Here is a sensitive and complex topic - it involves people's personal lives and therefore should not be anybody else's business. Yet it affects our work environment and impacts employees morale. Always! There are no exceptions.
It is not a rare occurrence either. In the past I had a boss who was seduced by his secretary and ended up leaving his family. In another company I had to fire a general manger to avoid a possibility of sexual harassment law suit, while the company's owner was on his second marriage to a woman who was his former secretary. And the list of stories I've heard from my colleagues, associates, subordinates and just friends is endless.
The nature of the boss/secretary professional relationship by itself has a somewhat intimate connotation. They are near each other in the office space. All day long the secretary attends to the boss's needs, frequently takes care of his personal matters, stays by his side when he works late. Add to that the fact that most secretaries nowadays are younger women, as the class of "career personal assistant" is disappearing. Plus, there is the appeal of power and a possibility of material benefits. All this together creates an undeniably fruitful environment for trysts. Hell, we have wonderful independent movies about it.
Unfortunately, it is not as much fun when you actually have to work with this in your face.
I frequently repeat in these posts that private businesses are absolute monarchies. Historically, every single Royal figure had his or hers favorite, i.e. an "intimate companion of a ruler," or, as OED defines it "one who stands unduly high in the favour of a prince." The contemporary "rulers" are just upholding this "fine" historical tradition.
The key here is the unduly power bestowed on the favorite. Again, I don't care about people's personal lives. I really don't! Moreover, if favorites were working ten times harder and their attitudes were twenty times nicer, I would consider that an improvement.
However, that is not what usually happens. In reality boss's secretarial lover stops working altogether. I witnessed a hiring of an "assistant to personal assistant" to patch the hole in the workflow. They become arrogant and acquire nasty disposition towards other people in the office. Frequently they get promoted to managerial jobs they are not qualified to perform with salaries they didn't deserve.
In a small business, even with 500 employees, that's hard to hide. Well, as a CFO or a Controller, you have your own powers and you don't really need to bother yourself with this unless she starts infringing on your scope of command (sadly, that happens too). And yet your position exposes you to the unfairness of the situation in the most explicit way: you are the one who has to sign off her 50% raise; you are the one who has to approve her 12 weeks a year vacation time; those are your direct reports that get mistreated by her.
Talking about terrible frustration!