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Understanding the CFO

Understanding the CFO. Philip Livingston Vice 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

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Understanding the CFO

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  1. Understanding the CFO Philip Livingston Vice Chairman, Approva Corporation Audit Committee Chairman – Cott Corp and Insurance Auto Auction

  2. 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!

  3. 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

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

  5. 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

  6. 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

  7. 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

  8. 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

  9. Priorities:Business Reviews and Evaluations • Most companies have a quarterly business review process • Usually very structured and VERY INFORMATIVE ASK TO ATTEND OCCASSIONALLY

  10. 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

  11. 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.

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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?

  17. 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

  18. 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

  19. 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?

  20. 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

  21. 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?)

  22. 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

  23. Approva Exception Based Continuous Monitoring

  24. Final Thoughts • IAS value is higher than ever • Leadership expected • Be balanced – control AND operating initiatives • Make reporting and follow-up efficient and concise

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