In an interview with Going Concern, DOPE CFO founders Andrew Hunzicker, CPA, and Naomi Granger, CPA, explain what common cannabis accounting mistakes CEOs make and why the industry presents a huge opportunity for accounting professionals.
If you’re a Big 4 CEO, part of your job includes bopping around lavish business events like the World Economic Forum. KPMG U.S. CEO Lynne Doughtie is no exception, but given this week’s events, you can’t help but wonder if she’s doing so with a raging fire atop her head. Not that you would know […]
A few years ago we published an article about what makes a great accounting CEO. Or rather, we published an article about a survey from PwC that asked CEOs what they think makes a great CEO. In that piece, we highlighted a quality identified by many CEOs that surprised PwC—humility. This included “maintaining a modest […]
BDO partners seem to like Wayne Berson well enough to let him keep his job a while longer: BDO USA, LLP, one of the nation’s leading professional service organizations, today announced that the firm’s partnership has re-elected Wayne Berson to a second four-year term as chief executive officer, effective November 1, 2016. During the first […]
In an interview, soon-to-be Deloitte Global CEO Punit Renjen said, "Our goal is not to be the biggest," which, obviously dude, you've got that in the bag so why state a goal that you've already achieved. Rather, he said he wants the firm "to be the undisputed leader in professional services," (aka THE BEST) and […]
Continuing our discussion earlier today about why there aren't more women at the upper levels of corporations and government, let's talk about the type of person that makes a great CEO. First, they have to want to be one. After that, though, we'll let PwC take that one. The following is early intelligence gleaned from […]
We've long agreed as a society that manly dudes are more likely to be in-charge types, from clubbing their mate of choice and dragging her back to the cave to heading up our nation's largest companies and accounting firms (we're looking directly at you, Jim Turley's imposing jawline). Now, we learn that manly dudes are […]
Slashing a CEO’s compensation after a company produces disappointing financial results may help improve earnings for a time, but it can also encourage earnings manipulation, according to a new study. The study, which was presented at last month’s annual meeting of the American Accounting Association, acknowledged that some prior academic research has found company performance […]
We've clearly got an Above Top Secret member hanging around the tip box this afternoon: The real unanswered question regarding Echevarria at Deloitte – I can understand that he wanted to announce that he did not want to stand for re-election (possibly he heard from insiders that he wouldn't get re-elected) the real question that […]
We need to clarify this situation before people start claiming everyone at GT is going to be fired and replaced with humanoids and/or shapeshifting lizards. As far as we know, that is not happening so just relax. What is happening is Stephen Chipman is aiming to hit the door at the end of 2014. Here […]
UPDATE — A couple of reports out of the Milwaukee press have confirmed our tips from yesterday. We've also received the text of two emails, one from Ms. McMasters and one from CLA's other CEO, Gordy Viere that communicate the decision to the firm's employees. They appear on the following pages.
A couple of tips came in earlier today that CliftonLarsonAllen's co-CEO Krista McMasters is retiring. If she were to step down then it stands to reason that Gordy Viere, the CEO of CLA Holdings would be the head of the firm. We're still trying to confirm that this is in fact the case but if true, that would mean all of the CEOs (managing partners, or whatever else they might be called) of the 25 largest firms would be led by men.
Who knows?!? Four years studying the debit and credit arts at UCLA along with five months at Deloitte is more than enough time to accelerate a drinking problem or weight gain, but lay the groundwork for a viral exposure of human rights atrocities? That remains debatable. It's certainly a better result than some people who […]
Ernst & Young has internally announced that Mark Weinberger will be the next Chairman and CEO of the firm. Mark is a tax guy, currently the Global Vice Chair of Tax but has a lot of experience inside the federal government serving as an Assistant Secretary to the Treasury of Tax Policy under President George W. […]
A recent study, “Why Do CFOs Become Involved in Material Accounting Manipulations,” by researchers at the University of Pittsburgh and the University of Washington attempts to answer just this question. Their finding? Pressure from the companies’ CEOs, more than the possibility of financial gain, tends to drive the actions of crooked CFOs.
