The Complete CFO Handbook: From Accounting to Accountability - Hardcover

Fabozzi, Frank J.; Peterson Drake, Pamela; Polimeni, Ralph S.

Hardcover

ISBN 10: 0470099267 ISBN 13: 9780470099261

Publisher: Wiley, 2007

Synopsis

This must-have reference covers all of the major areas of cost accounting and analysis including product costing, relevant costs, cost-volume analysis, performance evaluation, transfer pricing, and capital budgeting.

• Includes methods of reorganizing, classifying, allocating, aggregating, and reporting actual costs and comparing them with standard costs.
• Equips experienced cost accountants with a reference tool and students with a thorough textbook.
• Provides numerous examples, succinct language, chapter review, glossary, and appendices.
• Includes an abundance of exercises, many of which are based on exam questions from the CPA and CMA exams.

About this title

About the Author

Frank J. Fabozzi, PhD, CFA, CPA, is Professor in the Practice of Finance in the School of Management at Yale University. He is a Fellow of the International Center for Finance at Yale University and serves on the Advisory Council for the Department of Operations Research and Financial Engineering at Princeton University. He has authored and edited numerous books in finance.

Pamela Peterson Drake, PhD, CFA, is the J. Gray Ferguson Professor of Finance and Department Head of Finance and Business Law at James Madison University, Harrisonburg, Virginia. She is author or coauthor of numerous books and articles.

Ralph S. Polimeni, PhD, CPA, is the Vice Provost for Accreditation and Assessment and holds the Chaykin Endowed Chair in Accounting at Hofstra University, Long Island, New York. He has authored numerous articles and books on accounting.

From the Back Cover

Praise for The Complete CFO Handbook
From Accounting to Accountability

"The office of the CFO in corporations today must blend strategy, investor relations, corporate finance, control, budgeting, risk management, and a host of other key areas of expertise and knowledge. Business education, however, tends to be compartmentalized along functional lines and courses and texts specialize in subsets of these subject areas. Fabozzi, Drake, and Polimeni bridge that yawning gap by providing a comprehensive set of materials that can serve as a nice platform to develop managers tasked with the sourcing and managing of funds within organizations. The Complete CFO Handbook is well written and makes extensive use of examples to illustrate key concepts."
Jacob Thomas
Williams Brothers Professor of Accounting and Finance
Yale School of Management

The role of the CFO in business has expanded significantly in recent years as companies become more accountable to their stakeholders and regulators and as the sophistication of technology, risk management, financial analysis, and financial records processing has increased.

Filled with numerous examples, The Complete CFO Handbook lives up to its name and provides complete coverage of:

• The CFO's role in company communications with company stakeholders

• The tools and processes by which a CFO may manage risk, including taxes, theenterprise risk management process, and strategies for transferring risk

• Performance evaluation and the fundamentals of the capital budgeting process

• Traditional cost accounting topics of product costing and strategic cost management

Every CFO's desktop tool, The Complete CFO Handbook expertly provides financial executives with an extensive review of cost accounting as well as the background and tools for managing a company's financial functions.

From the Inside Flap

Praise for The Complete CFO Handbook
From Accounting to Accountability

The office of the CFO in corporations today must blend strategy, investor relations, corporate finance, control, budgeting, risk management, and a host of other key areas of expertise and knowledge. Business education, however, tends to be compartmentalized along functional lines and courses and texts specialize in subsets of these subject areas. Fabozzi, Drake, and Polimeni bridge that yawning gap by providing a comprehensive set of materials that can serve as a nice platform to develop managers tasked with the sourcing and managing of funds within organizations. The Complete CFO Handbook is well written and makes extensive use of examples to illustrate key concepts.
--Jacob Thomas
Williams Brothers Professor of Accounting and Finance
Yale School of Management

The role of the CFO in business has expanded significantly in recent years as companies become more accountable to their stakeholders and regulators and as the sophistication of technology, risk management, financial analysis, and financial records processing has increased.

