Woe Is the CFO
If you thought small-business CFOs weren't reeling from the Enron implosion like the financial chiefs of their billion-dollar brethren, you thought wrong. "I definitely feel the heat," says Arthur Tanner, CFO of Circle Group Internet Inc., a 34-employee Mundelein, Illinois, company that provides capital-raising and consulting services to emerging-growth companies.
Tanner, who recently prepared his company for listing on the OTC Bulletin Board, says the scrutiny from shareholders, regulators and auditors has been intense. Where they once gave certain numbers a cursory glance, "now they're asking more and more questions," says Tanner. "Everybody was a little bit more apprehensive than in the past, double-checking, triple-checking the numbers." As auditors scramble to rebuild their reputations, they're putting more pressure on their clients. "I have to know the rules a lot better because there are going to be more rules," says Tanner.
Indeed. The post-Enron slew of proposals for regulatory reform and accounting changes was only the beginning, despite the the fact that, at press time, many of the proposed measures were not expected to pass. "I don't think we've seen the tip of the iceberg as far as changes to accounting treatments that will ripple through small companies," says Richard Brenner, CEO of The Brenner Group Inc., a Cupertino, California-based company that provides interim executive management.
That will likely heap further complexity onto the role of the CFO, which has been continuously evolving over the past three decades. Once considered to be simply bean-counters, CFOs were forced by the M&A craze of the 1980s to become deal strategists; the '90s and the dotcom boom added investor-relations savvy to the roster of required skills and thrust finance chiefs into the celebrity spotlight.
Enter the dotcom bust and the Enron fiasco, which have swung the pendulum back toward a greater emphasis on traditional control and planning. CFOs still have to wear many hats and demonstrate superior financial acumen, but in an increasingly hostile, zero-tolerance environment, they also must convince shareholders and boards that they're pure as snow.
"There's a lot of caution in the hiring process [for CFOs]," notes Michael Flannery, co-chief executive of Redwood Partners, an integrated advisory firm in New York City that provides executive search and venture capital services to growing companies. "We are getting requests to do many more background checks, criminal checks, all sorts of different things to make sure no one has to look over their shoulder down the line."
The caution is understandable. While smaller companies don't have the same opportunity to do the extensive kind of off-balance-sheet activity that led to Enron's demise, they can still get into big trouble when the CFO operates below-board. "If the CEO does not have a strong advocate and advisor to be his conscience, he can run amok in a small company," says Brenner. One or two wrong turns can erase shareholder value quickly. "And my shareholders care just as much about their investment as Enron's shareholders do," says Tanner.
Which is why many entrepreneurs are taking fewer chances on CFOs who lack a full range of expert skills. Philip Livingston, president and CEO of Financial Executives International in Morristown, New Jersey, points out that Enron CFO Andy Fastow's narrow specialty in finance was a weakness. "When a person [has advanced to the level of] CFO, they should have experience in multiple areas of finance-that's accounting, budgeting, planning, tax, treasury and investor relations," says Livingston.
That's a tall order, particularly for small-business CFOs. "The CFOs of small companies today are really super-comptrollers," says Brenner. Most of them, he adds, rose through the accounting ranks to their current position. Brenner contends a true CFO is a genuine business partner, not a historical reporter or accountant. "The CFO should be intimately involved with and understand all the business decisions a company [will] make to grow," says Brenner. "His job is not just to talk about the financial implications, but to participate in what the impact of those strategic decisions will be."
How can you tell whether your CFO measures up? Larry Downes, consultant and author of The Strategy Machine: Building Your Business One Idea At a Time (HarperBusiness), advises giving a quick quiz. "Ask your CFO to tell you the last five legal or regulatory changes they looked at to see if they had an impact on how the company was doing its books," says Downes. "If they can't name five in the last two years, that's a problem." To test the CFO's knowledge of the company's strategic mission-which he or she will need to use finance as a competitive weapon-ask him or her to name the company's five most valuable intellectual or information assets. "If they say 'What's an information asset?' you know you have a problem," says Downes. "That's not the CFO you want."
C.J. Prince is a New York City writer specializing in business topics and executive editor of Chief Executive Magazine.
- The Brenner Group Inc.
(408) 873-3400, firstname.lastname@example.org
- Circle Group Internet Inc.
(847) 549-6002, www.crgq.com
- Larry Downes
- Financial Executives International
(973) 898-4600, www.fei.org
- Redwood Partners International
(212) 843-8585, www.redwoodpartners.com