Pre-award specialists are organized by department/unit. To find all of your pre-award specialists, select Pre-Award Constituency List below, and search for your unit using either the alphabetical list or search box.
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Post-award specialists are organized by sponsor. There are two ways to find your account specialist:
- Select SPAA Account Assignments below, and search for your award’s sponsor using the account number listing.
- Visit the GB1 screen in Define. Locate the “Acct Ct” (account contact) field in the bottom left corner of the screen. That field will list the name and number of the account specialist for the award.
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All proposals begin with the submission of a Proposal Review Form (PRF) to the Proposal Team. Upon submission of the PRF, a Proposal Specialist will be assigned to the proposal. The Proposal Specialist will work with the PI to ensure that the proposal meets the requirements of the sponsor, the University, and the State of Texas.
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When new awards arrive at OSP, they are assigned to either the Contracts & Agreements team or the Grants & Awards team. If the award terms require negotiation, the award is sent for processing to the Contracts & Agreements team; all others are sent to the Grants & Awards team. These teams will also manage set-up of any related subawards or subcontracts, and after award set-up these teams will manage all contractual/administrative contact with the sponsor.
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Once the Award has been fully executed (signed/agreed to by both parties) it is sent to Sponsored Projects Award Administration, or SPAA, for account setup. SPAA’s services include sponsored project award account (26- account) setup, sponsor billing and collection, financial reporting to sponsors and outside agencies, certain requisition review and approvals, award final closeout, audit response and support, and training. See Sponsored Projects Award Administration (SPAA) Account Assignments below.
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Reproduced with permission. Originally appeared in Financial Management and Accounting for the Construction Industry. © 2015 LexisNexis Matthew Bender.
Roles and Responsibilities of the Financial Manager | Members of the Management Team | Responsibilities to Employers | Responsibilities to Creditors | Ethical Considerations
Roles and Responsibilities of the Financial Manager
This information will assist in understanding the roles and responsibilities of construction financial managers. Specifically, this information is designed to assist:
(1) financial managers who are new to the construction industry;
(2) newly-promoted construction financial managers;
(3) existing construction financial managers who seek to broaden their influence on the success of the organization; and
(4) construction company owners who are considering the skills, attributes, and sophistication needed in the financial manager position.
Construction financial managers sometimes wonder how their duties, responsibilities and relations with others within the organization compare to other construction financial managers. Similarly, construction company owners sometimes wonder what skills are needed and what expectations should be held of their construction financial manager. This information will help provide the answers to such questions. We will review how a construction financial manager works with the senior management team to accomplish financial goals while helping other managers accomplish their goals, how financial managers administer the finance department, their responsibilities to the company’s owners and creditors, their administrative responsibilities and the related ethical considerations.
In today’s environment, the role of the financial manager in a construction organization is essential to organizational success, and more importantly, is vital to avoiding failure. That may sound extreme, but in many circumstances, competition is so fierce and margins are so thin, reliable financial information and analysis certainly can make the difference between success and failure.
The construction financial manager’s role may vary from company to company, partly because different financial managers have different skills and personalities. The role also varies depending on the size of the company. A construction financial manager’s background often indicates the areas in which the manager will concentrate. For example, a construction financial manager whose background is in construction operations (estimating and project management) initially will concentrate on the proper recording of job costs. A construction financial manager whose background is in public accounting probably will initially emphasize financial reporting and income tax planning. The financial manager should recognize these influencing factors and make efforts to compensate for any deficiencies.
The skills and personalities of the other members of the management team also affect the role of the construction financial manager. The majority of a company’s administrative work can be performed in any department and will be allocated among departments partly based on the skills and personalities of the respective department managers. For example, most construction financial managers feel that cash management is their responsibility. If the other management team members share this feeling, responsibility for cash management probably will be assigned to the finance department. However, if another management team member feels that responsibility for cash management should be shared, some compromise will be made. To a great extent, sharing of responsibilities depends on the skills and personalities of the management team members. Successful financial managers respect the need for compromise in sharing responsibilities.
