Friday, August 20, 2010

The Problem With a Non-CPA CFO - GUEST POST by Francine McKenna

NOTE: While I am on vacation, I invited some guest posts from popular bloggers. Following is our second guest post from Francine McKenna, managing editor of Re:The Auditors. She is also a popular speaker, and will be on a panel at the New York County Lawyer's Association on Sept. 15. Her guest blog post follows.

There’s been quite a bit of press about American Apparel’s financial troubles. It’s now three weeks since the company announced that its auditor, Deloitte, had resigned. (See also the company's Form 8-K and the auditor's response.) Shares plunged almost 25% on that news.

It’s not often that we see the details behind a high profile auditor resignation. It’s even more unusual to see that auditor resignation investigated by the U.S. Attorney's Office. Further, if a company goes bankrupt, we may learn more about how the auditor relationship deteriorated via a bankruptcy examiner’s report.


New Century Financial Corp. creditors have asked a federal judge for permission to investigate KPMG LLP's relationship with the bankrupt subprime mortgage lender…New Century's official committee of unsecured creditors said it wants to obtain documents from KPMG, and question current and former officers concerning its accounting, auditing and other services for New Century. KPMG resigned as auditor on April 27, 25 days after New Century filed for Chapter 11 bankruptcy protection from creditors.
Part of the problem with American Apparel may be its thirty-one year old CFO Adrian Kowalewski. It’s beyond my ken how a listed, public company with a history of accounting issues can get away with naming an investment banker with no CPA or even a hint of hands-on accounting experience to CFO.

“In his new role as Chief Financial Officer, Mr. Kowalewski will also have oversight over financial management, accounting, and financial reporting, including Sarbanes-Oxley compliance… Mr. Kowalewski began his career in investment banking at CIBC World Markets in mergers & acquisitions. He also worked at Houlihan Lokey Howard & Zukin and Lazard Frères & Co., both investment banking firms, where he was involved in mergers & acquisitions and financial restructurings. Mr. Kowalewski received a bachelor’s degree with honors in economics from Harvard University, and an MBA from the University of Chicago Graduate School of Business.”
Do you remember the last time we had a high-profile non-CPA CFO trying to sort out serious accounting issues?

Does the name Erin Callan mean anything to you?

In retrospect, it is easy to see the error of her ways for taking the job and of Lehman’s management for appointing her. What public company, of the size and stature of Lehman, in trouble already, can afford to have a CFO who is not an accountant? Have we not seen what happens when a CFO has no interest or aptitude for GAAP? A seasoned CPA CFO – not Mr. Kowalewski - would have known that an auditor resignation over “controls” could lead to lots of questions. Auditor resignations also eventually lead to lots of litigation if there’s a sudden stock price drop that accompanies them. [Editor's note (EO): Long-term experience and other credentials in place of or in addition to a CPA certificate per se may also help qualify a CFO, but there is a lot to be said for holding a CPA certificate and a fair amount of CPA experience to fulfill the role of CFO, including practicing professional skepticism, understanding testing of accounts, significant experience reviewing external reporting and internal controls, etc.]

“I don’t think there is any fire there,” Schey [American Apparel attorney] said. “Most of the smoke revolves around weak internal controls, being worked on as we speak. They may not be the most seasoned Wall Street players, but when it comes to ethics and integrity, they have it in spades.”

In spite of their lawyer’s exhortations, I’m afraid the U.S. Attorney's Office thinks ethics and integrity may be the bigger issue.

[Editor's note (EO): In the guest post above, McKenna writes about the importance of ethics and integrity. Ethical leadership and Integrity have been among the pillars of FEI's mission since its founding, over 75 years ago. Additionally, FEI members sign a Code of Ethics annually, which states, among other things, that all FEI members will "Share knowledge and maintain skills important and relevant to constituents' needs," and "Proactively promote ethical behavior as a responsible partner among peers, in the work environment and the community." To keep up on the latest issues, read more about our upcoming conferences, webcasts, research and advocacy activities. FEI, an international organization, also has local chapters where you can network with peers.]

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21 comments:

Jim Peterson said...

Michael Koss was CFO there (among other jobs) while Sue Sachdeva was off on her multi-year shopping spree -- his qualification being as son of the founder.

Jim Patlyek said...

I disagree with Ms. McKenna's premise that a CPA certificate is required to become a CFO. I have been an accountant for more than 30 years and have been a CFO and Principal Accounting Officer but never BOTHERED to attain a CPA certificate. The only 2 things I cannot do are sign and audit opinion and practice in front of the IRS - neither have ever been of interest to me. In my current role, I perform technically complex GAAP interpretations for public and private companies which have never been questioned by their independent auditors. It's not a piece of paper (saying that you passed a test) that makes an accountant it's the years of study and commitment to the profession. I suggest Ms. McKenna rethink her broad assertions that only individuals with a piece of paper can function as a CFO.

Francine McKenna said...

@Jim Patlyek

My premise is not that a CPA certificate is required to become a CFO, in general. My premise is that a very large, global, public company, in particular one with a history of accounting issues, requires at least an accountant and preferably one with significant public accounting/audit experience and SEC reporting/GAAP expertise.

If the CFO is playing the role of investor relations guy and capital raiser, an investment banker may be seen as more advantageous and the technical accounting left to a Controller and or a Chief Accounting Officer. But, in the end, it's the CFO that signs off on the Sec. 302 certifications. If you have no interest or aptitude for accounting, do you sign on faith?

I am not sure if your roles were with multinational public companies, but I hear that's a pretty complex, risky job these days. I can not imagine doing it, post Sarbanes-Oxley, with only real time, on-the-job training. The stakes are too high, as Ms. Callan is finding out.

