10 insights from corporate controllers on company management

November 14, 2022 2:54 PM

As the person in charge of the financial and accounting functions of their organization, the corporate controller must constantly keep up with professional standards, changes in federal regulations, and developing policies such as ESG reporting and DEI initiatives.

To address those challenges, a panel of corporate controllers from some of the largest U.S. corporations shared their insights on how to operationalize key management concepts during Financial Executives International's Current Financial Reporting Insights conference on Nov. 7-8.

"We do a lot more than accounting," said Paramount controller Katherine Gill-Charest. "You're policing your companies, but you're also supporting them strategically, helping them grow in good times, helping them transform or cost manage when times get a little bit tough."

She participated in a panel session alongside Merck global controller Rita Karachun, and Moody's corporate controller Caroline Sullivan where they discussed the obstacles and expectations for the future of finance and accounting. During an hour-long roundtable, they shared their perspectives on day-to-day management and interconnectivity of technical accounting, financial reporting, technology, service delivery, people and transformation.

Panel moderator Jazmin Gamboa (left) of Financial Executives International talks (from left to right) with Katherine Gill-Charest of Paramount, Rita Karachun of Merck and Caroline Sullivan of Moody's.

"The compliance that we all focus on is really important, but we are communicators," added Karachun. "I think making sure that you're continuing to help tell your company's story through what you disclose, and how you say things is important, something that controllers are in a unique position to be able to do because they see everything. They see the whole company, and they understand how the data and the numbers are really helping to tell the story."

1. Communication, transparency and teamwork in times of transformation

When going through internal or external changes, Gill-Charest believes a company should build broad strategic communication, relying on three points. First, she believes communication is key to handling those changes, but she believes there is a lack of detailed and tactical communication in middle management. In her opinion, the problem lies with the fact that managers are expected to execute every initiative and handle most of the workload while not being kept in the loop.

"What I've learned to do is try to create that space for folks on the controllership team who are running all of these initiatives to get together, brainstorm, trade ideas and sometimes vent a little," said Gill-Charest. "But whatever it is, give them the time to make sure they have the information they need and that they have the people to coordinate with and talk them through it. It has been really helpful, whether we do workshops, regular meetings or targeted communications, to hit that middle form of communication."

Companies should admit their shortcomings and be open with their team. If a firm is "blindly parroting" a disingenuous speech every time they face an obstacle, she believes the team will lose trust in the company and be more reluctant to help fix the problem. A firm should learn how to communicate about its mistakes and find a way to learn from those challenges. Lastly, Gill-Charest discussed the impact of small changes on teams, and how demoralizing it can be when they're already facing a heavy workload.

"Even though every day I come up with an idea on something I want to do differently, I try to rein myself in and follow the team's lead on what they really feel will be worthwhile to do now," she said. "Or maybe I just sit and wait on it, while we get through the bigger aspects of the change."

2. Diversity goes beyond race and gender

At Moody's, the company tries to give everyone a voice and strives to have a workforce that represents the world as it looks. But beyond the training and leadership programs that the corporation offers its diverse talent, Sullivan sees diversity as more than race and gender. People who seemingly have nothing in common may share similar life experiences, and recruiters should consider other factors such as ethnicity.

Sullivan discussed another layer of diversity that is not commonly considered within the profession.

"There are a lot of people who are competing for similar talent, experiences and skills," she said. "It's a challenging thing to do because you can't compromise on the standards you want. But I think the more we do it and remind ourselves that this is an important thing to do, the more people will feel comfortable about speaking up. Maybe then it will become self-perpetuating, where then you don't have to invite people in because you've created the environment where they are comfortable."

3. Invest in ESG training and acknowledge your shortcomings

Sullivan explained that Moody's goal is to train 100% of its finance team on an internally developed sustainability program. So far, 65% of Moody's staff have gone through the training and Sullivan hopes to reach the 100% objective by the end of the year. The company collaborated with PwC on a gap assessment about voluntary work, disclosures about Moody's needs to do, and what might come out of ESG initiatives.

The company also regularly meets with the Deloitte Center for Controllership, where a peer of Sullivan's plans to do greenhouse gas emission calculations on a monthly basis, in addition to closing the books. Sullivan says this kind of collaboration allows people to learn from other organizations and find inspiration for their own companies.

