Challenges, ConCerns, and Calls for a stronger VoiCe:

A Survey of Select Fortune 500 CFOs

ConduCted by

Institute of Management Accountants Caterpillar Inc.

in Cooperation with

To those interested in the future of the accountancy profession: Table of Contents

ts no secret that todays financial climate has created a dizzying array of regulatory and reporting requirements for U.S.-based multinational companies. Faced with these requirements, CFOs at U.S. multinationals are charged with preparing a myriad amount of information, some of which has dubious value for investorsand perhaps even for the organizations and regulators themselves. While many U.S. multinationals are contending with similar reporting and regulatory challenges, what isnt clear is whether they agree on an appropriate course of action in response. To find out how top financial managers really view the current situation and what steps theyre willing to take to find a solutionCaterpillar Inc. and the Institute of Management Accountants (IMA) conducted this study of financial executives at some leading U.S. multinational corporations. More specifically, this study sought to:
1. Identify common expectations of the CFO function and barriers to the successful

i.

letter of introduction, from David Burritt, CMA, CFO of Caterpillar Inc.

ii. survey findings: a. Expectations of the CFO Team b. Internal Barriers to Success c. View of the Current U.S. Finance and Accounting Regulatory Environment d. View of the New SEC Advisory Committee on Improvements to Financial

Reporting (CIFiR)
e. Willingness to Take the Next Step iii. the Challenge and the opportunity, by Paul A. Sharman, ACMA, President and CEO,

performance of these duties.

2. Assess the state of complexity of the U.S. financial reporting system and how it

facilitates or inhibits shareholder value creation.

3. Discover if business leaders believe they have a voice in the regulatory arena

Institute of Management Accountants (IMA)

or even if they want one.

4. Gauge the level of interest in securing a stronger seat at the table as contributory

participants in the regulatory process. To answer these questions, 30 U.S.-based multinational public companies were targeted for interviews, of which 17 agreed to participate. All companies except one were listed in the most recent Fortune 500, and seven were in the Fortune 100. In terms of the size and scope of the participants, they collectively employ 1.4 million people and reported gross revenues of $811 billion in 2006. All interviews were conducted either in person or over the phone: A CFO participated in 84% of the interviews directly, while the remaining 16% of interviews were with a Chief Accountant and/or Controller. We think youll find the survey results compelling, not only from what they reveal about the current state of affairs, but also about the level of commitment of leading CFOs and their willingness to take a more active role in the regulatory process. Thank you for your interest in this study and in the evolving state of the accountancy profession.

about Caterpillar inC. For more than 80 years, Caterpillar Inc. has been making progress possible and driving positive and sustainable change on every continent. With 2007 sales and revenues of about $45 billion, Caterpillar is the worlds leading manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company also is a leading services provider through Caterpillar Financial Services, Caterpillar Remanufacturing Services, Caterpillar Logistics Services, and Progress Rail Services. More information is available at www.cat.com.

about iMa With a worldwide network of more than 60,000 professionals, IMA is the worlds leading association dedicated to empowering accounting and finance professionals to drive business performance. IMA provides a dynamic forum for professionals to advance their careers through Certified Management Accountant (CMA) certification, research, professional education, networking, and advocacy of the highest ethical and professional standards. For more information about IMA, please visit www.imanet.org.

david burritt, CMa

Chief Financial Officer Caterpillar Inc.

A Survey of Select Fortune 500 CFOs | 1

expectations of the Cfo team

The survey found a striking similarity between what top management expects from the CFO team.

At the end of the day, we must make sure that all of

the company is using one version of the truth.

thoMas hofMann, Cfo, sunoCo

lthough respondents hailed from a variety of different industriesmanufacturing, technology, energy, consumer products, and othersthe survey found a striking similarity between what top management expects from the CFO team. Of the 17 respondents, more than 80% (14 out of 17) noted the following three primary expectations: Enterprise Risk Management: The CFO team must demonstrate leadership in holistically identifying and managing riskincluding financial, operational, strategic, and environmental riskthat affects the organizations ability to achieve its strategic and performance goals. Financial Reporting: The CFO team must ensure that financial disclosures, including statements, notes, and MD&A, are timely, correct, reliable, and relevant to preserve and grow investor wealth. Business Partner: The CFO team not only must assure integrity in controls, risk management, and financial reporting, but it also must help to influence strategy via analytics and decision support, working closely with operations. Other major concerns mentioned by the participants included growing shareholder value and developing talent. These findings reveal that the CFO team not only oversees the numbers, but it also works at the highest and most important levels of the organization to help shape the strategic direction and future of the enterprise.

