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PART ONE
Reports and Filings
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CHAPTER ONE
Chief Financial Officer's Role and Reports
ROLE OF THE CHIEF FINANCIAL OFFICER
The chief financial officer (CFO) plays a strategic role in the company's goal-setting, policy determination, and financial success. The CFO's typical title is vice president of finance (VP Finance). Unless the business is small, no one individual handles all the financial decisions; responsibility is dispersed throughout the organization. The CFO's responsibilities include:
- Financial analysis and planning: Determining the amount of funds the company needs; a large company seeking a rapid growth rate will require more funds.
- Making investment decisions: Allocating funds to specific assets (things owned by the company). The financial manager makes decisions regarding the mix and type of assets acquired and the possible modification or replacement of assets, particularly when assets are inefficient or obsolete.
- Making financing and capital structure decisions: Raising funds on favorable terms (i.e., at a lower interest rate or with few restrictions). Deciding how to raise funds depends on many factors, including interest rate, cash position, and existing debt level; for example, a company with a cash-flow problem may be better off using long-term financing.
- Managing financial resources: Managing cash, receivables, and inventory to accomplish higher returns without undue risk.
The CFO affects stockholder wealth maximization by influencing:
- Current and future earnings per share (EPS), equal to net income divided by common shares outstanding
- Timing, duration, and risk of earnings
- Dividend policy
- Manner of financing
Exhibit 1.1 presents the functions of the CFO.
Exhibit 1.1 Functions of the CFO
| A. Accounting and Control |
| Establishment of accounting policies and internal control |
| Development and reporting of accounting data |
| Cost accounting |
| Internal auditing |
| System and procedures |
| Government reporting and filings |
| Report and interpretation of results of operations to management |
| Comparison of performance with operating plans and standards |
| B. Planning |
| Long- and short-range financial and corporate planning |
| Budgeting for operations and capital expenditures |
| Evaluating performance |
| Pricing policies and sales forecasting |
| Analyzing economic factors |
| Appraising acquisitions and divestment |
| C. Provision of capital |
| Short-term sources; cost and arrangements |
| Long-term sources; cost and arrangements |
| Internal generation |
| D. Administration of Funds |
| Cash management |
| Banking arrangements |
| Receipt, custody, and disbursement of company’s securities and moneys |
| Credit and collection management |
| Pension money management |
| Investment portfolio management |
| E. Protection of Assets |
| Provision for insurance |
| Establishment of sound internal controls |
| F. Tax Administration |
| Establishment of tax policies |
| Preparation of tax reports |
| Tax planning |
| G. Investor Relations |
| Maintaining liaison with the investment community |
| Counseling with analyst regarding public financial information |
| H. Evaluation and Consulting |
| Consultation with and advice to other corporate executives on company policies, operations, objectives, and their degree of effectiveness |
| I. Information Technology and Management Information Systems |
| Development and use of information technology (IT) facilities |
| Development and use of management information systems |
| Development and use of IT systems and procedures |
How do you differentiate among the controller, treasurer, and CFO?
If you are employed by a large company, the financial responsibilities are probably held by the controller, treasurer, and CFO. The activities of the controller and treasurer fall under the umbrella of finance.
There is no precise distinction between the jobs of controller and treasurer, and the functions may differ slightly between organizations because of size, company policy, and the personality of the office holder. In most businesses, the role of the controller is constantly changing and adapting to the situation at hand. The controller's functions are primarily of an internal nature and include record keeping, tracking, and controlling the financial effects of prior and current operations. The internal matters of importance to the controller include financial reporting, internal control and compliance, cost and managerial accounting, taxes, control, and audit functions. The controller is the chief accountant and is involved in the preparation of financial statements, tax returns, the annual report, and filings with the Securities and Exchange Commission (SEC). The controller's function is primarily to ensure that funds are used efficiently. He or she is primarily concerned with collecting and presenting financial information. The controller usually looks at what has occurred rather than what should or will happen.
Many controllers are involved with management information and IT systems, and review previous, current, and emerging IT patterns. They report their analysis of the financial implications of decisions to top management. Controllers are called on to establish, monitor, and analyze the internal control structure of the company to the extent that those controls impact the company's financial statements. At times, controllers may be called on to consider operational controls broader in scope. In particular, for SEC registrants that fall under Sarbanes-Oxley 404 requirements, controllers are required to obtain an independent auditor's opinion as to whether the control design and operating effectiveness are able to prevent a material misstatement in the financial statements. For entities that are not SEC registrants, much of the Sarbanes-Oxley 404 requirement could be considered best practice. In this regard, a risk-based control self-assessment program is a useful starting point. Tools such as internal control questionnaires or process maps may be useful. It is important to keep in mind that every company is different, and, therefore, the internal control self-assessment process should be tailored to the particular needs and peculiarities of each company. When designing a control self-assessment process or modifying controls, it would be prudent to obtain the external auditor's view at the onset to facilitate that auditor's function and lessen audit costs.
The treasurer's function, in contrast, is primary external. The treasurer obtains and managers the corporation's capital and is involved with creditors (e.g., bank loan officers), stockholders, investors, underwriters of equity (stock) and bond issuances, and governmental regulatory bodies (e.g., the SEC, Public Company Accounting Oversight Board [PCAOB]). The treasurer is responsible for managing corporate assets (e.g., accounts receivable, inventory) and debt, planning the finances and capital expenditures, obtaining funds, formulating credit policy, and managing the investment portfolio.
The treasurer concentrates on keeping the company afloat by obtaining cash to meet obligations and buying assets to achieve corporate objectives. While the controller concentrates on profitability, the treasurer emphasizes cash flow. Even though a company has been profitable, it may have a significant negative cash flow; for example, there may exist substantial long-term receivables (receivables having a maturity of greater than one year). Without adequate cash flow, even a profitable company may fail. By emphasizing cash flow, the treasurer strives to prevent bankruptcy and achieve corporate goals. The treasurer analyzes the financial statements, formulates additional data, and makes decisions based on the analysis.
The major responsibilities of controllers and treasures are summarized in Exhibit 1.2. Typically, both report to the chief financial officer. The CFO is involved with financial policy making and planning. He or she has financial and managerial responsibilities, supervises all phases of financial activity, and s...
