The Many Skills of the CFO
By: Frank Manzi, CPA and Mark Martinelli, CPA
The demands placed on CFOs and their related financial organizations are driven by the many hats that they wear in discharging their responsibilities. As summarized in our prior column, “The Five Hats of the CFO” (October/November), these accountabilities fall into five interrelated, but distinct, roles:
- Financial steward
- Communicator of financial results
- Leader of financial planning and analysis
- Driver of internal controls and process improvements
The CFO is an operational executive who must deliver on promises in order to foster an environment where operational excellence is tightly correlated with financial accuracy and integrity. The figures supporting the financial organization are easy to generate and provide the business with a vehicle to understand operations and drive the company to success through data that can identify issues and capitalize on opportunities. Data integrity is far more critical, however, and there are many control processes that a company must have in place to ensure the data driving decision making is accurate. These skills are honed throughout a CFO’s career based on a combination of education, experience, professional attitude, continuous learning, and ethics.
The Beginning is Easy
The initial education box is easily ticked with a college degree in a financial discipline. Whether it is a degree is in accounting, finance, or economics, education gets a finance professional to the starting line. One must learn the financial tools, control processes, and structure of operations that comprise the economic aspects of a business. A CFO must understand how thousands of business transactions and operational metrics are effectively categorized and turned into decision making information. The external reporting framework is defined by the SEC, GAAP, and industry standards. The education process continues as business operations, reporting requirements, and stakeholder demands change over time. The control process must be effective but flexible enough to capture more data over time without overburdening a business with restrictive control processes that provide minimal value. Finance professionals must stay current with CPE courses to help ensure that they remain in compliance with public company and industry standards.
Information Technology—An Interdisciplinary Skill
A financial organization must have more than a passive understanding of how IT supports its goals and objectives. IT pervades a company’s operations and is what allows management to make informed decisions. The reliance of a company on system-generated data makes it crucial that this data be accurate, complete, and secure. Internal controls that ensure there is data integrity and accuracy in the financial systems must be well defined and operating effectively. Today’s CFO cannot completely delegate data integrity to the CIO. The CFO must be well versed in all data related controls including access security, virus protection, backup and recovery protocols, and the manual and computer-based controls that ensure data integrity and accuracy.
The financial organization’s training includes understanding the latest software products that are designed for process effectiveness and increased automation, such as robotic process automation (RPA), data analytics, data visualization, and other technology-driven business tools. These tools are just that, tools that work best within a financial organization that has a detailed understanding of how the current processes operate so they can, for example, use RPA most effectively by automating processes for efficiency purposes but building in control processes to monitor operations.
A CFO must also have a clear understanding of the IT investments necessary to ensure the company has the technology needed to stay competitive within the company’s cost envelope. It is a delicate balance, as the CFO must weigh the substantial investments necessary for current technology infrastructure against relative inefficiency of using existing technology for a longer period.
The Long Road of Experience
A CFO must understand the underlying operating processes to design a level of internal controls to ensure the company is aligned to achieve its objectives. Financial organizations continuously strive to enhance operating effectiveness. A detailed understanding of the processes is built up over time, as CFOs often work through different levels of an organization before reaching the CFO position. The value of financial personnel greatly increases when they are exposed to varying aspects of business operations. Experiencing firsthand how line accounting operations in billing and collections work, for example, allows financial staff to become better attuned to some of the revenue recognition challenges and ethical considerations they may face as they move up and across the financial operations of a company.
Bill and hold transactions are a good example of how dealing with an issue personally can give one further insight into the related revenue recognition considerations. Fulfilling the actual bill and hold requirements to recognize revenue is not complicated and addresses a real operational need; however, by the same token, an employee should not discuss such an option with a customer before the customer broaches the subject directly. Recognizing revenue on a bill and hold transaction runs the risk of recognizing revenue prematurely. Thus, the controls surrounding such transactions generally include a review and approval by a senior financial executive. If these transactions surface in the closing days of a quarter and professionals working in financial reporting had worked in a billing operation in the past, they may be more inclined to be appropriately skeptical.
In addition, financial employees garner considerable business and process knowledge by working in a financial planning and analysis (FP&A) group. A strong FP&A professional can discern the operational issues and opportunities that drive results. Monthly analysis reports allow senior management to make decisions and identify items to address in real time; consequently, an operationally knowledgeable analyst can facilitate an understanding of the underlying issues. Accumulating this knowledge while progressing through the ranks is invaluable and gives future financial executives a store of knowledge to draw upon for future success. Critical thinking skills and professional skepticism are excellent qualities that are honed to perfection from this vantage point as well.
Companies recognize that broad experience in diverse areas of finance and accounting—such as accounting and controls, divisional finance, and financial planning and analysis—is an excellent training ground for future CFOs and other financial executives. This is supported by Spencer Stuart’s index analysis of the CFOs at Fortune 500 companies for the 11-year period ending on December 31, 2016. Stuart’s study indicates that the most prevalent route to CFO is accounting controls and divisional finance with 61% of CFO positions held by professionals from internal placements. The path to the top is paved with operational knowledge and making the financial connections to the issues driving the business.