"As part of our journey, we've hired an ESG controller," said Sullivan. "We decided to go with somebody who is internal at Moody's with a lot of experience previously in financial reporting and internal audit. Both of those backgrounds are going to really help her to be very beneficial in that role as we get ready for that."

Conversely, Gill-Charest admitted Paramount didn't have an ESG team nor engaged a third-party partner to conduct a formal gap assessment yet. However, she said the company has been focused on which processes and controls are in place to formalize and document ESG efforts. It has also been partnering with its Sarbanes-Oxley and internal audit teams to provide an assessment of how things are going, along with findings and recommendations on its own.

"I always feel like I'm behind in this area, but when I do, there's always someone else who's farther behind me," said Gill-Charest. "We just need to build our expertise, and I think that attending this kind of conference, networking and eventually bringing more people into the organization with that expertise, will be really helpful for us."

4. Persistence and rigor in following climate disclosure rules

In March, the Securities and Exchange Commission released a rule proposal that would require public companies to include information about climate-related risks in their registration statements and periodic reports, as well as their greenhouse gas emissions. They would need to disclose what risks are likely to materially impact their business, financial condition and certain climate-related financial statement metrics.

Moody's has been working closely with its sustainability teams and plans to do further gap assessments on some international regulations, according to Sullivan.

"We were asked by our CFO if it was possible to go out there and get a tier two or three company to actually do the gap assessment," she said. "What I can tell you is we went to two different companies, and that was really difficult because the level of understanding of all of these rules and regulations isn't necessarily out there yet."

Merck did a preliminary readiness assessment to focus on a few metrics, and while it identified areas for improvement, there wasn't any gaping hole to report.

"We actually have our internal audit team review the data and make sure that everything that's in the report is supported," said Karachun. "We also go through a process where the owner of the data, before we file or publish our sustainability report, has to certify the information. It's similar to the process we go through for our 10-K and 10-Q [filings], where we have leaders around the world providing us with certification. We've pulled data from the report where people haven't been able or willing to certify.

5. Build a “strategic” risk management program

Gill-Charest has a simple tip for controllers looking to implement an enterprise risk management program: add the word "strategic" in the acronym. In her experience, it makes business leaders much more receptive to initiatives, and Paramount itself does an annual exercise to engage its business and finance leaders across the organization to discuss the risks they're facing in the coming year.

"Each year, the high-level categories of risks that we monitor don't really change, but what does change is how we're thinking about them in terms of the likelihood of them occurring, the impact they might have, and how quickly it might impact us," said Gill-Charest. "It's changing the way we're looking at economic risks relative to the way we're going through the individual risks in our business, presenting to the board and monitoring them ourselves."

The company is monitoring risk management closely and keeping its board and senior management updated. The Paramount ad-sales market is currently going through a difficult time and, while this problem would have normally been put in a separate vacuum, it is now included in the broader economic discussion.

6. The SEC’s window is too “narrow” for non-GAAP adjustments

Last year, the SEC addressed a letter to pharmaceutical company Biogen questioning the company's exclusion of upfront and premium payments for the acquisition of equity stakes from its non-GAAP results. As a result, other major pharma corporations such as Merck stopped excluding expenses related to acquired in-process research and development when calculating their non-GAAP metrics.

Karachun argues that pharma companies have great arguments for excluding certain expenses, as large as they can sometimes be, but the SEC was still not convinced and forced Biogen to change its upfront payment-reporting methods for quarterly updates.

"The SEC didn't give any indication that they're backing away from non-GAAP, but I do wonder if this is a bit of the tip of the iceberg," said Karachun. "They're going to go after some of the things in non-GAAP reporting that are recurring in nature and operational, but that many companies exclude. I think we'll just wait until we get a comment before we'll change anything, but it is a bit of a heightened alert for me."

She noted that the SEC didn't do any formal communication except for comments on those milestones, and she observed that its "recurring" window was fairly narrow. Unlike GAAP, non-GAAP figures shouldn't include non-recurring or non-cash expenses, but the SEC considers a once-a-year or once-every-two-year purchase to be a recurring part of one's business, regardless of the materiality of the expense.

