New Terrain

Post-Enron reforms have made dramatic alterations to the landscape of corporate governance. Boards, their committees, and internal auditors now have greater responsibilities and powers. How will these reforms change the CFO's job?

Internal Audit to the Fore

Many of those questions are likely to be raised by internal-audit staff, who now pose a managerial dilemma for CFOs, given their more-direct reporting relationship to the audit committee. Rather than chafe at this new reality, the finance chief can be a positive influence in making sure internal auditors get the respect and cooperation they need. If there are fears that the solid-line reporting between internal audit and the audit committee could lead to perceptions of internal auditors as institutionalized whistle-blowers—perhaps even prompting up-and-coming finance staffers to avoid internal-audit assignments—CFOs can allay such concerns.

The way for CFOs to promote a healthy atmosphere, some say, is to support internal audit’s greater visibility and help promote corporate respect for auditors in the reform environment. Some experts point to internal audit’s necessary closed-door meetings with the audit committee as a major step toward the kind of free and open corporate communication that most executives say is at the heart of better governance. “By requiring certain kinds of closed-door meetings to take place,” says Bengt Holmstrom, a Massachusetts Institute of Technology economist who has studied corporate-governance issues, “the new regulations actually nurture the relationships that shape governance, because now CFOs don’t have to question why such meetings occur or wonder whether they’re a sign of trouble.” Many companies have held such meetings as a matter of course, but the new rules now mandate that the best practices in evidence at well-governed companies be practiced by all.

“Internal audit has always walked a fine line,” says Barger. “But it’s their job to look for weaknesses and fix them, and we absolutely want them to do that.” Adds Paul Schmidt, controller at General Motors Corp., “We have 200 people in internal audit, and it’s now a more exciting place to work. Our audit committee values them, and even when we downsize, they keep a close eye on the size of internal audit to make sure we have the resources there that we need.”

Pitney Bowes Inc. CFO Bruce Nolop goes a bit further. “[Internal] auditors are rock stars now,” he says. “This is their day in the sun.”

Rock stars or no, internal-audit staff may find a measure of tension and even conflict of interest because of their peculiar location in this new regulatory terrain—caught between the CFO and the audit committee. H. Stephen Grace Jr., chairman of Financial Executives International and head of an advisory services firm in Houston, says FEI has joined with the Institute of Internal Auditors to study how “internal audit has been misused and distracted [from doing its job] in the past.” The goal, he says, will be to raise awareness of potential conflicts and to clarify the roles of internal audit and finance.

Complicated Yet Narrow

As CFOs confront the managerial complexities wrought by new regulations, they are seeking ways to simplify and clarify what’s expected of them.

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