Has the role of the CFO really changed over the last 100 years?

Pre-1960s finance directors, chief accountants and financial controllers were often regarded as mere bean counters, with a responsibility ‘to prepare the books and report back to higher level management on the overall financial risk and performance of the enterprise”.

Contemporary accounting literature creates the notion that before the 1960s and 1970s, CFO predecessors (finance directors, chief accountants and financial controllers) were more or less exclusively focused on bookkeeping and reporting and that they did not delve into contemporary business-partnering roles, and/or act as critical counterparts to other managers.

However, both the contemporary and historical accounting literature present limited empirical evidence on the tasks and roles of CFO-type accountants before the 1960s and 1970s. There is evidence that nineteenth-century accountants prepared information for managers, which was not just bookkeeping, but was used to “aid management decisions” and ‘to provide information to enable management to run their company efficiently.”

This is according to an academic study by Martin Hiebl, Faculty Member at the University of Siegen, entitled An analysis of the role of a Chief Accountant at Guinness c. 1920-1940.

Twentieth century accountants have always acted as advisors to management and thus, their work “was hardly distinguishable from what we call management consultancy today.”

After the First World War, and even more so after the Second World War, this advisory role grew as firms expanded their internal accounting departments. As firms increased in size, internal accounting department’s heads – with titles such as ‘chief accountant’, ‘finance director’ or ‘financial controller’ –reportedly gained importance. Despite this reported gain, historical studies lack detail of what such internal accountants actually did. Instead, such studies tend to focus more on macro-level issues such as professionalisation and external factors.

The modern CFO’s primary responsibility is the ‘management of the financial system of the firm’ and that a CFO usually ‘oversees preparation of financial reports and serves as the point person for external communication of financial strategy’. Thus, at least in listed firms, one important part of the contemporary CFO’s roles is communicating with capital markets.

The shareholder-value movement of the 1980s and1990s increased the orientation of large firms towards investors, and in response firms introduced CFO positions at the executive level.

The percentage of large US firms with CFO positions as members of the top management team increased from virtually nil at the beginning of the 1960s to more than 80% at the end of the Twentieth Century. CFOs are also increasingly reaching director positions.

A study by the consulting firm Heidrick & Struggles (2014) found that between 2009 and 2013,as many as 17% of all newly appointed directors in US Fortune 500 firms were current or former CFOs. This trend can be assumed to be at least partially due to regulatory changes. In the US, since the Sarbanes-Oxley Act came into effect in 2002, both the CEO and the CFO are required to certify the financial reports of listed firms, which has likely increased the CFO’s importance in comparison to that of other executives.

The term ‘CFO’ is a relatively new one. According to Zorn (2004), it first appeared in 1966 at the firm Dan River Mills. Before this time, executives in charge of US firm’s financial systems held titles such as ‘(executive) vice president of finance’, ‘financial controller’ or ‘treasurer’.

At the beginning of the twentieth century, most UK firms employed few or no professionally qualified accountants, i.e. Chartered Accountants. Instead, they relied on the service of public accounting firms for accounts preparation and audit work. Accountants working for public accounting firms also acted as advisors and non-executive directors in many British industrial firms. he First World War was a driver of change in the accounting profession. During the war, contractors to governments often lacked market prices for outputs. Thus, they relied on costing techniques to establish prices, which included some profit surplus on costs. In turn, the government relied on cost investigation departments, to prevent suppliers charging based on excessive costs (i.e. to prevent profiteering).

This study looked at the role and practice of the chief accountant at brewer Guinness between 1920 and 1940 and finds that many of the functions performed by a modern CFO were performed 100 years ago by the chief accountant – even though he did not occupy a board position.

In summary, the picture that we have of the Chief Accountant is of someone who:

  • learned the trade within the business;
  • was most likely not professionally qualified;
  • managed a large department; and
  • reported to and advised the Board of Directors, and had reporting lines to/from other departments.

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