in auction rate securities that were deemed safe and liquid. When the credit crisis hit, the market for these securities froze. Companies who required cash to fund their operations could not liquidate their positions leaving them in a very undesirable, indeed for some an untenable, position.

Mi: What is the best advice you would give companies in terms of financial analysis in these challenging times?

MB: Business metrics are legion these days. With the advent of financial software packages and the ubiquitous Excel, companies can come up with many ways to track business performance.

What financial planners and CFOs need to focus on are the real drivers of profitability that are applicable to their business. Rather than track 15 peripheral metrics, its far better to track the 5 or so that really count.

Mi: What in your opinion, is the number one skill or practice a CFO, a treasurer and an internal auditor should possess in order to drive the company’s success?

MB: The CFO needs to integrate and assimilate large quantities of data into a coherent picture. He also must be a good judge of the quality of data that he receives.

The Internal Auditor needs to be logical and a good negotiator. He needs to be able to evaluate processes with an unbiased eye and come up with common sense process improvements that will get implemented.

Finally the Treasurer needs to be somewhat of an economist as well. A good macroeconomic view will aid a Treasurer immeasurably in his job. Managing cash and other investments requires a broad economic understanding.

Mi: What’s the biggest mistake a CFO can make?

MB: Probably the biggest mistake is seeing his job in terms of his specialty. If an accountant becomes the CFO he sees the job as taking care of the accounting. If an investment analyst takes the job he sees his most important role as managing the investment community, if it’s a former treasurer then he focuses too much on capital structure and so on.

The CFO position is wide ranging and it is a challenge for many people in this position to forge beyond their own area of comfort and actively manage and improve all of the functional areas in their portfolio.

Mi: Based on your experience, what is the greatest lesson you’ve learned about business?

MB: A wise man once told me that the smart man learns from the mistakes of others, the average man learns from his own mistakes and the idiot doesn’t learn from either.
This lesson is not only true in business but also in everyday life.

Mi: Can you tell us about the most challenging project you’ve had to date and how you were able to attain a successful end-result?

MB: I think one of the most interesting projects we had was receiving a call on a Friday asking us to be on the other side of the country (California) by Monday.

Our client had a factory there that was losing money and no one knew why. Monday morning we began our analysis of the entire plant from both a financial and operational perspective. Within two days we had identified the issue to be an inventory problem and outlined the proposed solution to our client.

I am continually energized when we perform these type of profitability analysis projects because we are really able to contribute in a very tangible way to the success of our clients.

Mi: Your favorite book and what it taught you?

MB: Reflections on the Revolution in France.
This book was written in 1790 by Edmund Burke, an English Parliamentarian. Burke was very critical of the French Revolution because he thought the revolution sought to change French society in radical ways, rather than building upon existing institutions. In many ways he was right as the revolution later turned on itself in the famous Reign of Terror.

Burke’s advice is still valid today for businesses, foundations and nations.

About Michael Bechara, CPA

Michael is Managing Director of Granite Consulting Group Inc. an internal audit and financial management consultancy based in New York. His work includes advising organizations on risk assessment, internal audit and financial planning & analysis. Michael typically works with CFOs and Audit Committees to build sustainable governance, control and financial management processes.

Under Michael’s leadership, Granite Consulting Group has developed a neural networks based risk model that uses artificial intelligence to identify risks within an organization for planning purposes. This process is customized to each client, becomes stronger over time and draws upon the existing knowledge and culture of the company.

A former Chief Internal Auditor, he has worked for companies such as Daimler, Pepsi and EDO.
Michael speaks English, Arabic and conversational Spanish. He can be reached at or 1-845-282-3899.


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Kid Gloves

Special treatment. 

Everyone wants it.  A few people get it.  Those who don’t, continue trying to obtain it.    

That about sums up the state of financial accounting these days. 

For a profession that has traditionally prided itself on ethics, adherence to standards and fairness, these are indeed trying times.  The banking industry is again attempting to attain accounting Nirvana. 


By selecting which accounting standards they will comply with and which they will ignore.  

