“I couldn’t tell you, Mike, that there is a company in the world that does not have a threat of a criminal investigation at some point in time. I mean, every company in the entire world has that. All I can tell you is that we are not aware of any criminal investigation of Goldman Sachs.”
~ Goldman Sachs CFO David Viniar, responding to CLSA analyst Mike Mayo, who really, really, really, really wants to know if there is a threat of a criminal investigation into Goldman Sachs.
A surprising new report from Ernst & Young makes the bold claim that only 10 percent of CFOs actually want to become CEO. The report – entitled ‘DNA of the CFO’ – was based around a survey of 699 CFOs in Europe, Middle East, Africa and Asia and included in depth interviews with CFOs of leading companies such as Heineken, Dubai Aerospace Enterprise r.
The accepted wisdom is that in times of trouble, boards turn to CFOs to become CEOs. CFOs are seen as having a good handle on the numbers, attention to which is seen as the cure to the company’s problems.
While CFOs are generally seen as detail focused but not necessarily strategically focused, the survey shows that some 35 percent of all CFOs are intimately involved in the strategic side of the business. This is in addition to their day to day duties of keeping on top of the numbers.
While only 10 percent say that they want to be CEO, 73 percent say that they would like to remain in their role while taking on more strategic responsibility. This suggests that CFOs are put off by the unwelcome levels of scrutiny that CEOs face, which as CFOs they can largely avoid. And if CFOs can undertake much of the interesting strategic work which CEOs do but without the glare of publicity, that would appear to be a good bargain.
The survey also laid out CFOs’ professional failings, with a majority saying that their biggest lay in communication with external stakeholders, especially the media. Any financial journalist can attest that CFOs are difficult people to communicate with. They might possess the keys to the kingdom, in terms of the juiciest details about what’s actually going on in a company, but they are generally woeful at crafting a positive message. Those few that can are usually the ones who make it to the top.
Even so, the survey shows that not many CFOs actually want this. Rather what is revealed is that the CFO position is the destination itself, not the staging post to a role any higher. To that end, the report crafted a list of the competencies that finance professionals need to reach the role of CFO. These competencies are listed below, in order of priority.
• Extremely strong financial professionalism
• A strong commercial sensibility
• Deep understanding of the business
• Skill with people
• Ability to think strategically
• Excellent communication skills – the ability to translate complex issues in a simple, straightforward way
• Ability to manage conflict
• Inclination to solve rather than create problems
• International experience
• Language skills
• Experience of running major projects
• Business analytical skills
• Ability to manage stress and complexity under pressure
• Good health
• Operational experience
• Ability to adapt to change
• Experience of adversity
Many of these are the normal, boilerplate nonsense that headhunters come up with: it is difficult to do any job if you are not in good health, or even if you lack passion for the job in hand. Others seem bland enough to apply to any high level job such as the ability to adapt to change. Others might seem mutually exclusive: experience running major projects can often conflict with the task of managing the finances around those projects.
International experience and excellent communication are also skills that can be acquired. More challenging, perhaps, is the need to be a problem solver and not a creator while at the same time being excellent with numbers. Financial results are obviously not a day at the beach. If you can master them and don’t feel the need to be an excellent communicator, then like 90 percent of the respondents, becoming CFO is the end itself, not a path to the other corner office.
The AP reports that K-V Pharm named Tom McHugh as their new CFO today which is good news for KV but could be some serious bad news for Tom.
As you may recall, things haven’t been as good as you could ask for over at KV this year – directors, auditors and executives are all bolting for the door and someone has to make a run at this thing. One of those lucky ducks is Tom McHugh:
K-V Pharmaceutical Co. on Thursday named Chief Accounting Officer Thomas McHugh as its new chief financial officer, replacing Stephen Stamp after three months.
The company said McHugh becomes its CFO effective immediately. McHugh served as the company’s interim CFO from September 2009 until April 2010. He was named chief accounting officer in February.
So it sounds like Tommy probably knows the place well enough but he still gets to fix all this:
“Material weaknesses have been identified and included in management’s assessment in the areas of entity-level controls (control awareness, personnel, identification and addressing risks, monitoring of controls, remediation of deficiencies and communication of information), financial statement preparation and review procedures (manual journal entries, account reconciliations, spreadsheets, customer and supplier agreements, stock-based compensation, Medicaid rebates and income taxes) and the application of accounting principles (inventories, property and equipment, employee compensation, reserves for sales allowances and financing transactions).”
And find an auditor! Since KPMG quit, the hunt is on for a new one, so hopefully there’s someone in St. Louis willing to help them out because…the NYSE kinda, sorta took notice that the company didn’t file their 10-K on time and well, that’s a no-no. Just ask Koss.
So the good money is probably is riding against Tom but we’re rooting for you buddy. Turn this ship around!
Anyone that is in St. Paul/Minneapolis (ideally Baker Tilly Virchow Krause employees) should get in touch with us because this reeks of bad behavior that we absolutely must know about:
Angeion Corporation has terminated the employment of its Chief Financial Officer, William J. Kullback, effective July 9, 2010. The termination of Mr. Kullback is not related to any issue with respect to the Company’s financial statements.
Yes, that’s all there is. We did poke around a little bit and found that Mr Kullback was formerly with Price Waterhouse which could lead to believe that he’s got a bit of a temper and/or was roofied but then again we’re just throwing that out there.
We rang up Angeion to see what’s what and left a message with CEO Rodney Young who is supposed to call us back. We’ll report back if we find out the scoop.
8-K [SEC Filing]
UPDATE: Mr Young got back to us and we had a very pleasant chat although he wouldn’t elaborate on the dismissal of Mr Kullback, so speculate away! Or if you’ve got actually knowledge that will do too.
NPR has a new CFO and if you’re not a public radio junkie, you might not give a shit less. For those of you that can’t function without hearing the soothing voices brought to you courtesy of your very own tax dollars, then this is big news.
Deborah Cowan is joining NPR from Radio One where she was SVP of finance. She also did stints at IBM and Coopers & Lybrand (look it up, young people).
Not sure if Ms Cowan will be able to weigh in on editorial matters but we humbly suggest more of the following:
Oh and if you could encourage your boss to reverse a particular asinine policy, that’d be great. Good luck in the new gig.
There’s no shortage of drama at KV Pharmaceutical. Last week Chairman Terry Hatfield, Stephen Stamp, who was named CFO April 13, and board member John Sampson quit, citing “serious concerns” about newly elected board members and senior management.
The previous week, immediately following the company’s annual meeting, the newly elected board ousted interim President and CEO David Van Vilet, who had been in charge since December 2008.
The St. Louis-based company has not named a new CFO.
It also said it is looking for a CEO with extensive pharmaceutical experience. For now, Gregory Divis will be interim president and CEO, while continuing as president of Ther-Rx, the company’s branded pharmaceutical subsidiary.
In their resignation letters, Hatfield and Sampson said they had “serious concerns regarding the ability of the newly constituted board and senior management to provide the required independent oversight of KV’s business during this critical time in the company’s history.”
They noted that only three of the board’s seven nominees for board seats were elected at the annual meeting. The remaining elected members were candidates proposed by shareholders. Among those re-elected to the board was Marc Hermelin, son of the founder, who was ousted as CEO in 2008. Also re-elected was David Hermelin, the son of Marc Hermelin, and a former director of corporate strategy who retained his seat. David Hermelin was among the board’s nominees, Marc was not.
The year has been tumultuous. In February, KV agreed to a $25.8 million settlement with the United States Justice Department. Officials with the company’s subsidiary, Ethex Corp. pleaded guilty to two felony counts of criminal fraud for failing to report it was manufacturing oversized tablets that could be harmful to patients, (some had double the advertised dosage of medicine). In March the company fired 289 employees, or 42 percent of its staff, to lower operating costs.
However, the company’s board still found the cash to pay themselves a hefty raise. According to a recent SEC filing, the board was paid $116,000 in 2009, a $60,000 raise while the company was involved in massive layoffs.
Earlier this month KV closed the sale of the assets of Particle Dynamics for $24.6 million, plus up to an additional $5.5 million in potential earn-out payments over the next four years.
In a prepared statement the company said the board’s primary focus is two-fold: to continue to work with the Food and Drug Administration to reinstate KV to Good Manufacturing Practice compliance, and to continue to explore a variety of financial alternatives as a means to strengthen the company’s cash position.
The company could not be reached for comment.
“It’s an extraordinary thing for a company to do, but it’s an extraordinary thing we’re in.”
~ BP CFO Byron Grote, on the company’s decision to suspend its dividend, on a conference call with investors.
Certified Public Accountants are increasingly being asked to solve information technology problems for clients and prospective clients, according to a survey by the American Institute of Certified Public Accountants.
But that raises a potential conflict of interest of the sort that led the Securities and Exchange Commission to keep auditing and IT consulting separate. The pressure for auditors to help provide IT solutions will persist nonetheless, says the AICPA.
“The tide has really turned this year with the economy and increasing regulations,” said Joel Lanz, co-chair of the AICPA’s Technology Initiatives task force in a prepared statement.
