Welcome to the pressure-cooker world of CFOs. Squeezed by Wall Street and the government to improve forecasts and make their balance sheets more transparent, finance departments have their noses to the grindstone collecting, consolidating, analyzing and constantly updating diverse internal and external data to obtain a clearer forecast of performance. It has never been easy to come up with the right answers, but as technologies advance, there are just fewer and fewer excuses when a CFO fails.

Of course, the debacle with Enron Corp. has only added fuel to the fire under the pressure cooker. Now, when someone screws up, boards of directors–already skittish in such a litigious climate–are much more anxious to hang a name on mistakes early. Shareholders, who have never liked surprises either, are much more ready to believe that they have been swindled. And the Securities and Exchange Commission is much more likely to wonder whether there is some untoward activity being concealed and more to be reckoned with than just a mere missed forecast. Already, in the first two months of this year, the SEC opened a record 49 financial reporting cases, compared with just 18 in the first two months of 2001.

The pressure is not totally new; the job of CFO has been getting harder for years. But since Enron, it's just so much more. CFOs throughout corporate America privately acknowledge that their professional life is changing, that there is a new sense of paranoia that is forcing everyone to check and double-check before they sign off on numbers. "The CFO is in the eye of the storm," says Alan Yong, research director of financial analytics at the Boston-based consulting firm Aberdeen Group. "All executive levels are feeling the increased scrutiny post-Enron, but few to the degree that CFOs are."

Mistakes Prove Costly

"The scrutiny is definitely higher post-Enron, but that is not necessarily a bad thing," says CFO Chellam. "I'm taking leadership steps here to separate Xilinx from others to attract more investors to our stock. We believe investors will be more comfortable owning our stock because of our higher degree of financial disclosure and the simplicity of our financial statements." Xilinx will now disclose cash-flow metrics to Wall Street, in addition to its more conventional financial statements, he notes.

The costs of making a mistake, in terms of both dollars and reputation, are getting quite high: Following a two-year investigation by the SEC, Xerox Corp. reported in April that it must restate four years of earnings and pay a $10 million civil penalty–the largest fine ever levied by the SEC in connection with financial reporting violations. Xerox would neither admit nor deny the allegations of the SEC's complaint, which included claims of civil violations of antifraud, reporting and other provisions of the securities laws.

And there is far more than just the SEC who will be beating down the door in many cases. Last year, 327 class action lawsuits alleging management misconduct were filed against companies, a 60% increase over the number of filings in 2000, according to the Securities Class Action Clearinghouse at Stanford University. And "there are three credit agencies that will aggressively lower the quality of your debt, making it harder to borrow money and squeezing existing lines of credit," Yong says. "Companies now realize if they don't do what they say they'll do, they'll be the ones in the media spotlight. CFOs are compelled to improve earnings predictability – no matter how capricious the business climate."

Information and the flow of information have never been more vital. Given the growing fear that a company might be depending on fraudulent numbers, finance executives are increasingly seeking outside sources or external databases to help them verify the numbers and data their internal machinery is spitting out. "We've got to gain access to virtually every piece of financial information, internally and externally–from our producers, to our customers, to industry market analyses–on a more timely basis than we ever had to before," says Mark Thresher, CFO at Nationwide Financial Services Inc., a Columbus, Ohio-based financial services company with $3.4 billion in 2001 revenues. "And we need to understand the reasons behind this data to reforecast our prospects going forward and take action wherever necessary."

The answer for both Nationwide and Xilinx was to invest in new technology, specifically state-of-the-art planning, forecasting and budgeting systems that produce critical business information on a continuous basis. "Our goal is to provide real-time business information to the right people at the right time to allow for improved decision-making," says Chellam.

Each week, Xilinx tracks incoming orders, incoming shipments against its backlog and how its revenues by line are faring. "We make an estimate going into the quarter, but regularly look at how we're progressing against that," Chellam says. "We focus on nine parameters, including

return on assets, return on equity, revenue per employee, market share and percentage of revenue from new products. Then each month, we take these numbers up and down based on our forecast and make a mid-quarterly update to Wall Street to prevent some level of shock or surprise."

Nationwide boasts it now knows what its earnings essentially will be seven quarters out. "Our rolling forecast allows us to react to the current economic climate to alter our tactics and plans around the way our sales in certain markets and channels perform," explains John Davis, Nationwide vice president of financial operations. "Basically, we make decisions all the time here and not just on a quarterly basis, updating our forecasts monthly and then extrapolating from that seven quarters out."

Tapping into Sales Data

Departments are tasked to unearth any material variances affecting their previous forecasts and then reforecast against that going forward. A resource allocation committee then evaluates the new forecast to determine if dollars must be taken out of respective budgets to offset projected losses in sales and revenues. "Overall, we want to make sure we have pretty much a zero chance of missing our earnings estimates and disappointing shareholders," Davis says.

Linking the sales force more closely to the forecasting process is a best practice at both Xilinx and Nationwide. By gauging sales forecasts on a timelier basis, CFOs can take action to offset lost sales. "Companies want to know what the guys in the field are learning–if sales are coming through or not," says John O'Rourke, senior director of product marketing at Hyperion Solutions Corp., a Sunnyvale, Calif.-based vendor of planning and budgeting software. "They can roll up the forecasts to change their production schedules, product mix, pricing strategy and resource allocation."

More than just sales information is being tapped to improve earnings clarity. Cinergy Corp., a Cincinnati-based utility, wanted verifiable third-party data on the mark-to-market value of its commodity trades. "When you're trading a commodity like natural gas and your only source of data is the counter-party telling you what the trade is worth, I as a risk manager have to decide if that is the right answer," explains Tom Wiles, general manager of Cinergy, which services two million natural gas and electric customers in the Midwest. "Sure, I can collect and consolidate data from a variety of brokers and trading platforms to do this analysis to apply a shape to the forward curve, but who has the time?"

Cinergy now buys third-party market value information from Kiodex Inc., a New York-based energy risk management solutions provider. Raj Mahajan, president and co-founder of Kiodex, says relying on a counter-party for the fair market price–"the guy at the other end of the phone making the deal"–is akin to "smoking your own dope. That is not an independent assessment and investors increasingly want independent assessments." Kiodex provides such independent market data via its valuation tools. "We view ourselves as an agent of transparency when it comes to accounting and hedging transactions," Mahajan maintains.

Since the Enron mess, the phones at Kiodex have been ringing off the hook, he says. "We're getting inquiries from companies not because they want to adopt best practices, but because someone is telling them to do it," he explains. That someone, he surmises, is usually the company's auditors–and in many cases, its new auditors.