As already mentioned, the size of the company frequently affects the role of the financial manager, because roles and responsibilities are more specialized in larger companies than in smaller companies. In small companies, responsibilities are assigned to a smaller group of managers and, accordingly, each manager must handle a wider range of responsibilities. For example, the financial manager in a small company with three senior managers (owner, operations manager and finance manager) will typically be responsible for all administrative and financial tasks. The other two senior managers will typically concentrate on marketing, estimating and project management. In larger companies, with responsibilities assigned to a larger group of managers, each manager will be assigned more specialized responsibilities. For example, the financial manager of a large company with several senior managers often has limited responsibility for administrative tasks involving contact with customers and subcontractors. The department with primary responsibility for customer and subcontractor relations (usually the construction operations department) will prefer to be the primary contact in order to minimize the possibility of misunderstandings between the parties. Because there is no one standard set of construction financial manager responsibilities, each financial manager should be alert for areas of responsibility that are not clearly defined in the organization. The financial manager should take the initiative in assuring that all significant responsibilities are assigned.
Members of the Management Team
Management Team Members’ Objectives
The financial manager’s effectiveness depends on the manager’s ability to contribute as a member of the management team. Serving as a management team member means helping the other managers achieve their goals, while at the same time satisfying the financial manager’s direct responsibilities.
To assist the other managers in achieving their goals, the financial manager should first consider what the other team members need from the financial management function in order to achieve their objectives. For example, the financial manager should understand that the manager of the estimating department relies on the accounting department to maintain accurate historical job cost records. The estimating department uses these records to prepare estimates of future jobs. In keeping the accounting records, the financial manager may periodically prepare accrual entries when preparing the company’s financial statements. When the financial manager prepares these accrual entries, the manager should consider the impact these accruals have on job cost records. If accrual entries impact the usefulness of the job cost records to the estimating department, the financial manager should implement procedures to ensure that the accruing of job cost expenses does not interfere with the use of the records by the estimating department. Another example is the project managers’ need to track payments to subcontractors on a cash basis. Recording accruals of subcontract expenses may impede the project manager’s ability to use accounting records to track cash disbursements to subcontractors. The financial manager should take the initiative to think these issues through and should ensure that other departments’ informational needs are met.
The financial manager should also be sensitive to other department managers when distributing internal financial information such as financial statements, budget variance reports, and comparisons of job margins “as bid” with “as earned.” In most such situations, the financial manager should review internal financial reports with the other department managers before reviewing them with the chief executive officer, partly because the other department managers may be asked to explain variances in the financial reports. Beyond simply showing consideration for the other members of the management team, previewing information regarding various departments with the managers of those departments will help ensure the accuracy and reliability of information. The financial manager should ensure that internal financial reports are a resource to all members of the management team. Yet, at the same time, financial managers should question information that appears contradictory or doesn’t make sense. While it is incumbent upon the financial manager to be an effective member of the management team, it is equally incumbent upon the financial manager to ensure the integrity and reliability of the financial information.
Financial Manager’s Objectives
The financial manager’s responsibilities and objectives include monitoring the company’s profitability, liquidity, and solvency while ensuring timely and accurate financial reporting and making sure that the company has established and maintains an effective set of internal accounting controls.
The financial manager is responsible for monitoring and accurately reporting company profitability. This task may be divided into four components:
(1) job profitability;
(2) unapplied contract related costs;
(3) general and administrative expenses; and
(4) financing related expenses and investment income.
The financial manager should ensure that margins on jobs are maximized through cost recovery. As used here, “cost recovery” refers to those situations in which the proper recording of job costs affects the revenues earned. The clearest example is time and material contracts, under which the contractor bills allowable costs to the customer, with a percentage or stipulated amount added for overhead and profit. For these contracts, neglecting to record an allowable job cost has the same effect as neglecting to bill for the costs, overhead and profit involved. The opposite situation is fixed price contracts, for which the amount billable to the customer is the fixed price, and maintaining job cost records has no direct effect on the amount billed. In between these two examples are the more common contracts that are either (1) fixed price contracts with provisions for change orders or (2) guaranteed maximum price (“target price”) contracts that allow for the allocation of any net cost savings between the contractor and the customer. In these situations, the proper recording of job costs is important because costs incurred are the basis for change order and cost savings calculations. It is important to maintain job cost records even for fixed price contracts, because such records are needed for project management, financial reporting, income tax reporting, performance evaluation, and historical costs used in future estimates and may also be needed to support a request for an extra or a contract claim.
