Accounting scandals: where were the CFOs?

Amid the epidemic of corporate scandals and plummeting market values, the heads of corporate finance functions have often been conspicuous by their absence.

The last year has seen a number of high-profile finance and accounting scandals – most notably Enron, Tyco International and WorldCom.

While these are the most glaring and visible, there are many more companies whose shareholders and employees have suffered even more as stock prices have fallen.

In the US, these include Cisco Systems, Lucent Technologies, JDS Uniphase, AT&T, most of the regional telephone companies, software companies such as Oracle and Siebel Systems, most of the dot-coms and many others.

In Europe, Nokia, the major telephone companies, and, again, the dot-coms, have all seen their market values drop significantly.

During the past two years, trillions of dollars were lost by shareholders and employees.

Confidence in the capital markets has been shattered. CEOs are suspect. So, too, are the analysts, investment bankers, outside law firms and, of course, the auditors.

One question frequently asked has been: “Where were the auditors?” Surprisingly, except in the cases such as Enron, Tyco and WorldCom, where the CFOs (chief financial officers) have been directly implicated, little focus or criticism has been directed toward CFOs and the finance organisations they run.

They should be, in fact, the first line of defence against overly aggressive strategies, investments, and accounting and reporting practices.

What has happened in the last decade that could have contributed to CFOs and finance organisations failing to be on top of the “numbers”?

What lessons should they take away from both the highly visible accounting and reporting scandals and the general collapse of the worldwide capital markets?

The changing role of finance

During the last decade there was a strong feeling that the role of the CFO and the finance organisation must change from being primarily an accountant and controller (the catchy terms applied were “compliance” and “cop”) to that of a “business partner” and “strategist”.

Whole consulting practices have been built on measuring the number of finance personnel devoted to “transactional”, “analytical” and “strategic” activities, then helping client firms shift their emphasis.

Large, decentralised accounting organisations have been consolidated and relocated to “shared service centres” and in the process the number of accounting staff significantly reduced.

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