The linking up of risk information between those two facets, and the ability to make sense of the resulting data in terms of a view on systemic risk, is a new demand on the CFO after the economic crisis and a shift in attitude to risk management. That is compounded by the emergence of the ‘senior accounting officer’ (SAO) role – typically attributed to the CFO – which, under new rules defined in the Finance Act 2009, requires CFOs and finance directors to certify that their accounting systems are appropriate to meet the company’s tax obligations. It also requires an end-to-end review of the company’s systems.
Additionally, it was decided in the 2009 Budget that SAOs of large companies would report to HM Revenue & Customs on the adequacy of their accounting systems for tax returns: and it is the SAO who is personally responsible for complying with all of the new requirements.
Last autumn, panellists at a Federation of European Risk Management Associations conference debated the fact that CFOs are not only having to play an increasingly pivotal role in the risk management of their companies, but are also expected to lead the setting of best practice on risk management for the business – and they are being included in discussions about setting risk strategy, not just the price tag.
“In a world driven by financial metrics, key performance indicators are expanding to include a company’s performance in managing risks, in addition to return on investment and cost of capital,” says Marguerite Soeteman-Reijnen, chief broking officer for Europe, the Middle East and Africa at risk adviser Aon. “Hence, CFOs are being increasingly included in the development of strategic risk management processes and solutions, rather than solely on the co sts involved.”
Forward-thinking CFOs understand the requirements of their expanding role, the unique risks they present and the importance of having risk management strategies that effectively address the new risk profile of their finance organisation, according to a report from Deloitte. This new type of CFO, says Deloitte, knows the difference between practising risk avoidance and effectively managing risk-taking as a means to create value.
In a survey by PricewaterhouseCoopers, most respondents thought the CFO should perform the SAO job: 50 percent said that it should be the group CFO, while 31 percent thought it should be the UK CFO.
Bill Floydd, UK CFO of FTSE-100 technology company Logica, thinks adding the SAO role to his own is sensible. It “elevates tax to the boardroom agenda”, Floydd tells Financial Director. “Despite being an important cost for any business, tax has for too long been seen as a back-office activity, rather than what it really is – a cost to be managed like any other P&L line and an important part of a company’s social and corporate responsibility.”
It is generally assumed that the role of the SAO is part of a new position of responsibility for systemic and financial risk that CFOs must undertake. However, Simon Perry, partner in PwC’s risk assurance practice, does not see the SAO incorporating the position of systemic and financial risk that FDs carry. He believes that it is defined specifically by legislation, so is separate from merely just incorporating the new risk.
The decision to make the CFO the SAO may also seem a strange one given the relationship between risk divisions and the FD, which has often been fractious.
But times have now moved on and the chief risk officer role is in the ascendant. As Aon’s Soeteman-Reijnen says, CROs and CFOs are working together to ensure that risk management is elevated to the board and to increase standards of professionalism in handling the risks facing the organisation.
“CFOs are gleaning insights from their CRO on appropriate stress-test scenarios and decision-making processes,” she adds.
Mark Kennedy, director of tax at Deloitte, concurs that the legal aspect of the SAO requirement is probably best covered by the CFO. He admits, though, that the firm was surprised when it was announced. “Our initial reaction was to question its value, because directors already had an obligation under the Companies Act to keep a proper record of their liabilities,” he says.
Kennedy believes that the CFO as SAO makes sense, because the legislation stipulates that the identity of the SAO is the person with ‘overall responsibility for the financial accounting arrangements’ of the company. “In applying this, HM Revenue & Customs is taking a pragmatic view,” he adds, “confirming in its guidance to client relationship managers that it should be the ‘most appropriate person in the circumstances of the company’ – and that the onus is on the business to decide who is best placed to undertake this position.” He does not think ethical burdens placed on CFOs as a result of the legislation are that onerous or much in addition to those typically placed on all board members.
The reality is that the added burden placed on the CFO’s shoulders is only as big as the CFO allows it to be. “For some companies – such as those already subject to the rigours of Sarbox – the additional diligence required is reasonably modest. For others, the actions required can be more onerous,” says Logica’s Floydd.
Read our accounting columnist Peter Williams’s thoughts on the SAO here