Of course, the researchers couldn’t actually divine the motivations that drove the CFOs who manipulated numbers. Instead, they reviewed a group of firms subject to SEC enforcement, analyzing the role of the CFOs, as well as the costs they incurred and any benefits they gained from their actions.
They found – not surprisingly – that the CFOs involved faced stiff penalties for their actions. More than half of the CFOs (54 percent) employed by the nearly 300 firms in the sample that were charged by the SEC for accounting manipulation were prohibited from serving as an officer, director or accountant with a public company in the future. About 48 percent of CFOs were fined as a result of their wrongdoing, with a median fine of $50,000. A small number – about 4 percent – also faced criminal charges. Clearly, monkeying with the numbers can be quite costly for CFOs.
On the other hand, the CFOs that engaged shady number crunching didn’t have significantly higher equity incentives than CFOs in the control sample. That means the CFOs involved in misstatements took on a lot of risk, yet couldn’t expect to come out much further ahead financially than their counterparts at law-abiding firms.
Conversely, the CEOs of firms in trouble exhibited both greater power and equity incentive than CEOs of control firms. For instance, these CEOs were more likely to be company founders and to serve as chair of their boards than the heads of the other firms. “This evidence is also consistent with the pressured CFO explanation; that material accounting manipulations are more likely in the presence of powerful CEOs,” the researchers write.
What’s more, CFO turnover jumped during the three years before the misstatements occurred. That suggests that at least some CFOs either left or lost their jobs because they refused to participate in the manipulation.
The SEC also seems to have taken note of the larger role that CEOs, rather than CFOs, typically played in the schemes. When the researchers examined 188 companies in which both the CFO and CEO were charged with manipulating numbers, they found that the SEC had charged 18 percent of CFOs with orchestrating the schemes. When it came to CEOs, however, 32 percent were charged – almost double the CFO number.
Moreover, when the SEC charged just the CFO with wrongdoing, 30 percent of them benefited financially. That’s a lot, but it’s significantly less than the 46 percent of CEOs who were charged and also gained financially.
Given these findings, are there changes that could reduce accounting shenanigans? To be sure, the research doesn’t mean that CFOs who cook the books can simply blame their actions on their bosses; clearly they could have acted differently, as difficult as doing so might have been. The findings do suggest, however, that one step to reducing the opportunity for wrongdoing would be to provide CFOs with greater independence from their CEOs. One way to accomplish this would be to expect greater participation from corporate boards or audit committees when it comes to hiring and evaluating their firms’ chief financial officers.
No new recession, let tax cuts die: Geithner [Reuters]
“The economy is not likely to slip back into recession but letting tax cuts for t ans expire is necessary to show commitment to cutting budget deficits, Treasury Secretary Timothy Geithner said on Sunday.
In appearances on several Sunday talk shows, Geithner said only 2 to 3 percent of Americans — those making $250,000 or more a year — will be affected when tax cuts enacted under former President George W. Bush end on schedule this year.”
BP Said to Prepare Dudley as CEO as Board Looks for Recovery [Bloomberg]
“BP Plc plans to name Robert Dudley to succeed Tony Hayward as chief executive officer as the board looks to recover the company’s position in the U.S., two people with knowledge of the matter said.
Dudley, the director of BP’s oil spill response unit, is ready to be announced as the company’s first American chief and to take the helm Oct. 1, one of the people said, asking not to be identified because a final decision hasn’t yet been made. The decision was reached in discussions with board members about how best to take BP forward and rebuild its U.S. position, the person said.”
Madoff Investors Brace for Lawsuits [WSJ]
“Irving Picard said he could wind up suing about half the estimated 2,000 individual investors he has called “net winners” from their dealings with Mr. Madoff. Such investors withdrew more from Mr. Madoff’s firm than the amount of principal they invested.
