In this episode of Controllers Classified, Erik Zhou sits down with Karen Wu, the Chief Accounting Officer at Clari, to discuss the role of accounting in a company’s exit strategy. The conversation starts with an overview of Karen’s time in Transaction Services at PWC, where she helped a myriad of companies prepare for IPO - including Alibaba, the largest IPO in US history. Drawing on those experiences, Karen covers the reasons why a company may look for an exit, the types of exit strategies, and the role of the accounting team in those strategies.
In this episode of Controllers Classified, Erik Zhou sits down with Karen Wu, the Chief Accounting Officer at Clari, to discuss the role of accounting in a company’s exit strategy. The conversation starts with an overview of Karen’s time in Transaction Services at PWC, where she helped a myriad of companies prepare for IPO - including Alibaba, the largest IPO in US history. Drawing on those experiences, Karen covers the reasons why a company may look for an exit, the types of exit strategies, and the role of the accounting team in those strategies.
Specifically, Karen speaks to some ‘musts’ that accounting teams have to get right no matter the exit strategy - things like closing the books on time, ensuring precision and reliability in financial statements, and being able to comply with public company requirements. She speaks to the IPO readiness timeline, and how companies should approach it not just through the lens of accounting and finance, but across all functions.
The conversation then pivots to Karen’s time at Clari. She shares her priorities as well as her POV on global accounting processes given the company’s international operations. Her number one piece of advice? Don’t be hesitant to outsource pieces of work to consultants who may have a better handle on local tax policies.
The episode closes with a funny story from Karen’s PWC days involving an inventory count of Hairy Crabs. Have you ever wondered how baby crabs should be classified on a balance sheet? Then you must tune in!
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Erik Zhou: Welcome to Controllers Classified. I'm your host Erik Zhou. I'm the Chief Accounting Officer at Brex. And today we have a really special episode with Karen Wu, the Chief Accounting Officer at Clari. I love it when we record episodes and we have former auditors or folks that have been in the big four on the show. And as it turns out, Karen and I crossed... We didn't cross paths at the firm directly, I think, but we did work there in the same period.
Karen Wu: We overlapped. We overlapped.
Erik Zhou: We overlapped. It was like 11 years that we overlapped actually.
Karen Wu: Oh Gosh. Yeah. That really made it. Yes.
Erik Zhou: We just... I know you worked in a different sector. Maybe just a kickoff. Give us an intro to how you got started in accounting. What led you to the PWC and your career so far?
0 Karen Wu: Yeah, it sounds good. So I grew up in Hong Kong and went to the states for college education, picked accounting because it really synced to me. I originally was going to go for a finance major, but my accounting professor back then really changed my mind. So after graduating from Santa Clara, all big Fours recruited there and I happened to pick up PWC out of the big four. So most of the people started in the audit world, so that's where I started too. And then halfway through my career at PWC like the 12, 13 years that you mentioned earlier, I switched over from audits to transaction services or people call it deals where I focus the majority of my time on IPOs, divestitures, gap conversions. So any sort of one time thing transaction thingy my team focus on, then I was there to support the client along the way.
Erik Zhou: Just giving our audience a little bit of more context on what is like transaction services on deals, from my perspective, if I were to do some kind of exit or an IPO, there's obviously the underwriters or the investment bankers. There's my auditors. My auditors who are doing the opinions on my books and records and the reports, Underwriters council, what is transaction services or deals from the big four in that setting?
Karen Wu: There are two different sides of the, I guess different models here. If a client's actually a PWC audit client, then the audit team will actually reach out to deals team and basically say, Hey, can you guys pitch in one or two people here to help us review the non-recurring part of the IPO process? So preparing the S1, negotiating with the underwriter council on the comfort letter circle-up which level of comfort to provide helping the team go through things like perform a financial statements or perform an S adjusted that eventually goes into the S1. So the scope of the deals team in that situation will be a little bit more limited because we're bound by the independence rules as required by the SEZ so that we can go in and prepare anything on the client's behalf. So on the flip side of the client's actually not another client, then the scope can be way more flexible. We obviously still have to make sure that there's management oversight, but a lot of times in my past experience will actually kind of add as a extender arm for the clients and I help them put together schedules, help them put together disclosures and then actually sometimes occasionally helping them deal with auditors and answer some of the questions that the auditors may have but under the supervision of the client.
