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CFO
Introduction :
Organisations in the recent years are struggling to withstand
pressures from various quarters like compliance, auditors, capital markets,
shareholders and so on. These are over and above the usual day-to-day business
pressures. Take the case of US companies. The southward-moving economies,
mounting oil prices, falling currency, and increasing cost pressures have
already put US managements under tremendous stress. To top it, the hanging sword
of SOX coupled with obsessed auditors is making every quarter a strained
experience for the whole organisation.
Noticeably Chief Financial Officer — CFO — is at the centre
of all this stress and strain. The expectations from the CFO have undergone a
sea change in the last decade. While internal expectations are at the same
intensity, the external pressures from regulators and capital markets are
growing day by day and quarter by quarter. Just beyond crunching numbers, all
these internal and external stakeholders expect a CFO to deliver lot more value
for the organisation. While these dynamics are changing dramatically, the CFOs
have to handle their own financial organisations, who like other parts of the
business, resist any changes that are needed to face these pressures and
challenges. Looking at the various global organisations, I feel, the success of
the CFOs lies in how they handle these external and internal expectations and
how do they bring about the transformation within their own financial
organisations to cope with these changes.
Obviously, this means that the business requires not only a
competent leader heading the finance function, but also a competitive leader to
lead the business activities. The finance organisation is uniquely positioned to
direct some of the uncomfortable activities that the current regulatory and
external stakeholders expect because otherwise no one will do them.
Value creation :
In the given era, the business, externally and internally
expects the CFO to create huge and unique value for the company. The value, as
widely understood, gets created by having effective capital structure, setting
expectations for the investors, setting stretch goals for revenues and
profitability, so that the business meets its all long-term aspirations.
However, this happens not only under dynamic but sometimes volatile
circumstances.
The decisions on capital structure in the past used to be
long-term decisions. But in the given era, with globalisation and capital and
debt markets becoming smart and open, one has to keep a constant check on the
optimisation of capital structure. In a country like India where the laws reduce
the flexibility of such decisions (like buyback and issue of own equity, etc.),
the role of CFO gets tougher as the competition faced is of a global nature.
Thus in given constraints and framework the CFO has to perform more skillful and
non-standard financial engineering models to ensure that the business gets
optimum capital structure at all the times.
The same situation is faced on managing investors’
expectations. The capital markets around the world are coming closer and the
investors’ expectations are becoming almost similar from a business in the USA
and the one from India. The investors, if are giving higher multiple to your
company than a similar one in the USA or Europe, they have to be convinced about
the reason for such higher valuation of your business.
This brings the growth story. In IT industry, or now I would
now name it as Knowledge Industry (KI), the 30% growth story is impressive all
along to the global FIs, but to sustain these growth numbers at a billion $ +
top lines is a different challenge that no CFOs in India had faced before. The
CFOs are expected to create these values.
While doing that role, internally, the CFO has to maintain an
effective rhythm in the business thru participation in business planning and
review sessions. During this process, the CFO has to expose the areas of
underperformance in the business to ensure that overall growth and value do not
have a drag. This requires a lot of political and tactical skills. Weeding out
the dead log from the organisation in the current era is very critical and
crucial for survival of the organisation and the CFO has a lot of value to add
in this area.
Creating competitive edge :
As I said earlier, in the given volatile situation of the
markets and economy, every CFO has to ensure that the finance organisation that
he or she leads, has to have competent people that will give the business
competitive advantage. This needs attracting and retaining people with excellent
financial skills who are good at numbers and also technically sound. With all
kinds of GAAPs and clarifications and commentaries coming on such principles,
the CFO’s life has become more complicated. The hand-tied auditors and audit
committees add more complexities by their indecisiveness and tendency of keeping
themselves guarded in any eventuality. The CFO is truly trapped within business
objectives, regulatory interpretations and illusive shackles created by others.
This needs the CFO to benchmark each of the finance function
constantly. The basic benchmarks should be on performance on delivering
reasonable and adequate returns on capital deployed to the stakeholders.
Unfortunately, there are only few metrics available today to judge and measure
the quality and competency of finance personnel. Still, one has to form its own
metrics for the quality of the people in the finance organisation. As CFO, I
would always see if my people are in demand in the market. If one of the senior
persons leaves and joins as a CFO of another company at double the salary, I
take it as a benchmarking exercise of the quality of my people. They must be
good if one of them goes as a CFO of another organisation at double the pay !
Another way to judge the quality of output is to encourage people to participate in awards. Say, Institute of Chartered Accountants’ award for best-presented annual report. Such competitions provide an urge to improve quality of the output like annual report of the company.
