The Chief Financial Officer (CFO) of any corporation has a challenging job. Although the job functions of a CFO are varied, they can usually be grouped into the following main categories.
- Implementation, monitoring and overall supervision of required financial controls. This includes the establishment of various policies and procedures that would include such key elements as revenue recognition and write-off policies.
- Be the lead on key financial projects that require financial modeling and analysis as well as other key financial related initiatives.
- Establish relationships with sources of capital and financing and keeping such sources informed as to corporate progress as appropriate.
- Advise company senior management about the impact of operational decisions on company financial status.
There are many other roles and responsibilities for a CFO. But what happens when in doing his or her job, the CFO’s duties and professional responsibilities come into conflict with other senior executives? This can be even more of a challenge (and more troubling) if the CEO of the company has a very strong personality and is driven to get results, sometimes at all costs.
There have been a number of recent cases where this scenario has played out, sometimes in either the civil or the criminal courts. One of the most recent Canadian cases involves the criminal trial of key figures at Livent Inc, the live entertainment company that was run by Myron Gottleib and Garth Drabinsky. This case provides excellent insight into the relationships between the CEO and other senior executives and the financial accounting staff, including the CFO.
In her testimony during this criminal trial, Maria Messina, the former Chief Financial Office of Livent made several statements that alluded to the difficulty she faced when dealing with her senior management. At one point during her tenure at Livent, Messina learned that company managers were planning to implement more than $20 million in accounting manipulations. Messina met with company managers about this situation and urged them to reconsider the move. Management responded by telling her that this was just income smoothing and that this was not really her concern.
Messina further testified that the CEO’s management style was dictatorial and bullying and the CEO would often fly into a rage. “No one wanted to make a mistake that would trigger his anger….there was no way I was going up against him….I was afraid of what they would do to me.”
Messina’s experiences as CFO at Livent are instructive on how a strong CEO within a company can influence a CFO and other accounting staff to help manipulate the accounting records; manipulations that may amount to fraud. Livent was a classic case of corporate fraud within the executive suite.
An academic paper titled “ Why Do CFO’s Become Involved in Material Accounting Manipulations” (Feng, Ge, Luo & Shelvin) provides some excellent insights to this corporate problem. The authors examined CFO participation in accounting fraud from two perspectives:
- CFO’s initiate accounting manipulations for immediate personal gain (i.e. manipulate corporate earning to take advantage of stock market gains)
- CFO’s participate in accounting manipulations because of pressure from their CEO. Pressure may include compensation, career opportunities etc.
There is another perspective, however, that should be added. There are cases of accounting manipulations being done by senior executives in order to “save” a company. The accounting manipulations can make a company look more profitable. This can affect debt covenants, loan arrangements and the stock price of a company. Sometimes, executives are looking to buy some time in the hope that a company’s prospects will improve.
The academic paper also made some interesting conclusions.
- CFO’s seem to bear substantial legal costs for committing accounting fraud but to not reap substantial rewards for doing so.
- CFO’s tend to depart companies prior to the accounting fraud period. This may indicate that many CFO’s have either been fired for not acquiescing to the fraud or have voluntarily left the company.
- CEO’s are more likely that CFO’s to be described as the ones who orchestrated the accounting manipulations and who benefited most from them.
The paper goes on to conclude that “taken together, our findings are consistent with the explanation that CFO’s become involved in accounting manipulations under pressure from CEO’s rather than instigating such manipulations for immediate personal gain. “
As an institution, what can a company do to prevent a strong CEO from pushing through unethical or illegal accounting manipulations?
- The role CFO should be made more powerful within the organization. The CFO must have the ability to work independently so that the influence of the CEO is somewhat limited.
- The audit committee of the organization should be the one who hires, fires and assesses the work of the CFO.
- The CFO should have strong reporting lines to the audit committee, especially in cases where there are divergent opinions between the senior executives of the company.
What to Do?
For an honest CFO that is trying to be true to his or her obligations to their profession, the scenarios described are a nightmare. If a CFO is put in a position of being part of unethical application of accounting standards or out-and-out accounting fraud, what steps can be taken to protect him or herself. It’s a very difficult situation but here are some tips.
- The CFO must document the situation and the reasons why the accounting transaction is unethical or illegal. In the first instance, the CFO should present this memo to the CEO.
- If the CEO refuses to act, the memo should be discussed with the audit committee.
- When the audit committee reviews the situation and does not agree with the CFO’s viewpoint, the CFO has fulfilled his or her responsibility to the company. However, if the CFO is concerned from an ethical or legal perspective, further steps should be taken.
- The CFO should consult with his or her professional association and receive guidance concerning a course of actions and professional responsibility.
- The CFO should consult with his or her own legal counsel.
- Ultimately, the CFO may have to consider resigning if the CFO feels he or she is doing something against their ethics or is acquiescing to an act contrary to any law.
And what happened to the Livent CFO who testified at the Livent criminal trial. Although Messina was not charged with criminal fraud, she did receive sanction from her professional association, the Chartered Accountants of Ontario. The summary of the outcome of her disciplinary hearing is below:
Maria Bernedette Messina, of Toronto, was found guilty of two charges under Rule 201.1 of failing to maintain the good reputation of the profession and its ability to serve the public interest, and one charge under Rule 205 of signing a statement which she knew to be false and misleading, arising out of her involvement in fraudulent activities at Livent Inc. While chief financial officer of Livent, Ms. Messina failed to disassociate herself from ongoing and material accounting irregularities, including the fraudulent manipulation of the books and records of the company. She failed to disclose her knowledge of the fraud to the company’s board of directors, audit committee or auditors, and took insufficient steps to prevent the release of the misstated audited financial statements. She signed a United States Securities and Exchange Commission registration statement knowing that the financial statements attached to it were false and misleading. Ms. Messina was fined $7,500 and suspended for two years…
Accountants of all stripes should look at the Livent case as a warning that these difficult situations can happen to any professional accountant. Awareness about how to approach such situations can prove invaluable. You may lose your job, but not your career!