Erik Zhou: And so, okay, so what I heard from you was, okay, when you have a client and it's actually an audit client of yours, you guys are the calvary, you guys deal with all these capital markets transactions so much, you have the best expertise actually to look through all these non-recurring schedules and things that they wanna disclose, et cetera, and help out on that from the audit side to some respect. But then you also have a lot of clients that are, we call it C2 I remember like channel two clients. So channel one is audit, channel two is non audit. But when you have a C2 relationship, you can actually step in and help out management a lot given all your IPO expertise, et cetera and help them produce under their oversight those schedules from the get go because they don't necessarily have kind of IPO already staff or staff.
Karen Wu: Firstly, in an IPO situation, lots of companies never prepared things like EPS calculation before. So then my team would then go in there because we've seen a lot of different variety of how EPS can be calculated if the, that model prefer stock model. So then we would actually have them set the template so then set them up for success going like later on also when they become a public company.
Erik Zhou: That makes sense 'cause if I were to look at my own cap table at Brex and if we were to go IPO and I had to think about how to include all these options and items that aren't fully baked yet, like they're like on a fully diluted basis versus actual ownership basis, that seems like it would be a challenge for me and I might give your old folks or colleagues at PWC a call. Tell me about the transition then. So you were at PWC for a long time. I ended up moving on too 'cause I was curious about a different opportunity. What about you?
Karen Wu: So about six years in audit, six year in deals. So doing a lot of IPOs I've done probably 20 to 30 under my belt right now. I lost track of the actual counts and in between I did two years of international C Commons in China, which is when I actually flipped over from audit to transition and then after that moved into the industry because ready to get much more operational and then ready for a stable environment where I get to see the company grow and stick with a consistent team, see transformation versus jumping from project to project. So that's how I landed at DoorDash and eventually at Clari.
Erik Zhou: What are the biggest insights now that you're on industry? So for me I always, I didn't realize that I was so focused on the past all the time 'cause doing audit, like I'm just doing the work. But like at the end of the day the value that I'm providing is I am looking at the past. I think the biggest thing now being in industry is yes I get through the books and records, do the month end close every month. But I play a much bigger role in like working with my peers in finance team and management and like thinking about the future. That's what I think the biggest change that I've experienced. I don't know about you.
Karen Wu: Yeah, I think it's pretty similar. Obviously in a big four situation people that you deal with are pretty much professionals. They speak the same language, they use the same term. They understand what you mean by accrual, cutoff, reclassification. You don't have to do a lot of explanation, you don't have to set a lot of kind of basic understanding. But on the industry side, a lot of the people that we deal with on a day-to-day basis are not accountants by background. They may have some finance background, they may have zero finance background and a lot of times it's about education and education at the right level 'cause you can't jump right into this is the tentacle accounting and this is why I'm asking you, but it's more about framing the context why this is important, using plain English and using terms that the other people on the receiving end can relate to.
Erik Zhou: 100%. Yeah, I recall when I first joined, I hadn't quite made the switch yet. And so I'm talking to the founder about this really technical RevRec thing for our interchange net versus growth situation. And he's like, Erik, I don't know half of what you're saying, so why don't you go back and come back to me and try to explain this to so that definitely resonates with me. Given your experience working on exist and deals, and you don't have to tell me what's going on in Clari necessarily, but what are the things that you're working on from that perspective in deal making and capital markets, et cetera now in your new role?
Karen Wu: Yeah, so obviously yeah, we also, not really as Clari but more speaking from experience dealing with different companies of different sizes in different industries. Going through I guess different sort of transformation. 'Cause I've worked on IPOs. There are very small like kind of biotech, almost like kind of health tech space that doesn't even have revenue yet. I've worked at companies that have a gazillion revenue. Actually when I was abroad I worked on one of the largest, I think it's still one of the largest IPO in the US history, which is Alibaba. So obviously companies have different setups and whatnot. But what I would say is I think companies a lot of times look at exists, whether it be IPO or M&A for different reasons. Obviously a huge part of it is to raise capital so then you can then take the additional inflow of money to invest in your growth, in your team, your footprint, infrastructure, product developments, whatever it is.
Karen Wu: So access to capital. The second one actually that's also really interesting and that's when PWC did some work with Spotify back then when Spotify was doing a direct listing. So in that situation there's no money coming in. But what they are really getting is a lot of brand recognition, broader, kind of almost like a free marketing event. Not free, but a marketing event. And then the third reason a lot of times is to get liquidity for existing investors and employees. So depending on the different kind of I guess objective then the routes that companies choose are different. And then because of that then you would like go through different paths, have different compliance requirements to kind of follow.
