Are CFO roles the most dangerous in the corporate world?

Chief financial officers are increasingly in the legal crosshairs, with accusations of breaching their fiduciary duty emerging as the top reason CFOs are being taken to court, according to a new report.

The CFO Legal Tracker 2024, compiled by FP&A solution provider Datarails and legal expert Jed Chedid, found a staggering 233% year-over-year rise in cases alleging CFOs failed to uphold their fiduciary duty to act in the best interest of the company and its shareholders.

In 2023, there were 10 such cases filed against CFOs at major corporations like AmerisourceBergen, GoDaddy, and Columbia Pipeline Group. In 2022, only 3 cases centered on fiduciary duty breaches.

“Fiduciary duty applies when one person has responsibility for the assets or property of another person. The fiduciary must act in the best interest of the person who has entrusted those assets,” explained Tamar Frankel, a law professor at Boston University.

The duties require CFOs to be reasonably well-informed before making business decisions and act in good faith while executing their oversight of financial reporting and safeguarding of company assets.

Securities Fraud Cases Rise 50% The second most prevalent type of litigation against CFOs was securities fraud, which saw a 50% jump in cases from 2022 to 2023. Last year, 9 CFOs faced fraud allegations compared to 6 the prior year.

High-profile cases like the collapse of Silicon Valley Bank and investor lawsuits against Disney contributed to the rise. The SVB case named former CFO Daniel Beck for allegedly concealing how rising interest rates would threaten the bank’s solvency. Disney’s ex-CFO Christine McCarthy was accused of violating anti-fraud securities laws.

Unlike fiduciary duty cases which don’t require personal benefit, fraud charges require proving the CFO actively benefited from intentional deception or omission of material information that misled investors.

“CFOs have an information advantage compared to other executives, potentially allowing accounting manipulations that can favor both the CEO and themselves,” said a study by researchers at Kennesaw State University and the University of Scranton.

Other Legal Risks

While fiduciary lapses and fraud dominated, the report revealed CFOs also faced legal jeopardy for a wide range of other alleged misconduct:

• Gross negligence for failing to ensure proper insurance coverage (Martin Def. Grp. v. Aspen Am. Insurance)
• Theft and racketeering for embezzling $2 million to fund an illegal marijuana operation (Nanoventions v. Daniels)
• Late reporting of stock trades and holdings, drawing SEC penalties of $125,000 (Nicole M. Fernandez-McGovern, AgEagle)
• Breach of contract
• Failure to implement proper risk controls (TIAA v. SVB executives)

High-Profile Convictions

The tracker also highlighted recent high-profile criminal convictions of CFOs, including:

• Trump Organization CFO Allen Weisselberg (5 months for tax crimes, 2023)
• Ex-CFO Erin Verespy (66 months for $33M fraud scheme, 2022)
• Bankrate CFO Edward DiMaria (10 years for $25M accounting fraud, 2018)
• Panasonic Avionics ex-CFO Takeshi Uonaga (for improperly recording $82M revenue, 2018)

Protecting Themselves

With legal and compliance risks intensifying, CFOs were advised to take protective measures like:

With legal and compliance risks intensifying, CFOs were advised to take protective measures. They should thoroughly document all decisions to demonstrate duties were properly carried out. Investing in technology to ensure accounting data accuracy and prepare robust disclosures is also critical. CFOs must give bad news to the board promptly instead of obscuring negative information. Staying updated on new regulations that could impact the business is important to avoid missteps.

Automating financial processes and controls can reduce the risk of errors or omissions. Performing timely account reconciliations is recommended to detect issues early before they escalate. “The law isn’t intended to hamper businesses, and with proper controls, CFOs can minimize risks while fulfilling their vital roles,” said Chedid. “But they must make preserving ethical conduct the highest priority.”

Taking steps like meticulous record-keeping, technology investments, quickly elevating concerns, continuous learning on regulatory updates, streamlining processes, and prioritizing integrity can go a long way toward safeguarding CFOs amid today’s heightened legal and compliance dangers. The tips reflect the need for CFOs to be vigilant stewards who prioritize robust financial controls as the first line of defense against potential litigation.

“The law isn’t intended to hamper businesses, and with proper controls, CFOs can minimize risks while fulfilling their vital roles,” said Chedid. “But they must make preserving ethical conduct the highest priority.”

The report data underscores how CFOs, armed with their information-rich vantage point, face substantial legal exposure if they fail to serve as model corporate stewards and truth-tellers. Even inadvertent lapses can now prompt harsh consequences from energized regulators and plaintiffs’ attorneys. Investing in robust compliance and exerting profound financial integrity are fundamental self-preservation skills for today’s CFO.