RESEARCH TRIANGLE PARK — Let’s be honest, here. How many of you want to really read — or care about — chief financial officers?

The answer should be: You’d better want to read about them — and take care of a good one (or financial advisor firm) if you’ve got one.

Three separate items that crossed the desktop on Monday should concern entrepreneurs from small to the largest firms.

You should want to read and care about the CFO plight, because these men and women are becoming increasingly important and also a bit of an endangered species in these days of growing financial regulation and oversight. The Wall Street scandal fallout and the fraud and malfeasance of the dot com and telecom busts will be with us for years to come as lawyers and auditors armed with Sarbox and other regulatory powers seek to clean up the messes. As if businesses did not have enough to worry about finding competent chief executive officers and surviving a the tougher competitive global marketplace, now they need CFOs more than ever.

Item One: A KPMG survey out of Atlanta showed that 11 percent of executives were focused most of all on Sarbanes-Oxley legislation and regulatory requirements rather than growing their businesses.

Item Two: The New York Times, under the headline “Where Have All the Chief Financial Officers Gone?” points out that since 2001 “more than 225 CFOs of the Fortune 500 companies have left”. Isn’t that a staggering total?

Item Three: CFO magazine reports that a survey of 270 company boards found firms spent “an average of $16 million on Sarbox compliance, up 77 percent from last year.” Further, Sarbox costs are expected to increase by 9.9 percent over the next 12 to 24 months, the magazine said, citing PricewaterhouseCoopers data.

How many jobs are being sacrificed to achieve — or maintain — compliance?

How much funding for R&D is being sliced at the altar of Sarbox?

Three regional examples serve as reminders again that to ignore or underestimate the impact of CFOs and financial management carries great risks. Look at the turmoil that has threaten to overwhelm Nortel and aaiPharma this year — and the stock price hit Red Hat took when its CFO stepped down. How many companies have reverted to private control rather than pay the onerous cost of Sarbox? How many more will?

And the Sarbox story is far from over.

The worst is still ahead

Bob Broda of Visage Solutions, which helps companies comply with Sarbox and other financial regulatory requirements, tells Local Tech Wire that the worst is yet to come.

“Most companies have taken the stance to do the minimum needed to comply. Unfortunately for the companies that took that stance, all they are getting is the realization is that this is a lot more effort than they ever realized and that it is not going away,” he said. “For the companies that took a more pragmatic approach, they are now getting a better understanding on their processes and now have the budget to close potential problem areas that they may or may not have realized previously.

“Also, since this is the first time companies had to comply and the first time the external auditors have to judge the effectiveness of the controls, there has been a significant amount of rework that companies will (hopefully) not have to deal with in future years.”
I asked Broda why compliance spending was going to increase so much. After all, what department gets 10 percent more money on an annual basis these days?

“Compliance spending is going to increase because companies now have to fix the problems that have now been identified,” he said. “They also will have to spend money in building a sustainable infrastructure that they previously did not consider. They will be replacing systems and implementing business process improvements, which long term, will help them run their businesses better. Yes, this will cost money and in the short term companies may limit investing significantly in high growth opportunities. That may not necessarily be a bad thing, unless a company has bad fundamentals in which they will either go private, go out of business, or take the risk in the growth opportunities anyway.”

More attention to the numbers

Broda found a bit discouraging the Atlanta survey and the fact so many executives are focused primarily on Sarbox. Actually, he said the percentage should be higher.

“If only 11 percent of executives are focused on Sarbanes, then those companies are either in trouble or they don’t realize what Sarbanes (and subsequent rulings) are really about,” he explained. “The auditors will be trying to determine if there are any material weaknesses in the controls of the company. They will be trying to determine if there is more than a remote likelihood that a material misstatement may occur. This takes in more than just financial reporting.

“I believe that all executives need to make sure they have good control over their operations and reporting! If there are any portions of the company that does not affect the financial statements, companies need to refocus their energies into something that does. This is good for investors, employees and customers!”

Broda also said he expects more CFOs to jump ship.

“Every CFO that left probably have their own reasons for leaving. If I were a CFO, I’d be worried,” he stressed. “They now are legally responsible for something they may have little or nor control over, this with minimal or no pay increase. They now have to have more knowledge of the operations of the business along with relying heavily on the CIO who may or may not work for them.

“So we may experience a shortage of qualified CFO’s for a short time, but that is because their job function has fundamentally changed.”

Changing roles for CFOs

It’s Broda’s view that the days of bean-counting CFOs are over and the era as CFOs as key management players has begun.

“I believe CFO’s may be more strategic people with solid operational backgrounds instead of the traditional bean counter. This shift has been happening in the last decade or so, but Sarbanes is really pushing it,” he said. “The traditional CFO’s responsibilities may fall on treasurers and controllers, with the CFO’s will become more strategic than tactical. They will have to have a better understanding of the operations of the business than they may have needed in the past. They may be leaving because of the weaknesses they have discovered over the past year, but the devil you know may be easier to deal with than the devil you don’t!”

Broda also pointed out that pressure is increasing on boards of directors and others as well.

“And if you think the CFO change is significant, the changes may be even more dramatic for Internal Audit and the Audit committees.”

If your firm has a good CFO or someone operating as an outsider as consultant and advisor who is up to speed on Sarbox and can allow your firm to research, design, development, marketing and sales — take him or her out to dinner and a show.

They deserve it.