Erik Zhou: Does the way that you're working through a transaction change depending upon which of those three are the goals or, you know what I mean? Like, at the end of the day, if it's a marketing event, maybe you don't care as much about raising as much external money for example. And so therefore it might be a little bit different. I'm just curious.
Karen Wu: Yeah, I would say, I think regardless of the object of, I think the objectives probably change. Oh, I don't wanna say like maybe 20% of the overall work stream, but to the journey leading up from a private company that's, I don't know, like kind of prefer rounds to eventually an IPO exit. The preparation like 80% of it is pretty similar. So you gotta be able to, from an accounting team's perspective, 'cause that's where the audience of this podcast is. From an accounting team perspective, you gotta have like precision on financial statements. You gotta have a reputable other firm standing behind the financial statements that you put in front of the SEC. You gotta be able to close your books timely. You gotta be compliant with the, what would be a public company requirements and follow that earnings call cadence 10Q cadence.
Karen Wu: So timeliness, you gotta have established company policies and then you have to be able to apply that policies consistently versus changing every single quarter, every single year. And then also there are compliance things that you just have to kinda mitigate from a risk perspective, assess, mitigate, put in some process control systems in place. So I would say 80% of that process still stay the same regardless of what all your ending objective would be. But obviously when it comes to IPO new funds coming in versus dollar listing versus for a period of timespec was like super popular though there are some nuances between those two, three different, I guess, routes that companies wants to take.
Erik Zhou: I'm really curious about your take on a question that I've tried grappling with. So I would say Brex is a relatively late stage company. We've thought about different ways to try to get IPO ready and I'm not saying we're gonna go IPO anytime soon, but like, I always say sometimes like two years away from being two years away so to speak. But knowing that, one of the pushes that I've always gotten from my big four colleagues and even our auditors from time to time is hey let's start thinking about controls. Let's start thinking about the compliance piece and I try to reconcile their advice with the fact that actually if I were to file an S1, I don't necessarily need to be fully SOX compliant until my second 10K in theory. And so yes, there is some transition time and I know that like there's a lot of documentation that we would have to start keeping in place and recording month over month versus what we do now. But like how do you think about when to get started when knowing like on IPO day you don't need to necessarily be SOX compliant if that makes sense.
Karen Wu: Yeah, yeah, that totally makes sense. I did a bunch of my work back at the PWC deals team days was actually in addition to just obviously IPO execution as one execution, there's a huge part of it that's actually called IPO readiness. So back then I would go to companies who want to be public, aspire to be a public company and I help them assess how ready are you in your current environment from a cross-functional perspective. So we actually looked beyond accounting and finance, we looked into kind of compensation strategy, things like key metrics, things like your cap structure, your equity story. So I think that we usually back then would tell the clients back then approximately if you can do one to two years of IPO readiness, that's kind of the best time to start. Of course you can do IPO within four months if you really want to because the SEC's filing process back to back it's approximately four months so you can really rush it.
Karen Wu: But a lot of times companies that go through kind of the shortcut process really struggle once they become a public company because then people are not used to the transformation and everything became like a brand new exercise. Once they become public and they don't have any other choices to practice to modify their process, they just have to go and be, to stay listed, meet those minimum requirements. So what I like to do usually is I would tell companies start putting their public company cap on way early. And as CAOs controllers today, we run into hiccups already when we close the books, there are always other period adjustments. There are always a second set of lens that comes in and say, hey, like should this expense actually be in cost of revenue versus R&D? So there are always conversations like that. I would say identify the root cause, form the mentality and the habits to always identify root cause when something goes wrong, kind of write down those root causes. Some might be like low hanging fruits, you can fix right away. Some might be longer term, longer pool items. But have a good list of those so that when the team have capacity, when you start prioritizing, when there's another budget freed up to invest in tools and systems and people to fix those problems, you can then properly prioritize. I like the internal controls framework to think about root cause analysis and kind of identify problems and identify the ways to fix things. But I wouldn't say that SOX compliance is the only way to go. And obviously the documentation center is way deeper and way more rigorous when you need to be second year SOX compliant versus IPOs SOX compliant. 'Cause you do have to have some basic financial reporting controls in place. But versus even for a private company, the best practice is to have some sort of baseline controls in place so you know you don't have to review 100% of the transactions before the auditors come in.