Soft Skills Critical to CFOs and the Financial Organization
Financial personnel are expected to possess technical accounting skills built through years of education and work experience. Nevertheless, there are other “soft” skills demanded of finance departments that are equally critical to the success of a business. Such abilities include critical thinking, professional ethics, building and managing teams, and leadership.
Critical thinking skills are very important in our increasingly complex business operations and the diversity of responsibilities experienced by professional personnel. Critical thinking skills from the perspective of the CFO are best epitomized by the concept of professional skepticism. A skilled and politically astute financial executive asks pointed questions, allowing a deeper understanding of the issue and its underlying drivers without offense. At its root, professional skepticism is akin to the concept used by President Reagan when dealing with arms control issues, “Trust but verify.” A good dose of professional skepticism should be liberally applied throughout the finance organization to help to enhance data integrity as well as fostering a more in-depth understanding of the issues.
CFOs and their financial organizations have a special responsibility to their stakeholders and the public at large because they are responsible for providing accurate information to the public. The framework of GAAP and SEC rules provide excellent guidelines; but no matter how good the framework and rules are, financial professionals must have personal ethical standards that drive them into the direction of honest and accurate reporting. This can be complicated because compensation may be determined by financial performance, putting pressure CFOs to meet those objectives. An ethical environment is created when the CFO leads by example, and strengthened by free and open discussion.
The business structure must provide a mechanism for identifying questionable transactions to address in a professional manner. Ethics is a control environment process that flows from the top of the organization. The CFO must work with all functions to help them meet their objectives in an ethical manner. Financial personal must guard against functions and personnel outside of the financial group that could be either unethical or merely poorly informed of the control processes. Frequently, the finance organization must explain to those in other organizations, such as sales or product management, why their revenue recognition or cost assignment interpretations are misguided or impermissible. Strong monitoring and review processes to identify and prevent unethical decisions must be effective as well, ensuring that financial executives possess the ability to withstand pressures to achieve profitability targets by using unacceptable practices. This is where professional skepticism can help the financial organization identify issues to be addressed.
A successful CFO builds relationships and develops trust. This requires an open-door policy, made challenging in the remote COVID environment. A CFO also needs to be an active listener. In order to do that, the CFO must encourage employees to speak freely and to encourage employees to express their opinions. Employees should never be afraid to question company numbers.
Building and managing a team.
Financial organizations are made stronger using a team approach; it is up to the CFO to build departmental and cross-functional teams with well-defined objectives. The complexity of business requires the use of all the company’s skills and brainpower. Many companies improve their operating effectiveness and address business issues by assigning projects to a team of people empowered to analyze the issue at hand, develop viable options, and operationalize the agreed-upon solution. Project management skills come easy to a strong financial organization; financial employees are used to a disciplined approach and excel in environments with clearly defined goals.
Teams work best when given clear objectives and allowed to proceed with minimal amount of management interaction. The CFO is uniquely qualified to build effective teams because the CFO deals with people across the company. Micromanagement destroys the dynamics of a team and does not allow for creativity. Leaders must stay engaged and help ensure that the team does not stray from the task at hand. Scope creep is always a possibility and can result in a never-ending project with little to show for it. Demonstrated leadership abilities are a key part of the success of any financial organization, and fostering strong team environments can help achieve a positive outcome.
Many of the skills and attributes discussed above can also be classified as strong leadership skills. CFOs must be respected leaders in a company to help ensure that data integrity, honesty, and professional ethics are part and parcel of everything that comes from the financial organization. The CFO earns respect by living the ethics and principles on a daily basis. The following is a summary of leadership skills possessed by an effective CFO:
- Ability to delegate. Delegating responsibilities to staff allows a leader to devote more time to a smaller number of initiatives, resulting in better outcomes. Furthermore, delegating responsibilities throughout the company shows employees that their supervisor trusts them, which boosts employee morale and motivation.
- Respect and gratitude. Leaders can empower employees by promoting a culture of self-starters and decision makers. Employees should be trusted to make decisions and provide opportunities for employees to take on leadership roles. Employees that show initiative should be encouraged and rewarded.
- Emotional intelligence. The ability to read employees’ state of being has become more important since the coronavirus (COVID-19) pandemic. Being able to sense employees’ stress and frustration and acting compassionately, while effectively helping the CEO run the company, have become even more important. It is a strong trait to read the temper of the company’s personnel and to react accordingly.
- Adaptability. It is critical for CFOs to be able to work in an environment where there is not only constant change but accelerating change. This is necessary to build a forward-thinking organization.
- Influencing skills. CFOs must be skilled at bringing people together to deliver on the company’s shared vision. When there is trust in a leader, this is much easier; transparent and open communication helps to build a successful esprit de corps. Generating optimism demonstrates an ability to lift people up and move forward, even in dire circumstances. Leaders who lead with optimism create a positive, hopeful vision of a bright future that motivates and inspires the rest of an organization.
CFOs require many skills to fulfill the roles attributed to the five hats of the CFO. The breadth and depth of these skill begin to explain why the financial organization is looked upon to address many of a company’s financial and operational issues. Our next column will address the many risks facing the CFO.
Frank Manzi, CPA, is a professor of accounting at the College of Mount Saint Vincent, Riverdale, N.Y.
Mark Martinelli, CPA, CGMA, is the chief audit executive for Synchrony Financial, Stamford, Conn.
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