Tuesday, 28 December 2010

Why do CFO’s manipulate accounts - 2

Reasons for manipulation of accounts are more complex than the Harvard research (see last blog) acknowledges.

A dominant CEO was on the telephone to the finance director of a subsidiary company. The business was both manufacturer and retailer of a product so they booked a profit in the accounts whenever they transferred a batch from the factory to a shop and another profit whenever the shop sold an item. The year-end was approaching and the group as a whole was performing poorly so the CEO wanted the subsidiary to consign a large quantity of stock from the factory to a temporary warehouse – because there was not enough storage space in the shops - and take the profit. The finance director was using a speaker phone and the CEO did not realise he was talking to a room full of people – which is how I know the story. This case conforms to the Harvard model – the finance director got to keep his job while any benefit went to the CEO.

More recently I was finance director of a medium sized business and kept the monthly profit forecast conservative despite the optimism of my CEO. I did not want to forecast high and deliver low. However, I was less keen for the cash forecast to illustrate our problems because our chairman had a habit of giving grief rather than support. So, my cash forecast showed how I expected to manage the cash – which gave an accurate figure of the outcome, and showed that it was under control. And I reported separately, in the narrative, that cash was tight.

My accountant chairman was able not to ask the critical questions and I avoided getting a regular earful, which always came without any help to improve the situation. The only way out was to improve trading which we were trying to do – having cut costs as far as possible. I was confident that technically we were solvent.

This second case illustrates two things. Firstly that there is a line between an optimistic presentation and impropriety. I believe I kept the right side and when the situation changed I did not hesitate to act appropriately. Secondly a CFO - or any executive - has motives other than personal financial benefit. Having less hassle is a legitimate motive. You believe (or gamble that) things will get better and not worse, so you won’t be caught out. The test of character comes if things do get worse…what then? If you continue to show an optimistic case then you fail the test. If you cross over into active manipulation to hide the truth then you fail big-time.

CFO’s who cover-up bad news have bought time but they don’t use it to get another job. It seems they are sucked in to the deception and feel bound to use the time to solve the problem – even when that is impossible. Maybe, they suddenly realise it is too late and that the shame of the deception will follow them when it inevitably unwinds. I can understand that. You know that things are going to get very bad - you can’t see a way out - so you enjoy the weeks or months before the pain begins by blocking the situation out of your mind and doing whatever it takes to extend the period of calm before the storm.

The lesson - management is a team game. The whole team needs to enagage with and support everyone else. Don't just blame the CFO - it is a dysfunctional team that causes it and stops it coming to light.

1 comment:

  1. Brian

    I really like how in your comment on Part 1 of this topic you termed CFOs as "wishful thinkers".

    A CFO does not drive the operations that make these numbers happen, but they do interpret past, present and future company information to internal and external stakeholders.

    And yes, management is most certainly a team game. The biggest challenge senior management has is to be responsible for their silos, yet communicate and work together at the top to ensure success overall.

    The CFO, as a key member of the top, needs to work together with the others at the top including the CEO to make it work.

    I continually see many CFOs who leave (or are made to leave) when the others at the top cannot work together. A large majority of the CFOs that I speak with speak out internally where necessary and if they feel that they are being pushed to do something unethical, they will leave.

    Samuel Dergel, CA, CPA
    Senior Partner & Practice Leader, CFO Search
    Web: http://www.cfo2grow.com
    Blog: http://www.thefinancialstatement.com
    Aboutme: http://about.me/samueldergel/bio