Understanding the CFO

Philip LivingstonVice Chairman, Approva Corporation

Audit Committee Chairman – Cott Corp and Insurance Auto Auction

My Experience CFO

World Wrestling Entertainment Catalina Marketing Celestial Seasonings

Director and Audit Committee Chairman Cott Corporation - $2B soft drink company Insurance Auto Auction – auto salvage

Former CEO Financial Executives International – heavy involvement in SOX passage

CPA, MBA, member IIA Ultimate financial training – Raiders 1980/81!

Agenda

Major priorities and issues facing CFOs today

General expectations of Internal Audit from the CFO viewpoint

How can Internal Audit assist in addressing the major issues

What can Internal Audit do better to address these issues and/or expectations

Specific training for IAS

CFO Key Priorities:Managing Relationships Board members Operating management team Investors Analysts Customers Vendors

CFO Key Priorities:Developing People Building a great team is usually the hallmark

of a successful CFO Finance staffing market very difficult Technical accounting and reporting skills

scarce and expensive Bench strength a major issue for the finance

team

PrioritiesManaging Capital Allocation Capital expenditures Acquisitions Stock buybacks Dividend Policy – impact of tax changes

A KEY CHALLENGE – IAS CAN HELP HERE CAPEX BUDGET COMPLIANCE

IRR FROM MAJOR CAPEX PROJECTS POST ACQUISITION PERFORMANCE

Priorities:Planning for the Future Good CEOs and CFOs “live in the future” Good forecasting always important, but

becoming even more so

Implication for IAS Forecasting oriented projects Projects to review the quality of past forecasts and

consistent forecasting failures

Priorities:Cost Control - Productivity Scary commodity pricing environment

After big run up in commodity prices, they are DOWN 12% in the last two months

Cost of oil flowing through to many products and raw materials

Companies can get major advantages or be dealt huge blows by raw material volatility

Priorities:Business Reviews and Evaluations Most companies have a quarterly business

review process Usually very structured and VERY

INFORMATIVE

ASK TO ATTEND OCCASSIONALLY

Priorities:Business Intelligence Understanding what’s happening in the

business Real time Summary information with drill down ability

Understanding what’s happening in the market and with my competitors

IAS SHOULD BEGIN TO REVIEW BI SYSTEMS AND DATA WAREHOUSES

Priorities:Driving Process Improvements Cost cutting and productivity still critical CFO looked to for leadership in this area Those that stand still get crushed

IAS should be a major source of process improvement initiatives. Meld IT, finance

and operations knowledge.Centralization and web services still big

opportunities – MANY NEED A PUSH!!Connect ERP systems along the supply chain and into customer ERP systems – we are still scratching the surface here.

Current Issues for the CFO Financial reporting integrity and complexity 404 compliance and overall cost of being public Commodity / raw material prices Globalization – competition and labor markets Private equity reshaping industries

Best example is the retail industry Audit committee effectiveness Activist shareholders – changing role of hedge funds

General Expectations of IAS from CFO’s Viewpoint Be proactive but not alarmist Good review of key business and control processes Practical recommendations for improvements Assurance that the company is in compliance with

its stated business and accounting policies Understand the business – help operators deliver

better performance Be focused on key risks and continuous

improvement Solid technical skills – don’t punt on complicated

accounting issues Don’t create endless checklists or to dos

Other Thoughts for IAS Value-Adding Projects Compliance and assurance more important

than ever Unusual quarter-end adjustments 100% review of transactions with top executives

including Focus on key accruals

Bad debt, legal, inventory, incentive comp Capitalization policies

Other Thoughts for IAS Value-Adding Services Whistleblower mechanisms

Historically important at large sophisticated companies

Companies like GE and UTC rely on them to have confidence that bad stuff is flushed out

However, these mechanisms are underutilized because they are under-marketed.

IAS can provide important leadership here

Operational Audits to Consider Product quality Customer feedback Sales incentive programs Vendor rebates – side deals? Customer incentives – accounting Audit top vendor terms and acquisitions Independently confirm large transactions with

customers – ALL the terms documented?

IT Systems and Risks

Trends Widespread adoption of ERP systems pre Y2K Browser-based systems finally enabling user friendly

access to key business information SAP and ORACLE – web services and analytics Security a major enterprise threat Data integrity and protection troubling Web services enabling major cross- app integration

Trouble User access rights – access explosion creates challenges Interfaces between systems

Risk Assessment

Very important tool for insuring that IAS work is relevant and valuable

Interviews and questionnaires – broad group Always interesting results Consistent answers

Sources of risk identification outside of the organization Analysts Competitors Industry conferences

Risk Assessment – Red Flags

Changing business models – tumultuous market Culture

Gunslingers? Open disdain for controls or transparency

Troubled competitors New business initiatives – products or start ups High profile new management – sales and

marketing Cars in the parking lot??? Care more about press

than customers?

Revenue Recognition – Source of Many Problems Study after study indicates it’s the largest

source of restatements and reporting fraud Side deals – return or redistribution Future obligations related to the product Aggressive recognition usually timing shifts

that are totally unnecessary

A FEW Thoughts on 404

Needs to get focused fast or it will go into the history books

Companies willing to pay more for MORE ASSURANCE, not more documentation

Needs to be focused on: Controls around non-routine transactions Transactions with executives and related parties

(how many times to have to be burned by this?)

Training for IAS Professionals Industry specific conferences Leadership training

Having impact – projects that make a difference Communication skills ERP design and best practices Business intelligence and data warehousing Financial reporting

Approva Exception Based Continuous

Monitoring Manufacturing

Utilities Telecom Consumer Products

High Tech Healthcare & Pharmaceutical

Final Thoughts

IAS value is higher than ever Leadership expected Be balanced – control AND operating

initiatives Make reporting and follow-up efficient and

concise