The financial manager should ensure that job cost records are maintained that: (1) are supported by independent documents (time cards, vendor and subcontractor invoices or equipment job cost records); (2) are consistent with each individual contract; and (3) properly reflect all costs incurred.
Supporting documentation may be needed to substantiate job cost records for an audit of the contract by the customer, by the state or federal income tax authorities or by a CPA retained by the company. Customers and income tax authorities believe that because the contractor is in a position to maintain independent documentation to support job costs, the contractor will maintain this independent documentation for all supportable job costs. Accordingly, they often take the position that any costs the contractor is unable to support with independent documentation should be disallowed (deducted from the amount billable under the contract).
Financial managers are likely to face certain challenges when administering several different contracts simultaneously. Accounting and other administrative personnel sometimes assume that different construction contracts have more in common than is actually the case. The financial manager should ensure that employees are aware of the differences between the various contracts that are in progress. For example, if the company typically performs only fixed price contracts, employees may not be sensitive to ensuring that all allowable expenses are charged to jobs. If the company obtains a guaranteed maximum price contract, the financial manager should ensure that everyone involved is aware of the differences between job costing the guaranteed maximum price contract and the company’s fixed price contracts.
As noted above, it is important to charge all allowable costs to the appropriate jobs; identifying the allowable cost is one way to ensure that this is done. Some costs, by their nature, are clearly either job costs or overhead expenses. Other costs (unless specified in the contract or governmental purchase regulations), such as the cost of company-owned equipment, materials taken from the company’s inventory, and the variable portions of liability and worker’s compensation insurance, may not be clearly defined as either billable or non-billable. In some cases, the contractor must make an arbitrary decision regarding how to charge these costs. For example, a company-owned truck that is used on several jobs over a period of four or five years could be charged to the jobs several ways. One method is to charge the jobs with the cost that would have been incurred for renting a similar truck for the time it was used. Another method is to charge the jobs with the truck’s maintenance and depreciation costs, allocated to the jobs in a systematic manner. Because most private construction contracts do not specify the method to be used to charge the job for contractor-owned equipment, the contractor must make a decision in this matter. The financial manager should review these matters in detail to ensure that the contract is complied with and all allowable costs are charged to jobs.
The financial manager should also be familiar with expected gross margins on each job and should compare job margins “as bid” with job margins recorded as the job progresses and at job completion. The results of these comparisons should be discussed with the other management team members responsible for job performance to ensure that the team knows what job margins are being achieved.
The financial manager should understand the company’s method of estimating job costs. The manager should ensure that those estimates that are based on accounting records are calculated properly and that everyone who uses the estimates understands how the accounting information included in them is computed.
Unapplied Contract Related Costs
As previously discussed, the company may have additional items of expense which are related to contract performance, but which are not charged into job expense, or an estimate may be charged to job expense, but actual expense may differ from estimates. Beyond the examples already discussed, this may include project manager salaries, year-end bonuses, warranty expenses, and similar items which perhaps are not charged to projects as they are incurred, yet are expenses that are related to overall project operations. In fact, it is not uncommon for a contractor to estimate an average gross margin on projects which is higher than the gross margin on its financial statements. It is imperative that the financial manager not only understand the project related costs that are included in job costs, but also the unapplied contract related costs that impact financial statement gross margin and be able to reconcile between gross margin in the job cost system and financial statement gross margin.
General and Administrative Expenses
The financial manager should ensure that general and administrative expenses are reviewed and controlled by management. The financial manager should consider using a budgeting system in which general and administrative expenses are forecast, approved, and compared with actual costs as incurred. The financial manager should ensure that the budgeting system is used properly by the management team.
