The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) recently featured two key international accounting personalities, Fayez Choudhury, the Chief Executive Officer of the International Federation of Accountants (IFAC), and Rob Ward, Head of Leadership & Advocacy of the Institute of Chartered Accountants of Australia, at a CFO Forum held recently in Colombo, which focused on the complex and constantly demanding role of today’s Chief Financial Officer. 

Following are excerpts of the speeches: 

International Federation of Accountants^® (IFAC^®) CEO Fayez Choudhury

Thank you very much. Although I’m from Bangladesh, it’s the first time I’ve been in Colombo. It’s a great pleasure to be here. I’m particularly interested in talking about this topic to you today because I’m completely ‘knocked out’, as they say in America, at the buzz that seems to be going on in Colombo.

There seems to be so much development, there seems to be so much progress, so much vibrancy… so I think if you believe, as I do, that the private sector is really the engine of economic growth, then certainly, there’s a lot going on in Sri Lanka at the moment and people like yourselves are extremely important to make sure that development takes place in a very controlled, strategic and managed way.

The big picture

Let’s put the role of the CFO in the context of what’s been going on globally, because there’s no avoiding globalisation. Everyone is global now. You either operate globally, or you supply globally… you compete with people in the same industry around the world… and you look for comparative advantage, whether it’s wage arbitrage, government incentives, or whatever. We are all global citizens now. There’s no such thing as a local market.

We still have corporate failures going on, unfortunately all over the world. It’s the bigger ones in America and Europe that get the attention, but increasingly we are seeing global failures going on in very unexpected places—like the Bitcoin disaster. But the corporate failures remain a norm and that will happen continuously—and when they happen, depending on the market, they can threaten global stability.

We have also obviously come out of the period of the financial crisis, and I think fortunately, that seems to be behind us, but other global economic threats remain. I think if you look at the recent reports from the IMF, World Bank, etc., they point to a macro level relatively healthy picture. And there’s economic growth that’s going to occur in most parts of the world—in some regions higher than others—Asia obviously continues to grow; Africa continues to grow from a fairly low base; Europe is relatively stagnant; and the US is showing some signs of economic recovery.

I think one trend is increasing economic disparity. And that’s potentially dangerous going forward because it threatens social stability. I don’t know how many of you have heard of the French writer Thomas Picketty. He has written a book which is, I’m told, 543 pages, I wouldn’t recommend that you take it and try reading it in a short flight, but I think it’s the best seller now in Europe and in America. But it’s really challenging whether society can survive with this kind of global economic disparity, with the “haves” getting more and the “have knots” getting less, and the aging populations, demographics changing, increased urbanisation, more and more people going to cities, the prospect of mega cities, imposing different demands on infrastructure, on the distribution of societal support systems like education, healthcare, etc.

Although we are out of the economic crisis, arguably threats always remain. Where there are governments that are responsive to those threats, unfortunately the responses are often regulation. And where they are not responsive to those threats, there is usually inaction. So I think the global CFOs of today—and as I say we are all global citizens now—have to be cognisant of some of these trends, and as they plan and help steer their organisations into the future, they should understand that it’s not necessarily a stable and perfect world. 

But having said all that, corporations have to respond to that external environment. But at the same time there’s no getting around the fact that you also have to improve internal organisational performance, because that’s what defines one important element of your comparative advantage. You can try and read the tea leaves of what’s happening in the global markets and position your organisation accordingly. But unless you are geared to having your internal organisational performance live up to those expectations, to that demand, you won’t really be able to avail your full potential.

So one key requirement of an organisation is transparent, relevant reporting, both internally to be able to manage and assess your performance, but also externally to create the transparency and the trust in the reliability and integrity of your numbers so that your investors trust you, the capital markets trust you, your suppliers trust you.

That’s really key for the sustainable generation of wealth within the business world. But what’s often ignored is the public sector, because the private sector can operate within a dysfunctional public sector for only so long. There’s a limit to growth that’s imposed by a dysfunctional public sector. So increasingly the public sector also has to create an environment where they are transparent, where they manage citizens’ finances transparently, reliably and with accountability and create a stable macro-economic environment where corporations can flourish.

And of course responsible entrepreneurial business behaviour has to predominate, whether you are a public or a private sector organisation, because without those ethical principals you will eventually fail.

So how do we improve organisational performance within a company? I think increasingly good governance is being seen as key. You can have the right product, you can have great distribution, you can have great manufacturing, but if you don’t have the right governance structures that make sure that everything works in the right context, you will be at risk. You also need better and more integrated management.

