Transparency Is Everyone’s Responsibility

From the University of Virginia: Both finance and non-finance executives learn that ''the better the financial reporting, the better the valuation.''
Marie LeoneJuly 30, 2004

Nearly three years after Enron filed for bankruptcy, corporate accounting scandals continue to make headlines.

In the past few months, for example, the Securities and Exchange Commission charged Siebel Systems with violating Regulation Fair Disclosure (Reg FD) for the second time in four years; the SEC charged Lucent Technologies with “fraudulently and improperly” recognizing $1.15 billion of revenues in 2000; and a Pentagon official told Congress that “significant deficiencies” have been found in Halliburton’s handling of billions of dollars of government work in Iraq.

What happens next to executives at those companies is anyone’s guess. But professors at The Darden School of the University of Virginia have found a way to put such cases to good use in a course aimed at helping executives cope with the broader regulatory fallout. “Our program will be driven by situations pulled from the headlines, so we can focus on corrective and preventive measures,” asserts Mark Haskins, a professor of business administration at Darden.

The course’s intent, however, “is not to dwell on the headlines,” says Haskins, “but to use them to galvanize the conversation and understand the root causes.”

“Financial Stewardship in a World of Financial Scrutiny” is designed to bring managers up to speed on various “accounting shenanigans” by supplying them with a “heavy dose of financial expertise,” according to the professor. To that end, the three-day session covers six finance topics: the external reporting environment; financial-statement analysis; shareholders’ information needs; the Securities and Exchange Commission’s Reg FD; company-valuation criteria; and creating shareholder value.

That’s a lot to cram into a short course, Haskins acknowledges. He explains, however, that the program isn’t meant to be an exhaustive exploration of the topics but rather a discussion of “key insights derived from big issues.”

To be sure, Haskins and his co-instructor, Kenneth Eades, also a Darden business administration professor, plan to plunge into some heavy legal territory, notably the Securities Acts of 1933 and 1934, Reg FD, and the Sarbanes-Oxley Act of 2002. They intend to pay special attention to the financial-statement-certifications that Sarbanes-Oxley mandates for CEOs and CFOs and on the cascading impact of those signoffs on operating managers. What’s more, the professors aim to discuss financial-reporting transparency, including revenue-recognition policies, management’s disclosure and analysis, the debate on expensing stock options, and pension-fund liabilities.

But the intent of the course isn’t to provide a mastery of the rules. Instead, Haskins wants attendees to leave the classroom with a better sense of how to spot accounting games, such as those involving irregular revenue-recognition. The professor also hopes to help attendees develop skills to handle the internal pressure to “make the numbers at all costs.”

Like other reform proponents, Haskins believes that the new corporate reality demands greater financial transparency. He points out, however, that many executives forget that transparency is not relegated to green-eyeshade types in the finance department. The responsibility for accurate financial reporting ripples through the entire organization — is why the course targets more than financial executives.

Indeed, most of the course’s participants likely will be referred to it by CFOs with holistic views of financial reporting, according to the professor. The range of attendees, Haskins thinks, will include finance chiefs, sales and marketing executives, and general managers of divisions or business units. On the other hand, the program isn’t likely to resonate with not-for-profit executives or owners of small family businesses because of its focus on public-company topics.

New this year to Darden’s executive-education curriculum, the course will be held from November 16 to November 19. The course will be based on case studies to show how executives can make practical use of the tactics and strategies, according to Haskins, but theories of financial-statement preparation and corporate valuation won’t be ignored.

Participants, who will be taught how to derive valuations for their own companies, are encouraged to bring their employers’ financial statements to class. The valuation instruction will include the use of net-present-value, internal-rate-of-return, and cash-flow analyses. In the end, however, Haskins hopes that students should come away with a firm understanding that “the better the financial reporting, the better the valuation.”

Financial Stewardship in a World of Finance Scrutiny” will be presented at The Darden School of the University of Virginia on November 16-19, 2004.