Financing Related Expenses and Investment Income
The financial manager should ensure that the company earns the maximum return on its liquid assets and incurs the minimum interest expense on borrowed capital. Many financial managers consider this (treasury) function their primary opportunity to contribute to the company’s financial performance. While many financial management responsibilities are oriented toward minimizing or avoiding expenses, the treasury function is an opportunity for the financial manager to earn income for the company. Often, the financial manager’s unique viewpoint as administrator and treasurer enable the manager to identify opportunities to increase cash flows to the company. Because the financial manager is particularly sensitive to the time value of money, the financial manager may identify situations in which cash disbursements may be deferred or cash receipts accelerated without negative impact on the company’s vendors, subcontractors and customers. While most people are generally aware of the time value of money, the financial manager’s unique position within the company often presents the manager with opportunities that are not apparent to others.
While much space here has been devoted to the topic of profitability, managing the company’s liquidity is just as important (and sometimes even more important) than ensuring adequate profitability. Having sufficient liquidity is essential to the viability of the company. The financial manager must be sufficiently familiar with company operations to be able to foresee future cash needs and to plan for meeting those needs. The financial manager must also forecast and monitor the company’s financial condition to ensure that the company remains creditworthy and is able to obtain surety bonding as needed. The financial manager normally meets these needs by forecasting the company’s financial condition and financing requirements and periodically comparing these forecasts with actual conditions. Further, the financial manager is responsible for ensuring that billings are prepared timely, receivables are collected, and suppliers and subcontractors are paid at the appropriate interval. Along the way, the financial manager should keep the other members of the management team informed of the company’s financial condition.
The financial manager is responsible for the company’s internal and external financial reporting. Internal financial reporting consists of such items as the financial statements, budget variance reports and job financial performance reports that management uses to monitor the company’s financial status. External financial reporting consists of financial statements prepared using generally accepted accounting standards, plus any specific reports that bankers, equipment lenders, sureties and prospective customers may request.
The financial manager may find it useful to prepare written summaries of the significant accounting policies followed, primarily to assist others within the company in complying with the company’s practices. In the absence of written accounting procedures, the company may be dependent on the presence of the financial manager to record transactions and prepare financial statements. An example is the company’s system of assigning job numbers. Most companies adopt systems under which the individual job number digits indicate such matters as the type of contract used for the job, the project manager assigned, and the year the contract was signed. Unless the details are put in writing, the job numbering system is partly dependent on the person who designed it. Another example is the company’s policy for accounting for fixed assets. Most companies adopt threshold amounts below which assets purchases are charged to expense, standard methods of depreciating assets in the year of purchase and the year of disposal, standard economic lives for classes of depreciable assets, etc. These details are communicated best in writing. In the absence of written procedures, financial managers may find they have to periodically “reinvent the wheel,” because of uncertainty regarding details of the accounting policies that were used in the past.
Financial managers often organize the financial reporting process by preparing a closing schedule that lists individual tasks to be performed, the person responsible and the scheduled completion date. A closing schedule facilitates organizing the individual tasks and allocating them among the employees involved. Many financial managers have found that many of the tasks involved in closing the general ledger and preparing financial statements may be performed before the balance sheet date. This allows the work to be spread over a greater period and provides for completion of the financial statements at an earlier date.
Internal Accounting Controls
The financial manager should ensure the company has an appropriate system of internal controls. Internal controls can address risks in three areas: financial reporting, regulatory compliance, and operations.
1. Internal Controls over Financial Reporting: Financial Reporting controls help mitigate risks in the area of accuracy of management/financial reporting, fraud, and safeguarding of assets. These controls are designed to help prevent a material misstatement in the company’s financial records from occurring, or, if one occurs, from remaining undetected. In addition to assurance that the company’s financial reports are accurate, these controls add reliability to the company’s accounting system. This is important because an error that may be immaterial to the company’s financial statements may be material to the estimating or construction operations departments. Financial reporting controls are also designed to help prevent and/or detect loss from fraud or not safeguarding company assets (i.e. contracting, project management controls, etc.).