Filled with numerous examples, The Complete CFO Handbook lives up to its name and provides complete coverage of:

• The CFO's role in company communications with company stakeholders

• The tools and processes by which a CFO may manage risk, including taxes, theenterprise risk management process, and strategies for transferring risk

• Performance evaluation and the fundamentals of the capital budgeting process

• Traditional cost accounting topics of product costing and strategic cost management

Every CFO's desktop tool, The Complete CFO Handbook expertly provides financial executives with an extensive review of cost accounting as well as the background and tools for managing a company's financial functions.

Excerpt. © Reprinted by permission. All rights reserved.

The Complete CFO Handbook

From Accounting to AccountabilityBy Frank J. Fabozzi Pamela Peterson Drake Ralph S. Polimeni

John Wiley & Sons

Copyright © 2008 Frank J. Fabozzi
All right reserved.
ISBN: 978-0-470-09926-1

Chapter One

The Changing role of the CFO: From accounting to accountable

JOB DESCRIPTION: Oversee financial accounting systems, reporting, and disclosures; assure compliance of financial reporting with generally accepted accounting principles and securities law accounting requirements; assure compliance with local government, federal government, and international tax laws, regulations, and rules; expert in disclosure compliance with federal and state securities laws; establish, monitor, and evaluate internal controls; work with the CEO in the development of the strategic goals and plans, execute the strategic plans, and evaluate performance relative to the strategic goals; participate in long-term and short-term budgeting; exceptional communication and team leadership skills; able to raise capital and manage the firms' capital structure to maximize the value of the company and minimize the company's cost of capital; develop, monitor, and evaluate a program of risk management; communicate with the company's Board of Directors, shareholders, creditors, and credit rating agencies; no sensitivity to the effects of kryptonite.

Many years ago, the role of the chief financial officer (CFO) was to keep the financial records, and had accounting, internal control, budgeting, and treasury responsibilities. But the role has changed over the years to be much more comprehensive and to include decision-making that extends beyond the accounting and treasury functions. The CFO of today is responsible for measuring and monitoring performance, but the CFO is also now involved in managing risk and creating value for owners.

What has caused this change? There is not just one cause; but rather several forces that have resulted in the expanded role of the CFO. In the 1990s, we saw the role expanded from financial accounting and accounting systems to include financial analysis and an active role in strategic planning. This expanding role is apparent in the Chief Financial Officers Act of 1990, which specifically addressed the changing role of the CFO in federal government entities. In the 1980s and 1990s, with the continued globalization and technological innovations, the CFO in some companies became a starring role as a deal-maker who sought out growth opportunities for the company.

The role of the CFO widened further because of the financial scandals of the 1990s and early 2000s that included Enron, WorldCom, and, unfortunately, many more companies. The resultant changes in laws and regulations focused attention on the CFO and broadened the responsibilities of this position. This resulted in a renewed emphasis on the CFO's role in accounting and financial reporting, but also added responsibilities for restoring confidence in the integrity of the company's financial accounting, internal control systems, and risk management.

Throughout this book, we discuss the responsibilities of the CFO in an organization. We recognize that in large companies the responsibilities of the CFO may be shared with the controller, a vice-president of finance, the corporate treasurer, a chief risk officer, or some other, similarly titled individual. However, in referring to the CFO, we are referring to responsibilities of the financial officer with the ultimate responsibility for the financial decision making of a company, responsibilities that may be shared or split among persons in the organization.

SOX ACT OF 2002 AND THE CFO

The Sarbanes-Oxley Act of 2002 (SOX Act) is the most wide-sweeping legislation to affect the securities industry since the Securities Act of 1933 and the Securities Exchange Act of 1934. The SOX Act was passed as a reaction to the failures of corporate governance that were pronounced in scandals such as Enron. The SOX Act affects many participants in our financial markets: investors, security analysts, corporate management, and accountants. The Act includes provisions to increase internal monitoring, regulate the gatekeepers (e.g., chief executive officer, CFO, and the board of directors), penalize insider misconduct, and increase transparency.

We summarize the key provisions of this Act in Table 1.1. The SOX Act came about following numerous financial scandals that involved publicly traded corporations, accountants, investment bankers, and brokers, with most of the provisions of the SOX Act traceable to specific misdeeds. For example, the provision for the reimbursement of bonuses prevents lucrative exits of executives from companies that were involved in accounting misstatements, such as those that occurred at Gateway. As another example, the provision for the independence of the audit committee members from management of the company prevents management from participating in the dealings with auditors, which was a problem in the case of Adelphia Communications.

