CFO Studio | Monthly Archives: September 2016September 2016

Ethics in a Post-Enron World

As Seen in CFO Studio Magazine Q4 2016 Issue

ARE WE RAISING THE STANDARDS FOR FINANCIAL REPORTING – OR TAKING A STEP BACK?

“Everyone’s doing it.”

“It’s immaterial.”

“It’s been approved.”

“I’m just following the rules.”

These are the kinds of rationalizations that were made by employees during the Enron accounting scandal of 2001, William Craig, Chief Executive and Financial Officer of Tarantin Industries, told audience members during an ethics panel discussion at the CFO Innovation Conference. “Everybody in the organization maybe felt that what they were doing wasn’t quite kosher, but they did it anyway because it was approved and part of the culture,” he said.

As proof, Craig cited a recent memo that prominent hedge-fund manager and investor Whitney Tilson fired off this spring to top financial executives after witnessing a speech delivered by former Enron CFO Andrew Fastow, who served a six-year prison sentence for multiple charges in the Enron case. By Fastow’s own admission, Tilson wrote, Enron knowingly engaged in repeated transactions that were designed to mislead investors by hiding debt and special-purpose entities. “It wasn’t one deal that sunk Enron,” Craig said. “It was the repeated use of acceptable but gray techniques that were used to pretty things up.”

In the 15 years following the scandal, has the financial world learned from Enron’s mistakes? Craig fears the answer is “no.” Again citing Tilson’s memo, he said that many companies, including Apple, “continue to engage in behaviors like tax-dodging that, while technically legal, are designed to increase profits and inflate the stock by confusing regulators and investors via a massively complex web of entities … which is exactly what happened at Enron,” he said.

In a recent survey of 400 financial executives by the National Bureau of Economic Research, 20 percent of respondents admitted to distorting their company’s earnings figures by an average of 10 percent. “That’s just scary bad,” Craig said. At the same time, he said, the Financial Accounting Standards Board recently released a proposal that might make it easier for public companies to withhold key financial information from shareholders. Current standards, he said, require corporations to provide financial disclosures of information that “could” influence investors. The FASB’s new proposal would rewrite this standard so that corporations would have to disclose information only “when there is a substantial likelihood that the information might significantly alter investor decisions,” according to Craig.

“Is the bar being raised here? No,” Craig said. “This is so much open to interpretation; I see us moving backwards.”

The issues surrounding financial reporting are not the only ethical questions that should be on financial chiefs’ radars, warned panelist Eric Wukitsch, Chief Operating and Financial Officer of Vantage Custom Classics, Inc. Companies also need stricter ethics codes in place. This applies even to private firms, who are not bound by the Sarbanes-Oxley Act, especially when they’re doing business overseas, said Wukitsch.

“What’s ethical may be illegal in some countries and what’s legal may be unethical,” he said. As an example, in the apparel industry, Wukitsch said, it’s common to pay workers in some countries with a bag of rice for a month’s worth of work. “It’s legal, but is it right?” he said. Companies need to outline specific guidelines for issues such as compensation and employee safety in their ethics codes and communicate them to all employees. Firms that fail to do this may face criticism from customers, vendors, and financial institutions.

“With all of the focus on social responsibility right now, you need to show that you’re doing the right thing,” he said.

Thus, lessons learned 15 years ago are highly relevant today.

—Melinda Ligos

Financing Growth in a Slump

As Seen in CFO Studio Magazine Q4 2016 Issue

A POLITICAL FIRESTORM IMPACTS FINANCIAL OFFICERS IN BIOTECH AND PHARMA

The timing couldn’t have been worse. It was the morning of September 21, 2015, and Andrew Einhorn, CFO for EdgeTherapeutics, a biotech firm, was prepping for the first full day of the company’s IPO roadshow, when he heard the news: Presidential hopeful Hillary Clinton had declared war on escalating drug prices.

In a Tweet that sent biotech stock prices tumbling, Clinton stated that price gouging in the specialty drug market was “outrageous” and that she was going to lay out a plan to take on overcharging such as Turing Pharmaceuticals exemplified when it raised the price of Daraprim from $13.50 to $750 per pill.

“What followed in the days after the Tweet was the worst sell-off in biotech since 2008, and we were on the road meeting with our investors,” Einhorn told audience members at the 2nd annual CFO Innovation Conference, in May at MetLife Stadium in New Jersey. Although Edge Therapeutics ended up going public in a deal that “was priced quite well,” the increased scrutiny on drug prices is one of a few factors that weakened the biotech and pharma IPO markets in late 2015. According to Einhorn, in 2016 there have been just seven deals raising $600 million total, which is down 60 percent from the same period in 2015.