Highest integrity of each finance team member is also one of the critical factors to achieve competitive edge. In the current environment, it is important that there should be zero tolerance for non-compliance. Controls are not only needed in substance but also in form. For example, if you have internal review meetings, the minutes of the same need to be recorded and circulated, action items must be tracked and completed to ensure that all the adequate controls are in place and are followed adequately.
No surprises:
This is the dream that every CFO has and wants to achieve. Business and markets give you enough surprises. What you hate to have is more surprises coming from your own organisation, from auditors and from the audit committee. Thus constant liaison with auditors and the audit committee has no substitute. Every non-business as usual (BAU) matter must be informed to these entities immediately to avoid last minute surprises to either side. This ensures a healthy relationship between all the stakeholders !
Internally, anticipating issues before they arise is essential. The CFO must have a list of peculiar transactions that may give rise to any non-BAU issues. Such issues need to be attacked on a war footing in time to avoid the quarter-end surprises. If you have number of subs in multiple countries reporting their numbers in different currencies and GAAPs, your responsibility goes up multifold as each of such sub, its GAAP and reporting currency has many surprises stored at the time of consolidation. The interpretation of GAAP provisions and their respective treatments in books can vary so much that quarter-end consolidation can become truly a nightmare! This requires a tight forecasting schedule and ability of the business to forecast accurately. In spite of spending hours on calls with the business people on forecast numbers, outlooks and budgets almost every week, there is a huge scope for a surprise and one has to have a plan to deal with such situations wisely and sometimes bravely. Revenue recognition or impairment of intangibles or compensated leave provision are some of the areas that can give last-minute surprises in US GAAP. Foreign Exchange Accounting has its inheritant element of surprise on the last date of a quarter. The CFO has to learn to pass thru these situations.
Complex life:
While the CFO is busy adding value to business and creating competitive advantage to the business and avoiding surprises, the ever-changing laws and demanding auditors and audit committees (especially those coming under laws like SOX !) makes life of the CFO and his organisation more complex. Indian companies are going global, and preparing accounts with different reporting currencies, different GAAPs, consolidations under Indian GAAP and also mostly US GAAP, and lastly every quarter with ‘deadlines’, Most of my CFO friends truly experience the meaning of ‘Dead’ line! Truly, life has become too complex.
I think it is time to question what is the value of publishing the quarterly numbers. Modern businesses are too complex to be evaluated on just one-quarter numbers and get in to enormous discussions on QoQ and YoY numbers, LTM numbers and so on. Other than audit firms and TV business channels and media, no one (especially investors/shareholders) stands benefited! It loses quality and adds complexity of numbers at the heavy cost of health of finance/accounts organisation of each listed company. Further, we add to our complexity by giving guidance for the next quarter and try to achieve it or beat it with no regards to global market dynamics (not capital markets) of our own Industry.
I think all of us bring of the same fraternity should make a serious attempt, to see that we get a stable set of GAAP rules which do not have multiple interpretations, leave some space for the CFOs’ integrity and discretion, rather than asking auditors to interpret GAAP rules (AS) (as if they are Vedas and only the auditors have right to interpret them! !); stop this quarterly business and make it half-yearly and move as early to IFRS to have common rules for global subs and consolidations of accounts. There are number of areas where the same transaction gets treated differently in different parts of the world. Even OECD countries do not have common understanding of the accounting treatment of similar transactions. Compensated leave, intagibles, ESOP accounting are some of such areas. IFRS, I believe, will bring these complexities and confusions to an end. In the USA, number of multinationals have found a solution otherwise! They have started publishing ‘Non-GAAP’ numbers with a management statement that these numbers are not audited but the management feels that they represent ‘true picture’ of the business !
The problem that I see is, in all this intellectual exercises and professional egos, all of us have forgotten that the main purpose of the reporting is to elucidate the current shareholders and prospective investors about the affairs of the company and allow them to have more educated judgment on the future performance of the company they have invested in or want to invest. In the bargain, not only have we made our lives complicated, but also made these numbers almost indecipherable to all stakeholders.
I feel, this is not impossible, though difficult.What we need is to put brains of professional accountants, CFOs, and regulators together to see how we ultimately help to create a value for our business, how we bring competitive advantage to our business without making life unnecessarily complex by bringing some common standards and compatible accounting practices that give all global stakeholders some same and meaningful information at reasonable intervals. I can only hope, we will reach there one day and it may not be just Utopia!