Erik Zhou: If you were to come up with the top 3, 4, 5 items that you should definitely do at every month end or every quarter end, what would you recommend that companies start doing today? Whether or not they're going IPO or not. 'Cause you kind of mentioned, and I agree with you, there are some processes we do now even though we're not public because it's just good financial governance. I wanna make sure the books and records that we produce for not just the audit at the end of the year, but management reporting at the end of every month 'cause we make decisions on that, I want that to be trustworthy for those stakeholders as well. So like for you at Clari what are the things that you really insist that you have to do every month in order to do that?
Karen Wu: Yeah, monthly or quarterly, but like on a regular cadence. I would say, first of all, I always like to start with a really good close process review. So when I first join Clari, we don't have a detailed level of review that's kind of at the operating line item level by vendor, by GL, however you desegregate it, we put that process in place and that's been tremendously helpful because that's when you're actually operating at a level of detail precise enough for you to identify those problems. And first you gotta know the problems and then you come up with the solutions. So I like that being able to invest in a process that's repeatable, scalable, and then that becomes kind of like a muscle memory for the team to perform. Every single month we always have that same level of review and using the same formats people know exactly what the expectations are so then the team can do it timely and consistently.
Erik Zhou: Just to interject a little bit I wanna repeat that back to you. So are you looking at kind of like a general ledger line or account level and comparing the transactions from one month to the next to see what's changed and like basically to get yourself comfortable that the activity this month makes sense?
Karen Wu: Exactly. We do different levels of desegregation for different line items. So for revenue for example, it's always by customer and then by type or reassessed business, so we have subscription revenue and then we have PS revenue that kind of fluctuates, but it's always by customer, by type. And on the OPEX side, again, different level of desegregation, we look at it by FSLI, then by GL and then we look at it by FSLI done by Avenger because different cuts and slices you get to see different things and sometimes issues or errors don't really pop up until you look at it in a slightly different way. So I like to pivot that. When I was back at DoorDash there was a very similar process there as well. And it's worked even for DoorDash being a public company. So again, this is really good practice and I strongly suggest that to like everyone put that process in place, get their template or.
Erik Zhou: For the audience FSLI, that is a PWC term. I love talking PWC acronyms with other PWC folks. It stands for Financial Statement Line Item and then it's...
Karen Wu: definitely a good reminder.
Erik Zhou: Yeah, we talk about FSLIs all the time. So that's the FSLI level, that's like what shows up on your face of the financials, of the income statement, balance sheet and then what Karen is talking about disaggregating from there and looking at the underlying GL accounts and sometimes even more disaggregation based on customer or vendor, et cetera, as you just mentioned. Yeah.
Karen Wu: Yep. The second thing that I would say is look at significant accounting estimates. So back to the policy point that I was mentioning earlier, there are different ways to, like for example, I would say like fixed asset depreciation, everyone does the same thing. Like very rarely you see a different depreciation method. But when it comes to accounting estimates, every company has a different policy cadence input, like haircut, whatever you use the judgment are so different from company to company that I think establishing a policy that makes sense and establish a policy that is kind of on the longer term basis relevance and applied consistently is important so then the teams can use the same set of policies and on a repeatable basis, quarterly, monthly, whatever it is, apply the same level of judgment. So then again, your financial statements are more comparable period over period.
Karen Wu: And then documenting why things change. So that will be the second item. And then I think the third one that I would say is identifying metrics. 'Cause whether you go public or not, I'm sure a lot of the companies at our stage kind of late stage startup or mid to late stage startup, we all have investor reportings to do and then, or board reporting. So being able to pick out a set of metrics that are relevant, again, consistently measured, reliable. Those are all really good cadence to start with when you are a relatively smaller company so then you can then take those practice and can apply that going forward. I can't tell you how many clients I've worked on in the past that actually had to restate their key metrics because they all of a sudden realized, hey, that's not how investors from a peer companies look at the same set of key metrics. We have differences in terminology at how do we explain and bridge that gap like later on in the journey is very difficult. So then let's just restate every single year. So that's the situation that I would like to avoid because there's so much that's non-financial that my team doesn't have direct control over and it requires a whole village to lean in early to get consistency on that.
