The High Stakes of Not Having Your Financial Modelers Accredited

Written by Ian Schnoor, CFA, CFM Executive Director of FMI

At the heart of every major corporate financial transaction lies a deal team. Deal teams are assembled when a significant financial transaction needs to be executed. They come together for mergers & acquisitions, restructurings, and initial public offerings.

A high functioning deal team is like poetry in motion: it is a well-oiled machine with all the parts working together to accomplish a common goal. Communication between parties on the team is clear and frequent, and the level of expertise of the participants is high – it has to be – as there is a lot at stake: deal completion, jobs, the company’s stock price, tax implications, and sometimes, billions of dollars.

There are key members on every deal team: Accountants and lawyers are a given. Every deal needs their analytical and legal skills. Depending on the transaction, you might also find other specialized professionals on the deal team, like real estate professionals or engineers. Of course, at the core of every deal team are the investment bankers. The investment bankers work with their clients to prepare for the transaction, drive strategy, and generally steer the deal process.

While the study of business has been around for a long time – Harvard University first introduced the MBA in 1908 – spreadsheet based financial modeling is relatively new. It only really took hold in the 1990s with the adoption of Excel. Financial modeling training is even newer. Firms began cropping up to showcase the full power of Excel and to show bankers what it could do. Even today, however, financial modeling is not typically taught in business schools. While financial models are the tools that inform critical decisions, bankers are still expected to learn financial modeling skills on the job, or receive training once they are already employed.

Let’s go back to our deal team: An accountant, a lawyer, a real estate professional and an engineer. What do they have in common?

They are all licensed professionals. They all wrote accreditation exams in order to be allowed to do what they do. They all achieved a standard in order to practice.

How about the banker? What about the person running the financial model who, arguably, might have the most influence on the outcome of a major financial transaction?

Until recently, there has been no way for bankers to validate their financial modeling skills. Sure, you can go to school and get a business degree. But when it comes to building a well-designed, robust financial model? We have crossed our fingers and hoped for the best.

Financial modeling accreditation was put in place to mitigate risk. It was established to ensure that the banker building the model has excellent skills. It allows models to be transferred among parties in a clean and easy-to-understand way. Financial modeling accreditation demonstrates to employers, colleagues and clients that superior skills have been applied to build the model.

The collapse of SVB has been blamed, in part, by ‘bad models.’ With the stakes so high, doesn’t it make sense to ensure that the person building the financial model has had their skills validated beforehand?

Financial modeling is both a discipline and a profession. It may be new, but it is time to make sure that the modeler’s credentials match the other professionals on the deal team.