So what are IPO investors looking for in a softer market? Less risk, for one. “There’s been a trend toward investing in later-stage programs, whereas in frothy markets, a lot of early-stage deals got done,” he said.

Because of the fickle investment market and increased pricing pressure, biotech and pharma companies must scrutinize costs across the board, said fellow panelist Jim Mastakas, Senior Vice President and CFO at Amneal Pharmaceuticals, the industry’s fastest-growing manufacturer of generic drugs. “Lenders are all of a sudden saying, ‘Hold on, we’ve gotten too comfortable here. . .’ and are being more vigilant in questioning pricing and costs,” he said.

Brian Zietsman, President and CFO of Enteris BioPharma, a privately owned company backed by a venture capital firm, told audience members that Enteris has had to provide a highly detailed accounting of future costs every time it asks its investor for more equity.

“We’d come up with a number that is bare bones. . .and our investor would turn around and say, ‘Well, you have 60 percent of your ask.’ That obviously puts us under a lot of pressure.”

In response, Zietsman said, the company has sped up the research process and reduced costs by eliminating rats from its pre-clinical experimental models, focusing only on dog models at this time.

Indeed, improving speed is one way to help clamp down on costs, said Einhorn. “Time equals cash,” he added. “We need to keep in mind the levers we can pull if, for example, enrollment in our clinical trial takes longer than we think.”

At Halo Pharma, a privately owned firm that provides services and products to pharma companies, cost control is all about managing customer expectations, said Barry Lederman, CFO. Halo works with some pharma companies that are early in the development process and are not attuned to the reality of a cost-sensitive market. While these companies could turn out to be very profitable customers for Halo, he said, “it becomes a very challenging situation.”

Einhorn said CFOs who focus on cost controls will be in a better position when the investment market rebounds: “When that window opens back up, you want to be able to go through it.”

–Melinda Ligos

Innovating to Win

As Seen in CFO Studio Magazine Q4 2016 Issue

CFOS TOUCH DOWN AT METLIFE STADIUM FOR INSIGHTS AND NETWORKING

On just one day each year, all the announcements and banners and cameras, usually reserved for sports heroes at MetLife Stadium, instead celebrate CFOs. That is the day when CFO Studio takes over venues like the Coaches Club at the stadium for educational sessions, and finance executives pour in to listen and learn, question, and share experiences. The energy is appreciable. (If only it were possible to harness all that brainpower!) With rapt attention, S&P 500 CFOs as well as finance chiefs from much smaller firms absorb insights — not technical accounting points but broader views of the business landscape and the CFO’s changing role in it. Most end the day with a renewed understanding of the tools they might use in meeting their company’s challenges. The 2nd annual event was held May 5, 2016. If you missed the day, a brief overview follows on this spread and the next four pages.

Heavy Hitters

What does it take to be a successful CFO in 2016? That question was addressed in multiple ways by presenters, moderators, and panelists during the 2nd Annual CFO Innovation Conference. Some invoked the volatility in the world that make forecasting and planning for global operations difficult. Some spoke of the need to build intracompany relationships and connections with venture capital and private equity firms. Some described how they protect assets from major business threats. Among the presenters were CFOs from the Federal Reserve System, from AOL, from SAP, and from other notable organizations. Other heavy hitters included the director of cybersecurity for the New Jersey Office of Homeland Security and Preparedness, and the deputy head of U.S. Economics for Bank of America Merrill Lynch.

In between the educational sessions, conference participants visited the CFO End Zone and met service providers Robert Half, Reed Smith, Dun & Bradstreet, Alliance Cost Containment, Tahas Technologies, and BC Compliance Group.

A special appearance by Joe Klecko, retired defensive lineman for the NY Jets, sent a buzz through the lunchtime crowd. Klecko shook hands, took photos with CFOs, and signed autographs. A silent auction with autographed Jets memorabilia raised money for three of CFO Studio’s preferred charities. And at day’s end, more networking opportunities presented themselves at the taco station and the margarita bar during a Cinco de Mayo reception.

As the business day morphed into evening, the football field beckoned, and although threatening weather changed plans for a celebration on the 50-yard line, many executives in business garb took a few minutes to memorialize the day with a selfie in the stadium or when walking across the field. Then it was time for the awards in the Toyota Club, where 12 exemplary CFOs were honored as award recipients (and 33 more as finalists) for knowing exactly what it takes to be successful CFOs in times that are uncertain, but exciting.