Understanding the CFO

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Understanding the CFO

• Philip Livingston
• Vice Chairman, Approva Corporation
• Audit Committee Chairman Cott Corp and
  Insurance Auto Auction

2
My Experience

• CFO
• World Wrestling Entertainment
• Catalina Marketing
• Celestial Seasonings
• Director and Audit Committee Chairman
• Cott Corporation - 2B soft drink company
• Insurance Auto Auction auto salvage
• Former CEO Financial Executives International
  heavy involvement in SOX passage
• CPA, MBA, member IIA
• Ultimate financial training Raiders 1980/81!

3
Agenda

• Major priorities and issues facing CFOs today
• General expectations of Internal Audit from the
  CFO viewpoint
• How can Internal Audit assist in addressing the
  major issues
• What can Internal Audit do better to address
  these issues and/or expectations
• Specific training for IAS

4
CFO Key PrioritiesManaging Relationships

• Board members
• Operating management team
• Investors
• Analysts
• Customers
• Vendors

5
CFO Key PrioritiesDeveloping People

• Building a great team is usually the hallmark of
  a successful CFO
• Finance staffing market very difficult
• Technical accounting and reporting skills scarce
  and expensive
• Bench strength a major issue for the finance team

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PrioritiesManaging Capital Allocation

• Capital expenditures
• Acquisitions
• Stock buybacks
• Dividend Policy impact of tax changes
• A KEY CHALLENGE IAS CAN HELP HERE
• CAPEX BUDGET COMPLIANCE
• IRR FROM MAJOR CAPEX PROJECTS
• POST ACQUISITION PERFORMANCE

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PrioritiesPlanning for the Future

• Good CEOs and CFOs live in the future
• Good forecasting always important, but becoming
  even more so
• Implication for IAS
• Forecasting oriented projects
• Projects to review the quality of past forecasts
  and consistent forecasting failures

8
PrioritiesCost Control - Productivity

• Scary commodity pricing environment
• After big run up in commodity prices, they are
  DOWN 12 in the last two months
• Cost of oil flowing through to many products and
  raw materials
• Companies can get major advantages or be dealt
  huge blows by raw material volatility

9
PrioritiesBusiness Reviews and Evaluations

• Most companies have a quarterly business review
  process
• Usually very structured and VERY INFORMATIVE
• ASK TO ATTEND OCCASSIONALLY

10
PrioritiesBusiness Intelligence

• Understanding whats happening in the business
• Real time
• Summary information with drill down ability
• Understanding whats happening in the market and
  with my competitors
• IAS SHOULD BEGIN TO REVIEW BI SYSTEMS AND DATA
  WAREHOUSES

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PrioritiesDriving Process Improvements

• Cost cutting and productivity still critical
• CFO looked to for leadership in this area
• Those that stand still get crushed
• IAS should be a major source of process
  improvement initiatives. Meld IT, finance and
  operations knowledge.
• Centralization and web services still big
  opportunities MANY NEED A PUSH!!
• Connect ERP systems along the supply chain and
  into customer ERP systems we are still
  scratching the surface here.

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Current Issues for the CFO

• Financial reporting integrity and complexity
• 404 compliance and overall cost of being public
• Commodity / raw material prices
• Globalization competition and labor markets
• Private equity reshaping industries
• Best example is the retail industry
• Audit committee effectiveness
• Activist shareholders changing role of hedge
  funds

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General Expectations of IAS from CFOs Viewpoint

• Be proactive but not alarmist
• Good review of key business and control processes
• Practical recommendations for improvements
• Assurance that the company is in compliance with
  its stated business and accounting policies
• Understand the business help operators deliver
  better performance
• Be focused on key risks and continuous
  improvement
• Solid technical skills dont punt on
  complicated accounting issues
• Dont create endless checklists or to dos

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Other Thoughts for IAS Value-Adding Projects

• Compliance and assurance more important than ever
• Unusual quarter-end adjustments
• 100 review of transactions with top executives
  including
• Focus on key accruals
• Bad debt, legal, inventory, incentive comp
• Capitalization policies

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Other Thoughts for IAS Value-Adding Services

• Whistleblower mechanisms
• Historically important at large sophisticated
  companies
• Companies like GE and UTC rely on them to have
  confidence that bad stuff is flushed out
• However, these mechanisms are underutilized
  because they are under-marketed.
• IAS can provide important leadership here

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Operational Audits to Consider

• Product quality
• Customer feedback
• Sales incentive programs
• Vendor rebates side deals?
• Customer incentives accounting
• Audit top vendor terms and acquisitions
• Independently confirm large transactions with
  customers ALL the terms documented?

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IT Systems and Risks

• Trends
• Widespread adoption of ERP systems pre Y2K
• Browser-based systems finally enabling user
  friendly access to key business information
• SAP and ORACLE web services and analytics
• Security a major enterprise threat
• Data integrity and protection troubling
• Web services enabling major cross- app
  integration
• Trouble
• User access rights access explosion creates
  challenges
• Interfaces between systems

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Risk Assessment

• Very important tool for insuring that IAS work is
  relevant and valuable
• Interviews and questionnaires broad group
• Always interesting results
• Consistent answers
• Sources of risk identification outside of the
  organization
• Analysts
• Competitors
• Industry conferences

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Risk Assessment Red Flags

• Changing business models tumultuous market
• Culture
• Gunslingers?
• Open disdain for controls or transparency
• Troubled competitors
• New business initiatives products or start ups
• High profile new management sales and marketing
  
• Cars in the parking lot??? Care more about press
  than customers?

20
Revenue Recognition Source of Many Problems

• Study after study indicates its the largest
  source of restatements and reporting fraud
• Side deals return or redistribution
• Future obligations related to the product
• Aggressive recognition usually timing shifts that
  are totally unnecessary

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A FEW Thoughts on 404

• Needs to get focused fast or it will go into the
  history books
• Companies willing to pay more for MORE ASSURANCE,
  not more documentation
• Needs to be focused on
• Controls around non-routine transactions
• Transactions with executives and related parties
  (how many times to have to be burned by this?)

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Training for IAS Professionals

• Industry specific conferences
• Leadership training
• Having impact projects that make a difference
• Communication skills
• ERP design and best practices
• Business intelligence and data warehousing
• Financial reporting

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Approva Exception Based Continuous Monitoring
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Final Thoughts

• IAS value is higher than ever
• Leadership expected
• Be balanced control AND operating initiatives
• Make reporting and follow-up efficient and
  concise