CFO’s Bread and Butter: Compliance & Risk
Thanks for joining our series of posts comparing how factors such as timing and cost are seen differently by finance, procurement and legal.
Compliance and risk are no different. While procurement may see compliance and risk management as being a few rungs up their strategic maturity ladder, for finance — and legal, I might add — they are the bedrock of our existence in the organization. If a CFO isn’t focused on ensuring compliance and risk management, he or she isn’t going to be in that job for very long.
Compliance and risk are offset by information. Rising regulation and compliance enforcement increases the need for reliable business information. Consider the Sarbanes-Oxley Act of 2002 and the 2010 Dodd-Frank Act, laws that, in view of the expansion of international trade and the complexities of varying compliance regulations both domestic and worldwide, have pushed organizations to increase investment in risk assessment and oversight.
Compliance is one of those areas where even the terminology has a different meaning to finance than it does to other functions in the same company. When procurement talks about compliance they usually have an internal focus, such as contract compliance or purchasing process compliance. Finance may be driving internal efforts, but we have to make sure we are compliant with requirements established by groups and parties outside of the organization.
Finance is charged with satisfying the requirements of multiple external parties (i.e., auditors, bankers, governments, shareholders). And there is little forgiveness for organizations that miss the mark. Over time, the demands of these parties have become so stringent and exacting that the internal controls required to comply with them have become the central focus of internal audits. Processes, such as the ones that establish signature authority or spending limits, help finance maintain control over cash flow as well as provide supporting documentation and reporting.
Now risk, that’s a completely different thing to manage. With compliance, we’re bringing known but variable processes into alignment with known (if complex) external requirements. With risk, finance is doing our darndest to forecast and prepare for a variety of unknown conditions that will disrupt the company’s ability to operate, not to mention remain compliant. And if there is any confusion about how finance regards uncertainty, see my introduction to this series where I pointed out that we have to help the organization plan for the “unknowns” with the best “knowns” available to us at any given moment.
From a CFO’s perspective, risk ultimately stems from bad (or at least ineffective) decisions that lead to the less than ideal investment of time and money. While we can’t always control what happens outside of the company, we spend a lot of time trying to get visibility into risks that stem from inside. Most importantly, we need to know what commitments have been made, whether buy-side or sell-side, so that they can be measured and managed.
Like compliance, liabilities are not all created equal. Some are known, short-term commitments, which are easier to assess and manage the risk implications of. Then there are future, or what I like to call “stealth” liabilities that push our limits and involve the most risk (and highest potential reward). In these cases it is absolutely imperative that decision making be based on the most up-to-date information available. It is hard enough to make good long-term commitments — without current data — it should not be attempted.
Any solution that can make finance’s decision-making process easier and more efficient by putting solid, up-to-date information in our hands, in the right format, at the moment we need it, offers huge value. This, in turn, leads to improved compliance (can’t do without it) and lower risk (a must-have) across all parts of the business. Compliance and risk management contribute to competitive advantage by allowing us to to make improved decisions with minimal hands-on time, resulting in an increase to the bottom line — the happy ending every CFO is looking for.
In my next post, I am going to move on from finance’s bread and butter to the more complex and never dull topic of savings — from the perspective of the CFO.
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