“As small and medium-sized companies increasingly place IT under their chief financial officers, it’s becoming much more of a broad scope of responsibility,” added Ron Box, Lanz’s co-chair.
With a renewed focus on IT-related issues, the survey makes clear that CPAs need to be literate about information technology in order to collaborate effectively with clients and their IT partners.
Data security clearly is driving the new interest, and CPAs believe the issue will persist in importance for years, the survey suggests.
The biggest surprise from the survey, Lanz told CFOZone, is the fact that “CPAs are not only providing guidance on financial issues, but there is an expectation by audit committees that CPAs could advise on different IT governance issues. CPAs are now commenting to audit committees about business operations in addition to pure financial issues.”
It’s not that CPAs are expected to be the technology expert, but the expectation is that the CPA is able to provide business insight and IT guidance which then enables their clients to effectively leverage their technology to enhance the businesses value, he added.
Is this simply recreating the problem that led to the separation post-Enron and WorldCom of audit services from consulting, much of which was IT oriented? There’s the potential for a conflict of interest here, and a slippery slope toward bad audits as result. SEC rules specifically say audit firms cannot provide IT consulting services on matters that relate to financial reporting for the same client. And the audit committee must sign off on other types of consulting services.
Lanz concedes that CPAs will have to be careful. “It is a fine line,” said Janis Parthun, senior technical manager – IT, for AICPA, but she added that CPAs can help companies avoid problem here. “Sometimes audit committees do need some education in these areas and this is where they can reach out to CPAs that have some understanding of IT to give the audit committee options to make the right decision.”
Lanz adds says that the AICPA has helped on this front with some recent guidelines. “Recent standards provide CPAs with specific criteria for when they need to communicate with audit committees, as well as the type of communication required,” he said.
A spokesman for the Securities and Exchange Commission declined to comment on the trend.
Namely, Erin Callan.
More bad news on the hiring front, as CFOs say they are less likely to hire people now than they were three months ago.
According to the latest quarterly Robert Half Financial Hiring Index, six percent of chief financial officers said they plan to hire full-time accounting and finance employees during the third quarter of 2010.
In the prior survey conducted three months ago, seven percent of CFOs indicated they planned to add full-time accounting and finance employees during the second quarter. At the time, the folks at Robert Half celebrated the fact this was the highest hiring forecast since the first quarter of 2009.
Well, that party was short-lived.
Meanwhile, in the latest survey, nine percent of CFOs said they anticipate staff reductions. This is up from eight percent in the prior quarterly survey.
Add it up, and CFOs are more pessimistic now than they were three months ago. Not a recipe for bringing down the nation’s stubbornly high unemployment rate.
And accounting was supposed to be the good profession to go into because it is supposedly growing. Oh well.
Of course, the folks at Robert Half-an employment agency–put a positive spin on its results, asserting: “CFOs remain optimistic about the outlook for their businesses.”
The reality is – the job picture in this country is bleak and possibly getting worse. There is not one report out there that suggests companies are ready to unleash their HR departments.
In fact, the government’s recent report – which President Obama inexplicably predicted several days earlier would be strong – found that nearly half the unemployed have been out of work at least six months.
Even the teaching profession – long considered recession resistant and secure – is experiencing massive layoffs nationwide. Only a wage freeze movement is preventing even more teachers from losing their jobs.
Ultimately, companies need to see a connection between hiring more people and growing their business for them to decide to add to staff.
Increasing their taxes and piling more and more regulatory and policy mandates on them is certainly not going to entice companies to hire more people.
The Diebold CFO, controller and Director of Corporate Accounting had a fairly standard routine back from 2002 to 2007 – 1) get daily “flash reports” 2) look at BS estimates that analysts came up with 3) cook up some ideas for meeting those estimates 4) make up the numbers.
Pretty standard stuff, especially if you buy the idea that “legally cooking the books is a critical skill for attracting investors.”
The SEC presented the accounting hocus-pocus earlier today:
The SEC alleges that Diebold’s financial management received “flash reports” — sometimes on a daily basis — comparing the company’s actual earnings to analyst earnings forecasts. Diebold’s financial management prepared “opportunity lists” of ways to close the gap between the company’s actual financial results and analyst forecasts. Many of the opportunities on these lists were fraudulent accounting transactions designed to improperly recognize revenue or otherwise inflate Diebold’s financial performance.
Among the fraudulent accounting practices used to inflate earnings and meet forecasts were:
• Improper use of “bill and hold” accounting.
• Recognition of revenue on a lease agreement subject to a side buy-back agreement.
• Manipulating reserves and accruals.
• Improperly delaying and capitalizing expenses.
• Writing up the value of used inventory.
Gotta give yourself some options, amiright? Can’t just simply rely on channel stuffing!
But in all seriousness, if you’re a top financial executive at a company and part of your daily routine is finding ways to increase profitability through accounting manipulation, at some point you’d have to think to yourself, “This is one shitty business we’re running.”
The employer-sponsored health care system provides health insurance to more than 60 million people–but it does not exist in a vacuum. Employers are often reminded of this fact when their health care costs go up each year. Factored into that cost increase are premiums employers pay to hospitals to help those institutions provide care to the uninsured.
Two years ago the actuarial firm Milliman put a price tag on this cost-shifting: employers pay an additional $1,115 more for a family of four’s health insurance to make up for this loss. That totals about $88 billion annually.
This cost-shifting is once again becoming an issue as the federal government looks to provide insurance to people who cannot otherwise get it because they are considered high-risk.
States have for years created high-risk pools to separate the people with especially high health care costs from the rest of the population. Normally these folks can’t get insurance. The high risk pool absorbs some of the cost to insurers.
Now the federal government is getting in on the action, in large part to address the issue that insurers regularly refuse to issue insurance to some people or they do so at rates that are prohibitively high.
A new analysis on so-called high risk insurance pools that the federal government will set up as soon as July as a result of health reform makes the point that the money allotted will run out much sooner than originally thought. Instead of covering as many as 7 million people who could qualify there will likely be enough money to cover about 200,000 annually. This is not surprising. The need is always greater; the funds always inadequate.
So what does this all mean for employers?
It appears one step removed. But, as employers know, the health care system is fragmented yet, in the end, someone – either the federal government or employers – ends up paying the cost. In the analysis, published by the Center for Studying Health System Change, the authors point out that states with high risk pools currently do not assess self-insured employer plans.
Under the federal law this will change. Employers will face an assessment. One possibility is that the assessment will have to go up in order to increase the amount of money in the pot. The other of course is to limit who can get access to the high risk pools.
It remains to be seen what kind of conflict this issue will provoke. Like many other aspects of the new health care reform, it has the potential to fade away or to metastasize into something problematic.
But one thing remains likely: costs will continue to go up. The question is who will pay for these costs? If these assessments are any sign, it will be insurers and self-insured employers.
Layoffs, pay freezes, pay cuts. Pretty simple cost cutting solutions for CFOs who’ve got tight budgets. Unfortunately, the slash and burn tactics for personnel may have been better applied in another area – inventory.
A recent survey performed by Greenwich Associates of midsized and small company “financial decision-makers” found that, in particular, midsized companies ($10 million to $500 million in revenue) that reduced their inventory, on average, saved 30% more ($520k inventory vs. $400 layoffs).
While that’s great news, the unfortunate part is that only 17% of the companies survey bothered with that particular cost saving strategy while 47% of those survey used “staffing reductions.”
The survey also found that while 37% of used pay freezes to reduced costs with an averaged savings of $245,000. Crunching the numbers, that’s nearly 53% less savings than the inventory reduction savings.
Of course, not all companies have inventory in the dusty-stacks-of-pallets-in-a-warehouse sense. This is especially true of the professional services/financial services area where, unfortunately, the staff are sometimes considered to be inventory.
As a follow-up to last week’s blog on Molson Coors’ experience with outsourcing, the CFO of the Latin American division of Dutch comglomerate Philips provided a different perspective Thursday morning at the Hackett Group’s best practices conference in Atlanta.
While Molson Coors’ CFO Stewart Glendinning expressed disappointment over high turnover rates at the outsourcing company the beer company signed up with, Philips’ Latin American CFO Ronald Eikelenboom said he planned on high turnover when he inked a deal with Indian outsourcer Infosys in late 2008 to expand the two companies’ relationship to Brazil, where Philips’ Latin American operations are based.
Eikelenboom told the audience (and me in a follow up video interview that will be posted shortly) that high turnover was central to Infosys’ business model, as the outsourcer keeps salary costs low by rotating from older to younger workers. But that turnover was priced into the terms of the deal, which at $250 million (for, I believe, the global contract, not just the Latin American part) is considered one of the largest of all such transactions. Too, the terms set a minimum level of performance, so it’s up to Infosys to manage the downside of high turnover.
Infosys had few qualms about Philips’ demands, said Eikelenboom, because the company was eager to expand into Brazil and the Philips deal gave it an entrée. So the CFO had enough leverage with the outsourcer to reassure himself about the potential risks.
“We’re building something together with Infosys,” he told the gathering. “We share the same aspirations.”