Companies of today, as you well know, are complex. And unless you get that integration where you have cross-cutting themes and risk management and effective control procedures and systematic and consistent reporting practices, and an eye on sustainability, you are not going to get the operational performance management that is a pre-condition of your competitive success.

The changing CFO role

Within that context, the CFO role is stretched and scrutinised. Rarely do you hear about the Chief Marketing Officer or the Chief Human Resources Officer or the Chief Engineering Officer—you don’t read much about them in the press. You do read a lot about the CFOs. Arguably sometimes you read more about the CFOs than the CEOs. Certainly as you all know, your performance and your work is very carefully scrutinised.

You are really stretched because there are two competing demands. One as stewards and one as business partners and I’ll come back to this at the end and pose a provocative question to you. But for the purpose of this slide you are stewards because you support effective governance and compliance and control and business ethics. You are custodians of the reputation of the financial integrity of an organisation.

But at the same time, you are also a business partner. You have to provide the CEO and the Board with proactive leadership, direction, decision making, contribution to strategic directions—you have to finance growth, diversification, acquisitions, stability. You are a key person in the organisation. But at the same time, you have to make sure that you are a steward of the corporation’s resources.

CFOs have to manage the collaborative relationships and potential conflicts as trusted proactive partners, but they also need to own and manage the safeguards that are built into the organisation design, reporting structures, and required professional development.

So the old role of the CFO was as the number cruncher. Keep the books, make sure that the financial transactions are properly processed, do the right projections, and we are happy. But the new role puts the premium on issues such as ethical leadership and business integrity. Many people say that the breakdown in trust is probably the single most damaging thing for a company’s long term success.

I don’t know how things are for listed companies in the Sri Lankan context, but we all know in the major capital markets, it’s a major issue when there’s such a focus on quarterly earnings, the bottom line, bonus pay and incentives for the staff… How do you balance short-term concerns and pressures with the long-term vision, success, and managed, sustainable growth? How do you balance fulfilling the stewardship responsibilities and sharing the strategic leadership with CEO and senior management? There is a balancing act there.

If you are trying to make sure that you have the right risk management tools and techniques, the right controls—and at the same time you are trying to drive growth and entrepreneurship. There’s a tension there that has to be balanced. That can be very difficult sometimes. You have to ensure that the finance accounting function supports the business… accounting is based on certain principles, and the accountants in the room will know you can’t deviate from those. At the same time you have to provide the business with the right sort of numbers to enable their decision making.

Non-accountants will sometimes make suggestions… ‘I don’t like the way you are valuing this,’ ‘I don’t like the accounting treatment of these project expenses.’ So you have to make sure you are fulfilling your statutory requirements in accordance with sound accounting principles, and at the same time meeting the principles of business in providing reliable management information.

You have to drive and manage innovation. Again, critical for success, and not only for success, but critical for survival. But sometimes in conflict with stability, risk management and effective controls. Again a balance to be maintained that is sometimes difficult. And you have to engage and communicate effectively, internally and externally. Very often, in my experience, the CFO is actually looked at as a more reliable source than a CEO. People look to them as the stewards of the organisation. People look to them for what they are projecting in terms of the financial situation of an organisation. And once the CFO loses that trust with the stakeholders, that CFO becomes far less effective.

IFAC discussion paper

So just a little plug for a publication that IFAC has recently issued. It’s a discussion paper on the role of the CFO and its being prepared by our professional accountants in the Business Committee which comprises 18 senior experts from around the world. It has had inputs from accounting bodies and CFOs and it’s had direct endorsement by many CFOs and it’s currently open for public comment. So I would urge you to go on the IFAC website, have a look at it and I think you’ll find it interesting, but we would also welcome your comments because I think it would be enriched by the more perspectives that we can get. 

Some of the things that are brought out in that report are that the CFO needs to be an effective organisation leader and a key member of the senior management. They need to balance the responsibilities of stewardship with business partnership. They need to act as the integrator and navigator for the organisation. It all comes together in the CFO’s office. There needs to be an effective leader of the finance and accounting function. And they need to bring professional qualities to the role and the organisation.

Accountants are trained with a certain code of conduct with certain ethical requirements, with a very rigorous approach to what they can and cannot do and subject to investigation and disciplinary requirements. That’s the discipline that doesn’t exist in any other functional area in any organisation. So a CFO really has to bring that mindset and bring that leadership to an organisation of what constitutes ethical behaviour, what constitutes discipline and principled behaviour.

