CFO Roles and Responsibilities
The analysis begins with an understanding of the many responsibilities that sit on the CFO’s shoulders. A big issue that all CFOs and finance organizations face is that often they are viewed as the “adults in the room” that will be able to provide accurate and timely information to power effective decision making. This broad responsibility can be complicated by the specified role assigned to the CFO, and it can easily vary by company, industry, and circumstance. The specific role of the CFO in an organization must be clearly delineated and properly supported with related responsibilities, governance, and authority. To meet this expectation, a CFO must be well versed in how the company works, both operationally and financially, as well as the systems and processes that ensure the timely availability of accurate data.
The CFO plays several critically important roles within every business entity, especially as it pertains to publicly traded companies. A CFO has always had many competing responsibilities as the chief financial face to the public, the internal executive responsible for effective financial reporting and analysis, and the financial steward. Traditionally, a CFO’s responsibilities included internal and external financial reporting, cost management, tax, treasury, and—often—internal audit. The CFO’s role has expanded over time to take on functions that in the past were the purview of the Chief Operations Officer, such as information technology and human resources. In addition, with the advent of the Sarbanes-Oxley Act of 2002 (SOX), a CFO’s responsibility can also include such operationally driven compliance activities as managing a whistleblower line, records management, and code of ethics compliance. A CFO is never limited by the “Tyranny of the Or,” as all new responsibilities have equal weight and must be delivered on professionally and accurately.
The responsibilities and actions of the CFO of a publicly traded company are felt throughout the company; these affect investors and creditors alike. There are several technical and analytical skills required for CFOs to perform their responsibilities effectively. The CFO sets the tone of the overall control environment of an organization, but it is important to understand that the responsibilities and accountabilities actually reside with all financial professionals in a company, not just the CFO.
The Five Hats of the CFO are as follows:
- Financial steward
- Communicator of financial results
- Leader of financial planning and analysis
- Driver of internal controls and process improvements
As the “adult in the room,” the CFO must be able to clearly evaluate current results and understand the implications of future options. To effectively address this accountability, a company must have systems and processes that ensure data generated throughout the company is complete and accurate; in effect, it must ensure that there is unbiased data integrity. Although CFOs will rely heavily on the Chief Information Officer (CIO) for ensuring that data is correct, they must have a strong sense of what the data is expected to be to allow them to validate information and rely upon this data. This requires strong interpersonal relationships with all operating and back-office operations, in combination with strong critical thinking skills and seasoned business acumen, in addition to ensuring that the information systems architecture is built and operated within a strong framework of internal control.
Maintaining data integrity for the information generated from the systems is the first step in the process; it allows a CFO to commence an effective financial analysis as a financial steward of the company. This data is used to drive key financial and operational metrics that were designed by the financial organization with a knowledge of business cost drivers. Developing, understanding, and monitoring business metrics allow the CFO to help drive profitability and ensure that the company maintains operational liquidity.
The CFO is also expected to be the shepherd of cost containment and the catalyst for driving efficiencies through innovation to help ensure profitable operations. Inherent in the cost containment objective is that financial professionals have a strong knowledge of operations and cost reduction strategies. Buried in this responsibility is in-depth understanding of how to link new technology process improvements to reduce costs through automation, outsourcing, procurement strategies, effective customer pricing execution, staff reductions, and other process improvements. This is a never-ending journey, as technology keeps marching on. In the global business environment, cost management and inculcation of process improvements with technological improvements are even more important due to increased competition. Internal financial planning and reporting processes are integral elements to assist operational employees in meeting their financial goals and objectives.
Communicator of Financial Results
The regulatory environment of publicly traded companies has become increasingly complex. Regulatory compliance resides with the CFO and members of the financial organization. Several sections of SOX specify CFO requirements; the top CFO’s responsibilities are best encapsulated in SOX sections 302 and 404:
- Section 302 mandates that the CFO and CEO certify in writing that the company’s financial statements “comply with SEC disclosure requirements and fairly present in all material aspects the operations and financial condition of the issuer.”
- Section 404 requires that management establish internal controls, data accumulation, and reporting methods to ensure the adequacy of those controls.
In many ways, the SOX requirements are the underpinning of the overall reporting regulations defined by the SEC’s Form 10K. SOX-related processes help ensure data integrity that gives a company the information it needs to comply with SEC reporting requirements. The CFO must be the accounting expert who ensures that all the current and future reporting requirements are met. This starts with data integrity but does not end there, because a CFO also needs to know how to report the information ethically and with integrity. The CFO can easily be considered the conscience of the company and the key interface to the vested interests of all stakeholders, including stockholders, investors, creditors, governmental organizations, and the public at large.