The provisions of SOX 2002 that directly affect the CFO include the following:

Section 206: This section reduces potential conflicts of interest by making it unlawful for a CFO, CEO, controller, or equivalent officer to have been employed by the independent public accounting firm and have participated in the audit of the company within one year of the audit.

Section 302: This section requires the CEO and CFO, or equivalent officers, to certify annual and quarterly reports and, in signing, they are responsible for the establishment and maintenance of internal controls. By certifying, they are also attesting to have reported any deficiencies to the auditors and the Audit Committee of the Board of Directors.

Section 304: This section permits the Securities and Exchange Commission (SEC) to sue for forfeiture of any incentive-based, equity-based, or other bonus compensation of management in the event of a restatement of financial statements due to noncompliance. This provision deters management from manipulating reported financial accounting results for personal benefit.

Section 401: This section requires that periodic financial reports not only be presented accurately but be presented in a manner that includes incorrect statements or fails to state material information. It also requires that the issuer disclose material off-balance sheet transactions, contingent obligations, and other relationships between the issuer with unconsolidated entities such as special-purpose entities.

Section 404: This section requires disclosure of management assessment of internal controls and independent public accounting firm attestation of management's assessment. The requirement of reporting on internal controls imposed substantial startup costs on companies. More important, however, is the fact that this section creates a liability risk that is borne by the CEO and CFO. That is, the auditing firm and the executives signing off on the internal control report bear the liability for any failing in the internal control system.

Section 409: This section requires real-time, plain-English disclosures of material changes in the company's operations or financial condition. The effect of this is (1) an expansion of the number of events that require a company filing a Form 8-K under the Securities and Exchange Act of 1934 from 9 to 22 and (2) a shortening of the deadline to four business days.

Section 906: This section requires certifications of audit reports by CEO and CFO with respect to compliance with securities laws and that the information represents fairly the financial condition and operating performance of the company. Criminal penalties are possible for certifications when in noncompliance.

EXPANDED RESPONSIBILITIES OF THE CEO

The broadening of responsibilities of the CFO has made this role less of a reactive, purely financial function, and more of a proactive role in the company's future, participating in many dimensions of the company's decision-making.

Traditionally, the CFO's responsibility related to accounting and treasury tasks. The traditional accounting functions included budgeting, forecasting, financial reporting, and performance measurement. Therefore, the CFO must be familiar with financial accounting, management accounting, and budgeting, and have an ability to communicate this information internally, as well as to creditors, shareholders, and others. The traditional treasury functions include capital structure decisions and investment decisions. Investment decisions include both working capital management as well as long-term capital investment, and require the CFO to be well versed in valuation principles.

The expansion in the role of the CFO includes compliance, risk management, communications, and performance evaluation. This expansion adds to the complexity of the role of the CFO, requiring an expanded knowledge of laws, rules, and regulations, an understanding of risk and the ability to communicate risk both internally and externally, and an ability to evaluate performance, using such tools as the balanced scorecard, economic value added, and other metrics. We illustrate the nexus of CFO responsibilities in Figure 1.1.

Compliance: Tax, Legal, and Regulatory

The compliance obligations of the CFO become more complicated as laws, regulations, and rules are created or change. For example, the CFO is responsible for expertise in laws, regulations, and rules that affect financial reporting, risk management, and the management of internal controls. The laws, regulations, and rules that the CFO must be familiar with include:

Securities and Exchange Commission reporting requirements and regulations.

Compliance with Sarbanes-Oxley Act of 00.

U.S. and international generally accepted accounting principles (GAAP).

Internal Revenue Service reporting requirements and regulations.

Compliance with U.S. Foreign Corrupt Practices Act (FCPA).

Additionally, depending on the type of business, other laws and regulations may be relevant. These laws, regulations, and rules are all part of the responsibilities of the CFO, though many of these responsibilities may be shared with the controller.