Professional accountants bring some very valuable talents to the CFO role. They are trained to exercise professional judgment as an auditor, strong ethical leadership. If you want to call yourselves a CPA or whatever the designation is, you are required to comply with ethical requirements of your institute. And you obviously have deep financial acumen and a distinctive way of thinking, which again is drummed into you and which is very, very relevant and useful to the CFO.

And a little plug for IFAC. We have recently started something called the Global Knowledge Gateway, where we provide a global platform for topics of interest, not just to accountants but more broadly to finance professionals. We organise it under a number of topical areas and we provide links under each topical area to the worldwide set of resources that are available from accounting bodies and other authoritative sources. We also have viewpoints where leading figures in finance, regulation of accounting, etc., provide insights on certain topics and we invite discussion and dialogue around those issues.

I would strongly urge you to visit the Gateway, and I think you will find it interesting and a good resource, not just for yourselves but also for the finance staff within your own organisations to use. It is a free resource, you don’t have to be a member of an accounting body to access it and I think you will find it very helpful.

And let me just conclude, if I may, by being provocative because I think it’s so interesting to do that. Let me give a scenario, which a former boss of mine painted quite vividly—his words were “the currently defined role of the CFO is toxic. It is unsustainable, and it does more harm than good.” He says that trying to balance the roles of stewardship and the roles of business partner are fundamentally incompatible. That the finance function in terms of the controllership function, the integrity of financial transactions, the strategic reporting for a company should be an independent function, which has not only a direct link to the CEO but also a direct link to the audit committee.

And the finance official who guides the CEO and the board on driving the business, managing the business, growing the business should be separated from the controllership role. So in many ways that’s a reversion back to the model of 20, 30 years ago, but when you look at some of the major corporate failures that occurred and if you look at the role of this CFO in many of those cases, the judgment was bad because the tensions could not be managed.

Are we putting far too much pressure on a CFO? Because the CFO is supposed to be balancing the stewardship role and driving the business role. But he or she has got the CEO looking for a certain set of results, has the board looking for a certain set of results, has investors in the short term looking for a certain set of results and has his or her own pay check looking for a certain set of results. And when you throw in an incentive pay, which can be significant multiples of base pay and depend on the performance of the organisation, which often happens in Europe and North America, are you really making the situation much worse?

I think that’s an interesting discussion and in the course of the Q&A, maybe some of you can comment on that. It’s non-traditional thinking and it would be interesting to explore that.

Anyway, I hope you found these insights and thoughts helpful and I look forward to Rob’s comments and thereafter to a dialogue around this topic.

Thank you.

Institute of Chartered Accountants of Australia Head of Leadership & Advocacy Rob Ward

This is my first visit to Sri Lanka. The hospitality has been marvellous and the city is very impressive and it caused me to reflect on the debate in Australia at the moment which is reassessing its budget and how infrastructure is always considered a good indicator of a thriving economy. The renewal in infrastructure and the way the city presents itself it is always very encouraging.

Congratulations to all of you and thank you for the opportunity to speak today along with Fayez on this topic. Fayez and I have a long history going back. His presentation was excellent and there’s a lot of experience in there. What I’m going to do is, make you do a little bit of work privately.  I’d like you to think about what does Fayez’s presentation mean for you personally?

Some of the words Fayez used are quite overwhelming words, if you take them one by one, for example, stewardship, if you take the role seriously, you are the steward of an organisation. Transparency, meeting and competing goals, and being transparent about it is not easy. Business partner, integrated management, what do they mean?
Collaborative relationships in a competing world, building a network internally and externally, on relationships that make a difference is key. How do you do that when people are competing for their own survival? What do you do about that? And safeguards, how do you make sure you protect your organisation and how do you protect yourself?

Now he used another two words. Bean counter. So it’s quite interesting considering my background as described in the introduction. I have started many speeches with “I’m an auditor and I’m exciting.” I have also had a background, 40 years in the profession and responsible for over7,000 auditors in 148 countries, I’ve had a fantastic time. I’ve seen great growth stories such as the emergence of Asia but also stories of arrests and auditors being followed by intelligence agencies, and people call, being an auditor boring! I can assure you it’s not boring to be in a practice like that and it’s not boring being an auditor.

So I’ve had the great privilege of being a managing director, an auditor, a chief financial officer, managing partner. We all share a broad experience and I’d like to draw upon that and that to give you a secret to success. All organisations that succeed, every organisation that I see succeed, has a team of three people that run it. The Chair of the Board charged with governance. The second person in the partnership is the CEO. And person No. 3 is “Another”. The CEO needs Another, and so does the Chair.

Who is that Another in your organisation?  Just think about that for a second. That really is Fayez’s point: Are you Another? If you’re not, do you want to be? Stewardship is part of that role, because it’s part of what you do, transparency that brings to life the dreams of the organisation that the CEO is probably trying to bring to life. They can’t do it without one another.