One of the most important accountabilities CFOs have is to ensure that the company’s financial statements are presented in accordance with U.S. GAAP. CFOs need to make sure that the financial statements not only follow GAAP; they also must avoid an aggressive line that may lead to creative accounting and earnings manipulation. Some of the areas that a CFO needs to prioritize include the application of revenue recognition standards, where technical expertise and a financial organization’s ethics are most critical. Responsible financial professionals are not only expected to know all the revenue recognition rules; they also are expected to implement them in an ethically appropriate manner. Other examples of practices that CFOs need to watch for are aggressive accounting policies, such as when a company capitalizes more than it should or aggressively defers expenses. Many of these practices could arise at departmental levels where the CFO does not have day-to-day visibility. It is incumbent on the CFO to know not just accounting standards, but industry practices as well.
Many times, senior operational executives ask the finance team to stretch the rules to ensure aggressive revenue recognition. Of course, some senior management personnel without an accounting background may not understand the intricacies of applying the accounting rules properly. But many times, they understand that they are “probably” pushing the rules a bit and are really looking to transfer the responsibility of the improper decision to the financial organization. This is why integrity and ethics are key for the proper reporting of a publicly traded company. For example, I recall a time when a senior operational executive wanted to recognize revenue on a large contract for equipment that was still in the process of being manufactured for a specific customer. The early recognition would have helped the company make its quarterly results, so there was strong pressure to approve the transaction. The transaction was not allowed to be recorded before the equipment was shipped in accordance with proper application of revenue recognition principles. The financial decision was easy, but it was more difficult to make senior management understand that this was not a debatable point. This is a perfect example of how effective internal controls and personal ethics ensured that the financial statements would be reported in accordance with GAAP.
Leader of Financial Planning and Analysis
Internal financial planning and reporting processes are an essential element in assisting operational employees to meet their financial goals and objectives. CFOs are integral to setting the financial and operating targets of businesses; this process generally goes down to at least the department level. A CFO needs to definitively understand the operations and cost drivers throughout the business. In the target-setting process, key performance measures are defined. This is no mean task; the metrics must be set to incentivize employees so that they all work toward the same goal of improving the company’s financial results. Unattainable metrics cause employees to check out and not give their best efforts, whereas easy goals are quickly attained and result in a poor cost benefit.
The targeting process is just the beginning; it needs to be coupled with effective monitoring processes. The dissemination of regular monthly financial reporting and analysis reports packages helps ensure that management identify trends that may require adjustments to ensure they stay on track. Accountability, driven by the financial planning and analysis group, effectively keeps everyone engaged in attaining the business goals.
Driver of Internal Controls and Process Improvements
The most time-consuming and perhaps most important element of SOX is management’s responsibility to establish and maintain internal controls and reporting methods to ensure the adequacy of those controls. The Treadway Commission Committee of Sponsoring Organizations (COSO) Internal Control–Integrated Framework was designed in the 1990s to help companies across all industries and sizes measure the effectiveness of their internal control structures. The framework has been revised and improved, but its elements have remained consistent and had a positive impact overall. An inherent assumption in the framework is that members of the finance organization are experts in internal controls and related processes. The challenge facing CFOs is to implement controls that drive accuracy and integrity without substantially increasing the costs to the business. CFOs must have their fingers on the pulse of all operating processes to meet this goal. It requires knowledge of business operations and strong partnerships with management in various departments. Again, a strong understanding of technology is necessary to maintain internal controls without leading to ballooning operating costs and operational inefficiencies.
Devising and implementing a business strategy is an activity that encompasses all operating and financial aspects of a company. The CFO is able to perform detailed “what if” analyses when faced with different strategic and tactical options. CFOs’ strength in understanding business operations and their related costs allows them to build effective models to drive an effective coordinated strategy. In addition, as the financial leader, the CFO needs to identify the sources of capital to drive success with implementing a company’s strategy. The CFO has an integral seat at the strategy planning table, aligning business and finance strategy to grow the business. It does not end with mergers and acquisitions efforts and capital market financing strategies; the CFO must play an integral role in supporting a company’s other long-term investments.
A company’s strategy has many elements and can include business and operating model shifts to address cost containment when dealing with competition in the marketplace. A CFO’s deep understanding of business operations and financial modeling is critical, for example, when organizations are working to lower infrastructure and delivery costs. As a strategist, the CFO provides the leadership team with the financial acumen to help set strategic direction.
There are many hats that CFOs must wear in the business world today; basically, they must be financial GAAP experts, proficient in the identification and use of technology; cost containment police; providers of insightful and concise information to fuel effective strategy development and decision making; and guardians of corporate ethics as it pertains to external reporting. It is also very important that the CFO and their business practices be embedded throughout the company, because financial considerations and proper internal controls must be pervasive for an enterprise to enjoy long-term success.
The technical skills are merely an entry point and are not sufficient by themselves. The CFO and the financial organization skillset must also include:
- An in-depth process knowledge
- An ability to improve efficiencies of financial processes
- The incorporation of technology in processes, risk assessment, and identification of anomalies
- A combination of professional skepticism, critical thinking, and corporate ethics.
The next column will focus on the skills the CFO and the related financial organization need to deliver on their responsibilities.