Internal controls over financial reporting primarily consist of account reconciliations, review and approval of entries/financial reports, and segregation of duties. A major consideration when allocating accounting responsibilities is to ensure that employees do not have unsupervised access to assets and to the accounting records related to the same assets. For example, the employee who prepares accounts payable checks has “access” to the disbursing checking account. Accordingly, an internal accounting control over this employee’s access to the checking account would be to prevent the same employee from having access to the accounting records for the checking account. Access to accounting records includes the ability to conceal unauthorized transactions by alteration of the related bank account reconciliation, journal or other entry to adjust the checking account balance. In companies with small accounting departments, where such segregation of duties is impractical, management oversight may be substituted for segregation of duties. Continue with the example of the accounts payable employee with access to the disbursing checking account. If it is impractical for another employee to prepare the bank account reconciliation for that account, the financial manager could use the compensating control of reviewing the bank reconciliations or of having another employee do so.
2. Internal Controls over Regulatory Compliance: These controls are designed to help prevent and/or detect areas of non-compliance with regulations.
3. Internal Controls over Operations: These controls are designed to help the company achieve its overall strategic and operational objectives. For example, if a construction company has a safety objective, these would be the controls in place to help the company achieve this objective.
Financial managers sometimes prepare a list of potential accounting errors and the related internal controls over financial reporting to assist in evaluating these controls. This procedure may also be useful in detecting conflicting responsibilities and other opportunities for improvement in the allocation of accounting duties.
Responsibilities to Employers
Successful financial managers have learned that, to fulfill their responsibilities to their employers, they must act as their employer’s representative. This means that the financial manager goes beyond the technical tasks of acting as treasurer and preparing financial reports to acting on the employer’s behalf in general. The financial manager’s primary responsibility is as the employer’s representative for financial matters, but is also inclusive of all areas of management. Today’s financial managers in a construction company will impact many areas beyond finance and accounting, and must remember their responsibility to their employers.
In the financial manager’s role of custodian of the company’s liquid assets, the manager must ensure that the assets are safe from theft and misappropriation. The financial manager should ensure that, to the extent liquid assets are invested, the company’s owners understand and approve the risk(s) involved. Documentation of the risk management strategy for the treasury function is important to help mitigate and plan for any issues.
In the financial manager’s role of preparer of the company’s financial reports, the manager must ensure that financial reports prepared for the company’s owners and their representatives are accurate, timely, and complete. If the owners are not familiar with the accounting theory and policies used in preparing their company’s financial statements (i.e., accrual versus cash basis, details of percentage of completion), the financial manager should explain these theories and policies. The financial manager should also explain and obtain approval for the significant judgments and estimates the manager makes. The financial reporting policies should be well documented and updated for new accounting pronouncements or new lines of business the company has started.
Responsibilities to Creditors
The financial manager is often the company officer responsible for maintaining the company’s relationships with banks and sureties. Other creditors could include leasing companies or other lenders to the company. The financial manager should be aware of the company’s responsibilities to them.
The relationship of a bank to a construction company is similar to the customary relationship between banks and other commercial customers. Banks typically offer checking accounts, deposit services, short-term investments and loan services to construction companies. Additionally, many banks are offering services that help strengthen internal control around banking such as Postive Pay verification, remote deposit, and others. In administering these facilities, the financial manager’s responsibilities include complying with the terms of the agreements between the bank and contractor.
The financial manager should compare the company’s banking relationship with the marketplace to ensure that the company is paying only competitive rates and fees for the facilities it uses. The financial manager can contact competitor banks and other construction financial managers to identify competitive rates and fees. The financial manager should also be monitoring the financial strength of the company’s bank to help protect the company.
The relationship of a surety to a construction company is principally that of a creditor. Sureties guarantee, for a fee, that the contractor will perform a specific task. The surety normally has recourse against the contractor’s assets in the event that the surety suffers monetary damages. However, the surety does not offer insurance, because it does not assume the risk of loss. The surety incurs permanent loss only if the contractor’s assets prove insufficient to reimburse the surety. Since the surety guarantees the contractor’s performance, the surety establishes a financial and operational reporting system with the contractor. This reporting system is designed to keep the surety informed of the contractor’s financial condition and operations. From the financial manager’s perspective, reports that are prepared for the company’s surety are similar to reports prepared for a creditor. The financial manager’s responsibilities for preparing reports to the surety are usually set forth in the agreements between the surety and contractor.
