The prolonged economic downturn makes the role of the CFO more important; unfortunately, many accountants do not fill the role well. The ability to accurately foresee what “might happen” and “can happen” is a key skill for CFO’s. In uncertain times, organizations should precisely know their expected results during a month or quarter–not just at the end. Executives should be able to rely on their CFO’s to provide information in time to implement quick initiatives to improve results before they become history. Below are four areas where CFO’s can help executives manage effectively.

Mapping a financial route to success has always been important for the CFO; however, the current climate requires more precision in short-term and long-term profit planning than ever. An effective profit forecasting system should provide a weekly forecast update to other executives and provide scenario-based forecasts of monthly or quarterly results.

Managing cash flow is critical. Organizations with weak cash forecasting systems are in grave danger. Twelve to sixteen week forecasts will generally identify issues far enough in advance for organizations with consistent operations and sales to make needed adjustments. Strong cash management is also a critical element of balance sheet management.

In the face of rapidly changing federal tax laws, a sound tax strategy is necessary. Key provisions for businesses are set to expire in 2011 while other provisions are being debated. A strong CFO can develop scenario-based alternatives. In addition, businesses should focus on their total tax burden. State income taxes, real property taxes, personal property taxes and other miscellaneous taxes are substantial for most businesses. Often, tax-reduction initiatives in these areas provide benefits that extend for several years.

Creating an environment for growth is a tricky proposition for CFO’s. As the prospects for future inflation pressure increase, pricing policy is more important than ever. Knowing your product costs and the value your product brings to customers are the basis of an optimal pricing policy. The CFO, working with astute sales and marketing experts can help organizations develop a pricing policy that maximizes revenue and profit.

Occupational fraud is a global problem. The Association of Certified Fraud Examiners estimates that fraud leads to losses of 5% of revenues for the typical organization. Further, the ACFE estimates the global impact of fraud could reach nearly $3.0 trillion. Fraud is much more prevalent than most leaders believe—and for good reason. Most organizations that experience fraud attempt to keep the situation confidential to avoid both legal and public relations problems. KPMG, a large public accounting and consulting firm, released research that indicates the probability an organization will discover an instance of fraud in a 12-month period at 30%. Unfortunately, in difficult economic times, fraud tends to increase. Fraud is also a major contributor to small business failure.

“Leading the Fraud Resistant Organization” is a training program radically different from typical anti-fraud programs. After a brief introduction to the mechanics and known facts about common fraud schemes, the program focuses almost entirely on the behavioral aspects of understanding and preventing fraud. The program is designed with the belief that fraud prevention is a leadership task and that leadership teams can use subtle behavioral strategies to prevent fraud as effectively as these tools are used to create cultures of “quality” or “safety.” The program is based on both academic and professional research–current to research released in September 2011.

The program is divided into six sessions and four main topics. The first topic, and session, is an introduction where leadership teams develop a common understanding of the basics of occupational fraud. The second topic, and following two sessions, explore the criminology and criminal psychology of occupational fraud. The third topic, and following two sessions, explore issues of organizational leadership, organizational behavior and organizational ethics as they relate to preventing occupational fraud. The fourth topic, and final session, suggests specific action items that leaders can implement to develop a culture that resists fraud.

The program is available for leadership teams of up to 15 attendees at once. The program is fast-paced and designed to capture the attention of even the most easily-distracted leaders. For more information on you can schedule the program for your leadership team, please contact Chris Bryan at (904) 437-7022, or by email at cbryan@christophersbryancpa.com.

Dr. Frank Benford, a physicist at General Electric, developed a system for predicting the frequency of the numbers 0 through 9 in certain positions of real numbers occurring naturally. Dr. Benford tested his system using actual numbers of certain disparate measures such as the areas of rivers, street addresses, baseball statistics and a host of other actual measures. To illustrate, Benford’s law states that the first digit of any number will begin with a 1, 30.10% of the time; further, the number 2 will be the first digit 17.61% of the time, and so on. Benford’s law states that when the patterns of numbers do not comply with the natural frequencies, there is a good chance they are not credible.

Benford’s law is beginning to receive increased attention from accounting and fraud detection professionals and is increasingly used to test the validity of numbers on financial statements and tax returns. A recent article by Dr. Charles Jordan and Dr. Stanley Clark (February 2011, The CPA Journal) illustrates how Benford’s law can be used to detect cosmetic earnings management in financial statements. Perhaps of more concern, is what empirical analysis may reveal about the current state of financial reporting.

