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One reader shares a nasty little secret about earnings projections. Others wrote in to promote the importance of internal audit, defend private-equity fims, suggest that CFOs listen to their staff, and predict nonprofit consolidation.
CFO Staff, CFO Magazine
June 1, 2007
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The nasty little CFO secret about earnings projections is this: We don't know. Often we don't even have the foggiest notion ("The Long View," May).
As the CFO of a public company in the late 1990s I struggled with (and against) the sales team trying to figure out what our customers would do next. We had just suffered a significant drop in share price because our best customer had moved an order back a week so that the inventory wouldn't appear on his books at the end of a quarter.
I thank my lucky stars that we successfully sold that company and I'm now in a closely held firm where I can say we don't know but this is our plan. And I don't have to do stupid accounting tricks looking for that last penny to beat an estimate an analyst who has never run a company has decided we have to beat.
Chief Financial Officer
Therapy Review Systems Inc.
Perspective Beyond the CFO
While CFOs are an important source of information for boards and audit committees ("Board Battles," May), directors should not rely on them for information to the exclusion of two other critical parties — the director of internal audit and the chief risk officer.
The internal-audit function often reports to the audit committee (with administrative reporting to a company executive), and can be an objective source of information about company risks and controls, including both financial and operational issues. Likewise, the chief risk officer can provide directors with expert analysis on a range of company risks and responses to those risks. Both of these additional perspectives are critical to effective governance.
Dana R. Hermanson
Dinos Eminent Scholar Chair of Private Enterprise
Kennesaw State University
A Disservice to America
I totally disagree with Harvard Business School professor Josh Lerner's comments concerning corporations increasing their debt ("The Buyout Binge," April). I think he is doing a great disservice to the United States by encouraging corporations to do this.
Today hedge funds and private-equity funds are taking corporations private. They're loading them up with very cheap debt, paying themselves a tremendous dividend, and then taking the companies public again through initial public offerings, which are then sold to the naive public. This debt load is manageable now as economically things are reasonably good and the cost of debt is at a 45-year low. However, when the normal business cycle reverses and we have several years of tough times, many of these corporations will not be able to cover their debt requirements and will go bankrupt.
Interest rates, too, will eventually return to their normal level. So when these corporations refinance their debt, they will have to pay substantially higher interest, which will compound the problem. Private-equity and hedge funds couldn't care less, as they have already made their millions or billions of dollars. But the United States will end up as a second-rate nation with lower manufacturing, higher unemployment, and millions of people with lost pensions. Is this what you want? This is not what I want for my children and grandchildren.
Creating a Better Way
I read "Being Here" (Insight, March) with great interest. Robert Gunn is so right when he states, "Our assumption is that clients always discover the answer within themselves, as opposed to getting an answer externally." As a senior financial executive, I came to that conclusion years ago. Your staff knows better than anyone what the impediments are that cause them to do their jobs incorrectly or ineffectively. One has only to sit down with them and listen. Your staff is looking for someone to champion their cause. There is no magic bullet. It is simply listening and creating a better way.
Vice President & Controller
Bolger & Co.
Lessons from For-Profits
Having spent my entire career in the nonprofit financial field, the entire discussion/debate about nonprofit accounting continues to frustrate me ("Misgivings," January). If an organization is delivering on its mission (and that means not wasting resources so you'll have something with which to achieve your mission), most donors will pay scant attention to ratios and financial reports. However, some organizations have promoted the numbers because they prefer that to the challenge of measuring program effectiveness.
American business is overregulated as it is. If you want less of something, then regulate it more. Fundamentally, I believe nonprofit organizations should be free to report these costs however they wish. If they are not producing what the donor customer wants, they'll ultimately be put out of business, whether or not they have low overhead.
The entire nonprofit industry is ripe for consolidation. There are simply too many pieces trying to achieve the same purpose. If we would get together a bit, we would realize some of the economies of scale that for-profit businesses achieve through mergers and acquisitions. Then we might not be motivated to underreport overhead costs, because they wouldn't be as high. (I am a former controller of the United Way of America, former divisional controller of The Salvation Army, and former chief accountant of ExperienceWorks!®)
W. Vernon McHargue Jr.
The Heritage Foundation
In the May Insight column, the subtitle of Dan Gross's book Pop! was incorrectly identified. It is Why Bubbles Are Great for the Economy.