For that reason, Eikelenboom also expressed less concern than Glendinning did about outsourcing complex financial processes. And he said that was important for Philips as labor cost advantages in emerging markets dwindle over time as wages rise, and innovation and process improvement thus become more critical to the value that outsourcing creates.
“We’re moving up the ladder in BPO,” he said, referring to business process outsourcing.
With outsourcing, as with everything, I suppose, it’s different strokes for different folks.
Mary Schapiro took some time out of her fraud fighting Friday to ask Kenneth Johnson to quit acting as the Commission’s CFO and to take on the official responsibility of running the Office of Financial Management.
Mr Johnson (KenJo?) vehemently accepted the offer and threw in a shout out to the boss, “I’m honored to accept this new role at such an important time for the agency. Chairman Schapiro is deeply committed to strong financial management, and I’m proud to lead the agency’s initiatives in this area.”
Presumably, the CFO position isn’t a kicking-down-doors type job so Johnson’s first order of business should be to determine the savings on a group rate at one porn site that can appropriate service all tastes.
Washington, D.C., May 21, 2010 — Securities and Exchange Commission Chairman Mary L. Schapiro today announced that Kenneth A. Johnson has been named Chief Financial Officer for the agency.
Mr. Johnson has been serving as acting CFO for much of the past year. The agency’s CFO is responsible for leading its Office of Financial Management, which handles the budget, finance, and accounting operations for the SEC.
“I’m delighted that Ken has agreed to take on this role at the SEC,” said Chairman Schapiro. “His deep experience in the financial arena will be incredibly valuable as we grow as an agency.”
Mr. Johnson added, “I’m honored to accept this new role at such an important time for the agency. Chairman Schapiro is deeply committed to strong financial management, and I’m proud to lead the agency’s initiatives in this area.”
Mr. Johnson, 37, joined the SEC in 2003 as a Management Analyst in the Office of the Executive Director. In that role, he advised on all aspects of the budget process, developed strategy initiatives, and responded to inquiries from the Office of Management and Budget (OMB) and Congress regarding the SEC’s budget and financial operations. He became Chief Management Analyst in 2006.
Mr. Johnson has served as a valuable staff expert on legislative proposals, and he managed the development of the SEC’s long-range Strategic Plan that would guide agency policy through 2015.
Prior to joining the SEC staff, Mr. Johnson worked as a Commerce Analyst at the Congressional Budget Office. His primary responsibility in that role was to analyze and report on the budgetary effects of committee-approved legislation.
Mr. Johnson earned his Masters in Public Policy from the Kennedy School of Government at Harvard University, and earned his BA at Stanford University.
Jonathan Ramsden has been Executive Vice President and Chief Financial Officer of Abercrombie & Fitch since December 2008 and is a key part of a team trying to guide the retailer’s global expansion while managing something of a remake of its domestic operations. Going Concern caught up with him recently to find out how he sees A&F’s business and what else is on his mind.
Prior to joining Abercrombie & Fitch, Ramsden was CFO of TBWA Worldwide, a global marketing services company with operations in over 70 countries. He began his career with Arthur Andersen, spending nine years in the firm’s London and New York offices. He is a graduate of Oxford University and a UK Chartered Accountant. Jonathan lives in Columbus, Ohio, with his wife and thre ng>Going Concern: I’ve got to start by asking how analysts got Abercrombie’s early-year outlook so wrong. One early year report out in the Wall Street Journal anticipated an ugly same-store-sales decline, and the next day you post an 8% increase in January sales in stores open at least one year. February and March were good for you too. Why the gulf between predictions and performance?
Ramsden: Our business improved at the beginning of the year and, since we don’t give forward looking guidance, the analyst consensus was modeling a continuation of the prior trend. We have also consistently said that one or two months do not constitute a trend, and that month to month results may be volatile. Our focus is less on monthly sales figures than doing what we think is right for the long-term health of the brands and the business.
Going Concern: Do you see it as part of your job to find metrics that allow shareholders and analysts to make more accurate predictions and better comparisons, or does that really fall beyond the CFO’s purview? What can you do as CFO to help people better understand the company’s business?
Ramsden: We try to provide data that enables shareholders and analysts to understand the underlying dynamics of the business. Since the beginning of last year we have not been giving forward looking guidance on sales or earnings since we think that implies a degree of precision about future results we have not had in the environment we have been through.
Going Concern: How do you expect Abercrombie to perform this year overall?
Ramsden: We feel very good about our international business, which continues to affirm the global appeal of our brands. We have been through a challenging time domestically, but are working hard to improve the domestic trend of the business. Protecting the global appeal of our brands remains a paramount objective, and we have been willing to take some pain domestically to do that.
Going Concern: Is it fair to say that the growth will now come overseas? Expanding abroad can be fruitful, but it’s also a big investment. What if sales soften more quickly than expected?
Ramsden: We do believe that the future of our business is tied to our international strategy. At the same time, if we can achieve a sustained improvement in our domestic productivity, that will be very significant to both sales and earnings. There are certainly risks associated with an international expansion, but we have been very encouraged by the results so far.
Going Concern: There seems to be a wane in the company’s popularity here in the States. Does the company agree with that statement and what’s being done to address it?
Ramsden: We believe that our brands retain a strong appeal. 2009 was a challenging year in the US, but we think we can improve the domestic business going forward. Firstly, we continue to work on our pricing. Secondly, there are a number of initiatives in place on the marketing front that we think will help us to better connect with our core customer. We feel better about the assortment than we have in some time. Lastly, we expect that we will need to close a number of stores that don’t really fit in the portfolio, particularly for the A&F brand.
Going Concern: Has Abercrombie & Fitch actually cut costs over the last couple of years? How involved have you been in that and can you explain a little about the process behind identifying excess cost in the business?
Ramsden: We went through a reorganization of our corporate “Home Office” about a year ago, which included some significant lay-offs. The company had never been through anything like that before so it was a difficult process, but we believe the company will be more efficient as a result. The entire leadership group was involved in the process. At the store level, on an ongoing basis we have been looking to find efficiencies in variable costs such as store payroll, packaging, supplies and so on. The biggest component of the margin erosion we have incurred has been in store occupancy costs (rent, depreciation etc) which are relatively fixed in the short term, but which we think we can make progress on over time, including through store closures where appropriate.
Going Concern: What are your biggest challenges as CFO with respect to financial reporting in the coming year?
Ramsden: As we roll out internationally, we have to ensure that our local reporting is to the same standard as our US reporting. In addition, the international rollout adds to the complexity of our US reporting.
Going Concern: Have you started laying the groundwork for converting to IFRS? If so, when do believe the conversion will be complete? Can you give us a sense of the scale of this task and who is helping you with it?
Ramsden: We have done our initial assessment of what would be required to convert. The area of greatest complexity for us would be moving from the retail to the cost method of accounting for inventory.
Going Concern: A recent survey by Financial Executives International/Baruch college stated that only 44% of CFOs anticipate an increase in their hiring and that 25% expect to cut back on their rate of hiring? What kind of cost saving measures (as they relate to employees) did A&F utilize in 2009? Have economic conditions improved to the point that further cost saving measures (e.g. salary freezes, layoffs, reduced working hours) won’t be necessary? What are A&F’s plans with regard to hiring for 2010?
Ramsden: During 2009, as well as layoffs, we took a number of other measure such as deferring and reducing raise pools and reducing retirement plan contributions. Our current direction is a gradual return to normalcy. We are hiring where we need to, while seeking to keep the overall headcount close to the current level.
Going Concern: You were previously a CFO at a global marketing-services company. How difficult did you find it moving sectors? What are the main differences you see between overseeing the finances of a services operation as opposed to a retail operation? (What would you say to a senior level business finance executive who is switching business sectors?)
Ramsden: There are some significant commonalities. Both A&F and TBWA are full of creative, energized and driven people. During the ten years I was at TBWA, we were seeking to build a cohesive global brand. For A&F, the next 10 years are also going to be about international expansion. The starting points are quite different, but many of the challenges of running a global business are the same. I think there are a core set of CFO skills that are transferable and that make up a significant part of the CFO role in any organization. Industry knowledge is definitely valuable, but coming from a fresh perspective also has some value. Clearly there is also a huge amount of instituational and industry knowledge at A&F.
Going Concern: In overall terms, how do you view your role as CFO?
Ramsden: There are some things that are black and white, but most are not. As the CFO, you need to be surrounded by people and processes you trust. Good processes will take care of the black and white stuff, and having people you trust in key positions will take care of most of the rest. So you have to have complete confidence in the people you work with, and you have to ensure that systems and processes are effective. The CFO also needs to challenge conventions.
I’m down at the Hackett Group’s best practices conference in Atlanta and just finished a video interview with Stewart Glendinning, CFO of Molson Coors, on the topic of outsourcing.
While the video won’t be up for awhile, I can report that Glendinning wowed the crowd of 250 or so finance executives in attendance this morning with a frank keynote address on the subject.
He essentially warned the audience that outsourcing is hardly the no brainer that everyone – from Wall Street analysts to third-party service providers – makes it out to be.
While the CFO stood by Molson Coors’ decision to outsource most if not all of its information technology, finance and HR functions in 2008, he conceded that the arrangement has yet to live up to billing.
