As former Enron CFO Andrew Fastow negotiated the plea bargain that has landed him a 10-year prison sentence, many finance chiefs were quietly hoping that some stern justice would help restore investor confidence. “Jail time will be an effective way to inhibit fraud,” says Regina Sommer, CFO of Netegrity Inc., a Waltham, Massachusetts-based software firm.
Punishment isn’t the sole answer to Corporate America’s problems, of course. Those in government hope that regulation, rather than incarceration, will provide a lasting deterrent to corporate misconduct. But while the post-Enron regulations affect everyone from board members to executives to shareholders, CFOs find themselves at the nexus of these changes—and apparently quite ambivalent about it all.
A CFO magazine poll of more than 300 senior finance executives finds them split on whether the governance reforms enacted in the past 18 months are worth the considerable effort of implementing them. They are also divided about whether CFOs should work merely to satisfy the letter of the law or go further and embrace its spirit.
On one point they are agreed: despite the shift of responsibility mandated by the Sarbanes-Oxley Act of 2002, which gives the authority to hire external auditors to the board’s audit committee—and takes it away from the CFO—fully 70 percent of finance executives believe the CFO’s standing ultimately will be enhanced. Talks with nearly two dozen finance executives, academics, activists, and experts in the governance field indicate that this belief reflects more than just wishful thinking. Yet the interviews also strongly suggest that the emergence of these more-influential finance chiefs will depend in large measure on how they respond to a new corporate world in which power is more diffuse and penalties are substantially increased.
“These reforms represent a sea change for CFOs,” says Charles Elson, Edgar S. Woolard chair of corporate governance at the University of Delaware. The most conspicuous example, he says, involves the new dynamic between CFOs and audit committees. “Whereas the CFO and the audit committee of the board once worked together collegially, it has now become an oversight relationship, with power moving to the audit committee.”
Many CFOs say the greatest impact of the new regulations is that they establish uniform governance practices across all firms; few seem concerned about any potential loss of influence. “It’s not a zero-sum game,” says Hilton Hotels Corp. CFO Matthew Hart. “An increase in the responsibilities of one party [the audit committee] does not decrease the influence or power of the CFO. There is simply more for everyone to do. For the most part, these new rules create a more proper alignment of responsibilities.”
The CFO survey finds that 35 percent of respondents agree with Hart, and consider the audit committee’s external-audit hiring responsibilities a positive development. Some 55 percent are more blasé, expecting little or no impact on audit quality or improved governance, while only 10 percent see the switch as potentially harmful.