Erik Zhou: That's one of the big things that I've realized also in this role is ultimately like from an like as an accountant and running the accounting team, we are the core stewards of the inputs for a lot of these "non-gap metrics." It's a non-gap calculation. It's not something that I would put in the audited financials, but like cut paybacks for example is a really important thing when measuring the growth of a company or unit economics on like our sales motion, et cetera. At the end of the day, that cost of acquisition is the sales and marketing line that we put together, accruals and all including all the estimates for all that stuff too. So it's one of the things that I started appreciating, well, actually this is a number that it's not just important for my quarterly report or my annual report on a monthly basis I need to make sure that this number's relatively accurate so that we can track whether or not our sales team in the field is being efficient. And that's something that really resonated with me coming over to industry.
Karen Wu: Right, exactly. And then for us, like the software companies as companies ARR I always have to educate people, yeah, it does have the word revenue in there, but it's actually non-gap. So let's talk about how we can help you and the revenue, the sales team understand when bookings should happen and then we can chime in from a gap perspective, but there is a difference and then here's why. This is where the difference happen.
Erik Zhou: Maybe just switching gears a little bit, we talked a lot about IPO. I think you also had a lot of experience doing sell side acquisition or an acquisitions in general versus just going public. What about in those cases? What if you're getting ready for something like that? What if that's the exit strategy, so to speak?
Karen Wu: Yeah, so I think similar to the earlier conversation, like which path of IPO you go, I would say that sell side more or less has a similar theme. Obviously the sell side stuff can vary quite significantly depending on the scale of the company, the size of the company. And like in terms of maturity, like, different buyers will come in and have different expectations, but I would say things like financial statement accuracy as still highly relevant. Having accounting policies, especially on revenue recognition is still the same expectation because there's still a diligence process involved. The buyer will still want to evaluate whether the financial statements you're putting on in front of them, whether the forecast that you're putting in front of them have kind of the same basis as what they would expect in industry or at the buyer level.
Karen Wu: Things like compliance, for example, sales tax, whether are you like, how compliant are you with the different jurisdictions in the United States? Those all create different strategies, risks and mitigation along the way through the dual negotiation journey. So in that sense, I think there's a lot of similarity in terms of how you would want the company to be at a mature stage, whether you go exit through IPO or exit through M&A. I think the difference though is that for M&A you can build the deal structure differently to mitigate some of these risks. So for example, if you have significant sales tax reserve exposure, there can be a holdback that's set aside. It's all up to the different parties to negotiate and to mitigate a risk versus the public company situation. You actually have to then, if it's material, make that publicly known, like in your disclosure, the risk factors and everything. So underlying theme will be the same, the ways that you deal with the risks will be different.
Erik Zhou: When you were doing any of the sell side accounting or any of the work there, did you ever... I guess you tell me like what's the range of outcomes that you saw in terms of like the due diligence process? I just remember like being... I did help out on a few due diligence projects when I was at PWC and the conclusion was always like, okay, this is all good actually. I'm gonna sign off on this and I feel like this is okay. But I don't know if like behind the hood, were there ever any situations where like, oh well, this is something you should look into. We didn't get enough information on this, et cetera, et cetera, if that makes sense.
Karen Wu: I think again, it depends on the size of the deal. I think people generally have significantly lower level of expectation and requirements for company in a series AB below 100 people, 200 people versus a company that's Brex size or Clari size that's multinational with over 100 million or whatever the threshold is, I think those can be significantly different. But a lot of the requests are the same. Like surprisingly I would say probably an 80/20 ratio again where 80% of the information or the diligence requests would be consistent. Like we still want to see top 20 customers along with their contracts. We still want to understand your top 20 vendors and what's your purchase commitments. We still want to see org charts, we still want to see how you're consolidating, we still want to see accounting policies and stuff. So a lot of the basic requirements will be very similar with some level of degree of I guess flexibility around how mature you are, how consistently you are and stuff like that. And also audit requirements are completely different between a small company versus a more established mature company.
Erik Zhou: So you mentioned how you spent a couple years in China and that was also the time that you transitioned from being an audit to in C2 or transaction services, maybe like just to tie it all in, I think Clari has international operations as well. How have you thought about international operations and accounting for those at Clari? And did you use any insights from being in your tour in China for that? Or like how do you think about that?