The decision followed the merger of Molson and Coors in 2005, which was expected to produce roughly $180 million in cost savings. And while outsourcing has helped produce some of that, Glendinning – who was appointed CFO of the combined companies two years ago – acknowledged the arrangement with its vendor hasn’t been all smooth sailing. (He identified the outsourcer by name, but I’m leaving that out just to avoid starting an argument between the two.)
As a result of higher than expected turnover, largely in the vendor’s Indian and Costa Rican operations, for example, some of the labor savings that the outsourcer promised have failed to materialize. Glendinning said annual turnover in those two locations has run as high as 100 percent.
As a result, the CFO said the company was “a little shy” of the savings initially projected for the deal, due to project scope and implementation costs. He said that he would have to revisit some of these issue once the contract comes up for renegotiation in 2013. “You have to keep taking cost out,” he said.
In addition, Glendinning said that during the ramp up phase the arrangement produced higher-than-expected error rates in certain financial processes, and those produced an unwelcome payables backlog that threatened the company’s supply chain. And while he said some of the fault was that of Molson Coors, Glendinning noted that the outsourcer failed to bring it to the company’s attention, largely because of what Glendinning described as “reticence” on the part of its Indian employees to challenge their client.
While Glendinning said Molson Coors’ move to outsource was “the right decision nonetheless,” he cautioned the audience that there are a host of issues that finance executives must consider before going forward with such deals.
In particular, he noted that unlike IT or HR, more complicated, “sensitive” financial processes such as pricing and customer management probably should not be turned over to a third party.
“It’s not black and white,” he said about the decision to outsource. “There is a lot of gray in between.”
While shareholders and Sarbanes-Oxley demand more independent directors on boards, a new study shows companies with boards that have at least one key insider, the CFO, are better at financial reporting than those without that executive on their boards. But that doesn’t necessarily mean that all companies should appoint their CFOs to their boards, not at least without taking other considerations seriously into account. In fact, most companies probabl elsewhere for the expertise that CFOs supply.
The study found that companies with CFOs on their boards have more effective internal controls over financial reporting, higher accrual quality and a lower likelihood of restatements.
The study measured the quality of financial reporting by examining the incidence of material weaknesses reported under Section 404 of Sarbanes-Oxley. The provisions require companies to document and test internal control over financial reporting, and the company’s independent auditor to independently test those controls and opine on internal control effectiveness.
“One overarching benefit we saw was that there was an improvement in financial reporting when a CFO was on the board,” Rani Hoitash, a professor in the department of accountancy at Bentley University and co-author along with professors Jean Bedard of Bentley and Udi Hoitash, of Northeastern University, “Chief Financial Officers on Their Company’s Board of Directors: An Examination of Financial Reporting Quality and Entrenchment,” told CFOZone.
From 2004 to 2007, 12 percent of those with a CFO on the board reported problems with their internal controls, compared with 15 percent of those without their CFOs on the board, according to the study. Companies with their CFOs on their boards were also 15 percent less likely to restate their results.
These results imply that having a CFO on the board is more likely to align management’s interests with those of shareholders. One reason, the study says, is that CFOs are more likely to share information with other board members about the status of the financial reporting function, and secure sufficient resources to invest in the establishment, documentation and testing of internal controls.
Yet only 8 percent of the more than 7,000 companies studied had their own CFOs on the board.
Of course, SarBox says a CFO can’t serve on his or her company’s audit committee because of the obvious conflict of interest. But as Hoitash points out, “they can have input.”
And SarBox also requires a board to have financial expertise. A CFO obviously fits that bill.
But having a CFO on the board is not without its drawbacks. CFOs serving on boards are more highly compensated than those in other companies, earning an average of $218,715, or 34 percent more in total compensation than their nondirector peers did. There was also a 35 percent lower turnover rate, 8.2 percent compared to 12.7 percent, among CFOs who sat on their own companies’ boards, an advantage that sometimes existed despite a decline in earnings. Hoitash said the findings were evidence that CFOs who serve on boards are more firmly entrenched than those who are not.
That can be a good or bad, depending on a company’s performance. While in many cases where companies are performing poorly, they will fire the CFO without addressing the underlying causes, Hoitash noted that the opposite is true in cases where the CFO is on the board, and that’s obviously not a good thing either. “If the CFO is on the board and the company is performing poorly we found that they sometimes don’t leave, because they have power and influence,” he said.
The question is, will they use the power to do good or bad?” asked Hoitash. If they see themselves as part of the board and work to achieve goals, that is clearly a good thing. However, that power could also be used in their interest to the detriment of shareholders.
That makes some observers wary of appointing CFOs to boards. Instead, say these observers, they should merely attend all board meetings so as to share their expertise without becoming entrenched. “Look back in history, what transgressions brought us to Sarbanes-Oxley and other regulatory reforms?” asked Marc Palker, a certified management accountant and director of CFO Consulting Partners. “Once the CFO was granted stock options in the same manner as the CEO, there was a possible partnership for crime,” Palker added.
Others go even further by recommending that CFOs not attend meetings devoted to discussions of the company’s finance functions. In that case, “it might be appropriate to hold them without the CFO present,” said Sue Mills, a consultant with Tatum, an executive services firm that provides interim CFOs.
Bottom line: CFOs don’t belong on boards unless they cannot otherwise get financial expertise. In that case, Hoitash said, “you might want” to consider the idea.
…just disappointed about Andy getting all sue-y over BNY Mellon’s Ivy Asset Management’s involvement with Berns Madoff, which will result in more money going to – SHOCK – lawyers.
Bank of New York Mellon Corp.’s (BK) Chief Financial Officer Todd Gibbons told investors Wednesday that the company is “a bit disappointed” about the New York Attorney General’s decision to file a law suit against the bank related to Bernard Madoff’s Ponzi-scheme.
But as a result of the suit, and the current environment more broadly, legal cost are expected to run higher, the CFO said at UBS AG’s (UBS) Global Financial Services Conference in New York.
It has been well established in these pages and elsewhere that the SEC has had its share of problems. Take your pick: 1) missing the biggest financial fraud in the history of the world 2) hiring an army of porn-addicted accountants and lawyers to protect our markets 3) waffling on IFRS 4) did we mention missing huge frauds?
To be fair, the Commission has been working hard to redeem itself by cracking down on dubious activity (from Goldman to Overstock), hiring more fraud experts and giving those tranny porn-obsessed employees a second chance.
Regardless of the turnaround-in-progress, CFOs in this country seem to have ceased taking the SEC seriously. Sure the 10-Ks and Qs still get filed but those were in place long before the wheels fell off.
In a recent survey, Grant Thornton found that, despite a SEC deadline for public companies to utilize eXtensible Business Reporting Language (XBRL), a fair amount of CFOs don’t seem all that worried about reporting their financial statements using the technology:
64 percent of public companies do not currently report financial results using eXtensible Business Reporting Language (XBRL); and of those, half have no plans to in the future even though the SEC mandated that public companies have to report their financials using Interactive Data by 2011.
“It’s concerning that almost a third of public companies still have no plan on using XBRL to report their financials despite the requirement that all public companies comply with XBRL filing requirements by mid-year 2011,” said Sean Denham, a partner in Grant Thornton’s Professional Standards Group and a member of the AICPA’s XBRL Task Force. “I foresee a lot of companies playing catch up as the 2011 SEC deadline approaches.”
Whether this lack of action can be attributed to defiance, fear of technology, or pure laziness is not explained but we wouldn’t rule out the possibility that the SEC has an outright mutiny on its hands.
A third of public companies have no plans to use XBRL – despite SEC mandate requiring XBRL use by 2011 [GT Press Release]
Also see: XBR-Lax [CFO Blog]
As if it wasn’t a big enough risk already, CFOs may have to brace themselves for more private litigation over accounting fraud if a court decision on April 21 involving failed telecom equipment maker REMEC serves as precedent. The good news is that plaintiffs will have to show evidence of the executives’ intent in such cases.
Most cases involving accounting are either dismissed because they involve judgment or are settled before they go to trial, Robert Brownlie, a partner in the law firm of DLA Piper who represented the defendants in the REMEC case, told CFOZone last Thursday. The Del Mar, Calif., company filed for bankruptcy in 2005.
One of the largest such cases involved former Lucent executives, whom shareholders charged had defrauded them through improper accounting for goodwill. In that case, shareholders agreed in 2003 to accept a $600 million settlement.
In contrast to the Lucent case, the one filed by shareholders against REMEC’s former CEO, Ronald Ragland, and former CFO, Winston Hickman, was dismissed, though it also rested on charges that they misled investors because they didn’t write off goodwill that was impaired.
But the dismissal was more difficult to achieve than it would otherwise have been, said Brownlie, because the plaintiffs submitted evidence of internal reports and testimony showing that the company was behind schedule on certain objectives and not meeting its internal forecasts. The court said that those reports created a factual issue that should be determined by a jury; the defendants had to show there was no evidence of intent to deceive on the part of management.
