For those of us who follow the corporate scandals, the last several weeks have been pure bliss. In Lower Manhattan, the Martha Stewart jury is deliberating. The Rigas family is on trial for its Adelphia shenanigans. The defense has rested in the Tyco trial. And federal prosecutors have finally secured indictments against two of the most notorious CEOs— Jeffrey Skilling of Enron and Bernard Ebbers of WorldCom.
The Skilling and Ebbers indictments have brought attention—undesirable attention—to a group that usually doesn’t get any: chief financial officers. Both Skilling and Ebbers are on the spot because their CFOs—Andrew Fastow of Enron and Scott Sullivan of WorldCom—pleaded guilty and ratted them out.
To be a CFO is to suffer from a permanent inferiority complex. One letter of the alphabet separates the CFO from the CEO. But when it comes to compensation, prestige, and glamour, the distance is vast. Historically, CFOs have been glorified accountants—dronelike support personnel. CFOs are supposed to make sure the company has the right financing to support the brand, the product, the acquisition. It’s not their job to build the brand, pick the product, or decide on the acquisition. They don’t do any of the company’s interesting work.
Moneybox was for many years a contributing editor at CFO Magazine,which constantly seeks to find examples of CFOs who advance into the operating world—and hence give encouragement to its readers. It finds remarkably few. Stephen Bollenbach, the onetime CFO of Disney, is now CEO of Hilton Hotels. And Larry Kellner, who is about to become CEO of Continental Airlines, was formerly the company’s CFO. But that’s about it.
CFOs aren’t operators. They tend not to get paid as much and not to receive as much media juice as operating executives do. Everybody who has even a passing knowledge of business knows that Jack Welch was the CEO of General Electric in the 1990s. Many of Welch’s division heads became celebrities and went on to run giant companies themselves. But who can name the man who has served as CFO of GE since 1998? (Keith Sherin.)
In the 1990s, CFOs’ status improved somewhat as financial engineering—the legal manipulation of earnings that allowed companies to meet or exceed Wall Street’s expectations—became widespread. CFOs, responsible for areas such as pension accounting, the creation and maintenance of items like “goodwill” that could be used to juice earnings, were the go-to guys. But it turned out the CFOs were also indispensable for committing accounting fraud—the illegal manipulation of earnings that allowed companies to meet or exceed Wall Street’s expectations.
Accounting fraud can take place at every level of the company. And it can take place without the knowledge of top brass. The manager of a division can inflate sales; store managers can fudge invoices. But when the company is messing with earnings at the corporate level to try to please Wall Street, it’s hard to do so without the involvement of the CFO. And so as the scandals broke, CFOs—and not CEOs—were among the first indicted.
But the notion that CFOs would decide on their own to manipulate earnings in companies dominated by imperious CEOs is laughable. This is why CFOs quickly accepted deals in which they pleaded guilty in exchange for providing evidence against their onetime bosses. In the HealthSouth scandal, the feds have secured guilty pleas from five—count ‘em, five—former HealthSouth CFOs.
CFOs are the linchpins of the fraud cases against CEOs. Ebbers was only indicted once CFO Sullivan pleaded guilty. Skilling was indicted a month after Fastow, the prima inter pares of CFO fraudsters, struck a deal. Ditto for HealthSouth CEO Richard Scrushy, who was indicted last fall based on information provided by his five crooked number-crunchers.
There are two prominent instances in which indicted CFOs have refused to roll over on their former bosses. In the case of Tyco, CEO Dennis Kozlowski and CFO Mark Swartz are standing trial together. In the case of Adelphia, the CFO is Timothy Rigas, the son of company founder John Rigas. The family has decided to hang together.
The willingness of CFOs to accept pleas and cooperate in the prosecution of their bosses shows the ultimate indignity of their situation—they did the dirty deeds and took the rap for it, but people higher-up always made more money off the shady arrangements. CFOs, like the rest of us, are probably rooting for Skilling and Ebbers to go to prison for a long time and for their CFOs to get off easier. But if Skilling and Ebbers walk, while Fastow and Sullivan serve hard time, CFOs will be disappointed but not surprised. After all, they know their place.
Correction March 5, 2004: Due to a copy-editing error, the photo caption originally identified the subject as Scott Sullivan, former CFO of WorldCom. In fact, it is Andrew Fastow, former CFO of Enron.