Jialan Wang, a professor of finance at Washington University, performed an analysis of Benford’s law using quarterly financial data from Compustat, one of the largest databases of financial information from public companies in the US. Included in Wang’s analysis was a measurement of the trend of deviation from Benford’s law from the 1960’s to 2010. The upward trend is cause for concern.

Deviation from Benford’s law took a dramatic increase in the early 1980’s that coincides with the savings and loan crisis and again in the late 1990’s and early-2000’s that coincides with the dot-com bubble and accounting scandals. Wang admits, “While these time series don’t prove anything decisively, deviations from Benford’s law are compellingly correlated with known financial crises, bubbles and fraud waves.” More concerning is that the deviation trend is higher than ever and the upward trend was disturbed only twice since 1980—once in the 2003/2004 timeframe that immediately followed the implementation of Sarbanes-Oxley, and once in 2010 after reaching an all-time high in 2009.

Pay Awards

The number of organizations projected to implement pay freezes in 2012 is down to 2.9%, according to the Culpepper Salary Budget Survey released in September. A quick review of the report indicates that the average pay awards increase for 2012 is 3.0%. Flat, across-the-board increases are becoming less popular as organizations tend to reward high-performers adapting to the current environment.

FICA/Medicare Tax

Employees enjoyed a FICA payroll tax cut in 2011 that is scheduled to end in 2012; however, the recent jobs proposal offered by the White House could potentially extend and increase the benefit 1.1%. Additionally, the proposal could award a sizeable benefit to employers. Under the proposal, employers would enjoy a 3.1% holiday on the first $5.0 million in wages, but the proposal is far from a done deal. Both employees and employers will be safest to budget the normal FICA amounts until later. If a proposal passes with these provisions, employers can easily adjust for the $155,000 of savings the tax holiday will bring. (The wage limit for FICA has not yet been announced at the time of this post.)

Unemployment Insurance Costs

Unemployment costs are expected to rise for many organizations in 2012. The reason is that many states will be required to pay interest on funds borrowed from the federal government when state funds were exhausted. States are adding surtaxes to cover the interest costs and are looking at options to keep benefits flowing. Many are adjusting rates and taxable limits. Although the annual impact of these surtaxes will be relatively small, they will be large enough to impact forecasts for the first quarter of the year for larger employers.

Medical Costs

Medical costs continue to rise well above inflation. According to an estimate released in May, Pricewaterhouse Coopers expects medical costs to increase 8.5% for 2012. A sizeable increase will again provide upward pressure to the payroll burden rate of most employers. From my recent experience, the average payroll burden rate is approximately 35.0% and increasing and medical costs are leading the way. For 2012, employers will again need to review cost sharing arrangements with employees to slow medical cost increases to employers.

It’s easy to be an optimist when you’re the early bird or when you have lived through enough recessions that you realize there is always something new, hot and in-demand on the other side.

Let’s fly around…

In my experience, one thing organizational leaders don’t do enough of is “futuring.” Futuring is the practice of exploring how micro-trends will merge with super-trends and impact the world in which we will live. Organizational leaders can greatly enhance their strategic planning by examining the micro and super-trends in their industries. These trends will create opportunity that will return handsomely when the economy begins to improve. Many calendar-year organizations are beginning to enter the planning season for 2012. My advice is to take a little more time…do a little ‘flying around’…you may be surprised at what you discover.

Let’s Sing a Song…

Don’t underestimate your ability to impact the future. When you and your team discover an idea that could propel your organization forward, work hard at developing it—test it out—make the business case. If the idea has merit, capitalize on it. Cast the vision throughout the organization and your industry. Often, the industries we work in need someone to simply suggest a better future, model the way and the industry will follow. You may find that your winning vision of the future is what others considered, rejected or failed to develop. Emerson’s quote is timeless, “In every work of genius we recognize our own rejected thoughts; they come back to us with a certain alienated majesty.” Admittedly, we all can’t be Steve Jobs and change the world with a revolutionary new product; however, your ability to impact the future of your industry is greater than you realize.

LET’S EAT A WORM!

There is significant controversy on whether the ‘first-mover’ advantage is sustainable—especially in the wake of the Internet boom years of 1998 – 2002. Companies like Apple and Amazon prove, however, that it can be done. First movers experience abnormal profits when their revolutionary ideas take root and grow rapidly. What most often determines whether the leadership position can be sustained is how quickly the organization can replicate its success. Which means, when you are on top of the world, you should be using the view to see what comes next.