An amendment is currently being considered by Congress which will give the banking industry this very privilege.  For the background let’s go to the New York Times: 

The amendment, proposed by Representative Ed Perlmutter, Democrat of Colorado, and strongly supported by the banks, would give that group of regulators the power to order the Securities and Exchange Commission, which now oversees the Financial Accounting Standards Board, to suspend or change any accounting rule that the council thinks is a threat to financial stability. 

When thinking about this issue, three thoughts come to mind: 

First, as a guy who has spent a lot of time overseas, I can tell you that one of the defining characteristics of what we call the “third world” or “banana republics” is the exemption from laws/standards by privileged groups and the resultant “contempt for the law” by the remaining population.  

For some odd reason people tend to become upset when forced to comply with rules while others simply ignore or are formally exempted from the rules.  

Second, this is bad for accounting practitioners and finance people in general.  Sometimes accountants fall into the trap of thinking that accounting is all about FASBs, EITFs, SOPs and other technical advisory papers and pronouncements issued by the standard setters.  

It isn’t.  

For an accounting system to function it has to be accepted by the majority of issuers and users.  Once people realize that standards are not based on sound theory and principles, they will hold the system and the profession in far lower esteem.  

How might this play out? 

For example, CFOs, Controllers and Internal Auditors will expend enormous amounts of energy trying to explain and implement dubious accounting pronouncements, external audit opinions will lose their value and the investment community will continue to build their own models and ignore everyone.  

Third, these exceptions tend to proliferate.  Other industries and groups will take notice and demand their own exceptions and privileges.  Once this happens the system will become a maze of exceptions and caveats and will become unusable as an information system to measure past business performance or to plan the future.  

Are we alone in our assessment that these exceptions are detrimental to the accounting profession in particular and the economy in general?  Actually some people (smart people actually) may be with us on this one.  For more commentary we go back to the New York Times: 

A proposal to give banking regulators authority to block accounting standards is “a terrible idea,” Paul A. Volcker, a former chairman of the Federal Reserve Board, said Monday. 

We have to hand it Mr. Volcker.  He certainly knows how to be succinct.  

We close this week’s short post by wondering out loud where we are going?  The fact that this amendment is seriously being considered tells us a lot about the state of our economy…..and our society.  

Let’s be clear, if an argument was being made to change an accounting standard for all market participants there would be no issue, but to brazenly demand special privilege for an industry?  

That’s an entirely different matter.  

Have a great week,


Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.


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The Brewster Wood People

We sat down to have dinner and as my wife began to serve the food, the kids began chattering about what Jessica H. said, how to make a lower case “f” and other weighty topics.   

The phone rang and my wife testily informed me that it was for me.  Taking the phone with a “it’ll just be 30 seconds” look, I answered with a short, “Hello.” 

“There’s two down in Brookfield”, a voice said laconically.  

“How much time do you think we have?”, I replied.  

“We’re good for about an hour, I just got the call and nobody knows…yet”, the caller replied.  

I quickly finished dinner, grabbed my jacket and waited in the driveway to be picked up.  

In Brewster, NY and the nearby towns of Danbury and Brookfield, Connecticut, a curious subculture exists.  Men prowl the streets in 1/2 and 3/4 ton pick ups, scanning the front and backyards of the houses and staring each other down when they pass each other.  

All of us are looking for wood.  

Many people in the area heat their homes with wood stoves.  Most of the homes in the area have oil fired heating systems.  When you figure an average home consumes 1,100-1,500 gallons of home heating oil per year at around $3 per gallon, heating with wood can be quite economical.  

The key obviously is to obtain the wood… good wood specifically.  Sure you can go onto Craigslist or the local paper and simply buy the wood, but you will face two problems.  You will pay too much and the wood will be rotted, soft or not seasoned enough.  Clearly all bad things for a wood burning stove.  

Hence a lot of guys obtain their own wood through a complex web of relationships.  It works like this:

Since it is very difficult for one man to find the wood, cut it up, transport it home and split it with any efficiency or regularity, most guys are part of an informal team that accomplishes all these functions.  Each member contributes something and that something also determines his share of the take.  

