Governance, risk management and compliance. These aren't exactly the most exciting aspects of a CFO’s role, but that doesn’t stop them from being vital areas of focus. 🎯
In our conversations with CFOs across various industries, we’ve noticed how their role has expanded way beyond managing the books and crunching numbers.
Today, finance and compliance go hand in hand. 🤝🏽
These days, CFOs are navigating a maze of regulations to keep their companies on the straight and narrow. It isn’t just about balancing the books anymore. It’s about balancing them while tiptoeing through a regulatory minefield.
This means wearing multiple hats — from strategist to compliance expert — all in a day's work.
Keep reading as we break down the CFO’s role in governance and compliance – including finance and compliance challenges to avoid.
Topics covered:
- Governance and compliance: What’s the difference?
- The CFO's role in governance
- The CFO's role in compliance
- CFO compliance challenges and pitfalls
- Tips for staying ahead of regulatory and compliance
- Measuring governance & compliance program effectiveness
- What is compliance in financial management?
Governance and compliance: What’s the difference?
Before we dive into the CFO’s role in all this, let’s back up and talk about what governance and compliance means.
Corporate governance refers to the structures and guidelines in place for making business decisions in line with priorities, ethics, and risks, etc. It’s about promoting integrity from the top execs in the boardroom to interns filing paperwork.
Now, moving onto compliance. In simple terms, compliance is basically ticking off the long list of rules, laws and standards that apply to how companies operate globally. We’re talking financial reporting rules, data protection laws, tax codes, environmental standards, and so on.
Key regulations on the radar today include heavy hitters like SOX (Sarbanes-Oxley Act), which protects investors through strong internal controls and accuracy in financial reporting. Then there’s GDPR (General Data Protection Regulation), which safeguards personal data and privacy.
And let’s not forget financial reporting standards like GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) that shape those financial statements CFOs know and love.
Between potential lawsuits, fines, and lost business due to damaged reputations...non-compliance can become a massive financial sinkhole.
CFOs must assess exposure to risks from potential non-compliance, while investing appropriately in audits, controls, training, and more. This careful balancing act is at the heart of finance and compliance, ensuring that the organization not only remains on the right side of the law but also operates efficiently and ethically.
Richard King
The CFO's role in governance
As we all know, CFOs play a vital strategic role when it comes to governance.
CFOs often take the lead in developing governance frameworks and establish things like:
- Financial controls
- Risk management processes
- Audit procedures
- Compliance programs
- Ethics and integrity policies
- Board reporting and communications
- Training and education
They play a key role in finding the sweet spot for governance that meshes well with the company's unique culture and needs.
But their role in governance doesn’t stop there.
CFOs are the ultimate matchmakers between the board and management, crafting crisp, insightful financial reports and communicating performance metrics and risks.
A proactive CFO keeps the board engaged and informed.
But wait, there's more.
Most CFOs are on a first-name basis with everyone from investors to auditors. They aim to convey transparency and trust with every report they send out. Internally, they're setting the gold standard for integrity and controls without breaking a sweat.
A CFO’s role in governance isn’t just about keeping the lights on; it’s about leading the charge, smoothing out the bumps, and making sure everyone’s clued in—from stakeholders to the board. Governance starts at the top. 🔝
Sabrinthia Donnelly
The CFO's role in compliance
The CFO's role in compliance is all about mastering the maze of regulations that businesses need to follow. It's all about combining finance and compliance - making sure everything's legit and the company's in the clear.
Here's how they do it:
- Building programs to bake compliance into everyday operations - policies, controls, training, monitoring.
- Championing a culture where every employee feels responsibility for acting ethically and legally.
- Liaising with auditors and regulators to foster cooperation, transparency and trust.
- Keeping the board and CEO advised of finance and compliance risks and strategies.
- Staying current as regulations evolve. Compliance is not a "set it and forget it" endeavor.
Through their oversight and leadership, CFOs ensure compliance is not just a box checking exercise, but a company-wide commitment.
