Now that CFOs are, in effect, signing off on financial statements to the SEC rather than to auditors, it's crucial that financial reporting be spot-on.
The qualifications for a CFO job that executive search firm Russell Reynolds Associates received earlier this year from a leading financial institution fell in line with similar requests from other Fortune 500 companies. "They were willing to consider a highly talented, younger finance executive who was not a sitting CFO of a public company and who hailed from either the treasury or the control side," recalls Gordie Grand, who leads Russell Reynolds' financial officers practice. But not
long after presenting those specs, Grand's client reshuffled its priorities. "They said, 'We need a public-company sitting CFO, somebody with an outstanding track record in control accounting, financial management and information systems,' " he says. "They felt that they could not take the risk on somebody who isn't clearly recognized to have those abilities."
Other executive search experts agree that public companies are expressing a rekindled interest in CFOs who excel at collecting, controlling and certifying the numbers that flow within -- and, more important, out of -- their organization. The old news that CFOs need to know their company has taken on new urgency because of the accounting crisis, the passage of the Sarbanes-Oxley Act and the dispiriting economy.
The best finance executives have always treated financial reporting as a key activity. Now all CFOs and finance departments must do so, or they will face grave consequences from the investment community, and possibly from the SEC. CFOs who want to hear from executive and director search firms need to understand the importance of following the new corporate responsibility law, implementing appropriate control mechanisms and retooling their skill set if necessary.
Reg FD Redux
"When I read through the information contained in Sarbanes-Oxley," says Susan Johnson, CFO of Sapient, a technology consultancy headquartered in Cambridge, Mass., "my first reaction was to talk with PwC and with our internal auditors and say, 'OK, what am I missing here, because I'm hoping this is what CFOs are already doing.' When I sign the annual report every year, I've done so under the assumption that it is what I'm certifying."
Several other CFOs echo Johnson's point. "CEOs and CFOs have been signing 10-Ks and 10-Qs for as long as I can remember," says John Morphy, CFO of Paychex Inc. in Rochester, N.Y. "I've always assumed that signing a 10-K carried the same responsibility outlined in the new legislation." In a previous CFO job, when Morphy discovered a questionable accounting transaction, he announced that he would not sign the 10-K unless the problem with that transaction was solved.
Morphy compares Sarbanes-Oxley to Regulation Fair Disclosure, which in many ways clarified existing rules. Blythe McGarvie, CFO of French consumer-products company Bic Group, agrees. "I think Sarbanes-Oxley is very healthy in the sense that they're putting sharper teeth behind what really should have already been occurring," she says.
Although Bic follows French accounting guidelines, McGarvie closely watches the U.S. regulatory environment because in many ways it serves as a bellwether for the European arena (see An Insider on the Outside on page 22). Plus, the new rules directly affect McGarvie's board activity. She chairs the audit committee for Accenture; serves on the audit committee of Pepsi Bottling Group; and is the former chair of the audit committee of Wawa Inc., the $2 billion convenience store company based in Wawa, Pa.
"I've found that all three of the companies on whose boards I serve have been doing these things," McGarvie reports. "Now we're simply making it more formal. And when people [on the audit committees] ask what the real difference is now that the law is in place, I say we're not signing off to the auditors anymore; we're now signing off to the SEC."
The components of the new law that are receiving the most attention from CFOs are the certification requirement, the prohibition on loans to management, the shorter time frame (two days) for reporting insider transactions, and the stiffer penalties for breaking the rules.
Need To Know
Leading finance executives don't worry about prison sentences because they know their financial reports reflect the truth about their companies. That has always been CFOs' goal. But forces such as growth and globalization have made it more difficult to nail down all the details of corporate operations and financials.
According to Tom McLane, vice chairman of The Directorship Search Group, an executive search firm in Greenwich, Conn., CFOs have always needed to know their organizations, but that need is intensifying in the wake of Sarbanes-Oxley. "Large companies are complicated," he notes, "but sophisticated finance managers are there who should understand those challenges. Most of the large companies I've dealt with over the years have very strong finance departments."
These strong finance departments take proactive measures. For example, Paychex files its 10-Q the same day it conducts its quarterly conference call. Bic adheres to Reg FD, even though French accounting rules do not require it to, "because it's sound for the market and sound for investors," says McGarvie.