The financial manager should be aware of how sureties perceive contractors. From the surety’s viewpoint, backlog creates risk—the more responsibilities the contractor has (i.e., the more incomplete work in progress), the greater the risk. The financial manager should keep in mind that the surety’s job is essentially risk management. Experienced construction financial managers have found that the company’s ability to bond work is affected by the surety’s perception of how well the contractor is managing work-in-progress. No surety will bond additional work for a contractor that is losing control of current projects. To ensure that the company has adequate bonding, the financial manager should ensure that the company’s project control system is operating properly and that the surety is familiar with the company’s project control system.
Some financial managers have adopted the practice of conducting a year-end review of the company’s operations, and financial position for sureties and bankers. A common approach is to arrange a meeting of the company’s surety, banker, general counsel, certified public accountant, and senior management at which the company’s financial position, current-year operations and projections for the coming year are reviewed and discussed. Large contractors generally hold such meetings. Accordingly, a smaller company that conducts such meetings gives a significantly more experienced and professional appearance than do other small companies. In addition to providing a forum for communicating information about company operations and financial position, these meetings create a feeling of teamwork among the outside professionals and between them and the company’s senior management.
In addition to the financial manager’s administrative responsibilities, the manager is also responsible for supporting the company’s ethics policies. This is due to the position of trust the financial manager occupies and the integrity expected of the financial manager. Integrity is an element of character that is fundamental to trust and it is the benchmark the financial manager uses to test decisions.
Integrity requires the financial manager to be honest and candid in all matters, and may not be subordinated to the financial manager’s personal gain or advantage. A financial manager who acts with integrity may commit inadvertent errors or have honest differences of opinion with others, but integrity does not accommodate deceit or subordination of principle.
Position of Trust
Although financial managers believe their qualifications are based on knowledge and technical skill, their effectiveness is at least equally dependent on their reputation for fair dealing and independent judgment. Employers and others place great trust and confidence in financial managers. Many construction company owners cannot accurately evaluate the technical proficiency of the company’s financial manager, but they can and do evaluate the financial manager’s reputation and judgment. Creditors rely on the financial manager to report the company’s financial condition, operations, contingencies and opportunities accurately and completely. Creditors base their evaluation of the company partly on their opinion of the financial manager’s honesty and objectivity. The financial manager should act in a manner consistent with this trust.
Conflicts of Interest
It is important that financial managers avoid conflicts of interest, both in appearance and in fact. Because others inside and outside the organization must trust the financial manager, a financial manager who impairs this trust loses effectiveness.
Actual conflicts include certain situations in which a financial manager receives compensation or other benefits that have not been approved by the company’s owners or other affected parties. A conflict of interest may also exist if the financial manager has a relationship that could be viewed by the financial manager’s employer or another party as impairing the financial manager’s objectivity. A basic test to identify such situations is to consider whether the parties involved would be comfortable with the situation if it were disclosed.
For example, a financial manager may have personal checking accounts at the bank used by the company. If the financial manager does not benefit from the company’s maintenance of accounts at the same bank, there would not be an actual conflict. If, however, the financial manager negotiated favorable terms for the personal accounts based on the company’s maintenance of accounts at the same bank, the situation would represent a conflict of interest. The company’s owner would normally assume that the financial manager maintains the company’s banking relationships based on the company’s (and the owner’s) best interests. The company’s owner probably would not approve of the example situation, not because of the benefit received by the financial manager, but because the situation creates doubt as to whose interest the financial manager is representing. Similarly, the company’s banker would probably consider the financial officer’s request for favorable terms on the personal accounts as improper, and the banker’s impression of the financial manager could be impaired. As with the owner, the banker’s disapproval would not be based on the benefit received by the financial manager, but on the banker’s uncertainty as to whose interest the financial manager is representing. The amount of benefit derived is often beside the point. If the parties involved are not comfortable with the situation, the financial manager’s usefulness to the company is impaired.
