The common perception is that Chief Financial Officer (CFO) has an in-depth knowledge of organization risks. The premise is that finance teams are knowledgeable about risk management as most of them are qualified chartered accountants or certified public accountants. Secondly, Chief Audit Executive (CAE) or Head of Internal Audit quite frequently administratively report to the CFO. Hence, the obvious conclusion drawn about organization risks is that “CFO knows best”. After distilling information from a few reports, I realized that we may be thinking on the wrong track.
1. Misperception about Finance Department Risk Awareness Levels
The results of a recent survey “Ascending the maturity curve – Effective management of enterprise risk and compliance (A report from the Economist Intelligence Unit Sponsored by SAP)” indicates that this thinking is most likely a case of cognitive bias and may not be factually correct. The report states that – “Companies may be underestimating the extent of risk and compliance failures in their organization. Just over one-third of respondents say that their organization has suffered from one or more significant risk or compliance failures in the past three years. But this proportion is most likely owing to the fact that most respondents come from the finance function, where awareness of failures is relatively low. Among the four functions surveyed—finance, legal, risk and compliance—respondents from outside finance estimate significantly higher levels of risk and compliance failures. This suggests not only that the finance function is underestimating the level of failures, but that knowledge about risk failures is not being widely disseminated in order to improve practices and tighten policies.” The graph below shows that 65% of respondents from finance department said that their organization had no significant risk failure and just 28% stated that their organization suffered a serious risk failure.
With respect to risk awareness, when pitted against legal, risk and compliance departments the finance function doesn’t come out with flying colors. The graph clearly reflects that in most organizations there is an information gap between various departments about risk failures.
2. CFOs aware of shortcomings in risk management
My second thought on seeing the data was – do CFOs believe that they are the best bet when it comes to risk management ? Mark Twain had once said - “It ain’t what you don’t know that gets you in trouble; it’s what you know for sure that just ain’t so.” So what kind of perceptions and understanding prevails amongst CFOs about risk management?
I referred to the soon to be released report -“The Superstar CFO: After the Crisis – What it takes for Finance executives to excel in a changing and uncertain world (A report prepared by CFO Research Services in collaboration with SAP)”. A candid statement made by Mr. Allé, CFO at SNCB in Europe aptly describes the situation. He said – “The biggest impact of the CFO is eliminating, mitigating, and managing the risks. And, unfortunately, when a CFO is successful you don’t see the impact of these actions very much, because the risk doesn’t materialize. So it’s quite difficult to measure.” In my opinion this is a realistic perspective hence in some ways a confidence booster. CFOs are aware of the shortcomings in their capability to manage risks, especially the lack of focus on it in good times. But, it does raise the question as to whether CFOs focus on risks only in bad times?
Fortunately, that is not the case. The report highlights that as the global economy improves, CFOs are looking at risk management as a challenge of balancing risk and opportunity. Mr. Wong at Lenovo mentioned – “The risk management obviously is important, especially when the external environment is very volatile…. We spent a lot of time making sure that growth is not subject to an unnecessary level of risk. We can see risk management as an issue, but more importantly under the umbrella of growth.”
In my view, finance departments have not mastered the game of risk management. They still have a tough road ahead in the recession hit western world and BRICS emerging markets. In both economies, the risks are different. However, finance department is in a position to improve their risk management capability as they have access to critical data. A meticulous focus on risk management by finance department will keep the organization out of muddy waters and facilitate in reaching optimal targets.
In my opinion, some thinking needs revamping. The idea that all risks lead to the finance department is somewhat incorrect. With strategic, tactical and operational risks impacting business, the finance department maybe clueless about them. Finance departments apparently are still focusing on the financial risks. Here, organizations need to ramp up communication between risk management and finance departments to obtain an organizational view of risks. The CFOs on their part can’t get laid back on risk management because economy is recovering. Moreover, they need to meticulously focus on building an integrated risk management function within the organization.
The Superstar CFO: After the Crisis – What it takes for Finance executives to excel in a changing and uncertain world – A report prepared by CFO Research Services in collaboration with SAP - The report will be released in July 2011 and this is just a sneak preview for my readers. Special privileges for my readers. You can download it BRP_Advanced_Release_No1_AP_Superstar_CFO_After_Crisis_Jun2011.
Ascending the maturity curve – Effective management of enterprise risk and compliance – A report from the Economist Intelligence Unit Sponsored by SAP