The Changing Role of the CFO 

Careers

What does it mean to be a CFO in the post-Enron era?

FROM: NOV-DEC 2003 ISSUE | BY JEFF BUCKSTEIN

Fallout from the spectacular meltdown of U.S. giants like Enron and WorldCom has placed the chief financial officer of public companies under the microscope as never before.

"I heard someone jokingly say that the title CFO should no longer mean 'chief financial officer, but rather 'the meat in the sandwich' because the CFO's the one that's going to get caught between the rock and the hard place," laughs Stephen Spector, FCGA, president of Spector & Associates in Vancouver.

Joking aside, however, there's no questioning that those occupying the position, including a number of CGAs across Canada, face both unprecedented challenges and opportunities. The CFO's historical responsibilities — to maintain effective financial controls and accounting accuracy, reporting and integrity — haven't changed. But thanks to Enron and other corporate failures, their role in many organizations has taken on even greater significance.

"In today's environment, the CFO really has to know everything that is happening. We must be more diligent than ever because our feet are now being held to the fire to eliminate errors of judgment," says Eddison Doyle, FCGA, CCA, chief financial officer at Lucent Technologies Canada in Markham, Ont.

Legislative Reform

Legislators in the United States were quick to pass tough new legislation designed to prevent accounting irregularities and corporate governance failures such as those seen at Enron and WorldCom. The most famous and far-reaching new legislation is the Sarbanes-Oxley Act (SOX), which was passed by the U.S. Congress in July 2002.

Although the SOX legislation doesn't officially apply to Canadian public companies, some Canadian firms have begun to incorporate its major stipulations anyway. A main reason is that Canadian companies seeking to raise funds south of the border want to demonstrate that their governance standards are on par with their U.S. counterparts.

In Canada, the Ontario Securities Commission (OSC) introduced three draft rules for public comment in June 2003. One of the proposed regulations is a requirement that the CEO and CFO certify the accuracy of annual financial statements and interim filings four times each year. The second rule relates to the role and composition of audit committees, and proposes that external auditors report directly to the audit committee. The third draft rule requires that firms auditing the financial statements of public companies be in good standing with the Canadian Public Accountability Board. [At press time, the OSC was still accepting public comments and the rules had been endorsed by every province except British Columbia.]

The first draft rule closely tracks Section 302 of the SOX legislation, under which the CEO and CFO of a public company must certify that, to their knowledge, each annual or quarterly report has been reviewed and contains financial information that fairly presents the financial condition of the company.

In referring to the American legislation only, Lal Balkaran, FCMA, CIA, CGA, president of the Institute of Internal Auditors in Toronto points out that the definition of "fairly presents" goes beyond merely inspecting financial statements to ensure they've been prepared in accordance with generally accepted accounting principles (GAAP).

"It [also] involves ensuring that anti-fraud provisions have been complied with. Essentially, the CEO and CFO must confirm their responsibility for establishing and maintaining internal controls and attest to [their] effectiveness," he says.

But the proposed changes in Canada don't go quite so far. "Unlike Sarbanes-Oxley, the OSC proposal has no requirement for the external auditor to attest to management control assertions. Nor is there a requirement to use and name a control framework to evaluate controls," Balkaran adds.

In both the United States and Canada, however, CFOs must also pay greater heed to the content of the Management's Discussion & Analysis (MD&A), which now more than ever is being scrutinized.

In light of the problems that off-balance sheet special purpose entities (SPEs) — now known as variable interest entities (VIEs) — caused at Enron, it is recommended that the MD&A outline all significant off-balance sheet arrangements to which the company is still exposed. The MD&A must also list the effects such arrangements have on cash flow and earnings in prior and current periods, their potential effects in the future, and the potential risks to which those items expose the company.

One executive who now finds himself spending a lot of time writing the MD&A for annual and quarterly reports is Charles Janisse, CGA, chief financial officer of Nextair Inc. in Windsor, Ont., a publicly-owned developer of wireless enabling software solutions.

But it's not just working on the MD&A that takes Janisse away from dealing with bread and butter accounting issues. "I spend a lot of my day making sure everything is properly filed and that all of the press releases that need to get out regarding changes in the company do," says Janisse. " Two years ago you could put out a quarterly report with just financial statements and [include] very little information with it. But this year my first quarterly report is going to be at least 13 or 14 pages long. And probably 90 per cent of that will be financial information disclosure."

