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Thinking about accepting that offer? Here are ten signs you'd be better off taking a pass.
Craig Schneider, CFO.com | US
January 23, 2003
Larry Reinhold wasn't looking for trouble — he was just signing on for his first job as a CFO.
In January 2001, however, after only three weeks at Critical Path, he discovered questionable revenue recognition practices at the San Francisco-based Internet messaging company. At Reinhold's urging, Critical Path soon restated earnings downward. Its stock price fell, not surprisingly, and shareholders filed lawsuits against management. Reinhold stayed on for the next eight months, helping the company implement financial controls and clean up the accounting mess.
Jim Greer, during his own job search, was only asking what most other candidates would ask: Would you tell me about the previous CFO? The answer was, well, that there had been three previous CFOs in the past 15 months.
Yet from his interviews with the CEO, with HR, and with other managers and staffers at the organization — a well-known nonprofit medical-research institute — he determined that he could make a significant contribution quickly, and that the job was a good fit. Turns out, believes Greer, that he was right.
If you're actively looking for a new position yourself, consider these ten signs that you should keep looking. They'll help you walk that "fine line between due diligence and investigation," as Reinhold calls it, without "turning a job interview process into a forensic auditing engagement." After all, the managers and board members you're looking over today may be working by your side tomorrow.
Have any "sure signs" of your own? Send them to CraigSchneider@cfo.com.
1. Hidden CFO Histories
One of the first questions that many candidates ask their prospective employers is why their predecessor is no longer with the company. One of the first signs of trouble is when they receive a non-answer in return.
Joe Varraveto, now the CFO of eUniverse, has heard boilerplate responses plenty of times. "The business had outgrown them" was one old line that Varraveto heard from a former prospective employer. If the responses are pretty guarded, he continues, there may have been a larger issue with the former employee or with management as a whole. Depending on your read of the situation and your risk tolerance, it may not be worth the extra due diligence to find out the truth.
Michael Carus, CFO and general partner at New York-based venture capital firm JVP, thinks that candidates should push a little harder. "Why are they no longer there? Is it because of a skill-set gap?" You certainly need to find out, adds Carus, whether the previous finance chief was pressured to do something unethical. (You might be surprised how many CFOs say they have engaged in "aggressive accounting," often at the behest of the CEO.)
The predecessor's length of time on the job may also be reason for worry. "If he was in the job less than a year, that's a red flag," says Tucker Mays, co-founder and principal of Stamford, Connecticut-based OptiMarket, an outplacement firm for senior executives. Two years or less, he adds, is "kind of an orange flag."
2. CFO = Miracle Worker
The role of the CFO is more valued today than ever before. That can be both a blessing and a curse. Watch out for that job where they "want you to 'walk on water', which happens more and more in tough job markets," says OptiMarket's Mays. "You have to be realistic." Also beware the job whose description is so general that you really don't know what to expect.
Beware, too, the CEO who sees you as something less than a partner. "Does that CEO want a strategic counterpart," says JVP's Carus, "or are they looking to offload work? Are they open to advice and different ways of seeing," or are they looking for someone to "put the financial puzzle together for them?"
Then there's the bait-and-switch. A few months before Ron Rubin took his current job at Tatum CFO Partners, he interviewed for what he believed would be a position as a COO. When the HR director began talking instead about the CFO position, saying that the company needed someone "to pull them out of the hole" and to raise funds, Rubin made a fast exit. A follow-up call from the CEO confirmed that the job was to help raise venture capital — and as a consultant, not an officer of the company. (The company, adds Rubin, "has very recently filed for bankruptcy.")
Sometimes even the floor plan provides a clue — particularly the proximity of the CFO's office to that of the boss. Why? Greer has a theory: "The distance from the CEO's office is inversely proportional to the organizational perception of the importance of the job."
At a former employer, Greer actually took it as a personal challenge to help the accounting department grow in stature, but other CFOs may want a bit more support and trust from their fellow employees. At the start of Greer's campaign, the department was generally looked at as "the people that say 'no'," he says. "You get to feel that you're wearing a target around the office." (Or perhaps it's just a brightly colored grindstone. That's the impression of many overworked CFOs who'd like to "Take This Job and Split It.")
3. D&O Exclusions
Before a CFO signs on with a public company, checking for directors' and officers' insurance is standard. But even when Robert Schleizer finds at least $2 million in coverage (he prefers $5 million), not all D&O plans will do.
Schleizer, who's also a partner with Tatum, is particularly wary of D&O plans that carry a lot of exclusions — like those at one former client, which he learned about only after he was the CFO and a board member. Past litigation between the company founder and a majority shareholder, he explains, meant that the insurer for the new plan would not cover future disputes and actions of the board if litigation involved shareholders with more than 30 percent ownership.
