Not just bean counters anymore - Top Questions for Your CFO

Chief Executive, The, June, 2003 by Catherin Fredman

It used to be so simple. The CFO was a Dilbert-esque accountant with a green eyeshade whose job was to count the company's beans and decide whether there were enough to justify an acquisition or build a billion-dollar plant. Then in the l990s, crunching numbers became the path to power, with concomitant glory for some and spectacular flame-outs for others. In the fallout of Enron, WorldCom, Tyco and Global Crossing, among others, the role of the CFO has evolved into an uneasy balance: As chiefs of financial facts, they often know more about the company's inner workings than the CEO; as the master stringpullers and wheeler-dealers, their decisions redound directly on the CEO.

In addition, CFOs have to play an ever-widening number of critical roles. They need to have both general managerial experience and financial expertise. and must be able to represent the company to the capital markets, serve as a principal sounding board for the CEO and, oh, yes, ensure that the company stays on the right side of today's stringent accounting regulations.

Maintaining open communications with the CFO is more critical than ever. That's why Harry Jansen Kraemer, CEO of medical products maker Baxter International, says if he goes two days without talking to CFO Brian Anderson, "something's wrong."

Here are the questions that he--and other CEOs--should consider asking in those conversations.

"If I sign this, will I go to jail?"

In today's "hang 'em high" environment, CEOs are literally betting the company on their CFOs' judgment. A mistake on once-routine financial statements can signal a death knell for a CEO'S career. The problem is, says Judy Sprieser, CEO of software manufacturer Transora and former CFO of Sara Lee, "A lot of people believe that accounting is black and white. It's not. Accounting truly is a series of judgment calls; it's very, very gray in many areas.

Colleen Sayther, president of Financial Executives International, recalls, "When I was at AT&T, I constantly compared our accounting policy to that of Worldcom, Qwest and Global Crossing." All four companies were building fiber optic networks and selling capacity on them. But while Global Crossing, for example, recognized the revenues from two-year terms up front, AT&T recognized it over the full two-year term. "Obviously, they were far more aggressive and we're seeing the fruits of that," says Sayther.

Today, CFOs report spending more time meeting with their boards and audit committees as well. At Baxter International, Anderson even gave the audit committee a financial literacy test, then held training seminars on matters such as deferred taxes, revenue recognition and new disclosure rules, to ensure that the committee members were able to interpret financial data.

"It may be good accounting, but is it going to look good to the public?"

Even within Generally Accepted Accounting Principles, there is a range of ways to recognize expenses and revenues. "You could be exactly by the book and still be found questionable in your judgment," says Sprieser. And the court of public opinion often jumps to quicker conclusions--and renders harsher verdicts--than the Securities and Exchange Commission.

That's what Krispy Kreme Doughnuts CFO Randy Casstevens discovered when media reports zeroed in on the chain's use of a "synthetic lease" to finance a factory--an accounting practice favored by Enron's off-balancesheet partnerships. Although Krispy Kreme had disclosed the arrangement in its SEC filings, news headlines trumpeted the suspicion of accounting problems at the company. To forestall a public relations firestorm, Casstevens unwound the transaction and moved the factory hack onto the balance sheet.

"How strong is our cash position?"

When Jay Marshall was in business school, his finance professor used to say that only three things mattered in finance: cash flow, cash flow and cash flow. "At the time, that was so basic it didn't make much sense," recalls Marshall, principal of turnaround firm Alix-Partners. "But since then, I've seen so many companies find themselves in trouble [due to a cash shortage], I now see the wisdom of his teaching."

When Marshall evaluates a troubled company, his team routinely examines receipts and disbursements, how the cash is generated and how it is spent. To his surprise, many healthy companies don't follow these fundamentals.

But more may have to. During the '90s boom, financial institutions happily extended credit based on skyrocketing earnings. Those earnings have since fallen to earth--and the debt has come due in a tight lending environment, in which burned banks and other providers are far less willing to extend credit, limiting liquidity, the oxygen of corporate survival.

Enron was only one example of an earnings-rich, cash-poor company that couldn't--and whose lenders wouldn't--cover its debt covenants. Many '90s startups financed their growth with convertible debt, explains Sayther. But if the stock drops below a certain amount, the debt is triggered and the stock price is too low to leverage further loans. That's why CEOs should investigate the company's debt covenants. Have any of them been waived? Is there any risk that they will be missed, triggering payment sooner than anticipated?