Continuing with the series, as per COSO report “Fraudulent Financial Reporting 1998-2007- An Analysis of U.S. Public Companies” in 65% of the total 347 alleged cases of fraudulent financial reporting in 1998-2007, the CFO of the organization was involved. When we add CEO and/or CFO involvement, they are responsible for 89% cases of fraudulent financial reporting. Hence, the question comes up why CFOs participate in a fraud when their role is of being gatekeepers and protectors of the organization.
According to research done in the paper “Why Do CFOs Become Involved in Material Accounting Manipulations?” the CFOs participate in fraudulent financial reporting either because they are complying with the instructions of CEO or they are themselves perpetrating the fraud. The CEOs generally take the decisions about CFO employment terms and whether CFO can report to the board. Hence, if the CEO is powerful, the CEO can force the CFO to participate in accounting manipulations. The CEO can build a corporate culture to meet quarterly accounting targets that would put undue pressure on the CFO to meet them or directly threaten CFO with job loss. As in the Satyam case, Ramalinga Raju was in a powerful position and the ex-CFO Vadlamani Srinivas did not refuse to pass fraudulent accounting entries and do illegal fund transfers.
The second situation is when CFO instigates fraudulent activities. In these situations the CFO is lured by the financial benefits and misuses his position for personal gain. This occurs when CFOs are powerful, have minimum oversight control and the organization has weak internal controls. Internal and external auditors might be under the influence of CFO. This case can be exemplified by the recent Citibank fraud. The Hero Honda Assistant Vice President Mr. Sanjay Gupta allegedly took Rs 20 crore (USD 4.46 million) from Mr. Shivraj Puri of Citibank to divert Hero Honda group funds amounting to Rs 200 crore (USD 44.67 million).
The third situation is when the CFO role is given to an unqualified or an inexperienced person. The Enron ex-CFO Mr. Fastow was not a qualified certified public accountant. As mentioned in Greed and Corporate Failure authored by Stewart Hamilton and Alicia Micklethwait – “It is doubtful if he had the skill set required of the CFO of a major corporation, let alone one as complex as Enron.” In India, a company’s financial statements are required to be signed by its CFO who must be a certified chartered accountant. However, organizations can hire inexperienced chartered accountants and force them to sign of the financial statements.
The last problem which needs to be addressed in large corporate is the role of Chief Financial Officer and Financial Controllers (FC). If the organization has a number of business units or geographically distributed offices, the financial controllers are responsible for the business unit financial statements. In some situations they report to the business unit operational head and in some they have direct or dotted line reporting to the CFO. In this situation the CFO can be bypassed by the FC. The CEO or business unit head can directly influence the FC to manipulate financial records. This may be done with or without the knowledge of CFO.
India as such faces additional challenges and the pressure to comply is huge. It does not have a whistleblower protection act. In 2010, 11 whistleblowers were shot dead. The dilemma faced by whistleblowers is not just about risking a career; it is also about risking one’s own life and those of family members. Considering that it is extremely difficult to fight a legal battle in India, due to high corruption in law enforcement agencies, it is nearly impossible for senior officers to report corporate misdemeanors of powerful people.
Do not lose hope, the CFOs in India are continuing despite the challenges. On the lighter side, here is an incident. A friend of mine, married with a kid, is a CFO in a multinational organization and reports to a CEO. She was once having a bad day and angrily said to me – “You know what Sonia, my boss is a fraud. But when I see him virtually holding a revolver over my head, I tell him he is more suave than Richard Gere, more intelligent than Einstein, has wisdom of Aristotle! ” Straight-faced I asked knowing her heart and soul are in the right place – “Isn’t that over the top”. She gave me a dirty look and responded – “He believes it.”
The need of the hour is to make a CFO more powerful in the organization to enable him/her to work independently. This would prevent CEO and other CXOs from exerting undue influence on CFO.
1. The board of directors and/ or audit committee should be responsible for recruiting and terminating a CFO. The CEO shouldn’t be allowed the authority to terminate a CFO at will.
2. Indian Company Law Board has recently requested Institute of Chartered Accountants of India (ICAI) to initiate disciplinary action at the earliest against chartered accountants who breach the code of ethics. If chartered accountants believe that they will suffer no or minimal consequences for transgressions, they will resort to them actively. Hence, actively initiating disciplinary action is a step in the right direction.
3. ICAI should also provide a peer support and assistance to chartered accountants who wish to disclose wrongdoings. Though this is stated on paper, it is not being actively practiced. This will reduce pressure on chartered accountants to comply with incorrect instructions of CEOs.
4. Audit committees should be vigilant about CFOs becoming perpetrators in frauds.
5. Internal audit heads or other risk heads should not report to CFOs. If internal audit heads and risk heads report to CFOs, they lose their independence and cannot report on fraudulent activities of CFO.
6. CFO pay should not be linked to quarterly returns or stock market performance.
- Why Do CFOs Become Involved in Material Accounting Manipulations? (Authors Mei Feng & Weili Ge)
- COSO Fraudulent Financial Reporting 1998-2007- An Analysis of U.S. Public Companies (Authored by Mark S. Beasley, Joseph V. Carcello, Dana R. Harmanson & Terry L. Neal)
- Greed and Corporate Failure – The Lessons from Recent Disasters ( Authors Stewart Hamilton and Alicia Micklethwait)
- The Illegal Mining Whistleblower Case
To read the full list of Fraud Symptoms, click here.