“Normally, with matters of opinion or judgment, you either can’t bring a suit or it’s very difficult to do so,” Brownlie said. But he warned that the decision could mean more cases against corporate executives over accounting fraud.
The court dismissed the charges even though the plaintiffs’ accounting experts testified that they would have reached different conclusions than the former executives did.
Brownlie added that his case was helped by evidence of good faith conduct by the defendants, including evidence of transparency between the company and its auditors, disclosures of disappointing results and write-offs of other accounting items during the period of the alleged fraud and the absence of stock sales.
Describing the outcome for CFOs as “both good and bad news,” Brownlie said the decision showed that the critical issue in such cases will be “a connection between claims and evidence.” And he cautioned that in other accounting cases, it’s likely to be harder to defend executives on the basis of intent, which is why he said “there’s a paradox” in the REMEC decision.
The SEC, under attack last week for its Goldman lawsuit and porn allegations, late Friday finally had a victory to celebrate.
Carl Jasper, the former chief financial officer of Maxim Integrated Products was found liable for securities fraud in a stock-option backdating lawsuit filed by the SEC’s San Francisco office, according to Bloomberg.
Carl Jasper, the former chief financial officer of Maxim Integrated Products was found liable for securiti option backdating lawsuit filed by the SEC’s San Francisco office, according to Bloomberg.
It was a rare civil jury trial involving backdating allegations.
Even rarer, it was the second backdating case decided in a court in one week.
Earlier in the week the former CEO of KB Home was convicted of four felony counts in a criminal stock option backdating case.
In the Jasper case, the former finance executive of the maker of chips for laptop computers was found liable on eight out of 11 counts, and cleared him on three, according to The Recorder. Bloomberg said he was found liable for fraud, lying to auditors, and aiding Maxim’s failure to maintain accurate books and records.
“We are pleased that a jury sitting in the heart of Silicon Valley recognized that stock-option backdating is, in fact, a fraudulent practice that matters to investors, and that Mr. Jasper, as the CFO of a public company, was ultimately responsible for misleading investors about the accuracy of Maxim’s financial reports,” Mark Fickes, trial counsel for the SEC, told the wire service in an e-mail statement after the eight-day trial.
Jasper’s lawyer, Steven Bauer, told Bloomberg in an e-mail he will ask the judge to overrule the jury verdict at a May 24 hearing. “Carl Jasper is a good man who never intended to do anything wrong,” he reportedly said. “This is the first step in a long road, and we are confident that in the end he will prevail.”
In late 2007, the SEC filed civil charges against Maxim, Jasper and former chief executive officer John F. Gifford, alleging that they reported false financial information to investors by improperly backdating stock option grants to Maxim employees and directors.
The Commission alleged that Jasper helped the company fraudulently conceal tens of millions of dollars in compensation expenses through the use of backdated, “in-the-money” option grants.
In a separate action, Gifford agreed to pay more than $800,000 in disgorgement, interest, and penalties to settle charges relating to his role in the options backdating.
Maxim, without admitting or denying the Commission’s allegations, consented to a permanent injunction against violations of the antifraud and other provisions of the federal securities laws.
The Commission’s complaints also alleged that Jasper was aware of the improper backdating practices, drafted backdated grant approval documents for Maxim’s CEO to sign, and disregarded instructions from CEO Gifford to record an expense in connection with certain backdated options. According to the Commission, Gifford should have known that the company was not reporting expenses for those in-the-money stock options and instead was falsely reporting that they were granted at fair market value.
According to The Recorder, in his opening statement at the trial, Bauer said Gifford, who is now deceased, was to blame for the backdating and not Jasper.”You can’t talk about options at Maxim without talking about Mr. Gifford,” Bauer reportedly told the court. “You can’t talk about picking dates without talking about Mr. Gifford.”
The SEC is seeking injunctive relief, disgorgement of wrongful profits, a civil penalty, and an order barring Jasper from acting as an officer or director of a public company.
Early last week, Bruce Karatz, the former CEO of KB Home was convicted of four felony counts in a stock option backdating case. He was found guilty of two counts of mail fraud, one count of lying to company accountants and one count of making false statements in reports to the Securities and Exchange Commission, according to published reports.
He was acquitted on 16 other counts, including mail and wire fraud, securities fraud and filing false proxy statements, according to Bloomberg.
He faces up to 60 years in prison when he is sentenced.
It’s been a while since we shared some cost saving ingenuity from Florida’s CFO–cum-Gubernatorial candidate, Alex Sink. However, this time we learn how she managed to spend some of those savings.
According to the Politics blog of the South Florida Sun-Sentinel, CFO Sink’s Department of Financial Services has “purchased 182 assault rifles – costing $255,000, according to Sink’s office – in the last two years.” When you Google “assault rifle” one of the first links takes you to this.
A spokesman for the wannabe Guv made it plain for those GOP haters (who are all of a sudden against guns?) trying to block Sink from purchasing more BFGs:
The rifles are necessary to protect fraud investigators who deal with “dangerous people,” said spokesman Kevin Cate – arsonists, sophisticated car insurance fraudsters, money launderers. If Republican legislators are taking a shot at Sink with the assault-weapon purchasing ban, “that’s a shot at officer security,” Cate said.
Sink said: “I rely on my law enforcement people to evaluate what the risks are and what they need. I’m going to do everything possible to protect them.”
Look. We’ve got no doubt that some white-collar criminals are dangerous but this seems a tad ridiculous.
On the other hand, since it is South Florida and basically anything can happen (including 10 – 26% returns on arbitraging groceries) perhaps this type of firepower is necessary.
A blue ribbon panel on private company accounting is holding its inaugural meeting Monday, to assess how financial reporting standards can best meet the needs of users of US private company financial statements, which are mostly for bankers and other types of lenders.
The panel, formed by the Financial Accounting Foundation, the American Institute of Certified Public Accountants and the National Association of State Boards of Accountancy, will meet five times throughout the year and will issue a report with recommendations on the future of standard setting for private companies by the end of the year.
The debate has resurfaced after the International Accounting Standard Board issued international standards for private companies last July (called IFRS for SMEs). Financial experts have been discussing this topic for decades. For instance, in 1996, the Financial Executive Research Foundation issued a paper titled “What do users of private company financial statements want?”
Some of the old and new questions the panel will address:
• What is the key, decision-useful information that the various users need from GAAP financial statements?
• Are current GAAP financial statements meeting those needs?
• How does standard setting for private companies in the US compare to standard setting in other countries, both those that have adopted IFRS for small and medium-size entities and those that have not?
To the extent that current GAAP is not meeting user needs in a cost-beneficial manner, what are some possible alternatives or private company standards?
Even if GAAP is found wanting, however, the panel might not be all that keen on IFRS as an alternative, given the limited experience of US companies with the international regime and rising skepticism on the part of the Securities and Exchange Commission about the independence of the body setting international standards.
Not that public or private US companies are eager to switch to IFRS, which will be costly and cumbersome. At this point, it seems as if private ones would rather have the accounting devil they know, except they no doubt wish it were a bit less hellacious on their results. And that’s been pretty much a forlorn hope for years.
“Before the fraud broke, people would ask me what I did before I retired and I’d say I was founder and former CFO of HealthSouth. But today when people ask me what I did before I retired I kind of look away and say I was an accountant and hope they don’t ask me any other questions.”
~ Aaron Beam, former CFO of HealthSouth and current lawn-care business owner, at the University of Texas-Dallas Fraud Summit, earlier this month.
Let’s face it, accountants aren’t often featured as heroes in action flicks nor romantic leads in love stories, and are pretty much ignored by the media unless it involves blame and/or complicated financial rules that are just barely an accounting matter (accountants did not securitize every loan nor did some nefarious squad of beancounters dream up Repo 105) so it’s pretty exciting to see the Washington Post heralding accountant turned CFO Carl Adams.
No, he doesn’t have 12 mistresses and he hasn’t gotten any DUIs (that we know of) but the smart professional is cool again. As if he (or she) ever wasn’t.
Carl received his accounting degree from Penn State and, presumably, was really impressed by what he saw when he entered public accounting via Ernst & Young, so much so that he hung around to make senior manager before leaving to do a stint with the SEC.
Transitioning back to the private sector meant applying what he’d picked up from E&Y and the SEC in the capacity of an accounting professional, except plain old “accountant” just didn’t fit him anymore. Perhaps accountants are far more “superhero”-like than we give them credit for? Adaptable, talented, and equipped to deftly switch careers like some folks switch lanes on the freeway; what’s not to admire?
Since most CFOs are professionally qualified to be accountants anyway, a guy like Carl may not seem so spectacular on the surface but when you consider the ever-sophisticated landmine-laced territory of financial statements, there is no such thing as an over-qualified CFO. The definitive line between CPAs and finance professionals slowly becoming blurred and may become non-existent.
Since we know accountants – generally speaking – are change-adverse, why not introduce a more comprehensive curriculum in accounting programs that prepares future CPAs for this diverse, brave new world of accounting and finance to offer them maximum flexibility to transform with the industry?
Sorry for you old schoolers, the green eyeshade has been retired for quite some time: now is the era of the ever-evolving, constantly-changing, ready to head off the next Repo 105 before Wall Street implodes itself again accountant. Movie coming to theaters near you in 2011… in 3D!