In order to appease everyone, the insurance company included a hold-harmless agreement — a provision that assumes the liabilities of the past. But the policy's new plan exclusions meant that directors and officers still assumed greater risk for future liability. Adds Schleizer, "Had I not already been on the board, I probably would have not joined the company." (Find out how D&O insurance has become more expensive and less inclusive than ever.)
4. CEO = Dingbat
For many CFOs, the key to finding the right job is finding the right boss. Jim Greer learned that lesson the hard way at a former employer, when he took a job where he knew the chief executive was "a little off-balance."
Many of his peers might do the same today. Some finance chiefs look at their boss's idiosyncrasies as part of the challenge, but tackling a CEO's personality and behavior problems, warns Greer, are leadership issues for the board to deal with, not the CFO. "Life isn't worth it," he says of the experience. "Three years of your life, no matter what they pay you, is not worth putting up with a dingbat."
Other CFOs may want an incompetent boss just so they can look better by comparison. But Larry Reinhold, who intends one day to be a CEO himself, looked for just the opposite. When he started interviewing again after leaving Critical Path, he had the opportunity to pursue a chief executive position — but he decided to spend more time in an operational CFO role, getting first-hand training under "a competent, proper CEO." (Some CEOs believe a good first step is for a CFO to train her own successor.)
Many finance chiefs tap into the membership base at Financial Executives Institute and the Financial Executives Networking Group, which may include former employees of the company who are willing to provide an insider's perspective. Getting a few opinions of the boss and the working environment can help guard against a bad situation.
After his experience with Critical Path, Reinhold played it even more carefully. He passed on several job opportunities where the chemistry wasn't right or where the CEO seemed "inexperienced."
Eventually Reinhold interviewed at Wilson Greatbatch Technologies, a maker of power sources for implantable medical devices — where he knew no one. Reinhold sought out people who knew the CEO personally, "and all corroborated that the man is of the absolute highest integrity."
5. Premature Recognition
When it comes to sniffing out a finance department that's using creative accounting to boost its numbers, even a CFO candidate has to make some assumptions along the way.
For example, says JVP's Carus, suppose that receivables and revenue are listed with identical amounts. Those two line items could reflect an aggressive accounting practice in which revenue is recognized too early. But they could also signal that the company has delivery issues that are keeping customers from making timely payments. Or the company could be "selling into an industry that is going down the drain," adds Carus — that is, the business may rely solely on a handful of struggling customers. (Think "dotcom.")
Of course, especially for a job candidate at a private company, uncovering some of these specifics may simply not be possible. In hindsight, Reinhold still isn't sure how he could have identified the problems at Critical Path any sooner. "I don't know what else I could have done," he says, since the issues he discovered were ones that "a prospective CFO candidate would never have access to."
Reinhold notes, however, that people can be a lot more accessible than documents. Prior to taking the job with Greatbatch, he interviewed the controller about the company's level of conservatism in accounting and about its relationship with outside lawyers and auditors. "I didn't come in and say, 'I want to see sales contracts'," he says, "but I did interview the people who were down a level in keeping the books and records and preparing the financial information." (For more, see RevenueRecognition.com.)
6. Trial Balance = Doorstop
When you have the opportunity to meet with the prospective company's controller, ask to see a copy of the trial balance — and not just so you can confirm for yourself that total debits equal total credits. The trial balance, in Greer's words, is "the hinge document" between all the drudgery and detail of the general ledger system and the financial statements. And when the trial balance is too thick, it's the CFO who may come unhinged.
"If it's as big as a Manhattan phone book, I lose interest real fast," says Greer. "If it's over an inch thick, they probably have a really screwed up accounting information system." And if that system needs a huge overhaul, the new CFO will be doing a huge amount of the hauling. "Unless I'm interviewing at General Motors," concludes Greer, "it shouldn't be that way." (For more on the efforts of CFOs to close the books quickly, see "Virtual Close: Not So Fast.")
7. Taxing Experiences
Some private companies are chock full of surprises. Just ask Tatum partner Jon Steging, who arrived for one meeting with a client to find that the Internal Revenue Service was in the lobby, literally shutting down the company for not paying its Form 941 deposits for payroll taxes. "That turned out to be an assignment I didn't want to take," he says.
Not every sign is as clear as a big yellow "IRS" on a blue jacket. Steging had been referred as a consultant to the privately owned business; there were accounting issues, he was told, that prevented it from getting statements out on time. In fact, the company had cash issues, and it was a little more than a year behind on its payroll-tax deposits.
