An Anatomy of a CFO’s Agony

How a make-the-numbers mandate, threats from his bosses, and accounting skullduggery nearly destroyed him.
David McCannJuly 31, 2008

Relentless, exhausting pressure to hit numbers. Knowing you’ll be fired, and likely ruined, if they’re missed. Resorting to accounting shenanigans to make ends meet. Feeling trapped by blackball threats.

The pain experienced from such circumstances generally stays out of sight, but it all came out in a recent interview with a one-time finance chief at a company that had just gone public. He spoke about his ordeal, though, only on condition of anonymity, for both himself and his former employer.

To be sure, some of the discomfort was self-inflicted. The CFO — let’s call him John Doe — ultimately pleaded guilty in federal court to accounting fraud. He also settled Securities and Exchange Commission fraud and insider trading charges, albeit without admitting or denying guilt.

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In the interview Doe did not comment on those proceedings, other than to note that he “got in trouble.” But from his point of view, his actions were the result of extreme pressure from his superiors at the company, one of whom was convicted of fraud in a trial, while another pled guilty. (Although those events took place years ago, sentences still have not been handed down.)

For Doe, the emotions surrounding the matter are still raw. While he said he somehow emerged into a new career as a private-company CFO, he said too that thinking about the episode still upsets him. Yet he pressed on with the seemingly cathartic telling.

Doe had been controller of a company that owned several subsidiaries. When a plan was hatched to take one of them public, he was offered the CFO seat. He figured it was a fantastic opportunity.

Here is Doe’s version of what happened, in his own words (with minor edits for clarity and to preserve anonymity):

The parent company had been on an acquisition binge and had leveraged itself beyond its capacity to make its interest payments. The banks were screaming. The parent’s stock was not worth much, so going to the public markets to raise capital in the form of an equity deal for the parent wasn’t going to work. We spent a lot of money on people to come tell us what we already knew, which was that one particular subsidiary was a cash cow, that by spinning it off as a public company we could raise the capital we needed.

Our chairman had always been the type of guy to say, “Make the earnings target regardless.” It was up to the accountants, for some reason, to fill in the voids, where if problems with sales initiatives or manufacturing came up we’d have to go find a penny or two someplace, whether it be through depreciation or rolling in some reserves, or whatever.

The operating subsidiaries would give us numbers and the chairman would change them. So all of our forecasting and modeling was bull, because no one had agreed to those numbers.

The problem was that he needed to get a certain price per share from the IPO to pay down the debt and restructure the other companies. To get to that number, we had to show the underwriters forecasts for top-line growth, margin growth, and EPS growth, quarter after quarter, year after year. Believe it or not, we did 15-year projections.

We’d had some decent growth in previous years through acquisitions, but we put together a plan saying we were going to grow exponentially through organic initiatives, and that story is what sold the deal.

But it was not a growth business. I knew, and our president knew, and of course the chairman knew, though we never discussed it, that these numbers were absolutely unrealistic. It was impossible. But we went ahead anyway.

The investment bankers told us that we couldn’t miss a single quarter by even a penny or the stock would tank and it would take us years to recover, if we ever could. And there were a lot of options issued at the IPO price, so there was a tremendous financial incentive to achieve those goals. I was told that if we missed any quarter by even a cent, I would be terminated.

Initially we achieved the numbers, but most of that was through accounting gimmicks — playing with tax reserves, deferring costs, accelerating sales, going to customers and saying we’ll give you a deal now if you commit to a certain amount in this quarter — all one-off stuff that amounted to robbing Peter to pay Paul.

I remember telling my wife that we had opened up a major Pandora’s box, but that’s what the Street had bought and that’s what we had to perform on. A week after we went public the investment bankers all initiated coverage and I was spending all my time with them, and it was constantly repeated: “You can’t miss a number, you can’t miss a number, you’ve given us these numbers, if you miss a number our analysts, who live by their reputations, are going to look like fools.” Nobody paid attention to the company itself. We were EPS-blinded.

We were literally living quarter to quarter. We’d do anything we could to reduce or not incur expenses or increase revenues, even at the cost of borrowing from another quarter — we’d figure out next quarter what the hell to do. It was just a formula for failure.

But every day I would get a call from the chairman: “Where are we? I want reports on sales.” And everything in the reports indicated that the light at the end of the tunnel was a freight train. On rare occasions we’d have a frank discussion, and I’d ask him what we were going to do. He’d say, “You don’t worry about it. Just hit the numbers now and I’ll figure it out later, make an acquisition or something.”

I didn’t deal with it very well. I wasn’t sleeping, I started drinking, my wife and I were having problems at home. On many occasions I considered just quitting. I approached our president and said, “I can’t take this anymore, it’s killing me. It’s killing my relationship. I’m physically deteriorating. I want to quit.” He told me that if I quit, he could guarantee me that the chairman would put out the word on the Street and blackball me. There were threats that my name would be ruined, my career destroyed.

I was just waiting for the whole thing to collapse so I could get some relief. I knew it would not be pretty.

As it was a newly public company, now we had auditors in there. It was left entirely up to me to manage that whole process. I got no help from the president or the chairman. All I got was, “You better make sure they don’t find anything. If there’s anything to find, hide it — this is your ass on the line.” It was the same with board meetings: Don’t tell the board this, don’t tell them that.

We didn’t make it through one year as a publicly traded company before it all collapsed. The stock made a big run after we hit two quarters in a row. Then stuff happened, we couldn’t make it, and it fell far below the IPO price. The audit committee came in and said, “We see what you’ve been doing, there are some questionable things going on here.” Everybody got thrown out.

In many ways the job was a good experience. I traveled all over the world making presentations, meeting people, and wheeling and dealing. It was exciting, and I miss that action. But you start to believe your own crap after awhile. I could still give you verbatim the 10-minute pitch on the financials. I gave it to everyone, from one-on-ones with heads of major overseas banks to rooms with thousands of retail brokers.

The line between what is appropriate and what isn’t can get really blurry — perfectly honest, decent professionals start to lose perspective on what is right, wrong, or in between when you’ve got a chairman screaming down your throat, investors and analysts and banks calling you, covenants up the wazoo. You start to accept things that any reasonable person would look back on and say, “What, were you out of your mind?”