7. SEC cybersecurity proposal may put companies at risk

In March, the SEC issued a proposed rule that would require companies to provide enhanced disclosures about cybersecurity incidents, risk management and governance. After experiencing a material cybersecurity incident, public companies would have four days to report it, describing the scope of the attack, how much data was compromised, and what effect it had on the company's operations.

Karachun says that disclosing a cybersecurity incident puts a company at a bigger risk of an attack, especially when they haven't fixed it yet. She believes that cybersecurity is a question of balance for finance professionals and there should be more structure and rigor around what companies disclose and when they disclose it.

"The resounding theme that I have heard from the internal folks at Merck is really about the risks that companies would face, and as a company who actually had a cybersecurity incident a couple of years ago, we ended up disclosing it pretty quickly," said Karachun. "It didn't put us at risk because we were able to put it in a box, so we weren't concerned about it, but had we had a proliferation of it, we may not have wanted to disclose it until we had some time to put some patches in place."

8. How auditors are impacted by the hybrid working model

Moody's organizes regular meetings with its auditors to discuss a broad range of topics, Sullivan explained. Currently, the year-end audit requires a lot of in-person planning and the corporation's teams have been attempting to file 10-K forms a week early. She said it's critical for auditors to understand this goal and work as a team to reach the company's objectives.

Moody's has worked with KPMG to create a Center of Excellence in Budapest, where all its statutory reporting is brought together. As it gets ready for the year-end audit, Moody's has also consolidated its audit practice and used its statutory reports ideas to streamline and guarantee that PPC lists were up to date.

"I think it pushed some of the things that probably needed to be pushed in terms of efficiency, and things like electronic work papers or workflows all rolled out really quickly now that we're in the hybrid environment," said Gill-Charest. "People view flexibility as the best of both worlds but if you schedule correctly, you still get the benefit of that in-person time. I feel like we spend a lot of time working individually and to be able to do that in a quiet environment is a real gift."

9. FASB’s upcoming projects are interesting, but underdeveloped

FASB recently updated its projects on disaggregation and segment reporting, and Gill-Charest has been watching those changes. The disaggregation project aims to improve "the decision usefulness of business entities' income statements through the disaggregation of certain expense captions," while the segment-reporting proposal strives to offer investors better information on a company's performance, business activities along with potential cash flows.

Although both projects aim to improve expense information, which she recognizes is essential for investors, Gill-Charest believes there are too many complexities in terms of implementation. She admitted that while the segment proposal had the benefit of being based on the "management approach," which disaggregates information and assesses a company's segment performances the way management would, she was not so optimistic about the disaggregation project.

"So far, the things I've heard just aren't really addressing the complexities of how you deal with things like overhead, allocations and inventoriable costs," said Gill-Charest. "I get the principle of wanting more cost information and I think that makes sense, but that's the one that's on my mind most, just because any sort of reporting on costs in a different way than the company does for their own management is gonna be a huge challenge relative to our financial systems."

10. Retooling the extent of the expense information and CODM package

Merck CEO Robert Davis is the company's "chief operating decision maker," meaning he's in charge of allocating resources to and assessing the performance of operating segments with the support of canned reports. However, Karachun admitted that he probably doesn't use all the information disclosed to make informed investment decisions. As a result, she believes it may be time to evaluate those reports and consider what information the corporation is truly using. It's not about "gaming" the system, but thinking about whether the information going to her "CODM" needs to be redesigned for more efficiency.

"What I always say is that I want to understand what our CEO wants to see," said Gill-Charest. "If you're telling me to take something out of the report, I want to make sure it's not to game the system, but because he really doesn't need it. What I won't do is cripple the system, and if he wants the information, he's gonna get it, and then we're gonna follow the rules. So I think this is just going to give another layer to that same internal conversation around what reporting looks like."

Karachun says that while consistency is not the standard people are trying to get with segments, she argues that having some comparability between companies is a good thing. In her opinion, the segment-reporting standard has always been logical, as it requires someone to look at their business internally and use their observations to build an external report. However, some costs may not be embedded in certain segments when going into further details.

In the case of Merck, the only cost of sales that is allocated to its human health business is standard, and everything in the company's manufacturing variances isn't a segment. Conversely, the corporation's animal health business is more of a complete entity with full manufacturing results in its segment outcomes. Karachun concedes that understanding those nuances can be confusing when evaluating how the two businesses compare to the total, and it's incumbent on users to question and understand the significance of the information reported.