Not just bean counters anymore. (Top Questions for Your CFO).

It used to be so simple. The CFO was a Dilbert-esque accountant with a green eyeshade whose job was to count the company's beans and decide whether there were enough to justify an acquisition or build a billion-dollar plant. Then in the l990s, crunching numbers became the path to power, with concomitant glory for some and spectacular flame-outs for others. In the fallout of Enron, WorldCom, Tyco and Global Crossing, among others, the role of the CFO has evolved into an uneasy balance: As chiefs of financial facts, they often know more about the company's inner workings than the CEO; as the master stringpullers and wheeler-dealers, their decisions redound directly on the CEO.

In addition, CFOs have to play an ever-widening number of critical roles. They need to have both general managerial experience and financial expertise. and must be able to represent the company to the capital markets, serve as a principal sounding board for the CEO and, oh, yes, ensure that the company stays on the right side of today's stringent accounting regulations.

Maintaining open communications with the CFO is more critical than ever. That's why Harry Jansen Kraemer, CEO of medical products maker Baxter International, says if he goes two days without talking to CFO Brian Anderson, "something's wrong."

Here are the questions that he--and other CEOs--should consider asking in those conversations.

"If I sign this, will I go to jail?"

In today's "hang 'em high" environment, CEOs are literally betting the company on their CFOs' judgment. A mistake on once-routine financial statements can signal a death knell for a CEO'S career. The problem is, says Judy Sprieser, CEO of software manufacturer Transora and former CFO of Sara Lee, "A lot of people believe that accounting is black and white. It's not. Accounting truly is a series of judgment calls; it's very, very gray in many areas.

Colleen Sayther, president of Financial Executives International, recalls, "When I was at AT&T, I constantly compared our accounting policy to that of Worldcom, Qwest and Global Crossing." All four companies were building fiber optic networks and selling capacity on them. But while Global Crossing, for example, recognized the revenues from two-year terms up front, AT&T recognized it over the full two-year term. "Obviously, they were far more aggressive and we're seeing the fruits of that," says Sayther.

Today, CFOs report spending more time meeting with their boards and audit committees as well. At Baxter International, Anderson even gave the audit committee a financial literacy test, then held training seminars on matters such as deferred taxes, revenue recognition and new disclosure rules, to ensure that the committee members were able to interpret financial data.

"It may be good accounting, but is it going to look good to the public?"

Even within Generally Accepted Accounting Principles, there is a range of ways to recognize expenses and revenues. "You could be exactly by the book and still be found questionable in your judgment," says Sprieser. And the court of public opinion often jumps to quicker conclusions--and renders harsher verdicts--than the Securities and Exchange Commission.

That's what Krispy Kreme Doughnuts CFO Randy Casstevens discovered when media reports zeroed in on the chain's use of a "synthetic lease" to finance a factory--an accounting practice favored by Enron's off-balancesheet partnerships. Although Krispy Kreme had disclosed the arrangement in its SEC filings, news headlines trumpeted the suspicion of accounting problems at the company. To forestall a public relations firestorm, Casstevens unwound the transaction and moved the factory hack onto the balance sheet.

"How strong is our cash position?"

When Jay Marshall was in business school, his finance professor used to say that only three things mattered in finance: cash flow, cash flow and cash flow. "At the time, that was so basic it didn't make much sense," recalls Marshall, principal of turnaround firm Alix-Partners. "But since then, I've seen so many companies find themselves in trouble [due to a cash shortage], I now see the wisdom of his teaching."

When Marshall evaluates a troubled company, his team routinely examines receipts and disbursements, how the cash is generated and how it is spent. To his surprise, many healthy companies don't follow these fundamentals.

But more may have to. During the '90s boom, financial institutions happily extended credit based on skyrocketing earnings. Those earnings have since fallen to earth--and the debt has come due in a tight lending environment, in which burned banks and other providers are far less willing to extend credit, limiting liquidity, the oxygen of corporate survival.

Enron was only one example of an earnings-rich, cash-poor company that couldn't--and whose lenders wouldn't--cover its debt covenants. Many '90s startups financed their growth with convertible debt, explains Sayther. But if the stock drops below a certain amount, the debt is triggered and the stock price is too low to leverage further loans. That's why CEOs should investigate the company's debt covenants. Have any of them been waived? Is there any risk that they will be missed, triggering payment sooner than anticipated?

A corollary is, "What is the state of our reserves?" Ford's enviable cushion of cash quickly drained away in the face of litigation over the safety of its Explorer SUVs. Philip Morris is now threatened with bankruptcy as a result of having to post a $12 billion bond. "You want to look at the reserve levels," says Sayther. "can they cover the contingencies?"

"What are we doing to improve our cash flow?"

According to Financial Executives International, 80 percent of 255 CFOs of public and private companies polled in a recent survey identified cost saving initiatives as a priority, 66 percent named revenue initiatives and 45 percent pointed to capital structure adjustments and refinancing--all variations on improving cash flow.

Some companies can bump up liquidity by cutting costs or managing working capital more efficiently. But the best way to flip on the faucet is to improve the operating performance of the business. Although the CFO may not control where the business units spend the money, he or she can shine light on how it's being spent, and provide data to create the case for change within the specific businesses.

