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ROLE OF CFO (Chief Financial Officer)

By Mr. Mesug O. Sarip CFO SABRO Corporation Inc., Marawi City Former: Senior Accountant at Rolaco Trading and Contracting Co., Jeddah, K.S.A.

In Corporate Governance

TRADITIONAL ROLE OF CHIEF ACCOUNTANT

The Chief Accountants used to perform several tasks which were preparing accounts, preparing budgets, operational reporting and interpreting, evaluating operating results, preparing income tax returns, establishing internal control procedures to safe-guard the companies assets.

TRANSITION FROM CHIEF ACCOUNTANT TO CHIEF FINANCIAL OFFICER

Due to increased governance requirement there arises a need to empower the chief accountant and to make him responsible by requiring him to sign the accounts. There comes the code of corporate governance, which makes the chief accountant powerful and more responsible. With the new role, Chief Accountant becomes Chief Financial Officer (CFO).

Appointment and Approval Requirement

The appointment, removal and remuneration terms and conditions of employment of the chief financial officer of a listed company shall be determined by the Chief Executive Officer with the approval of the Board of Directors.

Qualification Requirement

The qualification requirement is defined under the code of corporate governance that is the person appointed as the Chief Financial Officer must be

Member of recognized body of professional accountants or

A graduate from a recognized university or equivalent, having at least 5 years experience in handling financial and corporate affairs of a listed company.

Attending Board Meetings.

The Chief Financial Officer of a listed company is required to attend the meeting of the board of directors.

IMPLICATION OF NEW RESPONSITBILITES

The new responsibilities apply to all Chief Financial Officers of Listed Companies, Insurance Companies, Banks and DFIs. Mostly the CFO presents the financial position relating to the period which has been over, and the period which has to come that is the financial position attained and the financial projection i.e. where the organization will be.

Responsibilities towards Board of Directors

The Chief Financial Officer is required to furnish necessary and classified information to the board of directors along with his analysis and suggestions as the Chief Financial Officer attends the board meetings, any issue with financial implications is being discussed, the person likely to be most in command of these implication is on the spot and immediately available for questions.

In order to strengthen and formalize corporate decision-making process, significant issues are required to be placed for the information, consideration and decision of the boards of directors by the CFO. These are: •	Annual business planes, cash flow projection, forecasts and long term planes. •	Budgets include capital, manpower and overhead budgets along with variance analyses. •	Quarterly operating results of the company as a whole and in terms of its operating divisions or business segments. •	Details of joint ventures or collaboration agreements or agreements with distributors, agents, etc. •	Default in payment of principal and/or interest, including penalties on late payments and other dues, to a creditor, bank or financial institution, or default in payment of public deposit. •	Failure to recover material amounts of loans, advances, and deposits made by the company, including trade debts and inter-corporate finances. •	Significant public or product liability claims likely to be made against the company, including any adverse judgment or order made on the conduct of the company.

Responsibilities towards Shareholders

The Chief Financial Officer is required to provide all the necessary data to be presented in the “Director’s Report”. For this purpose Chief Financial Officer must ensure the following.

•	The financial statement, prepared by the management of company, present fairly its states of affairs, the results of its operation, cash flows and changes in equities. •	Proper books of accounts of the company have been maintained •	Appropriate accounting policies have been consistently applied in preparation in financial statements and accounting estimates are based on reasonable and prudent judgment. •	International accounting standards, as applicable in Pakistan, have been followed in preparation of financial statements and any departure there from has been adequately disclosed. •	The system of internal control is sound in design and has been effectively implemented and monitored. •	There are no significant doubts upon the companies’ ability to continue as going concern. •	There has been no material departure from the best practice of corporate governance as detailed in the listing regulations.

Internal And External Reporting

Chief Financial Officer now has extensive responsibilities for internal and external reporting. All the information required for decision-making by the Board of Directors and Chief Executive is processed and furnished by the Chief Financial Officer. Apart from this, external reporting requirement is fulfilled by Chief Financial Officer, the accounts and financial statements are signed by the Chief Financial Officer before they are sent to concerned authorities.

CCG requires that the listed companies submit their quarterly accounts to the shareholders within one month of the close of the first and third quarter of year of account.

The CCG does not prescribe the time for submitting half yearly accounts to the shareholders. Here we can refer to section 245 of companies ordinance 1984 for this purpose, which requires half yearly accounts to be submitted within two months of the close of first half. The CCG requires a limited review of half yearly accounts by external auditor.

Annual audited accounts are now required to be submitted within four months of the close of financial year.

The Securities and Exchange Commission of Pakistan is exercising strict vigilance to ensure compliance of 4th and 5th schedule of the Companies Ordinance, 1984 and timely submission of accounts by companies. It has recently imposed penalties on Directors of nine listed companies who failed to prepare and circulate the quarterly accounts. Furthermore, fines have been imposed on chief executives.