Since the early-2000’s, increasing the maximum Section 179 deduction has been a “go-to” method for Congress to help spur the economy. The latest increase to the deduction was included in the “Small Business Jobs and Credit Act of 2010” signed on September 27, 2010. The provision is applicable to tax years 2010 and 2011 for property acquired before January 1, 2012. After January 1, 2012, the Section 179 expense deduction is set to return to $25,000—the 2003 level.

Section 179 allows a business entity the opportunity to immediately expense a capital equipment purchase in the year it is acquired up to the Section 179 deduction limit and up to the point where the entity has taxable income (deduction may not produce a taxable loss). To ensure that Section 179 benefits only small and medium-sized businesses, the deduction phases out when capital expenditures exceed the statutory maximum.

For tax years 2010 and 2011, the Section 179 deduction is $500,000 and begins to phase out when capital expenditures exceed $2,000,000. The ability to immediately deduct the expenditures enhances the after-tax-cash-payback of an investment by “front-loading” the cash flow provided by the immediate deduction. This benefit can often reduce the after-tax-cash-payback by several months. At the time I am writing this, there are approximately four months remaining for businesses to order, install, test and begin production using Section 179 property in 2011.

There are specific requirements that businesses must follow to take a Section 179 deduction, and even when a business qualifies for the deduction, it may choose to forego the deduction for other tax reasons.

In the deluge of bad economic news, it is easy to forget the long-term benefits that fundamental, fiscal restructuring of government, consumer and business finances can bring. Lyric Hughes Hale states in What’s Next that this fundamental restructuring will lead to future stability to the US economy.

Government

The recent budget debate in Washington was a debacle, and the downgrade of US debt was disheartening. The real benefit, however, is that both citizens and politicians have been forced to seriously consider the detrimental impacts of budget deficits and continually increasing national debt. The likely outcome, over a period of years, is that US budget deficits and debt should decrease creating an environment more conducive to business.

Consumers

No stakeholder in the US economy has felt the pain of the “Great Recession” more than US households. It is likely that in no other time since the 1930’s have so many Americans personally experienced, or closely witnessed financial hardship than did Americans in 2009 and 2010. This experience may have a positive long-term impact. US households have de-leveraged over $1 trillion dollars since 2009. This likely means that increases in consumer spending will be slower than in recent recoveries, but consumers will be more prudent and on better financial footing.

US Business

Finally, US businesses were able to restructure quickly in 2009 and 2010 than other nations. David Hale points out (in What’s Next) that US businesses have created significant productivity gains relative to businesses in other countries and that US manufacturing should emerge significantly more competitive than before the crisis.

At the heart of the US government bailout program and Fed actions, there was hope that the devaluation of the US dollar would spur an export-led recovery. Due to a number of factors, the export-led recovery does not seem to be underway; although, there is still hope that this will eventually occur.

Through the downturn, capital expenditures have remained healthy in some industries. Small and medium-sized business owners and managers should carefully consider whether they have kept pace with productivity gains of competitors in their industry. Opportunities will exist for those who have gained competitive advantage because it is likely that some competitors will not survive the downturn. Opportunities to grow market share will exist for those that win the productivity race.

Donald Cressey developed the fraud triangle in 1953. Cressey was a criminologist that performed detailed research of convicted embezzlers. His research led to the development of three necessary elements for individuals to commit their offenses. Although subsequent studies on occupational fraud have supplemented Cressey’s work, the fraud triangle is widely used to analyze certain risks of fraud.

First, a financial need that the individual cannot share with others will arise. Generally an unsharable need arises that would require the admission of a personal flaw or failure.

Second, the individual must identify an opportunity to satisfy the financial need without being discovered. Typically, the opportunity involves breaching a trust that can be expected to remain undetected. The individual pragmatically analyzes the risk of discovery versus the reward of relief from the acute financial need.

Third, the individual must rationalize the breach of trust. Most individuals consider themselves as having high integrity. In order to steal, most individuals must psychologically construct a scenario to justify their action.

I advise clients wishing to reduce the risk of fraud using behavioral methods to develop controls that thwart the development of these three elements. Behavioral efforts can significantly reduce the risk of fraud. Recent evidence suggests that organizations may face an increased risk of fraud in the current environment.

First, as the economy limps along, the risk that employees may face unsharable financial needs increases. Unemployment remains high and many two-earner households are now one-earner households struggling to meet financial needs. Researchers generally agree that occupational fraud is more likely when individuals attempt hold on to a lifestyle, status or asset that they have grown accustomed to versus committing occupational fraud to elevate their lifestyle, status or to purchase an asset they have not yet attained.

