Where’s the Ethical Line for a CFO?

August 17, 2010

This past week, one of my former employees asked my advice on how to best handle a sticky situation with their new CEO.  As a CFO, or any finance professional, this is the last situation that anyone of us would wish to experience. It is, however, a test of an oath that many of us have taken as a key component of our profession.

At OpenView Venture Partners, we provide management consulting services to our portfolio companies, often entailing career coaching, counseling, professional development and mentorship. The variety of circumstances that we’ve encountered with our portfolio companies and their management teams have run the gamut…none, thankfully, have included ethical challenges for the finance leaders of our portfolio companies. We hope to keep it that way!

Unfortunately, the world is not a perfect one, and it is more than likely that most finance professionals will find themselves faced with a situation that clearly crosses or pushes against ethical boundaries.

The CFO, or the finance leader in an organization, is expected to be the moral compass of an organization. There are several aspects to this; some aspects where the expectations of the CFO’s influence are crystal clear, and other aspects where the CFO must be able to influence the natural and healthy conflict of an organization in a positive and constructive manner.

The natural and healthy dynamic can be seen where the CFO functions as the yin to the yang of other members of the management team who may push the envelope as part of their drive to grow a business, meet targets and influence customers and investors.  These are the situations where…

  • the sales team pushes on revenue recognition criteria in order to try to close a deal, 
  • the CEO might want to embellish key facts in an investor presentation,
  • marketing might get ahead of product features in their rush to influence customers or make headway with competitive positioning.

Here, the CFO is expected to be the voice of reason and the gate-keeper. This does not mean that the CFO automatically or capriciously says “no” to any idea or strategy that other members of the management team may have. What it means is that the CFO is expected to understand the end-goal and find a balanced and ethical solution that can help meet those goals.

By the same token, it is also the CFO’s job to ensure that a company is abiding by all statutory and legal requirements, presenting financial results accurately and fairly, and ensuring adherence to codes of conduct, governance, policies and controls.  This is where a CFO or finance leader’s ethical standards and backbone may be tested…and it will not be comfortable for most individuals when it occurs.

Let’s walk through some examples.

  • Your CEO wants you to falsify your company’s bookings numbers.  The argument is that these really aren’t GAAP financial measures, and your investors may pull your funding if you don’t put lipstick on the pig. You know that your company doesn’t have signed contracts to back up the bookings numbers.
  • You’ve found that your company has a potential sales tax liability of a material amount that you’ve never filed, paid or recorded. You’ve alerted your CEO and he or she doesn’t want you to estimate or disclose the potential liability since it will impact his or her bonus (not to mention your previously reported financial results)
  • Your CEO doesn’t want to implement a code of ethics or whistleblower policy and thinks it’s too much work, too much hassle and really only applies to big companies. You are aware that there is a potential issue that an employee may report.
  • Your CEO doesn’t like the revenue that you’ve calculated after applying GAAP revenue recognition principles, and would like you to find just a bit more in order to make sure that the company meets its annual or quarterly targets (and so that bonuses can be paid out).

Well, what do you do?

Some finance professionals will cave, and this is unfortunate for the profession. Hopefully, this won’t be you. First and foremost, you must remember that you have an obligation to follow the ethical codes of this profession, the ethical codes of your company, the whistleblower policies of your company, and the laws and regulations of the countries in which you operate. If you can’t do this, sorry, but you are in the wrong profession…find something else to do.

1. You have a responsibility as a finance professional to raise an ethical or illegal issue to your CEO (or to your immediate manager if you don’t report to the CEO). Present the facts of the situation clearly and objectively. Explain the ethical issue(s) and ramifications involved.Give the CEO or your immediate manager an opportunity to remedy the situation. Document the details of the issue and your conversation, as well as the outcome. Hopefully, this conversation is productive and things will be remedied appropriately.

2. If you have raised the issue to the CEO, and have been met with a refusal to correct the situation or continued pressure to commit a wrong-doing, as the CFO you have a responsibility to escalate the issue to a member of your company’s Board of Directors (or Audit Committee Chair). (Before you do so, you should inform your CEO that you will be taking this step and give the CEO one last chance to remedy the situation.)Hopefully, however, your CEO comes to his or her senses before this conversation has to take place. If not, hopefully your Board member can work with you and the CEO to help resolve the issue. 

3.If after speaking with a member of your Board or your Audit Committee Chair, the situation still has not been remedied, you should raise the issue to the partner at your company’s external audit firm and/or the partner at your company’s law firm. Many times, the partner can help to provide an additional 3rd party objective view on the situation that can be helpful to your company. If your company has a whistle-blower policy or hotline, you should utilize that at this point. Again, make sure that you have thoroughly documented your actions and conversations.
Many, many times, an issue will be resolved during the course of these discussions. This does not mean that the situation won’t become an uncomfortable one for the CFO. It may become quite difficult, and perhaps intolerable. You may create a breach between yourself and the CEO that cannot be remedied. From a practical perspective, you may find that your job may become so difficult that you will have no choice but to leave in order to preserve your own ethical code.

Only you can decide how far you will push an ethical issue to resolution in a difficult environment. The key is that you make an attempt to resolve the situation, and that you do not commit wrongdoing despite whatever pressures may be upon you to do so.  Remember, once you’ve crossed that ethical line in order to keep a job, your career probably doesn’t have long to live anyway. It’s much easier to explain why you left a position with your ethical standards intact than it is to try to salvage a career after you’ve been found guilty of a wrong-doing.

Food for thought…where’s your ethical line?