CONCLUSION

The performance of any organization is reflected by the financial statements. Any ambiguity if remains there, makes the reflection of the performance doubtful. Therefore, the role of CFO becomes very important as he controls the reflection of performance, which is reported to different authorities and the organization is assessed by them, and they must perform their job with professional competency and integrity, so that the financial statements give credible information to its users. The code of corporate governance provides the guidelines and opportunity to do this.

By: Mr. M. O. Sarip

Balance Sheets: 1.	 Concepts Introduction A balance sheet is like a financial photograph of a business. It shows us the financial position of the business at one point in time. You might remember that the profit & loss account showed us what had happened over a period of time, usually a year. The balance sheet takes one date and shows us the value of what the business has (its assets), what it owes (its liabilities and capital) ________________________________________ Why? You know that a business will often owe money to various individuals or institutions. It might owe its suppliers money for a recent delivery, the bank for an overdraft or loan and it holds money that was invested by the owners/shareholders. The balance sheet helps us look at the debt position of the business and allows us to see whether or not it is financially secure. For instance, a business that had most of its debts in the form of an overdraft that had to be paid by the end of the month is in a worse liquidity position than one that has its debts in the form of a loan that doesn't have to be paid off for five years. We can also look at what the business owns. These items, known as assets, can be used to pay-off any debts and maintain liquidity. As well as using the balance sheet to look at liquidity, we can use it to understand what decisions the managers have taken and what they could do in the future. ________________________________________ Balance? This account gets its name from the fact that everything the business has is equal in value to everything that it owes. A business does not really exist in the same way that people do. Everything the business has, was paid for by money that either came from banks or from investors or other sources. If everybody knocked on the door of the business and demanded the money that was theirs, the banks would get their loans repaid, the investors would get their shares plus profit and the suppliers would get the money that was owed to them (trade credit). To pay everyone in full, the business would have to sell all of its assets - its property, its stock and even its paper-clips. Assets = Liabilities + Capital

2. Assets Fixed Assets These are items that the business owns and tends to hold for a long period of time. They include land, property, fixtures & fittings, vehicles, tools, etc. Fixed assets are often used for production and purchasing new fixed assets may help improve efficiency (e.g. buying a computer for administration work). This is often a good idea for a business with a lot of cash. Fixed assets are not usually very liquid. In other words, it may take a long period of time to be able to turn them into cash. It would be easier to sell stock than to have to go through the legal proceedings involved in selling a building. Fixed assets also tend to fall in value over time. A car bought five years ago will usually be worth less today than on the day it was bought. This is due to wear and tear, fashions, the existence of better models, etc. The value of the fixed assets shown on the balance sheet will fall from year to year. This is a process known as depreciation and a business will often set aside money to replace existing assets such as lorries (the depreciation provision will show up on the profit and loss account as an example of an overhead expense). ________________________________________ Current Assets Current assets are also things the business owns but they are more liquid - they can be turned into cash more easily. Included in current assets is the most liquid of all assets, cash. Also included is money in the bank and stock. Another item included in current assets is debtors. This represents the money owed to the business by customers who have not yet paid. It is considered an asset because it represents money that the business will soon have. Of course it may be hard to collect the debts and so a business would prefer to have its current assets in the form of cash, bank accounts or stock than as money owed in debt.

3. Liabilities Current Liabilities This is perhaps the section of the balance sheet that people look at first. This section represents all money that the business owes to others that has to be paid within a year. If a business has a lot of current liabilities, it could face a liquidity crisis - will it be able to pay all its short term debts? We will consider this more when we look at the current and acid test ratios. Included in current liabilities are: •	Overdrafts - money owed to the banks to repay short term borrowing •	Trade creditors - money owed to suppliers for inputs, raw materials etc. As mentioned, businesses usually pay their suppliers after taking delivery of items •	Taxation - businesses will owe the government money in the form of taxes and this is a current liability ________________________________________ Long Term Liabilities These are debts that will not fall due for over a year - they give the business a little more 'breathing space.' They will all have to be paid eventually but do not represent as much of a worry in terms of liquidity. If a business has to have debt, it may prefer to have long term, rather than current, liabilities. Common examples of long term liabilities are bank loans, mortgages and debentures.