If a smaller company has cash-flow problems, the payroll tax can be an early indication that something is amiss. When Steging's partner Robert Schleizer was interviewing for the role of CFO at a trucking company, he learned that its payroll tax was not current — and that management didn't know how much they owed. He signed up anyway, on a consulting basis, but since "they didn't have the money to do what I asked them to do," says Schleizer, he walked away entirely after two months.
As for Steging — and his client who'd already had a visit from the IRS — "I referred him to a tax accountant who had a law degree as well." (See how the tax efficiency of public companies measures up (provided they pay up) with the CFO PeerMetrix Interactive Tax Efficiency Scorecard.)
8. The CEO Stays in the Picture
During the interview process, a CFO shouldn't have trouble arranging whatever one-on-one meetings might be needed. And so when Tatum's Schleizer was referred to a private company recently, he assumed that he would be able to talk with the controller, the heads of marketing and operations, and salespeople.
Schleizer did meet with the CEO, but he learned that he couldn't interview the other senior managers unless the boss joined them. Suffice it to say, Schleizer didn't stick around long enough to find out why. "If I can't talk to key employees without the CEO being present," he says, "that's a tip-off."
Leaving was the smart move. The difficulties were "a lot more than the guy let on," Schleizer later discovered. "I have no problem going into difficult situations," he adds, but "you don't want to be surprised — get a lawsuit in the mail the next day, for instance. You can't deal with that when you're dealing with operational difficulties." (Some companies do get it right; find out more in "What Works: Building a Strong Finance Team.")
9. "Mary Works in A/P"
Sometimes, you can hear a lot just by listening. In the lobby of a prospective employer, while waiting to meet with the CEO, Jim Greer heard the repeated page, "Mary, you have a call on line 1." Says Greer: "Find out if Mary works in A/P. If she's ducking phone calls, it could be indicative of a severe cash problem."
You laugh — but after he accepted the position as CFO of the venture-backed manufacturer, Greer might have wished that he had the benefit of his own advice. Yes, Mary was employed in the accounts payable department; yes, there were cash problems, especially after the VCs stopped funding the company; yes, Mary was dodging phone calls because she didn't want to deal with irate vendors. And yes, after Greer took the job, he started getting the calls himself.
Some CFOs welcome the challenge of a troubled company. eUniverse's Varraveto says that many of his more job-security-conscious peers would likely have walked away from his job when he took it two years ago. "If you looked at the business financials, they were not entirely that healthy," he says. "The company had not started to monetize its assets." Notes Varraveto, "Risk of failure was probably high." That goes for the CFO as well as the company. (For more about taking on a troubled company, see "Meet the New Boss.")
10. The Auditors Have a Thing or Two to Say
If there's one thing a CFO candidate shouldn't take for granted these days, it's the opinion of the outside auditor.
Larry Reinhold never spoke with Critical Path's outside auditor, PricewaterhouseCoopers — in part because he was tapped for the job while a partner at PwC. Though Reinhold never audited Critical Path himself, knowing that members of Critical Path's management served on the audit team gave him comfort. (For that matter, everything seemed to check out: Reinhold knew Critical Path's president and outgoing CFO, the management seemed experienced, the board members were big-time VCs, analysts were bullish, and many people didn't know Enron from an end run.)
The next time around, when Reinhold interviewed at Greatbatch, he made sure to speak with the external law firms and outside auditors. In addition, he gave extra attention to "areas of integrity and ethical behavior."
When a company's outside auditors speak with a prospective employee, they aren't going to badmouth a client outright, but they might have a warning or two. "Auditors generally enjoyed talking to me about their client companies," says Greer. "I'm not sure they're supposed to, but it was usually a good source of information."
For a CFO who can reads between the lines, that good source can reveal some bad circumstances. If the auditor says, for instance, that they've been doing a lot of work on their cash flow or cash statements, "it tells me maybe cash is a big problem," notes Greer. These days, that would be enough for Greer to lose interest very quickly.
It might also be wise to see if the audit committee is displaying active and effective oversight, says Ernie Lorimer, a partner at corporate law firm Finn Dixon & Herling. If it's not, the incoming CFO may well need to unwind a series of hedges or some off-balance-sheet transactions that aren't fulfilling their purpose, or didn't have much of a purpose in the first place. Furthermore, an ineffective audit committee that "is not backing that effort," adds Lorimer, "will make the CFO's judgments less tenable."
For that matter, independent directors may have a completely different take than management does on the company's state of business. "If the board sees it differently, you can pretty much be assured that there are going to be big issues down the road," says eUniverse's Varraveto. (Although today, some companies that are "Tuning In to Cash Flow" often find that they may be better off than they seemed.) But sometimes, says Varraveto, "you can't reconcile it"; you have to "walk away."
Have any "sure signs" of your own? Send them to CraigSchneider@cfo.com.