You know the work you do as the CFO, accounting standards, auditing, taxation law, enterprise wide systems, HR staff, and marketing, all of that, if you try to think of that as just all the things you’ve got to do.

Five steps to success 

The overarching secret is the five-step process of bringing to life the governance structure that Fayez mentioned. I am going to go through the five steps, give you an example of how to bring those five steps to life, and how you can apply it in your organisation.

• Step No. 1: What are the principles that will guide our organisation forward? What are the guiding principles that will lead our organisation to success?
• Step No. 2: Having established those principles, have you communicated them to every person in the organisation? So your team knows where you are going and how to lead your organisation.
• Step No. 3: How you are going to train your people in what those principles mean? Not only how they now understand what you are doing, but also how you are going to teach them to do it. I’ll come back to that example in a second.
• Step No. 4: How you are going to provide assurance that the substance behind those principles is working?
• Step No. 5: How you are going to provide insight back to the board on how you are going against the principles. So it’s a loop. Can you see the loop? Start at 1, finish at 5 and that’s insight back to the board on those principles.

So let’s have a look at a couple of principles. A clear principle. We have a clear vision where we want to be and a plan to get there. That’s a principle. Another principle. We treat our people with respect. A third principle: We respect the laws of the land in which we operate – for example, It is ultimately up to your organisation to come up with the principles for your organisation. You’ve got to come up with the guiding principles for your organisation.

Another principle: We consider all of our stakeholders in ensuring our mutual success.

That’s another principle. So let me take any one of those. We have a clear system of financial control and stewardship of the shareholders’ funds. Let’s take that one as an example. So we have a system of control and stewardship of those funds. You do this one actually every day.

How do you communicate that principle to all the people in the organisation? How do you actually show them how that works, right through to the person at reception? How do you train them in their responsibility to do that? Are you certain that all of your appropriate people are trained properly? How do you provide assurance, not in a negative way, but in a positive way, that the funds of the company are well and truly subjected to a stewardship and control and reported correctly? And what insight you provide back to the board. Everybody in this room probably does that every month.

So let’s consider another one. We treat people with respect. It’s a bit harder. How do you communicate what your code of conduct is? How do you train people in the Code of Conduct, the way they treat each other and how they treat their customers. What assurance do you get as to how your people are treated well? And what insight from this step is brought back to the Board on a regular basis about that principle?

We have a clear, strategic direction to maximise shareholder value. And that’s another principle. How do you get that message out to everyone in your organisation? How do you train them and what it means for their daily job? Had you trained them on that? Do you have system of assurance that all the goals of the business plan are actually on track? And what insight are they giving back to the board. So I am sure you could imagine, if you shaped and adopted nine key guiding principles, you could put the organisation on a path that would bring your organisation to readiness for a bright and happy life.

And I don’t think there’s a better person in the organisation than the CFO to be ‘Another’ and lead that change.

The role of CFO at this time and in business is becoming more sophisticated, and the demand upon all of us is great. The role of the CFO is an excellent one.  All you have to do is step up to the challenge.

Thank you very much, everyone.
 

This article was reproduced with permission and first published in the Daily FT, Sri Lanka on August 1, 2014.

Former Executive Director, Professional Standards,  Jim Sylph addresses Ethics Forum participants at the Singapore Accountancy Convention 2014. He the discusses the public's expectations of the profession, recent fraud and regulatory activity, and the how the profession is responding. He also gives an update on the work of the International Ethics Standards Board for Accountants (IESBA) in developing and maintaining the Code of Ethics for Professional Accountants, designed for worldwide application.

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Public Expectations

Following a series of scandals, fundamental changes in organizational culture are being called for across sectors including media, food, retail, health, and banking. A series of inquiries into culture and ethics all point to the need to change culture in order to restore trust across the private and public sectors and new standards bodies have been set up to improve behaviors.

Boards and senior management have the prime responsibility for defining and analyzing organizational culture by promoting their ethics and values and the behaviors these require across their organizations. As organizations come under increasing pressure to demonstrate their commitment to improving standards of behavior, the accounting profession can be a key player in giving confidence to boards that measures put in place to change culture and thus behavior are actually working, and that the tone at the top is reflected at all levels.

We are dealing with human nature: greed and personal interest v. public interest. Following the financial downturn, consumers and investors have become more aware and increasingly intolerant of corporate conduct they perceive as unethical. As a result, regulators are expected to broaden their remit to enforce good corporate conduct. Businesses appear more likely now to be challenged on any activities that are considered to have been detrimental to consumers or the effective operation of the financial markets. Recent examples include the large number of mis-selling reviews in the financial services sector.

