The role of the CFO is no longer confined to the backroom

Enron. WorldCom. Parmalat. Three words irretrievably linked with accounting scandals, thousands of job losses, billions in shareholder losses, and a massive reaction from regulators.

In the wake of Enron’s collapse in December 2001, a wave of corporate governance and accounting reforms were put in place in the US.  Chief among these was the Sarbanes-Oxley act, compelling chief executives to pledge that they fully understand and take responsibility for their firm’s accounts.

The ripples of Enron have spread well beyond US borders, however.  Corporate governance is now a hot topic for governments, companies, accountants and regulators across Europe and around the world.  Sarbanes-Oxley, for example, covers any foreign company whose shares are traded on US stock markets or whose securities are registered there.

One of the key elements of Sarbanes-Oxley is that companies cannot make any statement of change without going to the markets first.  This is having a significant effect on corporate communications.  As the Act takes effect, companies are seeking advice on what they can and can’t say, and in some cases have simply stopped saying anything at all, beyond what is required by law, to avoid any potential problems.

Corporate governance, then, is not merely the latest management jargon.  It’s a new approach to running companies and a key driver of business, and it’s presenting companies with huge communications challenges.

The communications challenges

In the US, Micho Spring, chairperson of Weber Shandwick’s corporate practice, confirms that increased regulation has significantly changed the way companies communicate.

“There are a lot more procedures to follow now,” she says.  “Information must be equally accessible to various stakeholders and media, and operations must be as transparent as possible.  Communications logistics are under increasing scrutiny and this has altered the way companies deal with the media.”

The impact is also being felt in Europe.  Furio Garbagnati, CEO of Weber Shandwick in Italy, says there’s no doubt that financial ethics, and sensitivity towards financial behaviour and communications, have dramatically increased in the wake of financial scandals in the US and Parmalat’s collapse in Italy.

“Credibility within the governance system of the corporation must be the goal and focus of communications.  Corporate governance is not only about transparency but about managing relationships between the different players: between the company’s owners and its management; between the management and employees; and between companies and the community, suppliers and political environment in which they operate.”

Klaus Weise, managing director of Weber Shandwick’s Munich office, feels that the main communications challenge in Germany is sheer insecurity in the market because the rules are changing so quickly on a global, European and national level.  Communications teams, he believes, are afraid of making mistakes.

“Companies need a lot of guidance.  They are demanding information and advice, but are also worried about the cost of implementing all the new requirements.  One of our clients estimated that Sarbanes-Oxley has so far cost them 20 to 30 million euro.”

Weber Shandwick CEO for Belgium John Russell says that while Enron, Worldcom and Parmalat have placed new demands on corporate communications with traditional groups such as analysts and investors, other developments in the area of corporate social responsibility (CSR) have led to a “quantum leap over the past five years in companies’ communications requirements.”

Mike Kirk, who heads up the London financial communications practice Weber Shandwick | Square Mile, agrees.  “Corporate governance and CSR,” he says, “are both about internal processes more than going through the motions and ticking the boxes, and are indicative of companies running themselves properly and, therefore, in the long run, profitably.  The debate is how we persuade people that this is not just a communications issue, but a business issue that requires communications.”

Kirk adds: “It’s a real challenge to convince companies in the UK that there is something substantial to do rather than window dressing.  In the wake of Enron and Parmalat, people are getting a bit fed up and see corporate governance as something that is interfering with running the business, not as a framework for ensuring that the business is run properly and that there is open communication with government, consumers, stakeholders and employees so that everyone can see that this is the case.”

Skills in demand

This new environment is bringing various communications skills to the fore.  Corporate communications is more closely allied with investor relations than ever before, and the requirements of new legislation mean that internal communications is now much more than an optional extra.

It’s critical that employees do not feel disenfranchised, particularly in geographically diverse businesses. In the US, it’s one of the requirements of a listed business that information is not divulged to the public before it’s known in the workplace, so companies are learning to juggle these commitments by innovative use of video conferencing and Web sites to address these different audiences simultaneously.

“Credibility is key in this new environment, and you can’t credibly communicate any message if it doesn’t resonate with employees first,” says Spring.  “There has been an increased focus on internal branding, as well as social branding: making sure the values of the company are communicated to employees.”

Another growth area is in crisis preparedness, not just crisis management.  “Executives want to be well prepared for adverse events so that they can minimise damage to corporate reputation,” says Spring.

US vs. Europe

The US has adopted more corporate governance legislation, but Europe is not far behind.  Tighter accounting rules and new laws on financial reporting, non-executive directors, companies operating across borders, the movement of capital and the responsibility of boards and directors are being drawn up for the EU and at the individual country level.

