Command and Controllers

Sarbanes-Oxley may bring new risks to the CFO's office, but it's raising the profile of the once-faceless company controller.
Marie LeoneJuly 14, 2003

Ah, the delicious irony of it all.

In the early Nineties, with the arrival of powerful financial and enterprise software, CFOs began shucking their roles as numbers cop. During that period, enlightened boards of directors began insisting that finance chiefs focus less on closing the books, less on accounts receivable, less on the general ledger. Instead, they wanted finance chiefs to start zeroing in on top-line initiatives, strategic acquisitions (are there any other kind?), and nebulous brand exercises.

But the passage of the Sarbanes-Oxley Act of 2002 has landed many CFOs in the Way Back machine. Suddenly, certifying the validity of a company’s financial statements and internal controls — once done almost by rote — has become a very big deal. Sound internal controls, previously relegated to the back-office, have moved front-and-center.

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For controllers, arguably the hardest working employees in the corporate world, looking after internal controls is old hat. That may explain why, as a group, these top accounting managers barely flinched when Sarbanes-Oxley was passed. In fact, many controllers welcomed the new mandates, noting that the rules actually validated their daily routines. “I wasn’t shocked by the provisions,” notes Jody Bradford, vice president and controller for Penton Media Inc. “It was probably time for Sarbanes-Oxley.”

Many controllers agree, insisting that the process tweaks and documentation efforts sparked by Sarbox don’t mean that controllers have been lax about conducting financial reviews or discussing appropriate disclosure. Instead, says Mark Hood, senior vice president of finance and administration at Panera Bread Co., “Sarbanes-Oxley just formalizes that process around quarterly and annual review schedules.”

And with that formalization, comes awareness. Many controllers contend that, with the passage of Sarbanes-Oxley, the rest of the corporate world is finally catching up to their rigorous oversight. Financial discipline, they say, is in again.

Kevin Sonsky, controller of corporate accounting for software maker Citrix Systems Inc., claims that non-financial managers are now much more aware of accounting issues. As a result, he says, “controllers are getting more buy-in” when they make tough decisions that affect operations.

Training Days

That buy-in is helping controllers spread the gospel of financial discipline to other business units.

The bulk of the Sarbox work at cereal maker Kellogg Co., for instance, is in documenting existing accounting and reporting processes. Jeffrey Boromisa, senior vice president and controller at the Kellogg Co. says he is shifting around employees and working with outside auditor PricewaterhouseCoopers to make sure documentation is consistent across Kellogg’s six global regions.

Boromisa says that outsourcing the documentation process was not an option because he wanted ownership of the process — a process that Kellogg considers a critical part of their $8 billion-in-revenues business. Kellogg’s operations and finance department is closely integrated, says Boromisa — so much so that the unit managers don’t think of finance as a separate function, but rather an extension of operations.

At Panera, Hood says one of the major changes is simply circulating the 10-Qs and 10-Ks among all senior management, and setting up a formal feedback mechanism in the form of a questionnaire.

While the tasks may sound a bit pedestrian, they’re also vital to the new regimen of internal controls attestation. And the need for such attesting — wrought by Sarbanes-Oxley — has placed controllers squarely in the corporate spotlight.

Take Tupperware’s Judy Curry. As vice president of finance and corporate controller at the plastic-ware manufacturer, Curry is not only formalizing her controls and procedures — she’s also focusing on training the rest of the company about the impact of Sarbox.

Curry, who has 12 area controllers reporting to her from 45 different operating units around the world, believes that these additional training tasks are directly tied to the success of the operating units. How so? She thinks the hype surrounding Sarbox compliance may actually stop some operations managers from taking sound business risks for fear of crossing the Sarbox line.

To prevent such an outcome, Curry has increased her annual management training schedule to four times a year (twice for managing directors, twice for area controllers). She also provides periodic updates to the sales staff on revenue recognition and accrual accounting issues. This is especially important to Tupperware franchisees and distributors, most of whom take their orders by phone and need to be careful about the timing of booking revenue.

Interestingly, Curry’s Sarbox-inspired training program underscores a major transformation in the role of the controller: The move from accounting watchdog to financial communicator. Curry says she’s had to develop her speaking skills because part of her job is to communicate accounting nuances to senior management.

For example, Curry says her regular meetings with Tupperware’s CFO and CEO (to explain monthly operations, as well as the accounting nuances associated with earnings estimates and financial statement reporting) have changed markedly since Sec. 404 rules went into effect. These days, Curry says she is being asked to participate at the beginning of the process — rather than being called in for ad-hoc requests.

Not surprisingly, the new role requires better articulation of the business impact of accounting and finance issues. “I don’t have to tell senior management how the clock is made,” she says, “but I do have to tell them what time it is.”

The fact is, most controllers will have to develop better “people skills,” posits Gary Previts, an accounting professor at Case Western Reserve University’s Weatherhead School of Management. In this post-Sarbox world, Previts say controllers will also be called on to step back and assess long-term business prospects. In essence, successful controllers will move away from the conventional short-term, profit measure mindset.

Previts believes the big picture often gets muddied by the day-to-day operation of the controllership, especially as time gets tight and reporting deadlines loom. Still, he sees a hiring trend that gives greater weight to candidates with “right and left brain skills.” Previts reckons that from now own, CFOs who interview potential controller hires will look at “people, not degrees.”