Karen Wu: Yeah, so the tourists in China is very different. Obviously China back then was in a very different economic growth status compared to where they are right now. And obviously China is also a very unique country in terms of regulations and requirements versus the US so Clari actually is not in China. So I don't think that the experience are necessarily directly relevant. But from my hands-on experience here, expanding internationally, setting up subsidiaries, I say that a few things obviously do not be afraid to engage and outsource certain areas, especially when it comes to things like local tax rules that includes both direct and indirect taxes, kind of the partner with your people team and law firms, again, outsource if you need to understand the local employment regulations compliance status because those things are highly difficult to change once you put a process in place. And once you've exposed your current practice to employees and then having to change that like drastically in a short period of time.
Karen Wu: A lot of times when I go international I just go outsource and find a company, a consulting firm that has good practice there. Usually I like to go to one of the global firms. I'm sure a lot of you guys, a lot of different names out there, but one of the global firms that have a regional presence because those are the people that can feed you directly the local requirements, the different things that you may or may not be able to find out through chatGPT or Google search. And then also the other thing is leverage peers. We all have Slack group channels or LinkedIn group kind of network. Ask them if anyone has expanded in that region before and then find out what the common hiccups is and kind of try to avoid them. But I would say getting the right consultants in place are important and then setting the right transfer pricing tax structure and assessing those exposure evaluation early on is also highly important.
Erik Zhou: One of the things that we've struggled with... I don't know, it hasn't been easy, let's just say. So we have entities in Canada, in Brazil, we have an entity in Israel. What ends up happening is that we do our month end close process and for the month end close process we're so US focused. And then we end up needing to wait for our external bookkeepers or folks that we hired to get us the numbers at month end. And sometimes I can't let that hold up my management reporting and so I end up doing an estimate of what happened there based on like details and qualitative items that they've shared with me. And I don't get the numbers until like two weeks later. And it is just 'cause it's just a difficult time sometimes managing an outsourced resource or an outside bookkeeping firm, et cetera. I'm not sure if you've... Have you felt that or have you faced that and how do you kind of close the gap if there is one?
Karen Wu: So we definitely had a similar struggle when I first joined Clari. We use an outsource firm that has international, kind of presence like I mentioned earlier, to help us kind of look after the subsidiary set of books and then on a monthly basis they give us a reporting package that's in Excel. And then we basically try using the limited amount of close time that we have left from the time that we receive it till when the management reporting is due to try to review and ask questions, identify like key changes and whatnot. I think a few things had helped us along the way to shorten that process and also set better cadence with our international kind of reporting teams. We kind of reconfigured the reporting package templates and then we asked them to use a consistent kind of approach with supporting files attached in the same file.
Karen Wu: So set expectation revamped the template, we asked all of them to put their results directly into NetSuites. So we have one source of tool, everyone uses the same kind of journal entry, BU structure, department structure. So that also greatly helped. And then thirdly, to your point, when we know that there's an area internationally that's just subject to change, for example, like a recently India we had to do a gratuity, which is basically like a pension liability that we don't have an actual report until like every six months. So building a good estimate process to kind of project that month after month so then we have less variance to chew up. That also helps. So I think it's again identifying what are the pain points, putting in systems, tools kind of reeducate people on the process. And then eventually when you have to make estimates you use your best judgment, apply that consistently.
Erik Zhou: How did you get your outside consultants to kind of use the same instance of NetSuite? 'Cause one of the things I've... Sometimes we will go with a bookkeeper and that bookkeeper just has their own ERP system that they use for all their clients, et cetera. They're not really in the business of learning a new ERP and booking entries there and all that. It doesn't scale with them. And so did you just find like the right service that'd be willing to do that basically? Or like how did... You know what I mean?
Karen Wu: Obviously there's a little bit of education and negotiation involved in the process, but I would say understand, like ask the question like why are you not willing to go into NetSuite? Because NetSuite, I mean it's pretty easy to use, user friendly, everyone can learn that pretty quickly. But if you know after a few rounds of fire and then you still get a lot of pushback, then search vendor. There are so many people out there, so many options and availabilities that out there you can just bring on a new team that will fit your profile and timeline and cadence. But I think opening up the conversation is the first step. Usually international stuff I would say gets deprioritized Erik. I think you kind of mentioned that sometimes still like we're so focused on the US operations, majority of the judgment and the kind of transaction volume happen in the US but international stuff, I say don't let it become a sleeper issue until it's too late to fix and unwind. Start the conversation early. So then, yeah.
Erik Zhou: One question I also am curious about if you're comfortable answering is on transfer pricing. So I actually have a pretty easy transfer pricing model. We don't really have revenue outside of the US so it's cost centers that we have in Brazil, Canada, et cetera. And we engage an outside firm, we do a transfer pricing study and every year we update the rate and that's how we support the model. What do you do for that on that front?
