Strategy & Operations » Governance » Dealing with someone else’s accounting mess

The sympathy in some quarters for the young Pakistani fast bowler alleged to have been tricked into spot-fixing in cricket matches brings to mind the plight of a finance director who joins a board, only to find that the company’s accounting is not up to their standards. Trying to be part of the team, wanting to be seen as contributing to the growth of the business, the new FD can face several large obstacles to dealing properly with past and continuing accounting issues.

The sort of things the new FD can discover range from early income recognition or soft assets of dubious realisable value through to control weaknesses or even outright fraud. The obstacles to prompt and proper action can be many and varied. The FD may face outright denial from the rest of the board that anything could be wrong. They may face overt bullying along the chorus line of “you will cause us to breach covenants”, or “you could cost 3,000 people their jobs”. When really pressed, there are boards that will bring out the more pernicious and psychological defence: “I thought you were meant to be very smart: surely you can find a way through this?” And that is on top of “that’s just the way it is done in this industry”. Such corporate mendacity puts the FD in a very difficult position.

If this sounds like you, what’s needed is to line up a number of allies. Think through the possible reactions to the news of what you found from the chairman, the chief executive, the senior independent director and the audit committee chairman (presuming they are not aware of the problem). What about the auditors, brokers and financial advisors? What are the analysts and shareholders saying – and are they being heard in the boardroom? Without confidence in at least some of these critical parties, and their wholehearted support of you in return, you will be very lonely indeed.

What are such an FD’s options? Be prepared for immediate resignation to be spun your way as you are suddenly deemed not up to the job or viewed out of n owhere as someone who is not prepared to put in the effort to tackle the problems. Deciding to stay and attempt to fix it over the next few years is an even riskier strategy as events may not allow enough years. And after the FD’s first compromise, it becomes increasingly harder not to do so again the next time. The pressures faced in such circumstances are enormous and integrity – the ability to keep saying no – will be tested to the limit.

What that FD may not appreciate, unless one or more of the potential allies mentioned above plays a proper supporting role, is how strong their position can be in these circumstances. Taking your recommendations for change to the board and asking each and every board member if they are happy for it to become public that they opposed the FD’s recommendations on accounting (without breaching any confidentiality on what those matters are, of course) is a fastball they will find difficult to dodge. If you are simply outvoted, you then have a statement to make that cannot be denied: such a realisation by the board and its advisers should result in a reality check, allowing the FD’s integrity and standards to win out. However, where that doesn’t happen, an FD is unlikely to win by staying on.

Hardly the usual induction to a business, but these scenarios can and do crop up for FDs – I have seen all of the above examples. To avoid it, undertaking thorough due diligence as part of your interview process that continues through your first 90 days is worth its weight in gold. As one of my mentors taught me, go through the balance sheet line by line and understand every component; don’t accept answers that you don’t wholly understand. The alternative is to be where the Pakistani fast bowler is – facing a possible early end of a career that promised a lot.