Additionally, the CFO must be aware of the changes that are on the horizon to effectively plan and forecast. For example, U.S. accounting standards are converging with International Financial Reporting Standards (IFRS) as the Financial Accounting Standards Board and the International Accounting Standards Committee (IASC) work out the differences in these standards. These changes in accounting standards affect financial reporting and may affect financial decisions. As another example, securities laws are tightening in a reactive manner to financial or accounting misdeeds and the CFO must grapple with the implications of these changes to financial disclosures and financial planning.

Communications

The CFO's role in company communications has changed such that the CFO is now an important player in communicating with the company's stakeholders-the creditors, shareholders, and others-not only the financial condition and operating performance of the company, but the risks and strategies of the company. The increased demand for transparency has expanded the type of information disclosed and the method of disclosure. Companies are now required to make real-time disclosures of material company events, which increases the pressure to provide accurate, current information. A number of the disclosures that U.S. publicly traded companies must make are summarized in Table 1.2.

The acceleration of the speed of disclosures began with Regulation FD. In an attempt to "level the playing field," the Securities and Exchange Commission in 2000 adopted new rules regarding selective disclosure. These rules, in the form of the Fair Disclosure regulation (Regulation FD), require that if a publicly traded company or anyone acting on its behalf makes material, nonpublic information available to certain persons, the company must make a public disclosure of this information. All intentional disclosures are simultaneously to the public-not filtered through analysts, which was the previous custom. Now, if someone makes an unintentional disclosure, the company is required to make a prompt, public disclosure of the information. Regulation FD, combined with the real-time disclosures required under the new rules for 8-K filings due to the SOX Act of 2002, creates pressure on the CFO to be both fast and accurate.

Strategic Planning

A company's CEO may be the primary person who works with the board of directors to establish the strategic plan, but the CFO is often being asked to work closely with the CEO in the company's strategic planning, in both the development of the strategy and its implementation. The finance function within a company is broadening to provide the bridge among the company's divisions, management, and the board of directors. In other words, the CFO makes the strategic plan happen and monitors the company's progress towards the strategic goals.

The CFO is involved in evaluating growth opportunities by assessing mergers, acquisitions, or joint venture opportunities, and by developing growth opportunities from within the company. The CFO is integral in bridging finance with strategy, bringing financial and knowledge and analytical skills to help the company achieve its strategic goals.

Performance Evaluation

The CFO has traditionally been instrumental in measuring performance because of the role played with respect to financial reporting, both internal and external. The CFO is in a good position to understand the drivers of performance, which is important in aligning incentives with performance. For example, if the performance of a division is attributable in part to factors controllable by the division manager and in part to factors outside of the control of the manager, the CFO can then attribute the performance of the division manager to the controllable portion of performance.

There are numerous management processes and tools that a company may choose from to gauge performance. We summarize a few of the many available management tools in Table 1.3. The key is to devise and implement a system that most closely aligns the reward with the performance. The CFO, in working with Human Resources, plays a role in setting the expectations for performance for the company's management and then communicating this to investors.

Performance evaluation and the related rewards are now the focus of a great deal of attention because of the backdated options scandals. Companies are rethinking the use of stock options to align employees' performance and rewards. In December 2006, the Securities and Exchange Commission issued new rules pertaining to the disclosure of executive compensation for publicly traded companies. These rules increase the transparency of the compensation by expanding and reorganizing the disclosure of compensation information in the Proxy Statement. The new presentation of compensation will provide increased transparency, but also provide a linkage of the information on the Proxy Statement with that shown on the company's financial statements. Though the SEC rules affect the top-paid executives in the company, the increased transparency of compensation for the highest-paid executives reflects the growing demand for alignment of rewards and performance at all levels of the company. Whereas the Compensation Committee of a company's board of directors establishes the compensation program for the top management of the company, the CFO has the responsibility of devising a system of compensation for all other levels of employees.

(Continues...)

Excerpted from The Complete CFO Handbookby Frank J. Fabozzi Pamela Peterson Drake Ralph S. Polimeni Copyright © 2008 by Frank J. Fabozzi. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Edition details

• Publisher: Wiley
• Publication date: 2007
• Language: English
• ISBN 10: 0470099267
• ISBN 13: 9780470099261
• Binding: Hardcover
• Edition number: 4
• Number of pages: 864