CFO survey: Taking a deeper dive

The days when a chief financial officer’s role was a 'back-office' job – focused solely on financial reporting and tax return compliance – are long gone.

When EisnerAmper commissioned pfm to conduct a survey of the challenges faced by finance and operational executives of private funds, we were aware of how these senior roles have changed over the past decade. The days when a chief financial officer’s role was a “back-office” job – focused solely on financial reporting and tax return compliance – are long gone.

We understand that our private fund CFO clients are more sophisticated executives who add value to all aspects of a private fund operation, while still bearing much of the operational burden. Our annual conversations with clients have evolved into an ongoing dialogue throughout the year about the myriad of issues that the CFOs and chief operating officers are tackling: investor relations, valuation methodologies and tax structuring, regulatory compliance and internal control best practices, among many others.

In this era of big data, we wanted to take a deeper dive and learn more about exactly how roles have been changing. The idea was to go beyond our informal observations and gain an understanding of what today’s back office really looks like: how exactly has the CFO role changed?

This requires not just a few casual observations, but detailed insight into exactly what has changed and what the drivers are. To gain such extensive insight, we partnered with pfm on an extensive survey of private fund finance and operational executives that covers various aspects of today’s finance and operational activities.

The survey sought to define the role of today’s CFO amid greater disclosure demands, additional compliance requirements, increasingly complex US and global tax reporting, and a steady stream of new regulatory requirements. The goal was to establish benchmarks for the back office in order to give CFOs the necessary insights to enable them to act across a variety of issues, ranging from deciding which services to outsource to preparing to address external cyber-threats.

MULTIPLE ISSUES

More than 150 private fund CFOs, CCOs, COOs, controllers and tax directors completed our survey, with CFOs of private funds making up more than 60 percent of the sample.

The multiple-choice survey covered a range of internal, external and regulatory issues facing the private equity industry. It spanned back office versus front office, compliance and regulations, cybersecurity/privacy laws, proposed legislation and risk preparedness. The survey focused on how, in light of industry changes, finance and operational roles and responsibilities have recently changed.

The survey was conducted first in 2016, then again in 2017. While additional questions were added in 2017, the survey remained essentially the same as the previous year’s edition.

KEY FINDINGS

Here are the highlights of the survey, along with related observations:

More than 20 percent of the private fund firms had in-house operations/back-office teams of more than 10 employees in 2017, up from just under 9 percent in 2016. This shows the growth of the back office and reinforces the industry’s commitment to having the requisite back-office professionals to support ever-increasing operational, compliance and regulatory demands.

More than 40 percent of private fund firms have had or are undergoing an SEC examination in 2017, up from approximately 25 percent in 2016. Additionally, the number of respondents feeling “confidently prepared” rose sharply. While we expect the level of examinations to continue in the near term, this data merits constant monitoring as the geo-political climate evolves.

Firms are delegating less to outside professional advisors to address key compliance concerns. As firms build in-house compliance capabilities, it appears they are assuming more of the regulatory and compliance work that was previously outsourced. This is similar to how their public company colleagues developed in-house resources to maintain compliance with US anti-fraudulent accounting law Sarbanes-Oxley.

Firms consider themselves only “moderately prepared” to handle external security threats such as phishing/pharming, identity theft, social engineering, denial of service, and ransomware/malware. This response is somewhat expected. Due to the pervasive, high-profile media reports surrounding security issues, many feel the bad actors are technologically one step ahead and see themselves as susceptible to a security breach.

US institutional investors are the most likely group to increase pressure on the back office vis-à-vis due diligence concerns. While regulatory demands have been increasing globally, the fact that US institutional investors are at the forefront of due diligence demands should inform private fund managers about the requisite back-office resources that are necessary to be responsive to this vast pool of US capital. Managers who fail to meet the US investor demands may find themselves challenged to raise capital.

No doubt as regulatory environments change and technology evolves, so too will the roles and responsibilities of the modern CFO. We look forward to continuing our market research and providing key insights as they develop.

This article is sponsored by EisnerAmper and appeared in our supplement CFO 2.0: The New Frontier published with Private Funds Management in November 2017.