Expanded Responsibilities

The CFO's role as a communicator has increased, as CFOs are now more responsible for educating the board of directors about a public company's legal responsibilities to disclose information.

"Especially in a small company, decisions that would normally have been made at a management level are now going up to the board. That means the CFO has to keep the board better updated," Janisse says.

And CFOs may be forced to speak out if they feel the all-important audit committee is not adhering to adequate standards of corporate governance, suggests Balkaran.

"To protect their reputations, CFOs can use their knowledge and experience to advise on the composition and mandate of the audit committee. The CFO should ensure the committee has a proper charter that defines its mandate, reporting relationship, power, composition, roles and responsibilities," he says.

The new environment has also helped forge closer ties between the CFO and the internal audit department, who must work together to ensure that company-wide processes are effective. CFOs can take a leadership role in reducing the likelihood of corporate fraud by promoting an ethical business climate, backed by a written code of ethics that stresses honesty, trust and integrity.

Preventing Fraud

However, corporate fraud often arises from unexpected sources, making it that much more difficult to prevent, warns Andre Falzon, CGA, Toronto-basedvice-president and controller at Barrick Gold Corporation.

"I think that fraud at a level below that of the CFO is a lot easier to control because you can put an emphasis on internal controls and regular evaluation and testing. But most frauds we've seen — like at WorldCom and Enron — have allegedly taken place in the executive suite. So it's a tough situation and the CFO's got to have the ability to go to the board with issues such as this," he says.

Changes are also evident in the interaction between the CFO and the company's external auditors. External auditors often meet with the audit committee without management present, whereas in the past, many saw their reporting line as leading directly to the CEO or CFO. For their part, CFOs need to encourage a direct relationship between the external auditors and the audit committee as an integral part of good governance.

They should also ensure that external auditors don't perform non-audit services that could "undermine their own independence thus putting the credibility of their audit mandate in question," says Balkaran.

Many CFOs have also begun to assume a greater public profile than they had in the past. "Historically, the CEO has been the corporation's public face. Now the public wants to hear more directly from the CFO because they're often considered the corporate conscience," says Isabel Meharry, Toronto-based president and chief executive officer of Financial Executives International Canada.

Some CGAs, such as Sandy Campbell, senior vice-president and chief financial officer of publicly-traded WestJet Airlines Ltd., are concerned about the impact of a mass of new regulations. Campbell worries that "some of SOX may have been a little too knee-jerk and onerous without really resolving anything."

Excessive rules and regulations "throw a wet blanket over everyone," continues Campbell, who points out that "management representation and engagement letters with auditors now go on for pages almost to the point of extreme." Another downside associated with having a lot more rules and regulations is that it "catches the good guys up in a web of bureaucracy," thus resulting in much more expensive audits and liability insurance premiums, he adds.

And there are differing opinions as to how effective the new laws and regulations will be.

"With CFOs having been singled out by SOX to sign ethics codes, none may want to face the consequences where a breach occurs. No CFO will take the risk to put his signature on a report that he does not trust," says Balkaran, who adds that SOX, "is really giving teeth to what was implicit before."

Challenging Times?

Citing an increased workload, the greater likelihood of civil or criminal liability, and an increased emphasis on compliance with new laws and regulations, many CFOs believe this is the most challenging environment they have ever faced.

High corporate expectations, have "raised the bar" for how CFOs are evaluated, says Meharry of FEIC. But some think the job is a little easier than it was before. New legislation and reporting requirements have helped increase corporate discipline. A stronger ethical climate has been created in which the CFO is likely to receive greater assistance from management and staff with accounting practices, financial reporting and internal controls. Corporate culture has become more receptive to whistle blowing in response to a breach of ethics. And practising good corporate governance ranks very high on the agenda of shareholder and board of directors meetings.

The post-Enron regulatory environment has helped to relieve the pressure CFOs face to generate immediate profit, argues Falzon. "I think it's now a lot easier for the CFO to go to the board and say 'you can't do this' or 'this is the way you have to do it,'" Falzon says.

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Jeff Buckstein, CGA, is a freelance business writer living in Ottawa.