This is leading to a certain amount of confusion as US, EU and national rules are not absolutely consistent, and national attitudes to corporate governance in Europe are not yet as rigorous as they are in the US.

Hugues Andrade, CEO of Weber Shandwick in France, says that top corporations in France “are starting to protect themselves, and we are just begining to understand that it is a new attitude and no one will escape it.”

Andrade adds: “The different attitudes will change radically, and French directors are definitely aware of the fact that they can’t hold the position that France is somehow different.”

While the emphasis on corporate communications may be lagging in Europe, in the US the relationship between a corporate board and the company itself has changed so dramatically that boards are beginning to bring in their own communications consultants.

The role of the communications team

As the manner and the messages of corporate communications are changing, so is the role of in-house and consultancy communications teams as they guide companies towards becoming more accountable and transparent.

In many ways, Sarbanes-Oxley was the tipping point in an ongoing evolution of the job of the senior communications executive.  In the US, one Weber Shandwick survey of 104 senior communications executives found that their jobs were much more diverse and visible; they were reporting more directly to the CEO; and they were also at the centre of investor, employee and crisis communications.

Andrade agrees that as there is now so much focus on responsible communications, “CEOs now have to work a lot more closely with three key people: their heads of finance, HR, and communications.”

As a result, some communications functions are being brought in-house so companies have more control over what is being said on their behalf, although as Russell points out, “It’s tough to get the scope and breadth within an in-house team to cover all these issues.  You need a multi-disciplinary team, so there is a role for agencies.”

The role of the communications team also depends on how seriously companies are taking corporate governance.  As Kirk says, “At the heart of it is whether companies regard communications as the conduit through which they disseminate information in and out of the business, and therefore an integral part of the business.  One of the challenges is that many businesses still regard communications skills as a ‘nice-to-have’ rather than a real necessity.”

Changing leadership roles

It’s not just the roles of public relations professionals that are shifting.  Right at the top of an organisation, corporate governance is having a direct effect on the role of and communications from the CEO and CFO.

As Andrade says,“On financial issues, CEOs and CFOs know they have to talk and give clear and understandable messages, and that’s a definite difference from the past.  CFOs didn’t know anything about communications, so we are giving them media training and crisis preparation.  CEOs also know that they need to be much more aware of everything related to finance.”

Russell adds: “CFOs used to be backroom people and now they are very much in front and expected to communicate well and articulate issues that are more complex than just the numbers.”  Media training is becoming an ongoing need for CFOs.

Relationships with the media

Corporate governance is also having a real impact on the core media relations aspect of public relations, as there are now so many rules about what can and cannot be said.  This is an ironic result of legislation intended to increase clarity – and frustrating for journalists who now cannot always get the kind of information they used to expect.

“We’re not allowed to talk about figures, how things are going, or even how many employees a company has,” Weiss says.  “It’s difficult to be able to tell journalists anything.  We can talk about general trends and products and the competition, but there is a lack of hard facts.”

Russell says part of the problem is the lack of understanding of what can be communicated in a rapidly-evolving environment.  “There is inconsistency among different countries as to what can and can’t be said,” he explains, “and journalists are becoming more cynical.” 

The future

So what does the future hold for communications as corporate governance becomes further ingrained?  One view is that companies will need to work with international rather than local public relations consultancies, because CEOs will be dealing with international laws, rules and expectations.

Russell is concerned about the possibility of negative fallout from a movement that is in essence positive.  “In the future,” he says, “I fear we will get regional solutions to governance which are not incompatible but provide additional burdens, with multiple stakeholders to work for, and multiple costs of compliance.

“I also think we will get a pendulum effect. In the US, Sarbanes-Oxley has become a sacred cow and there is now a tendency to overreact. It’s up to businesses to be forthright about what is required of them - there’s no going back to systems that allow another Enron - but they have to find a balance.”

Spring feels that the job of the senior communicator has broadened and changed permanently, and that the silo approach to communications is being broken down.  “We’re seeing the blurring of all the lines that have existed in business between internal and external communications; between corporate image and the brand; between investor relations and employee communications.  We can help our clients leverage their messages in a unified way.”

Some companies are welcoming the new way of running business, and others will no doubt do the bare minimum to comply with the law.  But before long, managers in every public company will have a new understanding of corporate governance.

And thanks in part to the challenges of the new regulatory environment, corporate communications professionals will continue moving from the periphery to play more central roles in their organisations.