"One thing the CFO ought to do every week is come in with a couple of ideas of how to improve the company's operations," says Honeywell CFO Richard Waldman. "The only way to do that on a routine basis is to have a good sense of how the company is performing. Where are we hitting on eight cylinders and where are we missing? How can we maintain our strong position and how do we improve where we're not doing so well?"

"What risks are we assuming and do we have a plan to counter them?"

Sprieser looks to her CFO to evaluate risks within the company--for example, that the rising cost of insurance benefits to employees will prevent the company from making next quarter's numbers. At Honeywell, Waldman evaluates risk from the point of view of the resident economist. Early in 2001, anticipating a slowdown in the economy in the second half of the year, he spearheaded an initiative to cut costs by 30 percent over the next 18 months. When the bottom dropped out of Honeywell's core aerospace market after September 11th, the company was better prepared to face the downturn. In short, if there's a risk to the bottom line, whether it's operational risk, market risk or credit risk, it's the CFO's responsibility to identify and plan for it.

"How do you explain those risks to the investment community?"

One of a CFO's most precious assets is his or her credibility with the financial community. In today's tough economic climate, CFOs routinely report spending 25 to 50 percent of their time speaking to investors, analysts and mutual fund managers to make sure they understand the company's business, its risks and its financial statements. "I prepare a lot more to make sure they know that we're doing everything we can to improve performance," says Waldman. "In the end, the company's stock will be driven by its performance, but if the analysts and money managers don't have confidence in the management team, the company will never have as good a P/E as a similar company where they trust the management team. Our performance hasn't been where we'd like and we'd like people to understand what we're doing."

"If you won the lottery tomorrow, who would replace you?"

About 10 percent of Fortune 500 companies went looking for a new CFO last year, according to E. Peter McLean, leader of executive search firm Spencer Stuart's global financial officer practice. Finding their replacements isn't easy, underlining the need for CFOs to effectively recruit and develop staff. At Citigroup and General Electric, this function is considered so important that, according to McLean, their CFOs spend a quarter or more of their time on people development issues.

The dilemma is that finance has two faces: the controller, who worries about accounting, and the treasurer, who concentrates on raising cash. What Kraemer calls "the next nightmare" is a CFO who has all the right attributes but hasn't developed a pool of potential successors who understand finance, accounting, economics and business, as well as having the values and personal attributes that enable him or her to work intimately with the CEO.

It's establishing that trust and intimacy that makes it so difficult to replace someone who serves as the CEO's confidant with an outside candidate. "The personal chemistry with the CEO is very important," says Sprieser. "That is probably the closest relationship that exists in an organization, and you also require a technical skill set. You're trying to thread a very fine needle.'"

"Honestly, what do you think about my projected numbers?"

With all the other responsibilities a CFO now has, it's easy to forget about the first and most fundamental: bean counter. It's the CFO's responsibility to track every dollar as it moves through the corporation and test every number to make sure it's solid.

It's not an easy role, given the conflict between fact and opinion that frequently prevails in large corporations. Opinions masquerade as fact, assertions are made without proof or a business manager will argue for a particular decision based on passion rather than data. Business leaders will always be pushing stretch goals, and the CFO is the natural skeptic. "When I'm trying to establish financial goals for the next year, I throw out a number and see if he faints," says Sprieser of CFO Andrew Arquette.

"I like for the CFO to be the keeper of the facts," says Marshall. "If I assert that our market share is X, the CFO can say, 'It's really Y.' Or if I assert that a certain business unit is profitable, the CFO can say, 'It's actually not.'"

Baxter CEO Kraemer knows that experience first hand. "We set out last year to achieve a certain level of results, and Brian Anderson had to say, 'I know this is something we're driven to do, but let me explain that based on where we are today, we need to change this expectation.' Most CEOs would really rather not have to revise the expectation," says Kraemer. That's a flagrant understatement given the criticism that erupted when Baxter announced its sales growth rate would fall short by 10 percent for 2002. (It has since further reduced its sales and growth expectations for 2003.) "But that was the right thing to do," says Kraemer.

"Now that you're working more directly with the audit committee, doesn't that take away from my ability to manage or control the numbers?"

Not if you've hired the right CFO, says William Hickey, president and CEO of Saddle River, N.J.-based Sealed Air. And not if your relationship with him or her is based on genuine trust rather than an artificial alliance. A former CFO himself, Hickey says he "went through a long courtship process" with CFO David Kelsey to make sure the relationship would work. The two sit on a compliance committee that meets twice quarterly. "We both have to sign the certification," says Hickey, "and our view is that we're both in this together."

What is Your CFO Thinking?


"Expensing stock options will
 reduce compensation abuse and
 earnings management pressure."

Strongly agree                     8%
Strongly disagree                 28%
Somewhat agree                    29%
Somewhat disagree                 29%
No opinion                         6%

"Expensing stock options will
 greatly reduce employee
 participation in option plans."

Strongly agree                    23%
Strongly disagree                  5%
Somewhat agree                    37%
Somewhat disagree                 27%
No opinion                         8%

Source: Financial Executives Institute's survey of 255 CFOs.

Note: Table made from pie chart