4. Owners' Capital Defined The third section of the balance sheet is a bit like liabilities - it represents money that does not really belong to the business. The difference is that the capital section represents money to which the owners of the business have a claim. It is not directly owed to them in the same way that liabilities are owed to banks, creditors, etc. It's a subtle difference. Capital = Assets - Liabilities In other words, once a business has paid all its debts, anything left over belongs to the owners. ________________________________________ Capital This represents the money that shareholders or owners invested in the business. Some managers prefer to finance their activities using capital rather than by loans as they do not have to face interest charges. The downside, of course, is that they will have to pay profit to owners (dividends to shareholders or drawings to sole traders/partnerships). ________________________________________ Retained Profit & Reserves This is the value of profit made in the past and kept by the business. Remember that profit is a reward for taking risks and it ultimately belongs to the owners of the business. The managers may decide to pay it to the owners or they may decide to use it as retained profit for financing some expansion. They will probably pay some of it to the owners or they might find themselves voted out of their jobs. The value of the profit made in the year (if any was made) is calculated on the profit & loss account.

5. The Whole Sheet Putting It All Together The sheet below shows the various categories - assets, liabilities and capital. You will also see that there are a couple of other items that are explained below. Balance Sheet for SABRO Corp. Inc. as at 31/03/2011 PhP Fixed Assets Buildings	           250,000 Fixtures & Fittings	    75,000 Vehicles	            30,000 Total	                   355,000 Current Assets Stock	                     2,500 Debtors                      3,000 Bank	                    15,000 Total	                    20,500 Current Liabilities Trade Creditors	             1,500 Overdraft	                 0 1,500 Net current assets	    19,000 Total assets less current liabilities	374,000 Long Term Liabilities Bank loan	           170,000 170,000 Net Assets	                       204,000 Financed by: Capital	                    156,000 Retained Profit	             48,000 204,000

________________________________________ It Balances You can see it - net assets (the value of everything the business has once its liabilities have been paid) is equal to capital plus profit. After the debts are paid, everything left belongs to the owners ________________________________________ Net Current Assets Net current assets, also known as working capital is a handy way of looking at the liquidity of the business. Net current assets = current assets - current liabilities Can the business pay its immediate debts? Well, it could sell its current assets and, in this case it would be able to pay its current liabilities and still have PhP19,000 left over (which is handy). In this case, the business is liquid and does not appear to be in risk of liquidity troubles. Total assets minus current liabilities is also included on some balance sheets to help people consider a business' position. What if things were so bad that the business had to sell its fixed assets to pay its short term debts? This figure tells us whether such a strategy would work. If the figure is positive, the strategy would work (provided the business could find a buyer for those assets).

6. Ratios The Current Ratio The current ratio is a measure of liquidity. It helps us to answer the question: 'If a business had to pay off all its current liabilities tomorrow, would it have enough current (liquid) assets to make the payments and avoid insolvency? All you do is divide current assets by current liabilities, as shown below. If the current ratio is less than 1, the business has more current liabilities than current assets - it is in danger of failure. If the ratio is high, perhaps above 2, the business has more than enough current assets. It might be a good idea to use some of the value to buy fixed assets or increase employment and try to improve business efficiency. The ideal current ratio is between 1 and 2 - just enough to be getting on with. Looking at the SABRO Corporation Inc. current ratio, we can see that the business is certainly liquid. In fact, with PhP15,000 in the bank and such few current liabilities, it might want to pay-off some of its loan or run a marketing campaign to boost sales. ________________________________________ The Acid Test Ratio The current ratio says 'can we pay our current liabilities by liquidating our current assets?' The acid test ratio asks the more interesting question of 'what if nobody will buy our stock? Can we still pay our short term debts with our other current assets?' As you can see, we look at current assets without stock. This is a sensible approach - a business with liquidity problems might also be a business that can't sell its product easily. The same guidelines apply to this ratio as to the current ratio - it's ideally between 1 and 2. SABRO Corporation Inc. are secure. They could use their current assets, excluding stock, to pay their short term debts 12 times over. Perhaps it's time to use that cash for something better. ________________________________________ Return on Capital Employed This final ratio is not a measure of liquidity but of profitability and general performance. Return on capital employed asks how successful the business has been at making profit based on the money put in by the owners. It is a percentage, like the gross and net profit margins, and as with them, the higher it is the better. The figures you need are net profit, which comes from the profit and loss account, and capital. The figure used for capital is the value of the money invested by the owners plus the retained profit kept by the business. Assume that SABRO Corporation Inc. had a net profit for the year of PhP1,300. That would mean that a business that was sitting on PhP204,000 of owners' money produced a profit of only PhP1,300. That's 0.6%. If you were an owner or shareholder, you'd probably be a little upset with that figure - you could have earned more by leaving your money in a bank. 0.6% may not be bad in some situations - perhaps the whole economy had a bad year, perhaps the business is looking to grow in the long term, etc but it's not exactly a world record. Again, the higher the value the better. It's useful to compare the ROCE ratios of different companies if you are thinking about buying shares - which company has the manager who is most likely to turn your investment into profit (which will be your reward)?