The “Scalable” CFO: Today’s Challenge

Nick Shepherd, Certified Management Consultant and Professional Development Facilitation, EduVision Inc. | June 25, 2014 |

Today, people involved in the financial and accounting professions face one of the most challenging yet exciting times since the great depression. At that time, the growing scale of financial demands to build railroads, vast chemical plants, and many pillars of the industrial revolution, including expanding factories for mass production, drove the demand for greater transparency, accountability, and reporting integrity.

In response, the US Securities and Exchange Commission (SEC) was created and, through the SEC, the US Financial Accounting Standards Board (FASB), both aimed at protecting a growing breadth of investors and providing standards for external reporting. In addition, management accounting was developed to support internally focused reporting, including assistance to plan and understand cost behavior and to evaluate and forecast the potential financial results of management decisions.

The “sea change” in the profession today is being driven by a massive shift in the way in which value is created. While fixed (tangible) assets remain important in several industries, many of today’s organizations depend on their intangibles to create products and services and to create and sustain competitive advantage (see the OECD’s Intangible Assets, Resource Allocation, and Growth: A Framework or Analysis). This is also reflected over the last 25 years by the continued decline of the average proportion of organizational value attributed to the assets and liabilities on an organization’s balance sheet, i.e., its book value relative to its total value. Several studies have determined that, on average, only 20% of and organization’s value today is attributed to tangible assets while 80% of its value comes from intangibles (see CIMA’s Data: The Financial Management Magazine (2013) and Brand Finance’s Intangible Tracker).

Given that a key role of accountants and financial managers is to protect the interests of their clients, how well does the profession score in understanding, tracking, monitoring, nurturing, and reporting these “assets” that determine the majority of value? Success in responding to this challenge will be determined by the ability of accountants to move beyond their traditional capabilities and embrace aspects of value creation and sustainability that is currently either controlled by others or, in the worst cases, not being addressed.

The two key questions must be: a) can existing accountants grow, through professional development, their capacity and capability to understand and embrace these challenges; and b) will the evolution of the core competencies of the profession embrace this much broader aspect of value creation? Is the profession “scalable?” If not the space will be filled by others and the future of the profession might be in doubt. While we spend a great deal of time on the continued development of standards that widely ignore intangibles are we in danger of getting better and better at measuring what is less and less important?

I have a few suggestions that can serve as an initial approach to developing this “scalability.” First, monitor and review key publications that are tracking the changing role and competencies of CFOs. In particular, publications such as:

Second, the ground breaking work that is being done by International Integrated Reporting Committee (IIRC), in particular the creation of a framework that expands the “capitals” that an organization employs to create value, from the traditional financial capital to a framework of six capitals including human, natural, intellectual, relationship, and manufactured in addition to the traditional financial. This framework has significant implications for future performance disclosure with several national governments already having passed or developing legislation to integrate this broader approach to accountability into public enterprise requirements.

Third, researching and learning from the supplemental corporate reporting that has been growing over the last 20+ years under the concept of a “triple bottom line” or corporate social responsibility. There are many reports one can review— has a database of 57,428 reports across 11,255 companies from a global range of organizations in industries from resource and extraction to financial services and retailing. As a point of interest, the main bodies behind this alternative reporting, such as the Global Reporting Initiative and the Carbon Disclosure Project are active in the work of the IIRC. What we see is a new framework emerging that embraces the tradition of financial reporting with the greater disclosure being sought by a broader range of stakeholders.

As the economy starts to improve, accountants might look at the history of mergers and acquisitions that has a somewhat spotty success rate and consider the size of consideration being paid for and capitalized as goodwill. In most cases, goodwill represents a monetized value attributed to intangible assets that an acquired organization has developed. Is an impairment test an adequate professional response to understanding the components of goodwill? Or should accountants develop stronger skills in understanding exactly what these intangibles are and how they can be nurtured and protected so as to enhance the results on a merger and acquisition? The ultimate sustainability of enterprises that we represent depends on the protection and development of intangible assets and we must ensure our skills are “scalable” enough to embrace the breadth of the drivers of value.

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