The test of whether the parties involved would be comfortable if the situation were disclosed is a minimum test. Some situations pass this test, but still represent a conflict of interest. That is, some situations may represent conflicts of interest although the financial manager has fully disclosed them (or received permission to enter them). These situations arise when there are parties who are only indirectly affected by the situation. Parties who are indirectly affected are individuals who believe they are affected when they are not. For example, suppose the financial manager asks the company owner if the financial manager could spend some weekend time assisting one of the company’s subcontractors with income tax planning. If the company owner agrees, the financial manager could conclude that all parties involved agree with the arrangement, and there is no conflict of interest. This would be true, with respect to the parties directly involved (the company’s owner, the financial manager and the subcontractor). However, another subcontractor, who competes with the subcontractor the financial manager plans to assist, may view this situation differently. That subcontractor may believe the financial manager will become more comfortable with the subcontractor that is receiving the financial manager’s assistance and this will affect the financial manager’s judgment on bid day. As with the example of the financial manager’s bank accounts, the uninvolved subcontractor’s disapproval would not be based on the benefit received by the financial manager, but on uncertainty as to whether the financial manager is free of bias involving selecting subcontractors.
Other examples of potential conflicts include:
(1) a financial manager’s asking company employees or subcontractors to work on the financial manager’s residence;
(2) a financial manager’s personal use of company-owned assets; and
(3) a financial manager’s accepting a business opportunity (such as an investment opportunity) that should have been, but was not, offered to the company or the company’s owner.
Business Opportunities Accrue to the Employer
Opportunities related to the financial manager’s employment accrue to the benefit of the employer, not the financial manager. For example, assume that one of the company’s customers offers the financial manager an opportunity to invest in a real estate project. The financial manager may believe that, because the risk and the potential reward involved appear to be balanced, the financial manager is free to invest. However, the financial manager’s employer may feel otherwise. The employer may believe the customer offered the opportunity to the financial manager to win the financial manager’s support in transactions between the customer and the company. As with many ethical issues, there may be no way to determine if the company owner’s suspicions are justified. For this reason, financial managers should ensure that their employer approves of any such investments.
Another example is of the financial manager being offered complimentary airline tickets by the company’s travel agent. Again, many employers would expect the financial manager to make the tickets available to the company before accepting them personally. Likewise, free or discounted hotel rooms and event tickets that are offered to the financial manager should be offered to the company rather than accepted personally. A useful test of particular situations is to consider whether the company owner would expect the item in question to be offered to the company first. The financial manager probably should “play it safe” and assume the item in question is being offered to the company rather than to the financial manager.
Appearance of Conflicts
The appearance of conflicts includes situations in which the financial manager does not receive significant compensation or benefit, but the situation may appear otherwise. Continuing with the example of the financial manager with personal checking accounts at the bank used by the company, any benefit negotiated by the manager would probably be insignificant. However, if the company’s owner did not approve of the manager’s arrangement in advance and learned of it unexpectedly, the company owner may suspect that the situation is the “tip of the iceberg.” That is why experienced financial managers find that the best practice is to avoid the appearance of conflicts of interest as well as actual conflicts.
Other examples of situations that create the appearance of conflicts include:
(1) a financial manager’s acceptance of gifts from business associates; and
(2) a financial manager’s awarding company business to individuals or businesses with whom the manager has ongoing personal transactions or relationships.
