FDs need education not regulation

One of the many post-Enron suggestions is that some kind of certificate of competency should be required before anyone can take the title of CFO or FD. You can see the attraction of such a move to politicians and civil servants. After all, if taxi drivers need a licence, and, perhaps more seriously and closer to home, if auditors need one, why not the finance director?

It is tempting to believe an FD who earns his corn courtesy of a certificate signed by the Securities and Exchange Commission or the Financial Services Authority would be more cautious about acting, or allowing his colleagues to act, against the best interests of the shareholders. But that argument assumes the FD within a corporation is able to act alone.

The gravest objection to licensed FDs is that it will undermine corporate governance and in particular the idea of the unitary board. At the risk of sounding childish, if FDs need a licence why not other directors? One of the great advances in the way companies have been run – certainly on this side of the Atlantic – has been the recognition that the board collectively has stewardship duties. If some directors are singled out, you have divided the board, making some directors more important. Then, when trouble comes, the non-licensed directors will claim they thought the board’s actions were okay because the licensed director said they were.

The other major problem in any licensing scheme would be determining what exactly should be regulated. You can see that an auditor might reasonably be expected to be required to demonstrate to the authorities that he or she knows how to conduct an audit. But what exactly would a licensed FD need to demonstrate? Some FDs are, in essence, financiers who delegate the detailed accounting to the chief accountant. The role of the FD is so non-homogeneous it is difficult to see how a licensing authority could determine who was fit for the role.

The only possible objective would be to demonstrate that FDs have the competence to prepare financial information. But companies don’t fail because their FDs don’t know how to put the accounts together. They do however fail because FDs and other directors set out to defraud investors – but no licensing system will prevent that. It is equally hard to see how a licensing system could give warning when an FD is failing.

Regulation is only needed where there is systemic failure. That simply isn’t the case in the role of FD. The worst that can be said is that occasionally in a corporate failure there is an FD who is the tame supporter of a Robert Maxwell, or the architect behind a Kenneth Lay.

However, there is one option which could make accountants in business more professional – and that’s compulsory Continuing Professional Development (CPD). Accountants in practice are required to undergo a number of hours of education every year. This is surely something the professional bodies could bring in for members who work in commerce and industry.

You could argue that those who take their roles half way seriously already go in for CPD. That may be the case but there is no external evidence.

The only indicator we have is the number of qualified accountants who apply to become fellows of their institutes. But very few ACAs in business bother to get FCA after their name, and compulsory CPD would regularise and widen best practice. FDs need to be able to demonstrate that they remain technically competent – or at least in touch – and that they are aware of current business practices.

At a time when disclosure of intangibles and human capital assets is becoming popular, a line in the Operating & Financial Review should tell shareholders that the FD and his staff are keeping suitably up to date.

A few years ago it seemed possible that non-accountants such as MBAs would challenge the dominance of accountancy-based FDs. Such a scenario now seems unlikely. That is clearly good news for the established providers of accountancy education (ie, the big professional bodies). Indeed, although they would be unlikely to say so publicly, they may even welcome the idea of accountants in business undergoing compulsory CPD. Not only would flogging courses and books increase their revenue, it may help re-establish the tentative relationship between FDs and the professional bodies. And even overworked FDs and their staff may eventually see the merits of keeping up to date.