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How Compliance Is The Biggest Issue For CFOs

CFOs are constantly walking a fine line between ever increasing regulatory scrutiny and transparency, the pressures of business performance and corporate policies, and sometimes ethical considerations

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As much as Chief Executive Officers ("CEOs"), Chief Financial Officers ("CFOs") have been involved in corporate scandals reported around the world. There have been instances of connivance between CEOs and CFOs in fraudulent irregularities. Corporate scandals often involve material accounting manipulations, or what is commonly referred to as "cooking the books" which cannot otherwise be accomplished without the tacit nod of the CFO.

In the broader realm of effective corporate governance, CFOs play a vital role. One leg of the C-suite management tripod, CFOs are charged with various duties and obligations under several legislations including the Companies Act, 2013 ("CA 13"). These duties and obligations have, over time, evolved to indicate that the role of CFOs transcends that of just an accountant - CFOs are partners with CEOs/the Board in the business. A CFO is a key managerial personnel ("KMP"), who under the CA 13, now comes within the ambit of an "officer who is in default" (at par with a CEO or managing director), and liable to penalty or punishment as an officer of a company in default of compliance with specified provisions of the CA 13. The enlarged scope of "officer who is in default" under CA 13 to include CFOs, is by design, to designate the CFO along with other KMPs, in-house 'watchdog' for compliance with provisions of the CA 13.

One area of constant challenge for a CFO is the proper recognition of revenues and expenditures and how they are expressed or reflected in the financial statements. CFOs have a statutory obligation to ensure that financial statements (on a stand-alone basis) are prepared in accordance with Indian Accounting Standards, and should provide a true and fair view of the state of affairs of the company. CFOs are also required to sign financial statements after approval and authentication by the Board, and are liable for any materially untrue or misleading information in them. In listed companies, CFOs are required in terms of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, to certify compliance to the Board to the effect that financial statements do not contain any false or misleading statement or figures, and do not omit any material fact which may make such statements or figures misleading.

As with financial statements, there are other statutory obligations of CFOs, for which failure to comply attracts penalty by way of fine and/or imprisonment. The office of a CFO, as a KMP, is fraught with risk which caused a CFO to observe, "from financial statements to filings, you sign under the penalty of perjury".

Thus, CFOs are constantly walking a fine line between ever increasing regulatory scrutiny and transparency, the pressures of business performance and corporate policies, and sometimes ethical considerations. This balancing act becomes more crucial in listed companies with already heightened regulatory oversight. To effectively discharge their obligations, CFOs would need to go beyond perfunctory gestures of appending their signatures to statements/ certifications and step up on compliance.

Compliance therefore plays a huge part in discharge of a CFO's obligations. Compliance is, simply put, the difference between penalty and reward. Advancements in the value chain such as outsourcing of non-core activities, use of shared services centres and automation have made finance functions more complex and compliance even more challenging. Compliance requires proper planning and allocation of knowledgeable resources. As a CFO's role continues to evolve, an effective CFO would need to be involved in the entire financial machinery of the business including the establishment, evaluation and monitoring of adequate financial controls, reporting and processes that support and strengthen compliance.

The content of this write up is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Alfred Adebare

Alfred acts as Of Counsel to LexCounsel, Law Offices. Alfred has over 20 years’ experience as a cross border transactional advisor in the areas of infrastructure, project finance, financial services, private equity and information technology.

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