By business journalist Maja Pawinska

Bid adieu to the Great Audit War

JACQUIE MCNISH

From Wednesday's Globe and Mail

May 29, 2007 at 8:11 PM EDT

When the U.S. Securities and Exchange Commission moved last week to relax a provision of the Sarbanes-Oxley Act, it signalled the end to what could be called the Great Audit War.

Ever since U.S. lawmakers passed the corporate reforms in 2002, legal and financial executives have been waging a behind-the-scenes war with external auditors over the staggering costs and management burden stemming from what surely has been the largest corporate list-making exercise in history.

The culprit is a four paragraph passage in the now infamous Section 404 of Sarbanes-Oxley which requires thousands of U.S. and about 200 Canadian companies listed on American stock exchanges to "review and assess" the controls they have in place to detect financial reporting errors or fraud. The kicker is a requirement that outside auditors test and deliver an annual opinion about the effectiveness of the corporate safeguards.

With no guidance from the SEC about how to arrive at the annual opinion, the accounting police went, well, berserk demanding exhaustive tests and reports so auditors wouldn't be liable if financial shenanigans were exposed.



Massimo Marinelli, a partner with Ernst & Young LLP Chartered Accountants in Calgary (Chris Bolin/The Globe and Mail)

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The idea behind Section 404 was to build better warning systems to prevent an Enron-style accounting fraud meltdown. The result, however, is a classic tale of how well-intentioned lawmakers can gum up the business machinery by failing to properly draft the language or assess the economic impact of new rules.

"Section 404 was an overreaction to the failures of Enron, WorldCom and other corporate frauds," said Kevin Cramer, a New York-based securities lawyer with Osler Hoskin & Harcourt LLP.

Initially the SEC estimated public companies would only spend an average of $90,000 annually to comply with Section 404 every year. In reality, however, business experts say it has cost companies an average of $1-million in additional annual auditing fees.

Money isn't the only cost. According to a recent Ernst & Young survey, the majority of companies with revenues between $5-billion and $20-billion invested more than 25,000 employee hours to meet the internal control and testing requirements. A majority of companies with more than $20-billion of revenue, devoted more than 100,000 hours.

What were they all doing? Making lists and flow charts. A lot of lists and flow charts. If a new employee was hired, for example, companies had to document that it checked the employee's signature; had a designated supervisor to oversee the person who made the hire; outline how it traced and supervised the entry onto the payroll; and reconcile salary payments with bank transactions, and so on and so on. When that was done, the auditors moved in to conduct spot tests on the accuracy of these and thousands of other safeguards at each corporate division.

Not surprisingly, the result has been a tense standoff between auditors and corporate lawyers and financial executives. The strain is so bad that now even the accounting firms who saw their practices and revenues explode in recent years are happy to wave goodbye to the auditing motherlode.

"It is time," said Massimo Marinelli, a Section 404 specialist and accounting partner in Toronto with Ernst & Young, which credits the rule as a key factor behind the 70-per-cent growth in its Canadian practice since 2003.

"There has been a lot of friction … Clients thought we were being too inflexible and too strict. Their people were worn out and we were telling them they had to do more to comply with the rules," Mr. Marinelli said.

Responding to the audit battles, Canadian securities regulators have backed away from a proposal requiring auditors to attest to the effectiveness of internal financial controls. Instead the provinces' new so-called 52-109 rule, which takes effect next year, leaves it up to chief executives and financial officers to evaluate and describe their internal safeguards.

Some critics argue the U.S. requirement for broad audit tests of financial controls has damaged financial accountability because corporate executives fear the consequences of communicating with auditors.

"Many company officials are reluctant to seek guidance from their auditors lest their internal controls be found deficient," said Osler's Mr. Cramer.

Better times are around the corner. Last week the SEC issued for the first time guidance as to how companies should monitor the adequacy of their financial controls. The new language, which will take effect shortly, requires public companies to only identify and test the biggest potential risks to their companies' books. The approach gives managers more discretion to decide for themselves what the financial reporting hot spots are and eliminates the need for extensive checks.

Falling in step with the SEC, a U.S. accounting regulator last week voted to pare back the number of tests it requires auditors to conduct to check the effectiveness of corporate controls. The new auditing standard by the Public Company Accounting Oversight Board is expected to be approved by the SEC later this year.

Ernst & Young's Mr. Marinelli estimates the easier regime will eliminate 20 to 30 per cent of the work involved in annual audit inspections of financial reporting controls. It should also thaw the chilly state of management and auditing relations.

"Companies can now focus more of their energies on major financial risks," he said.