CFO Fundamentals

Your Quick Guide to Internal Controls, Financial Reporting, IFRS, Web 2.0, Cloud Computing, and More

Jae K. Shim, Joel G. Siegel, Allison I. Shim

• Publisher: Wiley
• Year: 2012
• ISBN:
  9781118219607
• Edition: 1
• Topic: Business
• Subtopic: Managerial Accounting
• Index: Business

The thorough reference that goes wherever you go

The Complete CFO Reference is the perfect up-to-date reference tool for today's busy CFO, controller, treasurer, and other finance professionals. Written in an easy format and packed with checklists, samples, and worked-out solutions for a wide variety of accounting and finance problems, readers can take this handy reference wherever they go-on a business trip, visiting a client, conducting a conference call, or attending a meeting.

• Covers all major developments in finance and accounting every CFO needs to know about including IFRS, Web-based planning, and ranging from financial reporting and internal control to financial decision making for shareholder value maximization
• Includes tables, forms, checklists, questionnaires, practical tips, and sample reports
• Incorporates Accounting Standards Codification (ASC) throughout the book, as well as coverage of International Financial Reporting Standards (IFRS) and its impact on financial reporting, XBRL reporting, risk management and disaster recovery, Web-based planning and budgeting, Web 2.0, cloud computing, and environmental costing

Simplifying day-to-day work in dozens of critical areas, The Complete CFO Reference is the perfect up-to-date reference tool for today's busy chief financial officer (CFO), controller, treasurer, financial director, budgeting director, and other financial professionals in public practice and private industry.

PART ONE

Reports and Filings

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...