CFOs also partner with the CEO and leadership team to ensure all business units make compliance a priority. However, the best CFOs go beyond building compliance programs by proactively managing risk. They lead efforts to implement strong internal controls that safeguard data privacy and manage third-party risk.
Detecting and preventing violations before they occur is the CFO's ultimate responsibility. Their stewardship helps ensure the organization has the right foundation of integrity and ethics.
CFO and data privacy
These days, protecting customer data is everything when it comes to integrity. And so, CFOs find themselves on the front lines of the data privacy battle, balancing finance and compliance to ensure the company's operations respect customer privacy while keeping the books straight.
Safeguarding financial information and customer details from breaches and misuse falls squarely on the CFO's shoulders.
This isn’t your run-of-the-mill financial responsibility, either. Navigating complex regulations like GDPR is just the tip of the iceberg. CFOs also have to work hand-in-hand with IT and legal teams to bake air-tight data privacy into the core of the company.
From investing in secure technologies to implementing meticulous policies and procedures, CFOs take the lead on risk management. Their goal is to lock down data while keeping the business healthy.
Sabrinthia Donnelly
CFO and cyber risk management
As cyber threats get more complex, CFOs need to understand the financial impacts. It's now a key part of overall risk management.
CFOs crunch the numbers on the costs of prevention (cybersecurity software, insurance, and training). But they also estimate potential losses if breaches occur.
Working with IT teams, CFOs prioritize smart investments in cyber resilience. Their goal is to not only check the compliance boxes, but also future-proof the company.
By taking the lead on cyber risk strategy, including contingency plans, CFOs help ensure the company's assets and reputation are protected.
CFO and third-party risk management
With supply chains now circling the globe, keeping tabs on third-party partners is tougher than ever.
For CFOs, vetting new partners is priority number one and involves researching their financials, compliance, and reputation. No stone goes unturned!
Contract negotiation is also key. CFOs ensure air-tight terms are in place for managing risks and maintaining finance and compliance.
Third-party risks may be rising, but with CFOs manning the radar, companies can proceed confidently. Their diligence and oversight keeps global supply chains secure. 🌎
CFO finance and compliance challenges
While CFOs play a crucial role in finance and compliance, it's not the easiest part of the job. Here are some common pitfalls to sidestep:
🚇 Tunnel vision. Don't just focus on financial risks. Operational and compliance vulnerabilities also need your attention, so try to take a broad view.
🧠 Knowledge gaps. Compliance is complex. Ensure your CFO skills are sharp, with regular training to stay current on evolving regulations. Lean on legal and audit teams to fill experience gaps.
💬 Communication breakdowns. Clearly convey the why behind compliance to the broader team in relatable terms so everyone’s on the same page.
📋 Undue influence. Pushback is inevitable when instituting new controls. Hold firm on critical changes without being dismissive.
📈 Whack-a-mole monitoring. Don't just react to issues. Proactively self-assess, audit, and update compliance programs. Think long-term.
Sabrinthia Donnelly
Tips for staying ahead of regulatory and compliance
Effective governance, risk management, and compliance require savvy CFOs to take the lead.
Below, we’ve put together 12 tips to help you out:
- Foster an ethical culture of integrity throughout the company.
- Instill risk awareness through training and open communication.
- Collaborate cross-functionally, especially with IT, legal, and audit teams.
- Prioritize internal controls and monitoring via audits, self-assessments and reporting.
- Maintain finance and compliance knowledge. Stay current on regulatory changes and industry best practices.
- Report risks and compliance metrics clearly to the board. Keep them engaged.
- Forge open and transparent relationships with external auditors and regulators.
- Evaluate cyber risks and data privacy needs proactively. Don't wait for a crisis.
- Vet vendors thoroughly. Monitor third-party compliance closely.
- Document controls and procedures clearly. Don't let knowledge walk out the door.
- Think long-term when designing governance and compliance programs. Build to last.