When Johnson became Sapient's CFO eight years ago, she insisted on participating in a workshop designed to help managers of a Sapient client think through a specific business problem. "I asked for the note-taker role and received some crazy looks," she recalls. "But I did it because I absolutely need to understand the business and what our delivery people go through. If I don't understand that, I may not make sound judgment calls on revenue recognition and I may not have a view that would lead to the most accurate financials possible."
Grand believes the pressure on CFOs to understand the many forces that affect their companies has increased markedly in the past three years. Part of the reason for that, he says, is that analysts have grown more aggressive in their expectations. "There is now an expectation that the CFO is going to know more about the company's business than virtually anybody in the company," he says. "They have to know the guts behind the business."
Strong finance departments must also gauge the effectiveness of their controls as new factors exert pressure on financial reporting. Although the term "control" normally carries technical connotations, the most effective CFOs tend to emphasize communication rather than procedural mechanisms.
At Sapient, Johnson's finance group recently hosted a brown-bag lunch for one of the company's consulting teams. "The objective was for this delivery team to explain to us what they're doing on the project, to flesh out the issues they're facing and to build relationships," Johnson explains. "I want my accounts payable person to have a relationship with people outside of finance. If a delivery person sees something going on, perhaps he or she doesn't feel comfortable coming to me, but if the delivery person has a friendship with someone in accounts payable, he or she can tell that person, 'Hey, something screwy is going on with this project.' "
Morphy invests a great deal of time in speaking to all areas of the Paychex organization. "I stress that if they think something we're doing is wrong, the burden is on them to go to the next level," he says. "And if that means you have to go all the way above me, that's what you have to do. If you think we booked an entry for a transaction that's not the way it should be, I want you to feel you can challenge it. I don't care if I get something in my office that is immaterial or perhaps is misunderstood. I want my people to know that's the climate they work in."
CFOs with progressive views on communication tend to install organizational structures that facilitate the gathering and reporting of accurate information. Johnson assigned finance "leads" to essentially serve as CFOs for each of Sapient's business units. And she now shares her certification responsibility, at least in spirit, with those people. "On the most recent 10-Q, I had them take a look at what I signed, and I actually had them sign the same thing internally," she reports.
Brian Jarzynski, CFO of business software maker Comshare Inc., based in Ann Arbor, Mich., believes the current investment environment requires finance executives to "get down in the weeds and know what is going on at their companies" more than ever before. "We've expanded the responsibilities of all budget holders to the financial numbers reported, including personal representation of their cost centers," he reports. "In addition, we have implemented a number of account-level reviews to be completed on a more timely basis as part of our month-end close."
Jarzynski also points out that certain types of software, such as Web-based corporate performance management applications, strengthen controls throughout a company. Many businesses have disseminated planning, budgeting, forecasting and consolidation processes deep into their organizational structure. Maintaining accuracy and integrity in an environment with shared responsibility requires additional controls.
Fabio Ronga, senior director at OutlookSoft Corp. in Stamford, Conn., notes that he has witnessed a shift in motivation among his performance management software customers. "Before, it was all about improving margins, improving revenue, pushing growth," he explains. "Now there is a strong interest in trying to guarantee corporate integrity -- making sure we have consistency with numbers and transparency across the organization."
He says those issues now occupy the base level of the CFO's needs hierarchy. "Are my numbers accurate?" Ronga asks, adding the following questions: "Is my consolidated revenue for the entire organization that I'm going to file in accordance with SEC guidelines an accurate number? Are my numbers consistent with my trends, or across the organization? Do I have a consistent way to compare my business today with my business three quarters ago? And -- very important for CFOs -- if you look at a piece of information, do you have access to all the knowledge that contributes to that information?"
As more and more CFOs wade into the corporate weeds to grasp their organization at root level, they flex skills that until recently took a back seat to (or, at the very least, received less fanfare than) their deal-making tools, IPO experience and Wall Street connections. "A couple of years ago, everyone was looking for the same thing: finance executives with pedigreed MBAs who were more the deal makers than the keepers of the flame," says Gary Kaplan, president of executive search firm Gary Kaplan & Associates in Pasadena, Calif. He saw a dramatic shift in that approach to CFO hunting in the spring of 2001, following the dot-com decline. "Since then, there has been a growing aversion toward the so-called superstar CFO and much more of an interest in CFOs that have impeccable track records."
