As I mentioned in a previous post, a CFO’s role is to manage financial risk, project long term financial planning and strive to optimize profitability. A CFO’s job is not to manage the day-to-day finances but to monitor the company’s financial health and to make sure senior management understands the company’s health (or troubles) in real-time financial metrics.
And at the end of the day, it is the CFO who is accountable for the company’s financial success or failure.
December 2011 marked the tenth anniversary of the Enron fiasco and just a few weeks ago, Andrew Fastow, the former CFO of Enron, was released from prison after serving six years for wire and securities fraud for his role in the energy giant’s accounting scandal. While Fastow admits he was motivated by greed, insecurity, ego and corporate culture, his actions were justified by everyone else’s ignorance. Fastow acknowledges he knew what he was doing was wrong, but these unique strategies were approved by a long list of professionals including corporate attorneys, accountants, boards, managers, auditors and bankers. No one on this list asked questions; no one on the list raised concern. It’s possible everyone on the list trusted that Fastow, as CFO, would not be capable of doing something illegal or it’s possible everyone thought Fastow, as CFO, understood how to sync Enron’s financial plans with the company’s objectives.
What do Andrew Fastow, Scott Sullivan, and Mark Swartz have in common? They are all former CFOs convicted of accounting fraud in their role in corporate accounting scandals. Fastow, former CFO of Enron, was recently released from prison after serving six years and repaying $23 million dollars in money and property as restitution; Sullivan, former CFO of World Com, was released from prison in 2009 after serving four years of a five year sentence; and Swartz, former CFO of Tyco International, is currently serving twenty-five years in prison and was ordered to pay $35 million in fines. Swartz recently filed a $60 million lawsuit for breach of contract for monies he claims Tyco owes him for executive retirement and other perks.
In 2001, Enron was the largest U.S. bankruptcy in the United States history until the following year, when World Com filed bankruptcy. Additional bankruptcy filings by corporate giants Lehman Brothers (2008), Washington Mutual (2008), and CIT (2009) is evidence that we haven’t learned much since the fall of Enron in 2001 or World Com in 2002. All of these companies presented great financial numbers even when there were warning signs that defied simple economics.
So what went wrong?
There is pressure for the CFO to boost profitability provided its financial plans are in sync with a company’s objectives. If the financial plans are not in alignment then the CFO must present solutions to fix the problem(s). The CFO should be courting clients, lenders and investors but he should not compromise the company’s principles or reputation when all parties do not share the same values. And finally, the CFO should managing risk not creating new risk through unchartered waters.
1. If the Auditors Sign Off, Does that Make it Okay? http://blogs.hbr.org/cs/2012/05/if_the_auditors_sign_off_on_it.html?cm_mmc=email-_-newsletter-_-finance-_-finance050812&referral=00209&utm_source=newsletter_finance&utm_medium=email&utm_campaign=finance050812&goback=%2Egde_100148_member_113752694
2. 10 Things We Didn’t Learn From the Enron Scandal http://abcnews.go.com/Business/10-things-learn-enron-scandal-10-years/story?id=15048641#1
3. Enron’s Collapse: The Overview; Enron Corp. Files Largest U.S. Claim for Bankruptcy http://www.nytimes.com/2001/12/03/business/enron-s-collapse-the-overview-enron-corp-files-largest-us-claim-for-bankruptcy.html
4. Convicted Former CFO Seeks $60 million from Tyco http://www.reuters.com/article/2012/05/07/us-tyco-swartz-idUSBRE84617R20120507
5. Timeline of Tyco International Scandal http://www.usatoday.com/money/industries/manufacturing/2005-06-17-tyco-timeline_x.htm