When a homeowner or a business cuts down some trees they typically give it away to whoever gets there first, hence good information is at a premium.  Not only must you know that some trees have been cut down, but you have to make sure it’s the right kind of tree.  Evergreens and other soft woods are nearly worthless, it’s the hardwoods; oak, cherry and maple, that generate the real BTUs.  

Some guys have been known to engage in misinformation campaigns to keep others away from the good stuff.  You could arrive somewhere expecting to find some good wood and find an overgrown Christmas tree lying on the ground instead.  

Now that we understand how this all works, we can now examine the hierarchy of the people involved.  

The “tree service” guys are on top of the food chain.  They have the information about where, when and what kind of trees are getting cut down.  

The construction guys are in the middle.  They have the pick ups, trailers and splitters needed to transport and process the wood.  

On the bottom are the white collar guys, having no information and no equipment, they only have their willingness to load, unload and split the wood to barter with.  

Ah my friends, guess to which category your dear author belongs? 

This all makes perfect sense of course.  Economics is based in large part on scarcity.  We have limited resources and we need to trade them for what we need/want.  The most significant determinant of how much you can get, is what you have to offer; information, capital assets or labor.  

Of course you can trade a mixture of these, and in different combinations, but nonetheless these are the basic categories.  Let’s take a look at each from a microeconomic perspective: 

The best thing to have is information, also known as technology.  It’s the old, “I know something you don’t know and if you pay me I’ll tell you.”  This derives the biggest profit margin as you don’t have to perform any labor or have any capital assets.  Simply share your know how and get paid.   Good examples of this business are pharmaceuticals, the self help industry and internet search engines.  

The next best thing is the possession of capital assets that provide the ability to process, manufacture, house or transport things.  This business is also good as you are essentially charging customers for the use of your assets.  Good examples of this type of business are the railroad, real estate rental and energy industries.  

The last item is the most common; supplying labor.  This is the toughest way to make money as if you don’t work then you don’t get paid. Good examples of this type of business are house cleaning, computer repair and bookkeeping.  

So we can see from a microeconomic perspective that it’s far better to have either ideas or capital assets to generate income for you.  Labor is, by definition, limited by time and biological constraints.  

Does this concept have a macroeconomic application to it?  

Of course.  

Developing countries are typically labor based and therefore limited by what and how much they can produce. 

Japan and Germany are manufacturing economies that have a significant amount of capital assets.  They produce some of the finest manufactured products on the planet and have the world’s second and fourth largest economies respectively.    

What about the USA?

Well, we used to have it all.  

Many of the necessities of the modern world were invented in the USA, we had an awesome manufacturing capability and plenty of skilled and unskilled labor to back it all up. 

And now….. 

We have outsourced most manufacturing, we have classified much work as “jobs Americans don’t do” and we have a warped idea of what it means to “invent something”.  

For example, we currently celebrate hip and cool 20 year olds who “invent” social networking sites and video games.  These “inventions” may be fine and good, but how exactly do they contribute to the generation of wealth or increase the competiveness of the country? 

The honest truth is that most technological advancements that increase our standard of living and make us more competitive are created by middle aged and socially awkward engineers and scientists.  

For a little reinforcement see this CNN video: 

When it comes to innovation, is America still head and shoulders above the rest of the world?


So if we don’t manufacture much, don’t invent much and don’t do much then…. 

Well my friends this is getting a little uncomfortable, so back to the Brewster Wood People.  

We made our way down a tree shaded road in Connecticut.  John’s Dodge RAM 2500 with the Cummins Turbo Diesel engine announced our arrival to all of the neighbors.  We pulled into the driveway and saw the trees lying in the front lawn with the telltale moss on the bark.  Looking at the stump, the interior wood had that gorgeous reddish pink color ..…yep it was Oak.  


The equipment owner and the informant leaned up against the truck chatting as me and another guy began to load the wood.  I began thinking about that old truck I considered buying a few months ago and smiled…see this post.  

As I heaved a good sized log into the back of the pickup, all I could think about was my future investment in capital equipment that will catapult me higher up in the food chain!  

Have a great week, 


Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.


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