Up until then, says Monaghan, "I'd been managing the whole problem, the investigation, the IPO. My response was, 'This is my responsibility; let me manage it. If we're unsuccessful, I'll accept full responsibility.'" In the end, Monaghan, accompanied by the company's auditors and lawyers, resolved the questions to the satisfaction of the SEC. "She trusted me," he says, "even though it must have been very difficult for her to let go of the reins on something so important."
A Leadership Moment
In the areas in which CEOs still lack critical financial understanding, says Useem, it is vital for CFOs to bring them up to speed. "It's really a moment for CFO leadership," he says. "How do you get someone to do something they're not inclined to do? You have to view that relationship as one in which you're going to help [the CEO] do what is right even if he's not inclined at first blush to do so."
In practice, the financial literacy of the CEO matters less than his ethical literacy. Indeed, pressure to commit fraud often comes from the top, as the CFOs in many of the high-profile cases have testified. "And the minute [any] CEO [says] to be creative, that executive is in trouble, whether he knows the details or not. Whether he got involved in how the books were cooked or not, if he intimated that the CFO and finance staff should look for ways to fill the gaps—bam. Guilty."
Messrs. Ebbers, Scrushy, and Lay had better pay attention.
Kris Frieswick is a senior writer at CFO.
See how CFOs grade their CEOs' finance knowledge
Three Blind Mice?
Richard Scrushy, Kenneth Lay, and Bernard J. Ebbers have all claimed ignorance about the financial condition of their fraud-riddled companies. A federal jury has already found Ebbers guilty of nine counts of securities fraud, conspiracy, and false regulatory filings. Scrushy's trial for violation of the Sarbanes-Oxley Act was under way at press time. And Lay is expected to face the music on bank-fraud charges as early as June and securities-fraud charges next January.
Regardless of the outcomes, these chief executives should not expect much sympathy from their peers. Whether or not their claims of ignorance are true, CEOs and CFOs polled on the subject have some choice words for the three. "Saying you didn't know what was going on in your own company is ridiculous," says Mike Jackson, chairman and CEO of AutoNation. "You're either lying, or you shouldn't have the responsibility to begin with. It's just utterly ridiculous."
Jackson believes that Lay's guilt or innocence has nothing to do with whether or not he understood Enron's financial condition. "Lay and the board granted the CFO [Andrew Fastow] an exemption from conflict-of-interest rules; then no one tried to make sure the conflict was handled right. They had an extraordinary responsibility to put in a process to manage the exemption. That has nothing to do with finance or accounting."
As such, these executives say that Lay, Scrushy, and Ebbers failed in their most basic duty to their shareholders—oversight of the corporation. "You can't be in business without understanding the factors that drive the cost," says Garry Betty, CEO of EarthLink Inc. "You have to look at your cash-flow statement. If any of these CEOs simply focused on [that], he would have seen something amiss. At WorldCom, it was $11 billion [worth] that was amiss. How could he not see it?"
Bob Davis, the new CFO of Computer Associates, which recently suffered its own accounting scandal, says, "It is never a viable defense" for a CEO to claim ignorance of the workings of his own organization. The job of a CEO is to stay intimately involved with his company, a role that far too many CEOs are abandoning in order to become global, says Gregory Scott, CFO of Pacificare Health Systems. "Some CEOs start thinking that hanging out in Washington is more important than understanding what is happening with their businesses," as Lay did when he became involved with President George W. Bush's special task force on U.S. energy policy. "If you want to be a figurehead, you'd better drop the CEO title and take another. You can't distance yourself from your own company, turn it over to someone else, and then [take] the 'I didn't know' defense."
Sadly, it's hard to find anyone who thinks this is the last we've seen of the CEO perp walk. "It's not the last time we'll see CEOs or CFOs in the courtroom," says Michael Short, CFO of Universal Orlando. "Greed is a powerful emotion." —K.F.
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