Looking for an easy way for your company to save a few bucks on office supplies? Change the font in the documents you print, reports the Associated Press.
The idea is simple enough: Certain fonts use different amounts of ink. That Arial font Word formerly defaulted to actually cost you money compared to using something like Century Gothic. For example, the University of Wisconsin-Green Bay has asked its faculty and staff to switch to Century Gothic for all printed documents. By doing so, the school figures it could save between 5 and 10 percent on its annual $100,000 ink and toner bill.
But such a switch could create more problems, because documents printed in Century Gothic tend to run longer than others. So while you may save on ink, you’re now getting smacked by bigger paper costs.
But it’s certainly interesting to think about how typography affects our business world. I highly recommend the documentary “Helvetica“, which explores arguably the most used typeface in Corporate America (think New York subway signs, American Airlines, AT&T and Jeep, among many others) and why we find it so appealing.
The AP story offers up a great example of how powerful type can be. In order to discourage people from printing too many documents, Microsoft even switched its default font from Times New Roman to Cambria for serif type and from Arial to Calibri for sans-serif.
The thinking? “The more pleasing a font looks on the screen, the less tempted someone will be to print,” the AP reported.
Most investors appreciate seasonality. They get that retail peaks around Christmas and that your big back to school sale will be in August.
Still, some executives like to remind us that their business is busier at certain times of the year than at others. And it’s not uncommon for execs to claim the weather ate their earnings.
All in all, these explanations are pretty lame. Either investors already understand the business cycle or they don’t want to hear the excuse.
Given that, I like the approach of Carol Tome, CFO of Home Depot.
At a retail conference sponsored by Citigroup, “Tome said that while the retailer hates to be one that cites the weather for sales trends variability, Home Depot does experience that, and it has seen ‘great variability’ in weather conditions across the country so far this year.”
So, there you go. Tome agrees that blaming the weather is lame. But, at the same time, you have to agree that the weather this year has been pretty outrageous, right?
Then again, Tome isn’t totally going to hide behind the clouds.
“Nothing has come to our attention that suggests we can’t hit the financial objectives that we’ve set forth,” she said, according to Dow Jones.
In the end, if you’re a Home Depot investor, pray we don’t have a June like last year.
“When the sun is shining, we’re very, very pleased with our performance,” Tome said.
Plenty of lessons came out of the financial crisis. For some it was that Big 4 auditors are irrelevant. For others it was that we need one set of high quality accounting standards ASAP. Aaaannnd for others, it was that the SEC needs to get better at pretty much everything.
For CFOs, it appears that at least some of them learned that miserable employees are a drag. Robert Half Management Resources surveyed 1,400 CFOs and 27% of them said “they learned to place greater focus on maintaining employee morale.”
It’s likely that this isn’t a lesson learned by just CFOs. Plenty of CPA firms have probably realized that a bunch of morose auditors and tax pros hanging around doesn’t make for a happy shop and are looking to improve their cheerleading skills going forward. KPMG has already brought back the Standing O, PwC, Ernst & Young, and Grant Thornton have all guaranteed merit increases for this year so there are signs that your happiness is no longer an afterthought.
CFOs Advise Keeping Employees Happy [Web CPA]
Private equity firm Providence Equity Partners announced on Tuesday that it had hired Robert S. Hull, GMAC Financial Services’ chief financial officer.
Hull will join the firm, which specializes in media, entertainment, communications and information companies, as its CFO in early April. He succeeds Raymond Mathieu, who will become a managing director focused on special projects for the firm.
The 46-year-old Hull was CFO at GMAC since 2007. He was a member of the beleaguered lender’s executive committee and served briefly on its board of directors.
Previously, he held a series of finance positions at Bank of America from 2001 to 2007, most recently as chief financial officer of the company’s global wealth and investment management business.
GMAC has received $17 billion in government bailout funds and hasn’t recorded a quarterly profit since the fourth quarter of 2008. Indeed, it has lost money in nine of the last 10 quarters and lost over $10 billion in 2009.
Hull was paid $4.9 million last year.
The departure comes just two weeks after Hull had to testify before a Congressional Oversight Panel regarding the U.S. government’s assistance to GMAC under the Troubled Asset Relief Program.
In a report regarding Hull’s departure, Standard & Poor’s laid out GMAC’s many troubles, which include “resolving strategic considerations for several business lines, most notably the mortgage operation; executing its plans to diversify beyond providing auto-finance products and services to GM and Chrysler dealers and retail customers; and coping with a still-fragile economy.”
Given all those challenges, the rating agency concluded, “it is not surprising to see turnover at all levels of the institution.”
Perhaps that lack of surprise is why GMAC, for its part, didn’t even bother putting out a press release over the departure, opting to make only a two-sentence filing with the SEC:
“GMAC Financial Services today announced that Chief Financial Officer Robert S. Hull has elected to depart the company at the end of March to pursue another career opportunity. The company will conduct an internal and external search for potential CFO candidates in the interim.”
Brian Moynihan is shopping around for a CFO and he needs a good one ASAP. The Post reports that Moynihan will go with someone from outside BofA so that means you’ve got a shot! Now before you get ahead of yourself and think you’re the BSD to turn this ship around, consider some of your responsibilities.
You’ve got to be the numbers jockey for the biggest bank in the known universe that is constantly being given the stink-eye by Tim Geithner, Barack Obama, Ken Feinberg, et al., plus an angry American populous that will not hesitate to call you names and picket your house. Oh, and you may or may not have to move to Charlotte. Maybe that’s not a sticking point for some of you but if you don’t like NASCAR then we’d suggest passing on this one.
See? Trying to come up with a good and willing candidate will not be an easy task. After all, getting someone to takeKen Lewis’ chair wasn’t exactly a piece of cake and CFO is actually a real job.
Naturally, soon-to-be former KPMG Chairman Tim Flynn comes to mind but Moynihan may want to go with some with a little less sweater vesty and he doesn’t really have the mane to match. Former Lehman CFO Erin Callan is busy hanging out with firefighters and Andy Fastow is still unavailable. Better put a call in to Robert Half.
CFOs around the world are looking on in a mixture of admiration and jealousy at the success of a former member of the ranks. Tidjane Thiam, CEO of the U.K.’s Prudential PLC is in the process of trying to pull together what must be the biggest deal of his life. The potential $35 billion takeover of AIA will, at a stroke, convert the company from a rather staid UK life insurer into a fast growing Asian financial services behemoth.
This is not the way that text books say it should happen. Generally when a CFO is elevated to the CEO position – as happened to Thiam in the middle of last year – it is usually because there is some dreadful financial crisis looming that only an experienced CFO can really manage. Indeed the promotion of the CFO to the CEO position is likely an admission that there will not be any major strategic moves, rather a relentless of pursuit of cash, debt repayments and risk hedging.
What makes Thiam’s move even more remarkable is that it was reported that he tried to scupper the plans of his predecessor Mark Tucker when he was thinking of making a bid for AIA a year ago. Cynics might say that he wanted to do the deal himself.
Other ex-CFOs of banks, who now find themselves in the top seat, could be forgiven for feeling pangs of jealousy at what Thiam is trying to do. For instance, Stephen Hester, the CEO of RBS is the ex-CFO of Credit Suisse. His job is now all about finding ways to offload toxic assets, keep bankers from leaving and trying to explain to a furious public why bankers need to be paid even if the bank suffers a loss. How much more fun to throw the whole institution at a deal that will not only define a decade but transform the geographic and growth profile of the business.
The trend of promoting CFOs to CEOs is only around 15 years old and can be partly attributed to the private equity business. Once companies are bought out by PE firms, the first priority is to manage the financials as tightly as possible, paying down the acquisition debt and serving interest before arranging an exit. This placed great emphasis on financial skills as opposed to strategic vision. Just such a situation happened last week when Carlyle led a group of investors in a $550 million deal buying into Bank of Butterfield in Bermuda. In the process, the existing CEO Alan Thompson left the bank. His successor? Bradford Kopp, the CFO.
The promotion of the CFO to the top spot can be seen as an admission that all the focus will be on the balance sheet and not the income statement. That could explain why CFOs at Goldman Sachs and HSBC – David Viniar and Douglas Flint respectively – tend not to be mentioned as the next CEOs of the banks; these institutions have very strong internal strategic cultures matched by fortress balance sheets. An admission that either is needed in the top spot would be a sign both of a weak culture and balance sheet. But with Thiam now pioneering the way, it can be shown that CFO’s can make great strategic CEOs. Who will be next?
Today in boilerplate press releases, MedAssets dropped BDO as its auditor for the bigger and bluer KPMG and the CFO punted on giving a real reason as to why.
“We are very fortunate to have had the pleasure of working with BDO Seidman for many years, including during the period of time covering our initial public offering in 2007,” said Neil Hunn, Executive Vice President and Chief Financial Officer, MedAssets. “BDO has been a tremendous business partner for us and instrumental in our success. MedAssets has experienced tremendous growth, especially over the last few years, and we expect this trend to continue. As such, we feel that KPMG is best suited to serve our Company and stockholders in the future. We look forward to our new relationship with KPMG.”