‘The people who made money, who got more, have made money at the expense of the people who didn’t,’ said Mr. Picard, who has the power under federal bankruptcy provisions to pursue money withdrawn from Bernard L. Madoff Investment Securities LLC before it collapsed in December 2008 and redistribute the funds fairly among victims.
Mr. Picard must file any so-called clawback lawsuits by December, the two-year anniversary of Mr. Madoff’s arrest and the filing of regulatory proceedings against him. ‘We’re not going to wait until the last minute,’ Mr. Picard said.”
Change the world or go home [AccMan]
Dennis Howlett implores you that if you want your firm or business to really stand out then it’s going to take more than a catchy slogan or a boilerplate email to get people’s attention. You best recognize an opportunity when you see one.
“I’ve lost count the number of times I’ve said but it is worth repeating. When disruption like SaaS comes along, it represents an opportunity. From a professional standpoint it should mean that firms can further commoditize what they do by using accounting dashboards that show them the status of their clients’ activity. It is a short step to seeing how this might be integrated into fees, billing, customer satisfaction measurement and the like.”
If You’re Going To San Francisco…AAA Will Be There [FEI Financial Reporting Blog]
Edith Orenstein has the lowdown on this year’s American Accounting Association’s (AAA) annual meeting. This year’s event is in AG’s backyard (she loves giving directions, btw) from July 31 to August 4th and will feature Francine McKenna and Professor Albrecht on one of the panels.
Join Me For a Nice Little CPA Exam Chat on August 3rd! [JDA]
Speaking of Adrienne, she’ll be over at CPA Exam Club to take your questions on everyone’s favorite test on August 3rd. Yes, that’s one week from tomorrow.
PwC Demands Dismissal of Glitnir Lawsuit [Iceland Review]
PwC’s lawyers argue that Glitnir and the firm agreed to do any legal wrangling in Iceland if the poo hit the fan. Late last week they requested that the lawsuit in New York be tossed.
Saltzman Hamma firm details merger with RubinBrown [Denver Business Journal]
“Saltzman Hamma Nelson Massaro LLP, a century-old Denver accounting firm, is merging with St. Louis-based RubinBrown LLP to form what’s expected to be among the 50 largest accounting firms in the United States, principals were set to announce on July 23.
The new entity, which will operate as RubinBrown, will employ 375 people in offices in Denver, St. Louis and Kansas City, Mo. The merger will be effective Aug. 1.”
District Court Denies Charitable Deduction for Donation of Home to Fire Department [TaxProf Blog]
Just donate a car next time. It’s a far worse investment than a house.
IRS Proposes PTIN Fees [JofA]
$50 for your very own preparer tax identification number! Of course there’s also a ‘reasonable fee’ on top of that from “a third-party vendor that will administer the application and renewal process,” that gets thrown in for good measure.
My Life as a White-Collar Criminal [White Collar Fraud]
Sam Antar went on Canadian TV last week to talk about how much fun it is to be a crook. Except the whole possibility of prison part.
The need for a chief executive to work with boards and communicate with Wall Street has never been greater, and CFOs have experience in both those areas–making them excellent candidates for the top spot in an organization.
Companies are increasingly recognizing the value of this internal asset and promoting their CFOs to CEO, according to executive search firm Russell Reynolds’ Chief Financial Officer Moves North America, Q1 2010.
Currently there are some 50 CEOs in the Fortune 500 who were previously CFOs for the same company. Their numbers recently increased, at least on an interim basis, as Marcel Smits, the CFO at Sara Lee, was promoted to the CEO slot.
CFOs have been promoted to CEO typically in organizations that are heavy on logistics or analytics, says Christopher Langhoff, who specializes in financial officer assignments for Russell Reynolds. He offers the example of Clarence Otis, Jr. at food services firm Darden–which owns and operates restaurants such as the Olive Garden and Red Lobster.
