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This article was published under chapter 7 of a new book by Saleh Hussain under the title "Corporate Governance – Board Performance Evaluation and emerging practices in Corporate Governance"

"The reasons for the financial crisis can all be attributed and blamed on accountants and Chief Financial Officers "CFOs”. An old friend whom I have not seen for the past number of years uttered this statement. He is a well-known journalist who spent years covering economic news generally and in particular financial sector news. In fact, the event both of us were attending was a seminar of two days arranged by professional accountancy bodies/ associations.

I asked him, why was he saying that? His response was "They were the tools by which Boards and executive management applied to inflate the values of assets and investments through financial engineering and improper valuation. The valuation methods they applied were exaggerated and in certain cases baseless. The financial engineering lacked adherence to proper accounting standards or found ways to go around them".

I cannot say that I agree entirely with such statement, yet I cannot ignore the fact that in certain instances some accountants and CFOs, contributed in one way or another to please their respective employers, by inflating the values of balance sheets and profit and loss statements. External auditors were blamed for signing off on inflated financials and, in fact a number of legal cases was filed against some of the big four companies.

During the late nineties of the last century and the first ten years of this century we witnessed an unprecedented upturn in every industry. The financial sector, the real estate sector and the construction sector are some examples. In the process the value of underlying assets in these sectors increased many times causing a great wealth accumulation by the personnel involved specially the top management and Board members.

Accountants and CFOs had to do the job assigned to them which is to come up with the financial statements for the companies they worked for. Generally, they had to apply whatever accounting standards were available and prevailing then to undertake an evaluation of values of assets and investments under their custody. Mind you, most of international accounting standards and IFRSs were only issued over the past few years. In large part, those standards were issued to address the shortcomings in the valuation methods and to correct malpractices.

On the other hand, one cannot deny the fact that financial engineering was in certain cases directed to either bypass certain regulations or to avoid paying extravagant taxes. That was something that some accountants and financial controllers contributed towards willingly or unwillingly.

The practices of some accountants and financial controllers combined with the resultant financial crisis opened widely the eyes of regulators causing them to enhance accounting standards. Those practices were also viewed by regulators and various stakeholders as a breach of the requirements of good practice and corporate governance. Hence the regulators tried their best, and are still trying, to close the loopholes in the governance. In that direction, following governance-related issues were addressed by regulators:

  • Accounting standards had been completely revamped to ensure that loopholes are closed. Regulators demand that management and external auditors undertake their own independent review of the financials to ensure accuracy and that the valuation of assets and investments are based on issued regulations.
  • The top management needs to sign a representation letter confirming that the issued financial statement are accurate and that they take full responsibility for their contents. In fact, to strengthen the governance side, even the Board of Directors must co-sign such a representation letter.
  • The accountants and financial controllers are now on the regulator’s "approved persons" list. This means listed companies, banks and financial institutions cannot employ them without the specific approval from regulators.
  • The regulators will only approve applications for approved persons if all prerequisites are satisfied. Qualification, specialization and related experience are some prerequisites. In fact, regulators would also make sure that related professional training is undertaken. If the application indicated that the candidate did not attend certain courses or lacked certain certification, the regulators would in most cases make approval conditional upon satisfaction of remaining prerequisites. Regulators may consider interviewing applicants for approved persons prior to approval.
  • Until few years ago, the CFOs were given responsibility for a number of functions including information technology. Some of those functions proved over time that they conflicted with the main areas of focus of the CFOs. Therefore, some changes are being witnessed here including the responsibility for IT functions being shifted from CFO to others. In this function, it was seen that some aspects conflict with responsibilities of the CFO. When given the responsibility of overseeing the IT function, a loophole could be opened through which the CFO could compromise the security and accessibility of the IT systems. Altering or causing an alternation through direct reports to accessibility and financial limits on the systems is a real concern. The direct reports work could be compromised as they try to please those who evaluate their performance especially if the CFO is the evaluator.
  • Another development is the reporting line of the CFOs which is witnessing change too. For ages, the CFO reported to the head of Operations (or commonly known now as Chief Operating Officer –“COO”) but this reporting line mostly now leads directly to the CEO. Currently the CFO is expected to present reports to the Board through audit committee and is expected to give specific confirmation to the Board that the financials are accurate and that all relevant accounting standards are being followed and applied.
  • The future will witness more streamlining of the role of CFOs and more regulations will be issued to address past issues and to rightly address the emerging trends of financial standards and their related structure and governance.

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