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Warren Miller said...

As a former CFO who is also a CPA, let me weigh in on this. The worst CFOs I've seen have been accountants; investment bankers doing anything EXCEPT investment banking are a menace to everyone's well-being and safety.

In my experience, accountants tend to make lousy CFOs because (a) they see everything as an accounting problem, (b) their ignorance of finance AND of human nature (where incentives are concerned) can be breathtaking, (c) they look backwards, and (d) they are conflict-avoiders. If accountants wanted to deal with the ambiguity of the future, they'd have never become bean-counters.

In addition, most accountants LOVE "rules." They avoid conflict by hiding behind rules. They are go-along/get-along people. I'm fond of saying this: "If accountants had been running our country in 1776, we'd still be working for the King."

I believe the solution to the accountant-as-CFO problem is to have a Chief Accounting Officer. Many corporations have done that. In today's Sec. 302 environment, if I were a CFO who lacked accounting expertise, I would take three steps:

(1) Learn as much about what I needed to know as fast as I could, including engaging an outside accounting expert to tutor me;

(2) Demand that the CAO sign off on a blood oath every quarter that there are no "accounting issues" in the financial statements - the CAO's job would depend on it; and

(3) Ask the chair of the Audit Committee, in consultation with her or his colleagues, to prepare an annual assessment of my progress in acquiring relevant accounting knowledge and assign an estimated percentage score as to how far I have gotten towards a benchmark of having the accounting knowledge that the Committee believes I need.

Regarding (3) above, given the FASB's totally boneheaded dash to embrace IFRS, there might be years when the "percentage" is lower than it was the preceding year because the changes in accounting could be tumultuous. I, for one, hope that the political earthquake that appears in the offing for the 2010 elections will result in drastic political action to reign in FASB and the SEC. Both are textbook cases of what can happen when too many bright people have far too much time on their hands.

Warren Miller, CPA, CFA

Warren Miller said...

As a former CFO who is also a CPA, let me weigh in on this. The worst CFOs I've seen have been accountants; investment bankers doing anything EXCEPT investment banking are a menace to everyone's well-being and safety.

In my experience, accountants tend to make lousy CFOs because (a) they see everything as an accounting problem, (b) their ignorance of finance AND of human nature (where incentives are concerned) can be breathtaking, (c) they look backwards, and (d) they are conflict-avoiders. If accountants wanted to deal with the ambiguity of the future, they'd have never become bean-counters.

In addition, most accountants LOVE "rules." They avoid conflict by hiding behind rules. They are go-along/get-along people. I'm fond of saying this: "If accountants had been running our country in 1776, we'd still be working for the King."

I believe the solution to the accountant-as-CFO problem is to have a Chief Accounting Officer. Many corporations have done that. In today's Sec. 302 environment, if I were a CFO who lacked accounting expertise, I would take three steps:

(1) Learn as much about what I needed to know as fast as I could, including engaging an outside accounting expert to tutor me;

(2) Demand that the CAO sign off on a blood oath every quarter that there are no "accounting issues" in the financial statements - the CAO's job would depend on it; and

(3) Ask the chair of the Audit Committee, in consultation with her or his colleagues, to prepare an annual assessment of my progress in acquiring relevant accounting knowledge and assign an estimated percentage score as to how far I have gotten towards a benchmark of having the accounting knowledge that the Committee believes I need.

Regarding (3) above, given the FASB's totally boneheaded dash to embrace IFRS, there might be years when the "percentage" is lower than it was the preceding year because the changes in accounting could be tumultuous. I, for one, hope that the political earthquake that appears in the offing for the 2010 elections will result in drastic political action to reign in FASB and the SEC. Both are textbook cases of what can happen when too many bright people have far too much time on their hands.

Warren Miller, CPA, CFA

Tom said...

Bernie madoff had a Cpa, enroll had a CPA ,world comm had a CPA
Being a CPA in a private or public company is rubbish, it's being sold a important when it's meaning less. CPA firms should clean up their act and improve their rule as outside auditors that are competent right now they are not trust worthy

Samuel Dergel - CFO2Grow said...

There are good CFOs. There are bad CFOs. Whether your CFO has a CPA (or another designation) does not make them a good CFO.

At CFO2Grow, we hire CFOs for our clients. Hiring a CFO is a serious matter. Many companies do not take the time and effort to truly understand what knowledge, skills and abilities are necessary for the role.

Just like companies are different, CFOs are different. CFOs need to fit the company they represent. Any situation where the company and CFO are not matched is an example of a company not having properly assessed their needs.

Samuel Dergel, CA, CPA, CPC
Senior Partner & Practice Leader - CFO Search
www.cfo2grow.com
@cfo2grow

tomhoodcpa said...

I think your points are valid and while there are plenty of CPAs without the requisite additional "soft" skills, and strategic thinking, the foundation of accounting knowledge (demonstrated by the CPA license)and the extra integrity and ethics that come with it are definitely a must.

I also think the contrast of the investment banker is a very good one - they are polar opposites. I got your points and happen to agree (with the caveat that it is the right CPA with the right skills and fit for the company)

Edith Orenstein said...

Thanks all for the insightful comments, and thanks Francine for getting the discussion going through your Guest Blog post.

Watch for a Guest Post post on Friday 8/27 from the NYSSCPA's on a related topic near and dear to the hearts of CPA's practicing in business and industry.

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chandra said...

This is all political drama!


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CFO's can be a head ache if you cannot deal with them the way they work - or if you don' know how their workflow and mindset is. Something that is very different when is comes to CPAs.CPACampus

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