Otis started with the company in 1995 as vice president and treasurer and progressed to CFO. He was appointed CEO in 2004. Similarly, David West joined the Hershey Company in 2001 as vice president of business planning and development and worked his way up to CFO, where he served from 2005-2007. He was promoted to CEO in 2007.
It’s rare, however, to see a move from CFO to CEO in the tech industry, says Langhoff.
The ascension of CFO to CEO is not likely to slow down any time soon. “We have more and more clients that are coming to us asking for a world class CFO that will likely be ready to be CEO in two to three years,” says Langhoff. “That’s a tall order. We looked back and many times prior to the appointment of a CEO, the person had served, on average 16 years at the company.”
The first quarter also showed a continued, robust turnover of CFOs in the middle market. “The lifespan of a CFO can be shorter than an NFL career,” says Langhoff. As for the rest of the year, Langhoff predicts more turnover. Over the past four months, Russell Reynolds reported a dramatic increase in search activity in the United States, Europe and Asia that spans industries.
The spike has been most pronounced within the financial services sector. Companies like Bank of America, Morgan Stanley, Neuberger Berman, Kellogg, PepsiCo, Walt Disney, Dow Chemical and CVS/Caremark all named new CFOs.
Says Langhoff: “When Sox was in full gear there was a need for a CFO who was a CPA. Now, companies are looking for a strategic CFO, a business partner. There could be a big shift.”
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.
Grassley Airs Concerns As Vote Nears on Financial Bill [WSJ]
“Iowa Republican Sen. Charles Grassley is ‘very concerned’ about a provision in the financial overhaul bill designed to pay for the le aid Thursday, potentially complicating White House efforts to build a filibuster-proof majority to back the measure.
If Mr. Grassley decides to vote against the bill, Democrats would be left with little margin for error when they bring the bill to the Senate floor, which could happen as soon as next week. Mr. Grassley was one of four Republicans to support an earlier version of the bill when it narrowly passed the Senate in May.”
State Jock Taxes: Is LeBron Better Off in Miami? [Tax Foundation]
Of course Florida has no income tax, so every game that LBJ plays in Florida he’ll have a tax liability of $0. What about the other 41 games outside of FLA? That’s another story, “True, if James plays in Miami, none of his neighbors will be paying state income tax, but thanks to the jock tax, LeBron will.
While most people who travel in their jobs pay state income tax only to their home state, which is zero in Florida, athletes get special attention. In the NBA, each player’s per-game salary is computed, and whenever a team is on the road, the players must pay whichever tax rate is higher, the home state’s or the away state’s.”
Facebook Often Not a Job Seeker’s Friend [FINS]
If you’re pounding the pavement for a new job out there, it’s pretty much a given that people are looking at your online activity. But just how much and where? Based on the conversation between FINS’ Kyle Stock asked Michael Fertik of ReputationDefender Inc, you’d better drop those loser friends from high school that have appeared on Cops:
Kyle Stock: Can you speak briefly on to what extent companies are checking up on candidates online?
Michael Fertik: They’re absolutely doing it. It’s somewhere around 70% to 80% of hiring managers. . . And not only are they looking online, they are also looking in really remarkable places like virtual worlds and gaming rooms.
KS: To what extent do people realize this is going on?
MF: Somewhere around 70% of employers are considering online information when evaluating a candidate and only 7% of candidates believe they are doing so. There’s a huge gulf of understanding. . . Everybody has been opted in. There’s kind of a willful ignorance about it. That’s changing, but it’s still there.
And the kinds of information being considered are growing very diverse. It’s not just the photo that you published of yourself with a beer or a bong, it’s also content like who your friends are and what they post on your page and what kinds of groups that you link to. There’s kind of an associative picture that they develop of you and then they make decisions about you based on those associations.
Internal Auditors Target Spreadsheets [CFO]
“Last month the Institute of Internal Auditors plugged a gap in its guidance for members by issuing recommendations for the auditing of ‘user-developed applications,’ which generally are spreadsheets and databases developed by end users rather than by IT personnel.
