“Meeting today’s financial challenges” by J. Carlitos G. Cruz (December 7, 2009)

The chief financial officer (CFO) is one of the most vital members of the C-suite.
He or she is expected to be vigilant in monitoring a company’s financial posi-tion, and is responsible for maintaining and enhancing that position. Everyone knows that after all has been said and done, it is the bottom line that really — sometimes, only — counts.

The CFO’s tools have traditionally been histori-cal, static data.

This is no longer the case. These days, transform-ational events and trends are reshaping the global business and financial landscape. This transform-ation brings about complex issues and significant challenges that impact organizations in the financial and accounting environment.

In addition, the CFO is not alone in the pursuit of robust and reliable financial information as the roles of other members of management, boards and audit committees expand.

To succeed in today’s marketplace, management, boards and audit committees need to effectively assess their most critical business issues and identify the best ways to respond to the challenges. In a number of studies and surveys conducted by Ernst & Young, including the Opportunities in Adversity (June 2009), The Future of Risk (July 2009) studies, and the recent Global Audit Committee Survey, respondent CEOs identified the five key areas in today’s environment, namely: enhancing corporate governance; effectively managing today’s business risks; evaluating the funding and liquidity strategy; assessing the impact of regulatory and accounting rules; and protecting financial reputation.

Enhancing corporate governance

There is a strong sentiment that part of the blame for the financial crisis has been poor corporate governance, because boards fail to understand and manage risk. While organizations face the prospect of new governance rules and higher expectations, audit committees and boards are realizing that they must be much more involved in understanding and reviewing the corporate response to the key risks and financial issues their organizations face. Corporate governance reform is now top priority in investor, regulator and board agendas.

Boards point to improving their performance by being more proactive with governance and providing greater audit committee oversight over risk manage-ment processes. Audit committees can significantly increase the effectiveness of their oversight respons-ibilities by identifying leading practices in areas such as communications and risk assessment, and tailoring those practices to their respective organizations. They will also need to take an increasingly broader view of enterprise and external risks, to fully understand the controls in place and any proposed changes to managing the key risks that could impact the organization’s overall performance.

Effectively managing today’s business risks

Recent economic events and increased investor scrutiny have sharpened the focus on the area of risk management. It has evolved and expanded to cover more enterprise and external risks than the typical concentration on financial statements risk. In looking beyond financial statements risk, one must not underestimate the need to evaluate the overall risk management infrastructure and investments. The board and audit committee need to understand the extent to which the company is exposed to financial, operational or strategic risks. They are also ultimately responsible for overseeing the company’s plan to address the identified risk exposures.

The complexities in the banking sector have posed challenges to companies trying to secure funding. Although bank lending may be improving slightly, it remains very restricted.

Management must proactively consider how to optimize cash flow when banking relationships are negotiated and what the company should do if debt covenants are broken. Companies need to consider options. One suggestion is for companies to build deeper relationships with multiple banks, while also tapping other sources of funding, such as equity and bond issuances and asset-backed lending.

In short, audit committees should closely monitor companies’ liquidity and funding, since these will continue to affect all organizations. To maintain liquidity, companies must be more proactive in communicating with lenders, analysts and rating agencies.

Management, boards and audit committees must determine the impact and understand the implications of new regulatory and accounting rules, not only from a financial perspective, but also from a business viewpoint.

This is the key to developing a response strategy that will effectively ease the impact of a new rule or monitor a new regulation.

While regulatory developments and accounting standards continue to evolve, management, boards and audit committees can enhance their businesses by implementing increased activities around risk identification, monitoring and strategic mitigation.

Protecting financial reputation

Financial reputation is fundamental and crucial to any business. In the past, companies only needed to meet targets to establish a good financial reputation. Today, financial reputation goes beyond reflecting substantive financial reports. Stakeholders and investors demand better information and transparency. There is a growing appetite for more useful and detailed financial and nonfinancial information on which to base investment decisions.

New developments will continue to require increased analyses, additional time, dialogue and greater scrutiny in order to address the needs and expectations of investors, regulators and other stakeholders. In this regard, boards have to prioritize good governance, constantly learn about financial and regulatory developments, and fiercely protect their financial reputation. The content of financial reporting will also feature more forward-looking information, with more detail on the judgments taken by management. Additional corporate risk management infrastructure and investments will be needed to address these changes.

Clearly, the finance function has become more dynamic in the recent years, and finance players should strive to continually upgrade their skills and knowledge to remain relevant to their respective organizations and stakeholders.

(J. Carlitos G. Cruz is the Assurance Head of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.