Not Playing Games

Dov Seidman agrees. Seidman, chairman and CEO of LRN, a Los Angeles-based compliance training company, believes the evolution of the controller position is underway, and Sarbanes-Oxley compliance is the springboard. “A CPA is a ticket to entry for the controller’s job,” he says, “but today a controller must be a business leader.”

For instance, Seidman believes the controller’s outlook will become less focused on the numbers — other than making sure that they’re accurate — and more focused on a long-term approach to corporate success. As guardians of transparency and compliance champions, Seidman says good controllers will sidestep the pressures of earnings management, and other gaming techniques, to zero-in on dealing with financial problems directly and swiftly. As a result, controllers will grow more independent.

But he believes corporate reporting structures will have to be reworked before controller’s gain real reporting independence within the corporation. For example, controllers will need the authority to put processes in place, as well as the authority to act or react if those processes are not followed. With that authority should come incentives, as well as penalties, tied to the controller’s decisions, says Seidman.

The consultant also predicts that the controller position will be the next to rise to the executive suite, just as risk, diversity, ethics, and compliance officers have been elevated. But, he says it may be too early to tell what the new organizational structure surrounding the controller will look like.

Filter Tips

Tatum Partners’ Joe Noga doesn’t think it’s too early to prognosticate about organizational structures. As a partner with Tatum, Noga has been an interim CEO, COO and CFO, and he thinks controllers should report to the CEO — an opinion Noga says isn’t popular with most of his colleagues.

But Noga believes many of the corporate accounting scandals that made headlines during the past two years could have been avoided if information from the controller — the top accounting watchdog — was not filtered by a CFO who “was clouded by strategy.” Noga also believes that scandals could have been nipped in the bud if honest controllers were made to certify financial statements, the way Sarbox requires CEO and CFO to attest to those numbers.

The interim CFO says that finance chiefs are almost always well meaning when they filter information to the CEO. Yet they can be “bound and determined” to sway from their controller’s recommendations for accounting treatment if they are fogged by larger business interests. “The CFO should be man — or woman — enough to allow the controller access to the top,” declares Noga, adding that the corporate control function should have a seat at the management table.

Noga admits that the unconventional reporting structure was not his idea. He credits Sunil Dovedy, president of Adizes Institute in Santa Barbara, with the revelation. As Dovedy explains it, the reason for the separation between the controller and CFO is a good one: it creates an independent point of view and a healthy conflict.

You’re a Superstar, That’s What You Are

In some ways, an independent controller would actually be a return to the way things used to be. Bala Dharan, an accounting professor at Rice University’s Jesse H. Jones School of Management, says that 25 years ago, controllers were considered top management. It’s really only been since the mid 1980s, Dharan says, that the controller lost sway, turning into a CFO report. Today, the professor claims, finance chiefs regard the controllership as another corporate function, like information technology or human resources.

In his opinion, the controllers will never be completely independent providers of information as long as they report to CFOs. But he doesn’t think finance chiefs will voluntarily agree to a change in reporting lines. Why? Mostly, because controllers have evolved into the keepers of all things financial — and CFOs rely on that information.

Whatever the reporting structure, “superstar controllers are always in demand,” says John Holland, vice president at A.T. Kearney Executive Search. Interestingly, Holland says top candidates that interview for corporate controller jobs are now performing more due diligence before accepting offers. They want to know, for example, what type of resources they can expect at their new job. They also want to meet with a company’s audit team, audit committee, and talk to the corporate lawyers. Why meet the lawyers? To find out more about outstanding litigation or pending court decisions that may impact the controller’s function. Attorneys can also talk about potential liabilities associated with the company’s subcertification process related to Sarbox Sec. 403.

That downstream paper trail should not add a sizeable amount of risk to the controller’s job, however. According to attorney Amy Goodman of Gibson Dunn Crutcher LLP, CEOs and CFOs (the executives who must certify the accuracy of financial statements under Sarbox) are still ultimately responsible for numbers released by a company.

But sub-certifications could be called into play in questions of proof during litigation or government investigations. What’s more, the Securities and Exchange Commission (SEC) has targeted controllers in the past in connection with accounting and financial fraud cases.

Faster Better?

The Commission’s emphasis on faster corporate reporting will also put controllers at risk. In the wake of the passage of Sarbanes-Oxley, the SEC is speeding up the reporting cycle for corporations. Material events — like the loss of a major customer or a significant environment liability — will soon have to be reported within two days. That could create snags for global controllers who are charged with gathering details from operating units strewn across several time zones, says Rick Fumo, senior vice president at Parson Consulting.

Furthermore, Fumo says he can’t be sure whether reporting numbers faster is good for business. But he is sure that implementing the speed requirements will likely be one of the most painful Sarbox exercises controllers have to manage.

David Klementz, CFO at Progress Rail Corp, predicts that pumping out financial statements as fast as possible will be the biggest Sarbox-related shift for his department. He says that the accelerated filings will require some extra legwork from the finance department until the schedule becomes routine. For example, Klementz expects to spend extra time choosing key ratios to better describe the business, squelching errors and increasing accuracy, and resolving new compliance issues.

Much of the gathering of the information to support those ratios will be done by the company’s controller. It’s a crucial task — and one that’s being repeated at scores of U.S. companies. Says Penton’s Bradford: “We’ve got our marching orders from the CFO — and the attention of the CEO — since Sarbanes-Oxley went into effect.”