I am astounded that in the United States it is common practice to remunerate the chief financial officer and the accounting department (collectively the “accounting function”) with bonuses based on a company’s performance. These rewards may take various forms including stock options and other incentives based on earnings and EBITDA (earnings before interest, taxes, depreciation and amortization) thresholds. One has to be careful not to put the CFO in a catch-22.
The accounting function can influence earnings by identifying and assisting in implementing activities that relate to obtaining advantageous financing, identifying the ideal leverage level, initiating cost cutting measures, determining and monitoring the key critical components in the industry and performing benchmarking comparisons against these indicators, ensuring a sufficient amount of cash is available to fund operations and future projects and investing all resources in such a way as to maximize return on investment without exposing the corporation to unacceptable levels of risk and tax optimization.
However, one of the CFO’s main functions is being a messenger who reports the facts as they have happened, and he or she should not be able to influence the historical numbers.
Part of the problem with corporate reporting today is a direct result of bribes to the messenger. In the article, “ Use Best Practices in Executive Compensation Plans ” ( JofA, Jun.02, page 22), the first bullet refers to earnings per share and cash flows as a basis to remunerate executive officers. The CFO should not be able to influence the reporting of the historical amounts as they have occurred. To expect or require him or her to do so is the root of “cushion” and “aggressive” accounting that often leads to a game of cat and mouse between the reporting entity’s accounting function and the external auditors. The CFO needs to be relieved of the onus of meeting earnings. To allow a CFO to change the bottom line after the fact or with accounting gimmicks would be to empower him or her with a dangerous responsibility.
So what is the CFO’s responsibility? In addition to the functions described above, it is to report, on a timely, accurate and consistent basis, the financial position and operations of the company.
We should, however, set performance goals to measure and reward the CFO. I firmly believe CFOs should be adequately remunerated for the talent and skill they employ and that such remuneration should equal in dollar amounts what’s given to other executive officers. Accurate, reliable and timely reporting and the directing of the accounting and finance functions in an organization are tough tasks that need to be suitably recognized.
Stephen Hodes, CPA
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