This emphasis on what Kaplan calls "the old ideals" does not mean CFOs can shed their strategic responsibilities. There is a balance -- an extremely challenging one -- to be struck. If the chief financial officer does not possess the necessary equilibrium, he or she should establish it within the upper echelon of the finance department. "What's happened is that some of the CFOs have gotten to be very strategic," says Morphy. "That's fine, as long as they still have a nuts-and-bolts finance background. If they don't, they'd better have somebody who does, and maybe that's what you call your chief accounting officer."
But Morphy cautions against overreacting to the current environment by emphasizing financial management skills to the exclusion of other capabilities. For example, he notes, executives coming straight out of major accounting firms aren't necessarily prepared to be CFOs.
"You want to have people comfortable in coming to you and saying, 'I have this unusual contract that I'm negotiating; are there any accounting implications that I should be thinking about?' " Johnson says. "And if you have a CFO who is just the bean counter, the salesperson is not going to feel comfortable or go out of his or her way to inform you of concerns, and that can be very dangerous."
Besides, McLane notes, it's not too difficult to sniff out errors in financial statements. Despite the Sullivans and Fastows of the profession, good CFOs use controls that are not difficult to master. In most of the high-profile accounting-related flameouts, McLane says, "following the cash would have raised questions about what happened and might have prevented the ultimate bankruptcies."
An Insider on the Outside
Blythe McGarvie, CFO of Bic Group, the French producer of household items such as pens and lighters, has a dual perspective on the U.S. accounting environment. As a member of the boards of Accenture and Pepsi Bottling Co., she directly feels the impact of the new corporate responsibility legislation. But her day-to-day financial responsibilities at Bic are less affected by events in the United States because the company follows French accounting regulations under the COB (Commission des Opérations de Bourse). So this insider has an outside perspective that sheds light on what the current accounting debate may be neglecting and how the global accounting environment will evolve in the near future.
Business Finance: What are some of the common impressions of the U.S. accounting environment, including the passage of Sarbanes-Oxley, in Europe?
McGarvie: I think Europeans often sense the void in these types of situations. From my interaction, mainly in France and the U.K., I think the void is that there needs to be some common sense. And I think that common sense would have prevented a lot of the accounting issues and overreaction [from investors] that we're now trying to address. I think from a European perspective people are looking at this and saying there should have been some of this going on already.
On the other hand, what's happening in the U.S. could very well happen in France or in many other European countries because their level of [board] independence is not nearly at the level of most American companies. In Europe, people are less likely to speak out as much as Americans speak out. But they're beginning to ask questions about independence now.
BF: The debate about American GAAP vs. International Accounting Standards has taken a back seat to more pressing needs in the past 18 months. What do you see as this issue's key focal points?
McGarvie: I'd like to see getting the IAS and GAAP a little bit more aligned. We had -- finally, after almost 20 years -- made one major closure, the elimination of pooling, to bring IAS and U.S. GAAP closer together. And remember all the hue and cry over the elimination of pooling here in the U.S.? I think now people understand that was a good thing to eliminate. ... We've been converting our French accounting closer and closer to IAS since I've been at Bic, and I think IAS is actually a cleaner way of looking at things, in large part because it is more principle-based than rules-based.
BF: Do you agree with the accounting professionals who suggest that Sarbanes-Oxley took a very short-term focus because it excluded important issues such as globally accepted accounting principles?
McGarvie: If it took 20 years for technical people to pull together one way to bring IAS and GAAP closer together, I don't think it could have been part of the scope [of Sarbanes-Oxley]. And yet, Sarbanes-Oxley basically defined what kinds of rules need to be followed regarding insider trading, the prohibition of improper influence of auditors and other issues. All of these things are very positive.
You first have to define what the standards are, and once you know the rules then you can follow them. These standards were not articulated as clearly prior to Sarbanes-Oxley. Most companies with high standards followed the principles of sound accounting, but the act helps all companies be clear about what they should be doing to follow proper review and control procedures and formalizes the procedures.