Risk & Compliance

Getting (and Giving) the Message

Internal communications may not be a CFO's top worry, but shoring them up can mitigate all manner of risks, both small and large.
Marie LeoneAugust 28, 2009

Internal communication issues are rarely top priorities for CFOs — that is, until they create potential liabilities. Witness e-mail messages and the policies (or lack thereof) surrounding them. Often, an e-mail flub is nothing more than embarrassing. At worst, though, the message could be entered as evidence in a lawsuit, as has happened to Enron, Boeing, J.P. Morgan, and Countrywide Financial.

Fortunately, relatively few CFOs will ever have to sweat out answering Department of Justice questions about subpoenaed e-mails. More typically the CEO, board, or audit committee will call on them to clarify the thinking and motives behind an e-mail they wrote or a response to an e-mail they received. “The tumult is a reminder to senior executives that they are operating in a fishbowl, and that all e-mails and actions are subject to intense review with the benefit of hindsight,” says Michael Mann, a partner in the law firm Richards, Kibbe & Orbe.

Mann counsels executives to treat every e-mail, incoming or outgoing, as a formal correspondence and to implement documentation and review policies around e-mails and other internal and external communications. In that way, companies can ensure that offhand remarks and “company speak” are not misunderstood and characterized as improprieties.

Another communications-related danger is not responding to a potentially explosive e-mail. For example, CFOs of even midsize companies may receive hundreds of e-mails a day but review only some of them. Some e-mails may never be read because they seem unimportant, are overlooked, or are left in limbo in a spam filter. If a whistle-blower’s e-mail to the CFO is tagged as spam, when it eventually surfaces it could send up a red flag to the audit committee as to why the CFO never responded.

In that case, an e-mail tracking system that records and files what goes into the spam folder, or a policy that states the CFO’s assistant must regularly read through the spam folder, would go a long way to putting the missed e-mail into the proper context and thereby reduce suspicion.

Executives also may come under board scrutiny when investigations rely on evidence that is a matter of recollection and reconstruction, notes Mann. Consider a situation in which a CFO receives an e-mail from a staffer who proposes a flawed and questionable accounting strategy that the finance chief considers ridiculous. The CFO simply replies to the e-mail with “call me,” figuring the issue better lends itself to a face-to-face discussion of why the idea is a problem.

A few months pass, and the CFO is now tangled up in a board investigation into questionable accounting practices. The “call me” e-mail is being held up as suspect, as if the CFO wanted to meet privately with the staffer to hide something. “Why take the discussion offline?” says Mann. Then there would be no record of the CFO’s motives or thought process, but merely recollections of the conversation between the CFO and the employee. “The world has changed with e-mail, and everything is recorded ‘forever,’” he warns.

But the importance of taking care with communications doesn’t end with e-mail, and setting up formal communications policies can reinforce how serious the matter can be. Say, for instance, a CFO feels the need to set up an internal committee to investigate an aggressive tax strategy. The CFO should give the committee members not only a clear goal and decision-making parameters but also a routine for how results should be reported back to senior management. What’s more, if new material financial information is uncovered, the procedures should instruct the committee to work with the CFO to disclose the information to comply with securities laws. Such policies “take a compliance approach and overlay it on a business approach,” notes Mann.

Another internal communications issue that has received attention of late is corporate policy related to the Foreign Corrupt Practices Act, the U.S. law that addresses bribery. Mann says policies should be in place that spell out how executives should respond to a counterparty that asks for, or offers, a bribe in exchange for business, and how and to whom the incident should be reported. “Lots of executives say they would never pay a bribe, but just having a good business ethic isn’t good enough,” he counsels. “The idea is to be proactive and insert compliance into the situation before any questions are asked.”

Poor communication between the CFO and the board could have serious ramifications for the future of the business. “If accounting issues hold up a liquidity event [like an initial public offering or the sale of a company or major asset], that’s a huge problem,” says Damon Lewis, audit partner at Ireland San Filippo LLP, a regional accounting firm that works with small and midsize companies. Faulty or nonexistent communication regarding working capital, earnouts tied to the transaction, and contingent liabilities have been known to gum up transactions.

By Lewis’s lights, it’s the CFOs responsibility to prepare the board for accounting and other financial irregularities that may surface during deal negotiations, if only to manage expectations. He contends that in most cases, accounting snags spotted and communicated early won’t change the deal at all, or at least will have a better chance of being solved in-house before anyone outside the company identifies them.

Lewis also suggests that CFOs set policies to make sure directors receive materials on a regular basis and at least a week ahead of meetings. While that may be easier said than done, it lets the board members prepare questions. The task is much easier at public companies, where finance teams are used to compiling information for analysts and investors who expect earnings guidance on a set schedule, and preparing financial statements for the Securities and Exchange Commission, which mandates hard deadlines for filing results.

What happens when a big deal gets in the way of compiling board materials, or the board meeting itself? Communicate that to the board, too. Many directors of smaller companies have worked for, or served on boards of, small companies, and have an appreciation of the priorities the CFO and other executives must juggle, notes Lewis: “No board member in the world would complain if a meeting is rescheduled because employees are preparing for negotiations with a potential customer.”