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Markkula Center for Applied Ethics

Creating an Ethical Culture as CFO

Margaret Steen

How can a chief financial officer make sure a company avoids financial fraud?

At the Business and Organizational Ethics Partnership at Santa Clara University's Markkula Center for Applied Ethics, panelists looked beyond procedures to the tone set by the CFO and other leaders. In a presentation entitled "Role and Responsibilities of the CFO in the Ethical Culture of the Organization," three panelists discussed how to create a culture that will encourage employees to withstand the pressure to falsify financial records.

The moderator, David Jolley, is managing partner of markets for Ernst & Young's West Region. The panel also included Dana L. Evan, a strategic finance and operations executive who served for 12 years as CFO of VeriSign and is now a venture partner at Jafco Ventures; and Satish Rishi, vice president of finance and CFO at Rambus.

Jolley started the panel "with the supposition that people don't wake up in the morning and say, 'I'm going to commit financial fraud.'" To look at the sort of pressures that can lead to fraud, he showed an Ernst & Young video about the accounting fraud at WorldCom, which caused investors to lose billions of dollars and thousands of workers to lose their jobs.

David F. Myers, WorldCom's former controller, explained in the video that when it became clear that WorldCom's results wouldn't meet Wall Street's expectations in late 1999, the CFO told him the numbers were "unacceptable." Ultimately they created a fraudulent entry in the books to make the earnings look better, assuring themselves that they would correct it the next quarter.

The panelists talked about reframing the focus on quarterly results. "In any business there's pressure to make numbers," Evan said. But that is accomplished by creating and executing a solid business plan.

"The pressure is real," Rishi said. It helps to remember that the numbers are "a report on how you've done: If you haven't done well, you haven't done well. You can't fabricate things or say it was a mistake."

While using stock options to give employees a sense of ownership can have many positive results, it can also create an unhealthy fixation on the stock price – and increase the pressure to report numbers that will keep that price up.

Evan said that when she was at VeriSign, when employees asked her why the stock was up or down on a particular day, she would tell them, "It doesn't matter. We need to focus on executing our plan."

"You've got to set the tone at the top," Evan said.

That tone comes from more than just a list of corporate values. "It's how you interact with your employees, how you say things," Rishi said. For example, he makes sure to "avoid any flippant remarks" in meetings.

There are other ways the CFO can help ensure that the company is set up to avoid fraudulent practices. For example, Rishi said, the CFO can advocate for enough staff members to make sure compliance is handled properly and any problems are caught early.

Evan said it's also important to enforce consequences when people are found to have violated the rules deliberately – while still creating a culture "where people know it's OK to make a mistake, as long as you recognize it and fix it."

The panelists also acknowledged the tension between enforcing policies and allowing the business to move quickly. Evan said she tried as CFO to "put in processes, policies, and procedures that accelerated the business and kept the entrepreneurial pace and speed." One key was communication, she said: "Anyone, if they thought a process was stupid, could come to me."

Often, though, communication and education are enough to make people accept and follow the procedures. "If people understand why they need to do something this way or why we are putting this in place, then they're all part of making the process work," Evan said.

Margaret Steen is a freelance writer.

Feb 1, 2014