Understanding the CFO
Philip LivingstonVice Chairman, Approva Corporation
Audit Committee Chairman – Cott Corp and Insurance Auto Auction
My Experience CFO
World Wrestling Entertainment Catalina Marketing Celestial Seasonings
Director and Audit Committee Chairman Cott Corporation - $2B soft drink company Insurance Auto Auction – auto salvage
Former CEO Financial Executives International – heavy involvement in SOX passage
CPA, MBA, member IIA Ultimate financial training – Raiders 1980/81!
Agenda
Major priorities and issues facing CFOs today
General expectations of Internal Audit from the CFO viewpoint
How can Internal Audit assist in addressing the major issues
What can Internal Audit do better to address these issues and/or expectations
Specific training for IAS
CFO Key Priorities:Managing Relationships Board members Operating management team Investors Analysts Customers Vendors
CFO Key Priorities:Developing People Building a great team is usually the hallmark
of a successful CFO Finance staffing market very difficult Technical accounting and reporting skills
scarce and expensive Bench strength a major issue for the finance
team
PrioritiesManaging Capital Allocation Capital expenditures Acquisitions Stock buybacks Dividend Policy – impact of tax changes
A KEY CHALLENGE – IAS CAN HELP HERE CAPEX BUDGET COMPLIANCE
IRR FROM MAJOR CAPEX PROJECTS POST ACQUISITION PERFORMANCE
Priorities:Planning for the Future Good CEOs and CFOs “live in the future” Good forecasting always important, but
becoming even more so
Implication for IAS Forecasting oriented projects Projects to review the quality of past forecasts and
consistent forecasting failures
Priorities:Cost Control - Productivity Scary commodity pricing environment
After big run up in commodity prices, they are DOWN 12% in the last two months
Cost of oil flowing through to many products and raw materials
Companies can get major advantages or be dealt huge blows by raw material volatility
Priorities:Business Reviews and Evaluations Most companies have a quarterly business
review process Usually very structured and VERY
INFORMATIVE
ASK TO ATTEND OCCASSIONALLY
Priorities:Business Intelligence Understanding what’s happening in the
business Real time Summary information with drill down ability
Understanding what’s happening in the market and with my competitors
IAS SHOULD BEGIN TO REVIEW BI SYSTEMS AND DATA WAREHOUSES
Priorities:Driving Process Improvements Cost cutting and productivity still critical CFO looked to for leadership in this area Those that stand still get crushed
IAS should be a major source of process improvement initiatives. Meld IT, finance
and operations knowledge.Centralization and web services still big
opportunities – MANY NEED A PUSH!!Connect ERP systems along the supply chain and into customer ERP systems – we are still scratching the surface here.
Current Issues for the CFO Financial reporting integrity and complexity 404 compliance and overall cost of being public Commodity / raw material prices Globalization – competition and labor markets Private equity reshaping industries
Best example is the retail industry Audit committee effectiveness Activist shareholders – changing role of hedge funds
General Expectations of IAS from CFO’s Viewpoint Be proactive but not alarmist Good review of key business and control processes Practical recommendations for improvements Assurance that the company is in compliance with
its stated business and accounting policies Understand the business – help operators deliver
better performance Be focused on key risks and continuous
improvement Solid technical skills – don’t punt on complicated
accounting issues Don’t create endless checklists or to dos
Other Thoughts for IAS Value-Adding Projects Compliance and assurance more important
than ever Unusual quarter-end adjustments 100% review of transactions with top executives
including Focus on key accruals
Bad debt, legal, inventory, incentive comp Capitalization policies
Other Thoughts for IAS Value-Adding Services Whistleblower mechanisms
Historically important at large sophisticated companies
Companies like GE and UTC rely on them to have confidence that bad stuff is flushed out
However, these mechanisms are underutilized because they are under-marketed.
IAS can provide important leadership here
Operational Audits to Consider Product quality Customer feedback Sales incentive programs Vendor rebates – side deals? Customer incentives – accounting Audit top vendor terms and acquisitions Independently confirm large transactions with
customers – ALL the terms documented?
IT Systems and Risks
Trends Widespread adoption of ERP systems pre Y2K Browser-based systems finally enabling user friendly
access to key business information SAP and ORACLE – web services and analytics Security a major enterprise threat Data integrity and protection troubling Web services enabling major cross- app integration
Trouble User access rights – access explosion creates challenges Interfaces between systems
Risk Assessment
Very important tool for insuring that IAS work is relevant and valuable
Interviews and questionnaires – broad group Always interesting results Consistent answers
Sources of risk identification outside of the organization Analysts Competitors Industry conferences
Risk Assessment – Red Flags
Changing business models – tumultuous market Culture
Gunslingers? Open disdain for controls or transparency
Troubled competitors New business initiatives – products or start ups High profile new management – sales and
marketing Cars in the parking lot??? Care more about press
than customers?
Revenue Recognition – Source of Many Problems Study after study indicates it’s the largest
source of restatements and reporting fraud Side deals – return or redistribution Future obligations related to the product Aggressive recognition usually timing shifts
that are totally unnecessary
A FEW Thoughts on 404
Needs to get focused fast or it will go into the history books
Companies willing to pay more for MORE ASSURANCE, not more documentation
Needs to be focused on: Controls around non-routine transactions Transactions with executives and related parties
(how many times to have to be burned by this?)
Training for IAS Professionals Industry specific conferences Leadership training
Having impact – projects that make a difference Communication skills ERP design and best practices Business intelligence and data warehousing Financial reporting
Approva Exception Based Continuous
Monitoring Manufacturing
Utilities Telecom Consumer Products
High Tech Healthcare & Pharmaceutical