Additionally, regulators can be expected to increase their focus on financial statement fraud as the risk of such behavior is perceived to increase as businesses struggle to fulfill the resurgent growth expectations placed on them by the markets.

Governments across a wide range of markets are also introducing new tools for regulators to use such as deferred prosecution agreements, forensic data analytics tools, and aggressive investigative techniques. Wiretaps, for example, were used in the high-profile insider trading prosecutions led by the US Attorney for the Southern District of New York, and the SEC has widely publicized its new forensic data analytics capabilities.

International cooperation among regulators continues to strengthen. The multi-jurisdictional investigations of LIBOR manipulation have exemplified this.

The Ernst & Young 13^th Global Fraud Survey of 2,700 executives published earlier in 2014 makes depressing reading:

• More than 1 in 10 executives surveyed reported their company as having experienced a significant fraud in the past two years.
• Unethical behavior persists with 42% of respondents saying that their entities offer entertainment to retain/gain business; give personal gifts to retain/win business; make cash payments to win business or misstate the company’s financial performance.
• On the last point, 11% of the CEOs surveyed (out of 155) thought misstating financial results was justifiable to survive an economic downturn. And Singapore respondents (whom I would have thought had ethical standards as high as anywhere in the world) showed a 28% response rate accepting that misstating financial performance is justifiable.

In the light of results like this and the information now trickling out about the very senior level business leaders involved in some of the major financial failures and corporate malfeasance, the question this Forum must ask itself is, what must accountants do?

As IAASB^® Chair Professor Arnold Schilder was quoted in his article in the May 2014 edition of ISCA’s magazine [IS Chartered Accountant]:

The global financial crisis came as a shock and a surprise to many parties, including politicians, central banks, regulators, financial institutions and auditors. Every party has to ask itself the question: What can be done better to enhance financial stability and audit quality, and increase public confidence? It appears from various inquiries and investigations (for example, European Commission Green Paper) that there continues to be high expectations regarding the value of an audit.

After each crisis, regulators set the bar higher to prevent wrong-doing. There is much action underway. The OECD is strengthening its recommendations on corporate governance and the Financial Activities Task Force is doing the same on anti-money laundering. The G20 has called for greater transparency in governmental financial reporting, as well as agreeing to share tax records by 2015 as part of a pledge to crack down on individual tax cheats and global corporations that use complicated arrangements aimed at paying as little tax as possible. The topic of taxation in a global economy has become a key political issue as multinational firms, such as Apple and Starbucks, face scrutiny about their low tax bills from the countries in which they make most of their money. Investigative reports into the use of offshore tax havens by the world’s wealthiest individuals have added weight to the view that governments are missing out on much-needed revenue.

Let me suggest we have to raise our game. Complacency is not an option.

We must make the audit more recognized as a valuable service. Not a low-priced service with a boilerplate report, but a highly priced service with a focused and meaningful report tailored to the specifics of an engagement. You will all be aware that this idea is being considered by the IAASB, and I expect we will see a final standard issued by the end of the year.

We should consider making the audit report more personal by identifying the name of the engagement partner. In some jurisdictions this is already common practice; in others it is highly contentious. But from an audit perspective I think we need to do as much as we can to personalize the audit work and remove the perceived barrier that auditors are hiding behind a cloak of partnership secrecy.

But audit issues are the subject of another session at the Convention, so let me turn to ethical matters.

Reputations, whether collective or individual, are built up over long periods of time and can be lost in an instant. And unfortunately, in the context of the global accountancy profession, actions in one continent can have a domino effect on its reputation on the other side of the world. We all need to remember that the actions of one professional accountant impact the credibility of all 2.5 million of us. And, therefore, we each personally and individually have a responsibility to ensure that the high expectations that the world holds us to are upheld. That applies equally to professional accountants in business, auditors, and management consultants.

One hundred years ago, the profession would have argued that it could manage and police its own ethical behavior. But there have been too many examples of individual professional accountants failing this self-assessment and self-management. And so regulation has increased to impose rules on the performance of accountants—particularly auditors. The regulation comes from two main sources—the IESBA^® as the drafters and promoters of a global Code of Ethics and national regulators responding to local issues.

How Are Accountants Responding?

Let me turn to my slides [see below] to focus on how IESBA is responding to this increased expectation of regulators and stakeholders from the accounting profession. First, it is most satisfactory to see the number of countries that have adopted the IESBA Code in their own jurisdiction….