Job Hunting

How to Avoid an Accounting Scandal

Recruiters offer three tips for maintaining your integrity.
Jennifer CaplanMay 14, 2001

Lernout & Hauspie. Lucent Technologies. Xerox. Sunbeam. Critical Path.

It seems like every week, another company is being investigated for accounting irregularities.

In fact, accounting-fraud cases accounted for about 20 percent of the SEC’s roughly 500 enforcement cases last year.

Charges were filed against 26 companies, 19 chief executives, and 19 chief financial officers in 2000.

Now, it’s very rare for a CEO to walk into a CFO’s office and say, “Let’s fudge the numbers.”

Rather, accounting transgressions unfold rather slowly and subtley. Initially, they fail the smell test more than anything else as management tries to meet their projections or Wall Street expectations.

“In this environment, CFOs may be asked by CEOs to do things that in their conscience they don’t think is right,” concedes Walter Williams, a managing partner at Clarity Partners, a boutique executive search firm that focuses on financial executives.

Many CFOs are thus faced with a difficult dilemma. Do they leave a job that challenges their integrity, or succumb to pressures that can potentially destroy their careers? It can be a fine line to draw, but one that CFOs will need to become more adept at making.

Stephen Scroggins, a managing director at executive search firm Russell Reynolds Associates, says that every situation is different, but in general CFOs must decide when to draw the line. “It’s a judgment call every time, and you need to know when to get out,” he says, “because if you don’t you’re going to get burned.”

The pressures on CFOs have never been greater and the stakes have never been higher, Scroggins claims. He accedes that pressures from Wall Street are intense, but stresses that at the end of the day, a CFO who pushes the edge with creative accounting practices will pay a steep price.

Accounting abuses can tarnish and even ruin a CFO’s career, say Scroggins and Williams. “CEOs don’t want CFOs that have been at companies with accounting irregularities, and dubious revenue recognition practices,” he confirms.

Williams claims that CFOs that heavily value their reputations should depart at the fist sign of anything suspicious. “They should make a career decision to go to another job to maintain credibility,” he contends.

Of course, this is easier said than done when CFOs are pulling down a healthy six-figure salary, anticipating a six-figure bonus, and financing an expensive lifestyle for their families.

So how should CFOs cope with mounting pressures and still keep their professional integrity intact? Here are some tips from the search firm experts:

1. Make sure you and your CEO are on the same wavelength. Be sure you both agree on where the business stands, where it will be in the short-term, and where it will go in the future.

“If you’re out of sync and not on the same page as your CEO, tensions will arise and it is more likely that you will be pressured to do things you may not agree with,” says Scroggins.

Williams says, “Make sure your CEO understands that you can’t be dancing around things. Educate your CEO that he is expected to be forthright to the degree expected on Wall Street.”

2. Focus on operating financial measures as opposed to accounting financial measures. “It is one thing to put together the books for a quarterly or yearly release,” says Williams. But, often the real health of a business is not very well described by GAAP [Generally Accepted Accounting Principles] numbers, he claims.

“For a lot of businesses, particularly smaller ones, cash is far more important.” Metrics such as bookings of new orders, days sales outstanding, same store sales, and cash flow measures are often better gauges of a company’s true financial health. And he contends that CFOs should be responsible for painting this more realistic picture for the CEO, shareholders, and the company’s board.

“An accounting-based income statement can be very misleading in terms of the real health of the business from a short-term perspective,” Williams says.

3. Maintain your personal credibility with Wall Street and your auditors, and keep your lifelines open in case you do need to look for a new job.

“As recruiters, when we’re checking someone out as a potential CFO, we will talk to the accounting firms, and investment- and commercial- banking firms that the person has worked with in the past,” says Williams. “You can be sure that [recruiters], or the CEO of a hiring company, is going to talk to those folks about you.”