2 | A Survey of Select Fortune 500 CFOs

My biggest internal challenges include hiring and and identifying evolving technologies to free

retaining talent up our team to spend more time on analytics.

roy teMplin, Cfo, whirlpool

internal barriers to success

top internal barriers to suCCess

Staffing Recruitment Achieving diversity Employee development and training Staff retention Evolving technology Resource allocation Ability to manage change

f expectations of the CFO team include serving a valuable role within the organization, what internal barriers hinder the successful accomplishment of these responsibilities?

To learn the answer, respondents were asked, What are the top three internal challenges you face in delivering on your organizations expectations of your team? Slightly more than 50% of respondents (9 out of 17) noted issues around human capital. While some simply said staffing, others elaborated by citing challenges related to recruitment, achieving diversity, employee development and training, and staff retention. The human capital challenges also spurred discussion of related internal barriers, including contending with new technology to free up employees to spend more time on interpretive tasks, resource allocation, and the ability to manage change. The results underscore a clear need within U.S. multinationals for properly trained, motivated, and committed finance professionals those that are knowledgeable about the technical aspects of the finance function and that have strategic and decision-support expertise.

4 | A Survey of Select Fortune 500 CFOs

A Survey of Select Fortune 500 CFOs | 5


View of the Current u.s. finance and accounting regulatory environment

The joke goes, why, when 10 commandments are sufficient, do we need 178-plus accounting standards? Things may be getting a bit out of control.
tiM pistell, Cfo, parker hannifin

e all know the press wields enormous power, so its not surprising that when respondents were asked if they could say one thing for a feature in a national accounting periodical, some of their gravest concerns emerged. Overwhelmingly leading the list were concerns about the finance and accounting regulatory environments complexity. In fact, all respondents either mentioned it individually or in conjunction with shareholder value. Among the more notable responses: The current environment is complex, and with the pressure of large penalties for technical noncompliance, what has resulted is a system that does not produce valuable information for investors or board members. Accounting has moved from focusing on guiding shareholder value to just applying rules rigidly. The things we do for compliance bog us down, and the end product is a lack of relevant information. When asked later to quantify the current state of complexity in U.S. financial reporting on a scale of 1 to 5 (with 1 being the least complex and 5 being the most), respondents gave a staggering average rating of 4.4. Repeatedly, respondents expressed the view that the complexity of the regulatory process and standards was their greatest impediment to preserving and growing investor wealth. In fact, several respondents said that it was unfair and wrong to produce a product that does not help the typical investor. Said one pointedly: The answers are there and correct, but the financial statements are a disservice to the average user who does not know what they mean.

Not only was the value to investors questioned, but so was the time drain on the organization itself. Many respondents said that keeping up with and synthesizing rule changes, clarifications, and the like on regulatory pronouncements, guidance, and standards was a huge, nonvalue-adding taskespecially when regulators are unforgiving when it comes to technical noncompliance with overly complex standards and rules. Similar frustration was expressed with the way standards are set. More than one respondent said, in effect, that there were too many theorists setting standards and that regulators need to be more seriously engaged with the business community about what it takes to interpret, implement, and sustain standards.

If you could describe your view of the current finance and accounting environment in the U.S., whats the most important point youd make?
100% of respondents noted CoMplexity and/or its laCk of Value for shareholders.

6 | A Survey of Select Fortune 500 CFOs

A Survey of Select Fortune 500 CFOs | 7

View of the new seC advisory Committee on improvements to financial reporting (Cifir)

Similarly, when asked to consider whether the SEC CIFiR would produce any meaningful or transformational change, nearly 90% responded with either no or great skepticism. These results indicate that although they clearly desire a more active voice in the regulatory arena, leading CFOs doubt the ability of a body like the SEC CIFiR to affect the changes necessary to solve their complexity concerns. It should be noted that this survey was conducted while the SEC CIFiR was in its early stages of activity. Since the IMA/CFO interviews were conducted, CIFiR has made considerable progress. As CIFiR releases proposed recommendations for exposure, we anticipate further reaction by CFOs. Indeed, discussions with SEC staff indicate they look forward to receiving CFO participation in the exposure process and welcome their comments.