Second, organizations struggling to survive have reduced headcount. This is unfortunate for those that are terminated, but often it is unfortunate for those that remain. Their duties are expanded and some “non-critical” tasks are left undone. Proper segregation of duties is often compromised and the opportunity for fraud without detection increases.

Third, employee surveys continue to show that employees remain on their jobs even when they grow to dislike the organization where they work. In fact, in 2010 Deloitte released survey results where one-third of workers stated they wanted to leave the their employer as soon as the economy improves. Increases in employee dissatisfaction increase the risk that employees can rationalize occupational fraud.

I contend that the risk of occupational fraud is greater now than it has been since the “Great Recession” began in late-2008. Organizations should take steps to implement anti-fraud controls—now more than ever.

In my prior experience as the CFO of a $100 million business, some of the most difficult budget discussions concerned marketing and advertising expenses. During my tenure, these expenses ranged from a high of approximately 2.0% of sales to a low of 0.75%. These discussions always seemed to explore tactics that could be employed to make a larger impact at lower costs. Social media is a great enhancement. Below, are three items to consider in maximizing your advertising and marketing efforts on a decreasing budget.

Maximize touch-points – Every contact with a customer or potential customer is a marketing opportunity. You probably recall the 1993 book, Raving Fans. Its message is just as relevant today as it was in 1993. The book extols the value of creating an excellent experience for the customer. The opportunities for creating a great experience abound even more in today’s social media environment. Consider assigning at least one person in every customer-facing department as your representative. Customers and potential customers that are most excited about your products enjoy participating in online discussions about your products. Your most experienced and knowledgeable staff members are welcome in these discussions.

Engage – Focus on the ways you can engage current and potential customers in a bilateral exchange—offer honest advice, recommend solutions and collect valuable input on what is important to market participants. Previously, it was more difficult and expensive to discover what your market was thinking. Today, any small to medium-sized business owner or manager that can get plugged into social media discussions can get an enormous amount of market information from the most enthusiastic market participants. Consider establishing measurements and targets for social media engagement.

Find synergies – Traditional advertising and marketing still has its place. The key to maximizing the impact of both traditional and social media is to discover the ways that each can enhance the other. Traditional media is still the area where the business has some element of control over the message. Use traditional media to “nudge” the social media discussion—use social media to find the message that resonates and incorporate it into traditional media.

For those of you wanting to explore this issue further, try reading two books in the same week and compare and contrast them. Read Raving Fans by Ken Blanchard and Sheldon Bowles (1993) and The Thank You Economy by Gary Vaynerchuk (2011).

Current debate related to profit planning focuses on the time horizon and refresh rates; however, I propose that the most important debate should focus on the breadth of the profit plan. A comprehensive profit plan should help organizational leaders communicate the strategy and vision of the organization and is evidence that leaders are committed to the strategy. To develop a broad, strategic profit plan, leaders should address four key stakeholders in the profit plan.

1) Financial Stakeholders – The traditional profit planning process generally produces a product that satisfies bankers, insurers, investors and owners. Often, however, only financial analysts and accountants understand it. Financial stakeholders need to know how key financial targets will be met each month and quarter. Projected income statements, operating cash flow statements and balance sheets that are internally consistent provide financial stakeholders the tools that allow them to understand the financial goals of the organization. Organizational leaders should internally communicate these statements in simple terms and link key financial targets to other initiatives.

2) Employees – Supervisory and line employees are too often ignored in the process. Engaging these employees early is an excellent way to generate ideas for improvement during the coming year. When their ideas are adopted, funded and implemented, leaders can be confident that employees will achieve success. Communicating the adopted plan to employees is an excellent opportunity to motivate. Employees are inspired when business leaders propose a comprehensive, cohesive plan that shows a clear path forward.

3) Customers – Consider including the concerns of customers in your profit planning process. The clear and sure path to increasing sales volume is to provide a better product and/or experience for clients and customers. Planned and funded initiatives that focus on your customers reinforce their importance to employees and can be based on evidence gathered from customer satisfaction surveys and other forms of customer feedback.

4) Citizenship – Corporate social responsibility is increasingly important. Weaving environmental and community service initiatives into the profit plan lends credibility to the initiatives and provides a platform for ongoing review and measurement against targets.

A broad view of profit planning will yield a plan that meets the needs of more stakeholders will surpasses prior efforts. In fact, financial stakeholders can be assured that the plan links the goals of the business to the people in the business, the people to performance, and the performance to profit.