Dealings with Employers
In certain situations, the company’s owner(s) themselves may pose an ethical dilemma for the financial manager. For example, suppose the company is in a construction joint venture and the agreement provides that each of the partners will charge the joint venture for any costs they incur related to the joint venture contract. Further suppose that the financial manager was involved in negotiating the joint venture agreement and the question of “costs incurred” was discussed and determined to mean only out-of-pocket (i.e., cash) expenditures. If the company’s owner instructs the financial manager to estimate the market rental value of company-owned equipment used on the joint venture contract and to charge the calculated amounts to the joint venture as costs incurred, the financial manager is presented with an ethical dilemma. The company owner may argue that, because the company has the option of renting equipment (rather than using company-owned equipment), the company is justified in charging the market rental rate for any company-owned equipment used on the contract. The company owner may believe that, because the owner is responsible for both the financial manager’s actions and the company’s compliance with the joint venture agreement, it is reasonable for the company owner to resolve the financial manager’s questions. That is incorrect—the employer cannot assume responsibility for the financial manager’s ethical behavior. The financial manager bears that responsibility alone. Employees answer to higher authority than their employers and supervisors. Although employees should advocate their employer’s interests whenever possible, there are limits. Employees cannot, directly or indirectly:
(1) violate local, state or federal laws; or
(2) violate contracts and agreements between the employer and other parties; or
(3) act in any way that is dishonest or misleading.
In the example situation, the financial manager should attempt to reconcile the company owner’s and the financial manager’s opinions by seeking the other joint venture partner’s agreement with charging market rents for company-owned equipment. If that cannot be done, the financial manager should inform the employer that the employer’s request would violate the joint venture agreement and, accordingly, the financial manager cannot do as the employer requests. However, the financial manager is also well-advised to exercise poise, tact, and humility whenever a hard line must be drawn on an ethical issue like this one. Many, though certainly not all, employers who may initially consider crossing an ethical boundary can be appropriately swayed to stay on the right path when they are confronted with an earnest and sincere concern for doing what is right for the business; however, the same employer may actually become emboldened in their stance if they feel that they have been confronted with self-righteous indignation. Though the financial manager’s core position is unchanged in either circumstance, his or her communication style can have long-lasting implications on the employer/employee relationship—either positive or negative.
Other examples of dealings with company owners that can present ethical issues include:
(1) a company owner instructing the financial manager to have the company pay (and deduct for income tax purposes) nonbusiness expenses incurred by the owner; and
(2) a company owner instructing the financial manager to misrepresent information presented to the company’s bank or surety.
Dealings with Co-Workers
Another category of ethical issue is the financial manager’s dealings with co-workers. The financial manager should set an ethical standard that exceeds legal requirements and serves as an example for others within the company. There are numerous opportunities to do this. Whenever the financial manager hires an employee, the financial manager should fully comply with both the letter and the spirit of equal-opportunity laws in order to create an environment where there is a high standard for fairness in employment opportunity. When the financial manager addresses compensation issues, individuals should be rewarded based upon their individual performance, the value they bring the company as a whole, and compliance with company policies and expectations. Friendships, personal preferences, and favoritism should never enter into the equation when setting individual compensation. When preparing his/her own expense report, the financial manager should apply a strict and conservative interpretation of company policy to personal expense reimbursement requests. If any doubt ever exists, the financial manager should seek approval in advance from the company president or equivalent position of higher authority. In fact, the best practice for expense reimbursements for the financial manager is to always have the financial manager’s expense reports approved in advance by a position of higher authority. Lastly, the financial managers should be beyond reproach in avoiding personal relationships with co-workers. In each of these areas, co-workers are very sensitive to such issues, and will take the financial manager’s conduct as a sign of what is expected of them. Financial managers have found that setting the proper example facilitates enforcing ethical standards.
Dealings with Creditors
A final category of ethical issue includes the financial manager’s dealings with bankers and sureties. As noted above, the company’s creditors trust the financial manager to fully and completely disclose matters of interest to them. Experienced financial managers have found that it is in the company’s interest to disclose the actual and potential issues that will affect the company. Creditors are very sensitive to this issue, and classify financial managers depending on the degree of trust they earn. For example, if a creditor believes that a financial manager will only fully disclose negative issues when the financial manager is forced by circumstance to do so, the creditor may conclude that the financial manager is not reliable in disclosing information the creditor needs. The creditor may see this as a lack of cooperation and good faith on the part of the financial manager. The financial manager in this situation loses effectiveness in dealing with the creditor. The solution to the issue of disclosures to creditors is for the financial manager to determine the degree of disclosure the creditor expects and (with the company owner’s understanding and approval) for the financial manager to meet the creditor’s disclosure expectation.