iven their frustration with how standards are set, respondents echoed these sentiments when asked about the strength of their voice in affecting regulations, guidance, and standards in financial reporting. When asked to rate their current voice on a scale of 1 to 5 (with 1 being the weakest and 5 being the strongest), the average response was a disappointing 2.0. In fact, only one respondent gave an answer above 3.5. Although respondents perceive their current rate of influence as low, it was encouraging that when asked to rate on a scale of 1 to 5 the benefit of having a stronger voice at the regulatory tablewith leading regulators such as the SEC, Public Company Accounting Oversight Board (PCAOB), and Financial Accounting Standards Board (FASB)respondents gave an average response of 4.0 (with only one response below 3.0). Clearly, respondents would greatly benefit if regulators listened to the business community before deciding on new standards and regulations. Strengthening that voice, of course, is the purpose of the SECs new Advisory Committee on Improvements to Financial Reporting (CIFiR). Yet judging from the survey results, while it appears that leading CFOs believe this committee is well intentioned, they also expressed healthy skepticism about whether timely, cost-effective, transformational, and sustainable changes can actually be implemented. When asked point-blank if they believed the SEC CIFiR would represent their companys interests and issues to reduce complexity and produce correct, relevant, and reliable financial disclosures for investors, more than half (53%) said no, only 35% said yes, and 12% said they were not sure.

Do you believe the SEC CIFiR will lead to any meaningful or transformational change?
yes 12%

Do Do you believe theSEC CIFiR will you believe the SEC CIFR will represent your companys interests represent your companys interests and and issues to reduce complexity issues to reduce complexity and and produce correct, relevant, and produce correct, relevant, and reliable reliable financial data for investors? financial data for investors?

no 88%

100 75 50 25 0

No 53%
8 | A Survey of Select Fortune 500 CFOs

Yes 35%

Not Sure 12%

A Survey of Select Fortune 500 CFOs | 9

willingness to take the next step

The Challenge and the Opportunity

n general, respondents were interested in pursuing a more active dialogue with regulators if the opportunity became availablebut with some important conditions. More than 75% of respondents said they would be willing to participate in additional forums and discussions only if it was a valuable platform with participants who wanted to listen and make change. Clearly, then, these leading CFOs are interested in pursuing regulatory advocacy at some level, but only if the regulatory community seriously engages with the business community. If that were to happen, there was a general agreement that such a dialogue could be instrumental in creating some major and sustainable changes, such as reducing unnecessary, value-eroding complexity and regulatory processes.

I
Would you be willing to participate in follow-up discussions with regulators?
no 24% yes 76%

by paul a. sharMan, aCMa president & Ceo, institute of ManageMent aCCountants

t appears that we have some good news and some bad.

On the negative side, this survey reinforces what anecdotal and documented evidence has demonstrated for quite some time: Complexity in regulatory processes and standards is perhaps one of the gravest problems facing U.S. public companies today. Whats also discouraging is that even attempts to address this concern in the form of a new SEC Advisory Committee are being met with skepticism and caution. Fortunately, that isnt the whole story. On the positive side, weve got leading CFOs willing to take a more pronounced role at the regulatory table and work with regulators to provide investors with higher quality and more understandable financial results. Im encouraged that these leading CFOs are so concerned about the value of the information they provide to their shareholders. I also know that these individuals care greatly about how the problems of accounting complexity hinder their organizations successful accomplishment of critical economic goals. Frankly, thats what its all about. We must remind ourselves that the most important purpose of accountancy is to facilitate business performance and economic development. This is achieved through transparent, honest, and forthright disclosure of a companys financial performance, without which all capital market participants fail to achieve the common objectives of economic growth and prosperity. I urge regulatory bodies and CFOs at some of this countrys largest companies to capitalize on this willingness to engage in a dialogue. To the regulators: Create forums for business leaders to participate in the regulatory process. Talk to them, listen to their concerns, and work with them to create a system of financial reporting that works better for all of us. Finally, I want to thank all of the participants who gave their time and valuable opinions to this survey. Your voice mattersand I trust that it will be heard.

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2008, INSTITUTE OF MANAGEMENT ACCOUNTANTS. All rights reser ved. Printed in USA.