So if we were translate this statement, basically it sounds like MedAssets wants a big firm because the business is growing like gangbusters and they simply can’t be held back by a second-tier firm like BDO.
Or maybe we’ve got it dead wrong. Maybe MedAssets is spooked about BDO’s chances in the Banco Espirito appeal. Maybe KPMG’s Atlanta office is desperate for work and lowballed the audit fee. Feel free to share your own speculation but we’re sure as hell not buying the statement that a firm (in this case, BDO) ‘has been a tremendous business partner’ and ‘instrumental in our success’ and just gets up and dropped because ‘tremendous growth’ is expected to continue. Is BDO really that incapable of continuing to serve the company?
Basically, we are asking for more honest language in SEC filings and press releases.
There are three pieces in the blogosphere today that touch on the fundamental problem with our economic system and why it will remain in a ditch, or just lurch onward to the next crisis, if it isn’t addressed.
And that is monopoly. I’ll leave aside the politics of that, which is addressed well enough by Thomas Franks over at the Wall Street Journal. In a nutshell, he warns of a return to feudalism, which I’ve done as well before.
What struck me as new was this analysis, which made me realize that the macroeconomic problem with monopolies is that they discourage hiring and capital investment.
After all, if you have a market locked up, your profits are so high that it makes no sense to take any risk on new investment. You just keep doing what you’re doing with the resources you have, hoping to maintain your barrier to entry. Oh sure, you expand, but only by acquiring competitors so as to keep your monopoly intact and your margins high.
Capital investment? Hiring? Forget about it. There’s no need. In fact, you want to reduce those things. That’s called synergy.
So where does expansion in GDP come from in that case? It derives more and more from speculation about where your stock price will go. Multiply that to the nth degree, a process known as financialization that’s been taking place for decades, and everything ultimately becomes geared to asset prices, with the bubbles and busts that inevitably ensue.
Yes, this description is woefully simplistic and won’t pass muster in a traditional macroeconomics course. There’s also plenty of room for argument as to what degree monopolies currently dominate the economy.
But it seems to me that this is the sort of analysis that’s required to restore the economy’s health. How else, after all, can one explain the paltry amount of hiring and capital investment we’ve seen since the late 1990s?
The point of such a discussion, of course, would be to come up with a solution to the problem. As cogent but unfashionable as its description of the problem may be, the Marxist view expressed in the Monthly Review article cited above is that it cannot be solved because of the irreconcilable contradiction at the heart of capitalism, and that political instability of the highest order is thus inevitable. Sorry, but no thanks.
The alternative: Vigorous antitrust enforcement, which, as Simon Johnson of MIT points out, is what the progressive Republicans pursued a century ago when financial trusts threatened to put a stranglehold on the entire system.
Indeed, breaking up monopolies, in banking and elsewhere, strikes me as the only viable means of growing the economy without creating a more dangerous asset bubble in short order.
Yes, you could conceivably do it instead through better regulation, and I’m all for that, but the back and forth we’ve seen in Washington over financial reform shows that better regulation is impossible until the economic power of the banks, and the political influence that goes with it, is sharply curtailed. The Federal Reserve and other bank regulators had all the authority they needed to keep banks in check, but failed to do so. Why? It wasn’t because they were dumb.
Not exactly shocking news but one of the mysteries of the financial crisis is how it came to be that banks ended up with r transferred to investors.
Sure, it’s well known that the assets banks removed from their balance sheets did not shift much risk to investors after all, thanks to liquidity guarantees they supplied to investors. But that even took former Citigroup vice chairman and Treasury secretary Robert Rubin by surprise, as Rubin said he didn’t know such guarantees existed until after the bank was forced to increase its capital reserves because it had to make good on them.
Now research that came out a year ago but was revised late last month helps clarify what went awry.
It turns out that a conflict between the Financial Accounting Standards Board and federal bank regulators was even more critical than I thought it was when I reported it in 2004. The conflict arose after FASB voted to require commercial banks to consolidate such vehicles after such financing arrangements caused energy trading firm Enron Corp. to fail.
I was aware that the regulators asked the FASB to delay the new accounting rule and that the board eventually provided an exemption for so-called “qualified” special purpose entities, which provided a loophole from consolidation so long as they vehicles weren’t actively managed.
But the full significance of that escaped me until I saw the research, which shows that securitization along the lines of Enron’s — guarantees that limited or even eliminated investor risk — exploded after bank regulators codified the exemption in their capital requirements. Indeed, the exemption essentially paved the way for banks to use more off-balance-sheet financing vehicles that masked their true risk.
How exactly? In late 2004, the Federal Reserve Board, Federal Deposit Insurance Corporation and the Office of Thrift Supervision decided that asset-backed commercial paper put into special purpose vehicles known as conduits would not have to be consolidated for purposes of calculating capital requirements. And the regulators decided that banks need only reserve against 10 percent of the amounts put into conduits even when they guaranteed that investors would be repaid if there were a run on the conduits. Previously, securitizations typically put investors on the hook for that risk.
The research, originally published in May 2009 but revised in late January and entitled “Securitization without Risk Transfer,” found that the amount of subprime assets securitized through such vehicles soared in the wake of the exemption, even though the liquidity guarantees extended to investors meant that little or no risk had been transferred to them.
“Regulation should either treat off-balance-sheet activities with recourse as on-balance sheet for capital requirement and accounting disclosure purposes, or, require that off-balance sheet activities do not have recourse to bank balance sheets,” the authors, Viral V. Acharya and Philipp Schnabl of New York University and Gustavo Suarez of the Federal Reserve, conclude. “The current treatment appears to be a recipe for disaster, from the standpoint of transparency as well as capital adequacy of the financial intermediation sector as a whole.”
Perhaps he wasn’t crazy about the new forced ranking method on pay?
The Hartford Financial Services Group announced late on Tuesday that Christopher Swift will join the insurer as chief financial officer effective March 1.
Swift, 49, is jumping ship from American Life Insurance Company (ALICO) where he was CFO. ALICO is a subsidiary of American International Group, which the bailed-out insurer is trying to sell to MetLife for $15 billion. The deal is currently hung up on a tax issue.
Hartford, which received $3.4 billion in government aid, has been undergoing a major executive shakeup.
Liam McGee, a former head of consumer banking at Bank of America, took over as chief executive in October from Ramani Ayer, who had led Hartford’s aggressive push into variable annuities and retired at the end of 2009.
Shortly after taking over, McGee tapped Hartford’s current CFO, Lizabeth Zlatkus, for its chief risk officer position. She’ll move into that role when Swift officially joins the company.
AIG, for its part, has been bleeding talent. More than 60 managers have left the company since it was bailed out in September 2008, according to data compiled by Bloomberg. Pay practices at AIG have been under intense scrutiny by the public, as well as the government.
Swift began his career as an auditor in the Chicago office of KPMG where he focused on financial services. He was made partner at 32. He then became executive vice president of Conning Asset Management, a subsidiary of General American, where he was responsible for finance, sales/marketing and information technology. After MetLife acquired Conning in 1999, Swift returned to KPMG and was eventually appointed head of the firm’s Global Insurance Industry Practice. As leader of this segment, he worked with clients in both the life and P&C segments, globally and domestically. He was responsible for matters ranging from strategic and regulatory to audit, risk, advisory and tax services.
They already share a first name.
Other than that, they probably don’t have much in common but does anybody else have a problem with the fact that the head of the energy trading unit that Citigroup sold to Occidental last year is setting up a hedge fund?
It would be an entirely different situation if Andrew Hall were leaving Occidental to do this, but he isn’t. Instead, he will wear both hats simultaneously.
That sure sounds like a clear conflict of interest to us. After all, fee structure of a hedge fund clearly incentivizes Hall to favor its investors over Occidental’s, though the oil company has a 20 percent equity stake in the fund.
The FT doesn’t explore this issue for some reason, referring merely to the fact that the two companies will be run “separately” and that the trades will be done “in parallel,” whatever that means.
And the article’s point about this deal having an air of history about it seems woefully misplaced.
Forget the fact that Hall’s hedge fund, Astenbeck, is named after a village near the historic German castle he owns. The more telling historical reference has to do with the conflict of interest. Indeed, the last time we saw a conflict this clear-cut was when Andrew Fastow ran some of Enron’s key off-balance-sheet partnerships while serving simultaneously as its CFO.
It was the disclosure of that particular factoid in a footnote that helped prompt short seller James Chanos to question Enron’s financial results back in early 2001.
And maybe this is just a coincidence, but Enron was an energy trading company as well. Remember Get Shorty?
As a side note, my colleague Matt Quinn wonders if Hall’s hedge fund will attract a lot of Citigroup’s former fund investors, and even draw Citigroup itself as an investor. That would certainly make sense if the bank is forced to get out of proprietary trading, as the Obama administration is proposing. Plus the bank would get to benefit from trading without having to reflect the risk on its balance sheet.
But the big question is, would Citi and its investors be treated better than Occidental’s shareholders?
