More than the math: CFOs should be 'people people' too

HR Magazine, Feb, 2008 by Kurt A. Powell

Corporate governance and proper disclosure have become of paramount importance in today's business world since the enactment of the Sarbanes-Oxley Act (SOX) in 2002.

In the SOX legal landscape, companies need well-rounded, interactive and accessible--as well as technically proficient--financial executives. It is not enough for these executives to look just to the bottom line. They must command strong people skills that will enable them to manage talent and facilitate fluid and productive internal and external communications.

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Human resource executives can play a critical role for their organizations at this intersection of money and people. As Gail Auerbach, an executive coach with Corporate Performance Strategies in Atlanta, says, "There isn't a managerial position that exists any longer that can just be a technical functioning manager--what's equally or more important is the ability to develop and motivate a team.

"If we're talking about individual accountants and not managers, they're still typically in positions where they're supporting other people or providing information to others, so they have to be able to relate well to the internal customers they're serving and make sure that what they're doing is relevant to the business."

Consequently, Auerbach stresses that it's not enough to know just the balance sheet. Far from it, chief financial officers (CFOs) and their staffs need to understand the overall dynamics of the business, not to mention the people who make it happen. And they need to know how to listen and communicate--in short, play well in the sandbox.

"If they're isolated with only technical skills, it doesn't fulfill the needs of the business," says Auerbach, a former vice president of human resources at Randstad HR Solutions and at Solvay Pharmaceuticals. "Accountants today must have the ability to also understand their people, not just the work they're doing financially."

A Demanding New World

Most HR professionals are familiar with SOX, passed in the wake of Enron and other corporate scandals. This legislation established increased accountability for corporate governance and required improved internal controls over financial reporting.

Under Section 404 of the act, managers must assume specific responsibilities in assessing the effectiveness of such internal controls. As set forth in Auditing Standard No. 2 by the Public Company Accounting Oversight Board, management must:

* Accept responsibility for the effectiveness of the company's internal controls over financial reporting.

* Evaluate the effectiveness of the company's internal controls.

* Support its evaluation with sufficient evidence, including documentation.

* Present a written assessment of the effectiveness of the company's internal controls at the end of the company's most recent fiscal year.

As part of managers' assessments of internal controls, they must classify accounting deficiencies as inconsequential, significant or material. The classification of deficiencies typically will consider factors such as the type of control failure--missing documentation, noncompliance with policy or that proper procedures do not exist, for example--the likelihood of a financial misstatement and the magnitude of a potential misstatement in financial reporting.

While responsibility for making these assessments rests primarily with the CFO, the process for implementing, testing, evaluating and remediating internal controls relies on the involvement of and input from many individuals, especially within accounting and information technology departments.

Results of these detailed accounting processes have major implications for a company. Managers are required to communicate to the independent auditor and to the audit committee of the board of directors significant deficiencies or material weaknesses identified during assessment processes.

Tough Spot

The CFO can be in a tough spot. The company's stock--and reputation--will suffer if the company reports a material weakness. CFOs do not want to relay negative news to the public and Wall Street unless they are sure that the data, accounting interpretations and assessments require it.

But CFOs also want to protect the company and themselves by doing the right thing from an ethical and technical financial reporting perspective. The last thing a CFO wants to do is certify a report that gives an inaccurate picture of the company's financial condition and internal controls.

Directly reporting to the CFO are the internal-controls staff and accountants who gather, monitor, test and analyze data for the internal-controls processes. In many instances, they are going to have opinions about how the internal controls and particular issues or deficiencies have been handled--and whether they should be categorized as inconsequential, significant or material.

'Tone at the Top'

Moreover, in assessing internal controls, company officials are required to consider both the effectiveness of communications and the "control environment"--the tone, integrity and ethical values of management--that influence their people. Thus, managers' style, or "tone at the top," is expressly recognized as an important factor in assessing the effectiveness of internal controls.