It's Not the Apples

Throwing fruit at lawbreaking CFOs is not enough. The fact is, the system of financial reporting needs some serious repairing.


It's tempting to attribute the current spate of financial scandals to a few bad apples, and to believe that punishing the bad and urging the rest to behave ethically will prevent future problems. But that construction ignores the pressures that cause apples to rot in the first place.

For the past decade, CFOs have faced such pressures from a system that has sometimes rewarded bad behavior and penalized the virtuous. Stock options, intended to align management interests with shareholders, instead have given executives a powerful incentive to push up share price at all costs. Investors have given them another, by punishing any stock that fails to meet ambitious quarterly earnings estimates.

In such an environment, it takes a strong character indeed to forgo the fortune and risk getting fired rather than fudge the books if necessary to make the earnings numbers. It is to the credit of the finance profession that most CFOs have resisted the pressure anyway.

We can't pretend that the problem is simply a few outlaws run amok. By the end of the boom, with both investors and executives chasing unsustainable growth and excessive wealth, the system itself had run amok.

As preparers of the financial reports, the transparency and accuracy of which are the cornerstones of the American market, CFOs work at the heart of the system. Thus, they are crucial to reforming it. The results of the first of our four surveys on finance practice (see "The Fear of All Sums") suggest that while few have committed fraud, many are reluctant to disclose any more on financial statements. But at this point in history, restoring confidence in those statements may be the CFO's most important job. Or in the long run, none of those apples will be worth much.

Julia Homer, Editor-in-Chief


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