Corporate executives have really gotten to show off their cost-cutting skills during the financial downturn and the ongoing, tepid recovery, as many have managed to push earnings up even as revenues sagged.
But, in looking forward, they have to wonder what cost those reduced expenses came at.
According to a survey released by KPMG on Wednesday, board members and senior executives are doing just that. Forty-five percent of the respondents expressed concern about the sustainability of the cost reductions undertaken by their companies in response to the economic crisis.
“Significant cost cutting can create a variety of risks to the business, both near- and long-term,” said Mary Pat McCarthy, KPMG Vice Chair and Executive Director of the Audit Committee Institute, in a press release.
In particular, two-thirds of those surveyed said they were most concerned about the impact of cost cutting on their company’s employee talent and training. Other concerns include the impact of cost-reductions on internal controls (36 percent), fraud risk (25 percent), management of outsourcing and supply chain (24 percent), financial reporting integrity (21 percent), and the Foreign Corrupt Practices Act and compliance issues (9 percent).
Some 13 percent of the respondents said their companies had not implemented significant cost reductions.
While previous recessions were characterized by short-term belt-tightening and a quick return to normal, KPMG noted that current cost reductions may be much longer-term, and possibly permanent.
The long-term nature of the cuts is understandable in light of the executives’ economic outlook. The survey found that 45 percent of respondents don’t expect the U.S. economy to reach pre-crisis growth in terms of investment, employment and productivity before at least 2013, and 22 percent said it would be beyond 2014.
Another 17 percent were particularly pessimistic, saying the economy would not see pre-crisis growth “for the foreseeable future,” while 15 percent said recovery could come in 2011. Just 1 percent said recovery could occur in 2010.
Similarly, in a separate response, 66 percent said American companies will not return to “business as usual” and will operate in this new environment through at least 2013.
In dubious CFO news, Vincent Rubio, the former financial chief at Tustin Hospital and Medical Center, agreed to plead guilty yesterday for paying kickbacks to “marketers” who recruited homeless people from the Skid Row area of Los Angeles.
Rubio pleaded guilty to health care fraud and tax evasion; he was the fifth person to charged in the investigation that is still ongoing. He faces fifteen years in prison After the homeless people were treated, the hospital billed Medicare and Medi-Cal for unnecessary treatments.
The AP piece doesn’t have much to it so we’re got to wondering all sorts of things like: A) Who discovered this fraud? Was it — gasp — the auditors? B) what were these unnecessary treatments? We’re these displaced individuals getting checked for hernias or less intrusive procedures? C) how much was Medicare and Medi-Cal charged? Are we talking Madoff-esque numbers? D) When the homeless were finished up at the hospital did they strap them to a rickshaw and send them back out in the streets or did they try to help them for real?
We called the hospital to find out more and we were connected to a spokesperson, who told us that she could not comment on the matter. She informed us that our message would be relayed to the hospital’s President, James Young. At the time of posting, we had not heard back from him. We’ll update this post with any comment or further information.
Ex-hospital CFO pleads guilty in homeless scam [AP via SF Chronicle]
UPDATE Friday, February 12th: We received the press release from Pacific Health, the owner of the Hospital:
February 11, 2010
Pacific Health Corporation learned of the allegation that a third party made improper payments to Vince Rubio on November 30, 2006. Upon receipt of the allegation, Pacific Health Corporation contacted its outside counsel to investigate the allegation.
Within one day of the allegation being received, Pacific Health Corporation took employment action in the matter, placing Mr. Rubio on leave. Within one week, Pacific Health Corporation terminated the employment of Mr. Rubio.
After the completion of the its internal review and taking the employment action, Pacific Health reported the matter to law enforcement officials. That took place in early 2007.
We briefly discussed work-inspired nightmares yesterday but as professiona robably don’t get a whole lot more unsettling than Joe L. Price’s.
Price, the former CFO at Bank of America, must be tossing and turning lately, what with the attorney general of New York naming him personally last week in a lawsuit over the bank’s handling of the ugly Merrill Lynch acquisition/investor-subsidized bailout/compensation party in late 2008.
Now, Price and former BofA CEO Ken Lewis face another unpleasant twist in what they must’ve thought originally was a slam dunk in an awkward but palatable settlement with the SEC over the Merrill Lynch deal (beware that slam-dunk feeling [see Tenet, George]).
Recall how Jed Rakoff, the irascible U.S. District Court judge presiding over the BofA/Merrill Lynch case, last year rejected a settlement between the SEC and BofA, saying that $33 million wasn’t nearly enough for the bank to make things right with investors who were kept in the dark about the unsavory downside – if that’s not too generous a word – for taking on Merrill Lynch’s baggage. And then on Monday Rakoff started asking mean questions about the second rendition, in which the SEC and BofA are saying, okay, fine, how does $150 million sound?
Going by some of the doubts Rakoff raised, he isn’t leaning toward letting the BofA executives ease on out of their difficult litigation-riddled winter into a springtime of sun-dappled redemption and new life. Easter, as it were, may yet be cold and wet (as may Passover, choose your festival). But don’t blame Rakoff because there are better scapegoats – the SEC, Andrew Cuomo, Punxatawny Phil …
Cuomo, that pesky AG in Albany, asserted in his allegations against Price et al. that BofA lawyers who had counseled against pulling the curtain aside on certain details about Merrill Lynch were essentially operating in the dark and that they were, therefore, misled. “Bank management failed to provide any of their lawyers with accurate information about the losses which the disclosure issue concerned,” the civil-suit complaint says, adding painful elaboration that alleges “false and incomplete information provided by Price.” (Ron Fink explains here).
This is not the kind of thing a CFO likes to read about himself or herself, which is why it may be best as a rule to come clean from the get-go. At the heart of the controversy is the assertion that BofA execs were simply not forthright about how they allowed Merrill Lynch brass to receive billions of dollars in bonus bucks in exchange for having lost billions of investor dollars.
In such a context, Radoff has implied, $33 million is chicken feed and $150 million is – I don’t know – cat food? The good judge apparently wants the bankers to throw some steak over the wall.
Also at issue, and fundamental to how BofA is managed going forward, are questions about how certain aspects of corporate governance are handled, perhaps especially about how compensation is set. Rakoff suggested that there might be better ways to come up with a reasonable pay scheme than leaving it to BofA’s compensation committee to pick its compensation consultant of choice.
A big clue about how he might rule on this is in his observation on Monday as to the “incredibly bloated compensation of too many executives in too many American companies.”
The honor goes to Stephen Kunken, best know for his role as James Reston in Frost/Nixon. He will be alongside Norbert Leo Butz who will be playing Jeff Skilling.
We located the list of the cast for the London production of Enron and there is a role for “Arthur Andersen” and two for “Lehman Brothers” so these key roles still need to be filled.
Back to the future Tony winner; we don’t envy the research that Kunken has ahead of him since we’re assuming that he’ll have to channel the book cooking prowess of AF. Then again, since he’s an actor, he only has to pretend to know what he’s talking about with regard to accounting and financial reporting; there’s accountants out there doing that every day.
Kunken Will Play Enron CFO on Broadway [Playbill]
– Updated to included statement from Deloitte
By now you’ve heard that Ken Lewis and former BofA CFO Joe Price are in a bit of pickle, thanks to NYAG Andy Cuomo.
Long/short is that Drew has filed civil charges claiming that these two ignored advice to disclose information about the losses at Merrill Lynch and went ahead with their plans that ended up screwing just about everyone in the entire world.
According to the complaint, Deloitte was right in the middle of the action back in December of ’08 as the auditor of ML and from the sounds of it, they kinda-sorta encouraged ML’s counsel to disclose the losses saying:
given the losses through what it looks like will be November when it closes, given the fact that you have another couple of billion of dollars coming down the road in goodwill impairment, we believe it’s prudent that you might want to consider filing an 8K to let the shareholders, who are voting on this transaction, know about the size of the losses to date
Okay, so “prudent that you might want to consider” sounds like a “you can disclose the losses if you want to but we’re not making a BFD out of this” but Andy’s complaint sure presents it as a legit warning. We’re not saying that Thomas Graham, the Deloitte partner on Merrill, needed to be hyperventilating while telling ML’s Chief Accounting Officer David Moser that they “might want to consider” the disclosure but Moser was worried enough to tell in-house counsel about it.
Maybe Moser didn’t bring it up because he knew that lawyers don’t take anything auditors say too seriously. If everyone who claims to be worried, was legitimately concerned, perhaps they should’ve considered some double exclamation point usage. Oh well; next time!
We haven’t seen a statement from Deloitte anywhere and they haven’t gotten back to us at this time. Deloitte provided us with the following statement:
Deloitte personnel have testified as part of the New York attorney general’s investigation. Some of that testimony is cited publicly in the attorney general’s complaint. Deloitte is not a party to this proceeding, and due to professional standards, we cannot comment further on confidential client matters.
At the end of the day, BofA’s own general counsel tried to tell KL what’s what and he ultimately got fired so Deloitte ends up being a small fish in this whole situation (i.e. “not a party to proceeding”). Cuomo wants to be governor for crying out loud. Voters don’t give a shit if you file civil complaints against auditors.