- Balance governance and controls appropriately for company culture and risk appetite.
Sabrinthia Donnelly
Measuring governance & compliance program effectiveness
Strong governance and compliance programs require diligent oversight and measurement to succeed. CFOs play a pivotal role in monitoring program effectiveness and identifying areas for improvement.
Here are some ways CFOs can measure the effectiveness of governance and compliance programs:
Risk metrics - Track identified risks and mitigation strategies over time. If you see a reduction, it demonstrates good risk management.
Cost of governance/compliance - Measure legal, audit, and program costs over time. Then, weigh these costs against program maturity and company growth.
Industry benchmarks - Compare audit deficiencies, violation rates, liaison relationships against peers.
Stakeholder surveys - Survey employees on compliance culture or investors on transparency. Positive trends demonstrate effectiveness.
Board reporting - Robust, timely reports to the board enable oversight. Feedback indicates their level of confidence.
Training completion rates - High completion rates for governance/compliance training shows engagement.
Violations metrics - Track incidents of fraud, data breaches, policy violations etc.
Self-assessments - Regular self-assessments on meeting compliance requirements or following governance procedures will highlight improvement areas.
Audit results - Internal and external audits will identify control gaps or noncompliance that need to be addressed.
What is compliance in financial management?
Compliance in financial management refers to the adherence to laws, regulations, standards, and ethical practices related to financial operations and reporting.
This encompasses a range of activities, such as:
- Accurate financial reporting
- Tax compliance
- Adherence to accounting standards such as GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards)
- Implementing effective internal controls and risk management practices.
Getting finance and compliance right is critical for maintaining the trust of investors, regulators, and other stakeholders, and for protecting your company from financial and reputational damage.
FAQs: CFOs, finance and compliance
How can CFOs stay updated on regulatory changes affecting their industry?
CFOs can stay informed by subscribing to updates from regulatory bodies, joining industry associations, participating in professional networks, and utilizing regulatory advisory services.
How do CFOs measure the impact of their company’s governance and compliance programs?
Effectiveness can be measured using KPIs such as audit outcomes, incident reports, resolution times for compliance issues, and employee compliance awareness levels.
How can CFOs manage cyber risk in their organizations?
CFOs can manage cyber risk by investing in cybersecurity technologies, conducting regular risk assessments, developing a comprehensive cyber risk management plan, and ensuring continuous monitoring and incident response readiness.
What is the compliance responsibility of the CFO?
The compliance responsibility of the CFO involves ensuring that the organization adheres to all applicable financial regulations and laws, both domestically and internationally. This includes overseeing the preparation of accurate financial statements, ensuring proper internal controls are in place, managing financial risks, and maintaining the integrity of financial reporting.
Can a CFO also be a compliance officer?
Yes, a CFO can also serve as a compliance officer, especially in smaller organizations where roles are often combined due to resource constraints. However, this dual role requires careful management to avoid conflicts of interest and ensure that compliance responsibilities are given sufficient attention alongside the financial duties. In larger organizations, it's more common to have a separate Chief Compliance Officer (CCO) who works closely with the CFO.
What is the role of the CFO in governance?
The role of the CFO in governance extends beyond financial management to include a broader responsibility for ensuring the organization's overall governance framework is effective and aligned with its strategic goals. This involves overseeing financial reporting and disclosure, ensuring transparency, managing risks, and fostering ethical business practices.
What is an example of compliance in finance?
Compliance in finance refers to adhering to laws, regulations, standards, and ethical practices that govern financial operations and reporting. An example of compliance in finance is following the Sarbanes-Oxley Act (SOX) requirements for publicly traded companies in the United States. SOX mandates strict financial reporting and internal control procedures to protect investors from fraudulent financial practices. For instance, a company must maintain accurate financial records, establish internal controls to prevent and detect fraud, and undergo annual audits by independent auditors to verify compliance. This ensures transparency, accuracy, and reliability in financial reporting, safeguarding the interests of investors and the integrity of the financial markets.