User-developed applications, or UDAs, are subject to a high level of data-integrity risk because there may not be adequate controls over validating their output or making changes to them, the IIA points out. There is also confidentiality risk, because a UDA and its data typically are easy to transmit outside the company via e-mail.”
If you could sum up the years of 1998 to 2007, how would you do it? Promising career crushed in a millisecond? A seemingly endless loop of awkward moments? Various forms of experimentation?
If you’re the Committee of Sponsoring Organization of the Treadway Commission (“COSO”) you’re more or less way: Financial reporting fraud is getting bigger. Financial reporting fraud causes businesses to fail. CEOs and CFOs are usually the ones blamed.
If you’ve been paying attention at all, this probably doesn’t surprise you one iota but it is nice that COSO took it upon themselves to wrap it up in a nice little package entitled, Fraudulent Financial Reporting 1998-2007, An Analysis of U.S. Public Companies.
The report examined cases of alleged accounting fraud that were investigated by the SEC for the period. Some of the more interesting findings:
• Financial fraud affects companies of all sizes, with the median company having assets and revenues just under $100 million.
• The median fraud was $12.1 million. More than 30 of the fraud cases each involved misstatements/misappropriations of $500 million or more.
• The SEC named the CEO and/or CFO for involvement in 89 percent of the fraud cases. Within two years of the completion of the SEC investigation, about 20 percent of CEOs/CFOs had been indicted. Over 60 percent of those indicted were convicted.
• Revenue frauds accounted for over 60 percent of the cases.
• Twenty-six percent of the firms engaged in fraud changed auditors during the period examined compared to a 12 percent rate for no-fraud firms.
• Initial news in the press of an alleged fraud resulted in an average 16.7 percent abnormal stock price decline for the fraud company in the two days surrounding the announcement.
• Companies engaged in fraud often experienced bankruptcy, delisting from a stock exchange, or material asset sales at rates much higher than those experienced by no-fraud firms.
Lot of takeaways: bogus revenue is still popular, switching auditors is usually not a good sign (*ahem* Overstock.com), oh and if you cook the books, investors run away from you like a band of lepers.
Further, Compliance Week reports that the 347 cases reported is an increase from the 294 reported for the 1987-1997 period as well as tripling the average size of the fraud from $4.1 million to $12.05 million. The median assets and revenues of $100 million jumped from $16 million in the ’87/’97 range.
While this suggests that frauds are getting bigger, occurring at larger companies and as a result, destroying more wealth, the successful criminal prosecution of the people in charge of the companies doesn’t appear to be keeping up.
COSO Chair David Landsittel said, “All parties involved in the financial reporting process need to continue to focus on ways to prevent, deter, and detect fraudulent financial reporting,” although if the CEO or CFO (who certify the financial statements) are involved in the fraud, this statement doesn’t mean much. Sam Antar doesn’t think so either, telling us,
[W]e needed a study to find out that financial fraud leads to bankruptcy? Where have these guys been?Until we move away from the process oriented “check the box and fill in the blanks” routine in audits and start understanding criminal behavior, there isn’t much any auditor can do to deter fraud. Former Speaker of the House of Representatives Tip O’Neill once said, “All politics is local.” Similarly, we need to learn that “All fraud is personal.”
And since the SEC names a CEO or CFO in 90% of these cases, yet only 20% of those cases actually result in indictment within two years, does this indicate that the naming of said CEO/CFO is largely a photo op for the SEC/DOJ et al? Even if 60% of those executives are convicted it appears that finding fraud is (relatively) easy part; successfully blaming someone in the court of law is something else entirely.
One of the authors of the study, Mark S. Beasley of North Carolina State University noted that there is work still be done, “We need to determine if there are certain board-related processes that strengthen the board’s oversight of risks affecting financial reporting.” This seems to indicate that there is some significant high-level processes that are still not in place that could keep tabs on the Andy Fastows of the world but for now, we still seem to be going with the honor system.
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?