Karen Wu: Yeah, it's pretty similar. I think transfer pricing is just an area that you want to, again, it's risk mitigation. So I think if you are doing the right things, which you are by engaging subject matter experts that are familiar with that international region kind of engaging them early, doing your annual reassessment about the rates... Well, first of all you gotta establish the rates and make sure that it's reasonable and then do a kind of refresh analysis and assess changes if any new version that added to that region. So if you're doing all of these and keeping good documentation when and if the auditors come in and audit you, then you have stuff that you can use to kind of defend your position. It's risk mitigation in the sense that there's no endpoint on transfer pricing study and there's no endpoint on how much you can document and how often you have to document. So it's really a cost benefits kind of analysis. I think there's other risks and then there's auditor coming in and disagreeing with your risk. So I think as long as you do enough to reduce the overall risk to acceptable level, I don't think you need to necessarily boil the ocean.
Erik Zhou: That's interesting. I don't want to go off the ledge here, but are you suggesting that perhaps I don't need the full blown study every year?
Karen Wu: Yeah, I think a lot of companies do different things depending on the scale of the operations internationally, obviously if we're talking about a 10 people subsidiary versus a 1000 people subsidiary, your risk of getting audited significantly kind of differ in those two scenarios. I would say I've seen a lot of companies not having to do a full blown transfer pricing analysis every single year and still be okay. But again, it's risk based, it's exposure based. And as you're...
Erik Zhou: I'll need to go back and look at this. We are actually in the middle of our annual planning cycle for next year and coming up with our budgets and so we're still trying to get lean and mean on the opex and efficiency side. So I'm gonna take that back. That's super valuable, at least for me. We are closing up on our time today, so we always end with a segment I like to call finance leaders are fun too. And Karen, I did give you a preview that this was coming, so I'm just letting, okay, so now it's here. I'm not sure if you have any just funny stories about accounting or accounting debacles or jokes, et cetera.
Karen Wu: I do have a fun story that I've heard that I'm happy to share. So when I was working in China for two years, there's a local delicacy called Hairy Crab. I don't know if we had that for Erik.
Erik Zhou: These are for rice patties.
Karen Wu: Rice patties, okay.
Erik Zhou: I think it's like crabs that they put in the rice patties and then those crabs actually keep the rice stalks clean and then when the harvest time is over, the water's receded and the crabs are like, they've eaten all the nutrients and they're like, this is delicious. They're hairy crabs. I think that's the story behind.
Karen Wu: But it's delicacy only available for like, I don't know, two or three months out of the whole year. So one of my friends actually did an inventory count at a Hairy crab farm and then, so I was asking them, okay, so you just like go in and counter crabs. I guess it's pretty easy, certain amount of crabs in a certain region you can just kind of cages or whatever and then he goes, yeah, that's easy. But then the accounting classification of Hairy crab is actually pretty interesting because only baby crabs are counted as inventory. The female crabs are counted as fixed assets because they can be there for multiple years and produce baby crabs that you can sell. And then the male crabs are actually expensed.
Erik Zhou: What?
Karen Wu: That blew my mind. Yes. Sorry.
Erik Zhou: You could tell, how do you tell?
Karen Wu: Between the gender of the crab?
Erik Zhou: I guess you could just tell. Like it's some kind of shape.
Karen Wu: Like through sizes and you can tell from the shells whether they're female or male 'cause the female crabs are used for breeding. I guess if you were to look around cattle industries, probably pretty similar, but that just blew my mind.
Erik Zhou: That's similar. The thing I look to... Okay. Now I'm putting my audit hat on. I'm just thinking back. Okay, so if I were to do an inventory count and if I had to do something like this, like because of the vast difference in treatment, I'd actually wanna look at a pretty big sample of the female crabs to make sure none of them are male. And so I'd have to be able to eyeball or identify that these crabs are actually male. I don't know how to do that. I don't know what kind of scientist you'd have to be to do that.
Karen Wu: Yeah, you flip the crab around and look at the shells.
Erik Zhou: That's awesome. Karen, it was great having you on the show. Thank you for all your insights.
Karen Wu: Yeah, thank you for the conversation. It was obviously very fun to be honest and thank you for the chats.
Erik Zhou: Always love seeing a successful PWC alumn so that's great.