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Are you CFO or CEO?

Finance functions face important choices about where to place focus. At a time when businesses want their CFOs to become actively engaged in the strategic direction of the business – participating in strategy development, leading M&A activity and providing leading indicators for predicting business performance – CFOs themselves believe that they are still far too distracted by the demands of compliance and corporate governance. This is according to a survey of 251 of the world’s most powerful businesspeople recently published by Ernst & Young. The survey, What’s next for the CFO? Where ambition meets reality, indicates that CFOs must now make decisions about their areas of leadership and their priorities if they are to move further along the spectrum towards their natural role as business partner.

The following diagram conveys the survey findings on which activities CFOs currently allocate their time to and how CFOs think their time should be allocated. See Diagram 1 below.

Diagram 1

Diagram 1b

CFOs are being pulled in all directions and, ultimately, this is not sustainable. They are being asked to be business partners to their CEOs and commentators to their boards, as well as performing their more traditional roles as score-keepers of financial performance and custodians of risk management.

With a dramatic increase in focus on corporate governance from shareholders and regulatory bodies, the role of the CFO is more stretched than ever before, with increased responsibility and influence residing in this office.

As the finance function makes an increasingly strategic contribution to business activity, individuals in this essential role will need to re-evaluate the proportion of time and cost spent on transaction processing and reporting. The paradox here is that increased complexity in compliance and reporting is coupled with an expectation that costs to achieve this will be reduced. Options to consider include the use of shared services or even outsourcing of some of the routine transaction processing. This is enabled in some respects by the global availability of service providers.

In effect, the finance function is rapidly evolving. The CFO is in a position where the cost of finance can be leveraged more effectively to dramatically improve the value that is delivered to the business. However, this is a continuous journey, which requires the CFO to align the capabilities of the finance team to its expanding role in order to achieve greater measurable value, efficiency and quality in the eyes of the business and the wider stakeholder community. Success is often determined by bringing the right people on board that can act in the roles of not only scorekeeper but commentator, diligent caretaker and business partner.

Survey respondents say that finance functions collaborate effectively with function such as tax, treasury and IT, but less well with research and development; human resources and marketing. It is in these latter areas that the finance function can play an enhanced role by combining financial and non-financial information and applying a more future orientated perspective.

Facing these huge demands, CFOs are having to choose either to limit themselves to technical accounting or extend their role to include a focus on more strategic functions. If they want to deliver on their traditional role as well as meet the expanding expectations of their C-suite colleagues, three key focus areas for the CFO will be :

  • streamline scorekeeping and custodian processes to free up resources to focus on value adding roles;
  • Integrate financial and non-financial information to facilitate the role of finance and its impact on strategy; and
  • focus on succession planning by identifying and building a pool
    of talent.

The business risk landscape is changing and so is the role of the CFO

With local and international investors increasingly demanding more transparency and ‘no surprises’, the role of the Chief Financial Officer (CFO) is coming under tremendous scrutiny. In addition, whilst the CFO role was often well defined and limited to certain spheres, the CFO is now increasingly being seen as a key organisational asset to drive business competitiveness and effectiveness.

CFOs, perhaps more than most executives, are engaged in creating internal controls that deliver not simply a compliant business, but a proactive risk managed business. In many ways, especially with the advent of the Sarbanes Oxley Act, the financial director is seen as the custodian of the ‘risk and control’ mindset required to achieve that objective.

An Ernst & Young Internal Control Survey conducted early in 2007 indicated that many CFO’s and Heads of Internal Audit believe that certain internal controls are still ineffective, with the biggest ‘blind spots’ being controls over expansion into international markets, post-acquisition integration, and real estate and construction projects.
Particular blind-spots and gaps in control also arise in areas outside ‘business-as usual’, such as major change programmes. The survey also showed that three quarters of all businesses were planning to make considerable investments in control. The CFO has a pivotal role to play in ensuring that control improvements achieve the Return on Investment (ROI) that is expected from them.

Today’s CFO recognises the importance of maintaining stakeholder confidence through visibly ensuring compliance with regulatory requirements while still building in the flexibility to accommodate the next wave of change.

All businesses face common drivers for a better control environment. These include the need to respond to both external and internal stakeholders’ expectations, achieving improved governance whilst reducing the cost of compliance and the need to improve business processes in order to maintain and enhance competitiveness.
CFOs are likely to be best placed to drive a proactive risk-based approach and to help others use the same approach to build effective controls in their area of responsibility.

Equally important is creating the appropriate mechanisms for feedback so that senior management is able to gain assurance that what was requested is done. Gaining confidence and comfort through a properly established feedback loop allows CFOs to decide how much detail they need in the processes supporting particular controls.

Adopting a risk-based approach to challenge why processes and monitoring controls are executed in a particular way makes it possible to drive efficiencies and streamline controls so that they are cost effective. CFOs need to identify how controls within their organisation are managed at a practical level in order to find areas for improvement. They need to understand what is the cost of operating their present system of internal control, and how new thinking may help to achieve greater efficiency and deliver a system that is more fit for its purpose.

The CFO role is at a crossroads. Decisions need to be taken on where to focus and how to adequately structure and resource the finance function to meet the ever increasing demands made on it.

Mike Kane CA(SA), BCom, is a director Business Advisory Services at Ernst & Young.