Lesson Learned: Dummy Vendors and a Cover-up

By: Robert F Cummings
Consulting CFO, Connecticut
SBA * Consulting LTD

Internal controls are not for big business only. I learned the hard way. I
was the Controller CFO for multi-site property management firm. Our net
revenues were approximately $4 million. Our project revenues were in excess
of $20 million. The reason is that we received funds and paid bills on
behalf of different owners and governmental agencies.

The branch offices always complained that they could not pay for time
sensitive bills like food and delivery charges and office supplies by going
through corporate. So to combat that problem, we gave them small checking
accounts that required two (2) signatures. Sounds good, right?

Well after two years, it appears that we were getting systematically drained
to the tune of $3,000-$5,000 per month in small charges. No charge was ever
over $1,000 so the external accountant auditors never questioned the
propriety of any of the branch expenses.

The records all looked good and the checks were always approved and signed
properly. Here is what was going on. The branch assistant would have the
manager pre-sign some checks when he was going out of town. She added her
signature to those checks and paid a fictitious (dummy) company. The
company put on the checks was the Office supply house in pencil, copied,
sent to corporate. The original check was erased the payor changed and
cashed by the rogue employee.

We never saw the checks returned because they were destroyed by the employee
with the returned bank statement. Since the amounts were small relative to
the overall expenses, they did not look out of line on the corporate
consolidation. An alert accounts payable clerk noticed that the delivery
charges were to a utility where the employee’s relative worked. Since we
did not business with the utility, the employee was questioned and
confessed.

What internal control mistakes were made and how could this have been
prevented?

1.) Two signatures? Fine, but the manager negated this control by
pre-signing checks.
2.) The bank statement should be opened and examined by a supervisor with no
check or accounts payable access. Original cancelled checks should be
examined, if possible for changed numbers and payers.
3.) Corporate should have insisted on seeing original invoices and cancelled
checks. The copies covered up the malfeasance.

Lesson Learned: Take the time to periodically examine your procedures and
checks and balances. Your CFO and external CPA are knowledgeable in these
areas, but you, the owner know what makes sense and what may be out of
control. Take the time to check the details and work with your CFO. If you
do not have a CFO, consider getting one part time to help you guide and
manage your business.

Feel free to distribute this newsletter to your business associates and
clients.

The primaries are over and now we Americans and the world get to see the time honored spectacles of the Republican and Democratic Conventions.

A place where party faithful come and listen to leaders of their party paint a vision of tomorrow and in turn try to convince the greater party members and those of other parties that their vision is better.

Sound nice on paper, doesn’t it?  However, many times, and it looks like especially with this election, the paper is a little thin on specifics and heavy on hyperbole.  Nevertheless, this article isn’t really about our electoral process or this specific election as it is a similarly to what many CEO practice; business plans that are thin on specifics and heavy on hyperbole.

Business Planning

We were taught when we were young that the quickest route between two points was a straight line (it is actually a great circle, at least when it comes to navigation; I add this because I don’t want the fact checkers to have a snit).  So why are so many businesses without not only a strategic business plan, but a tactical plan as well?

“You fail to plan, then you plan to Fail.” – John L. Beckley, Founder of The Economics Press, Inc. and author

Ask a CEO what the business plan is, and they will give you a bullet pointed executive summary as proof that there is a plan.  While this limited executive summary is better than nothing; it really isn’t much.  It is talking points, and as we saw in the primaries, they get old after a while, especially without any meat to backup those talking points.  And by meat, we’re talking facts, figures, roadmaps, tasks, milestones, dates, timing, slippage and ultimately [sub]-goals.

Now let’s be fair to our CEOs.  Not every company has the talent or budget to have a planning department in their company.  Planning takes time, a tremendous amount of time.  Time that many feel is unproductive, failing to meet the goal of producing revenue.  This can’t be farther than the truth (within reason).

This is why we have the old military adage, the 5P’s.  Proper Planning Prevents Poor Performance.  Five simple words that say it all.

Strategic v Tactical Planning

Of the two types of planning, strategic is the most common.  Why, because you can create your bullet pointed executive summary, having for all intents and purposes a strategic plan, albeit a thin plan, but a plan nonetheless.

Most people can think strategically to some extent.  Moreover, if you are a CEO or business owner, you’ve at least identified long-term or overall aims and interests and the some means of achieving them.

Some of the business plans I have seen say:

“We are the primary distributor of widgets in the southern part of the county.  We do this by providing:

• The best value proposition
• Next day delivery
• No minimums
• No handling charges

Which will allow us to build our company and ultimately enter the northern part of the county.”

That is for better or worse a strategic plan.  Where we are, where we want to go and some reasons why they will be able to achieve their goal.

Tactical plans give you a step-by-step, inch-by-inch recipe of how to go from here to there.  They should provide milestones, timing, be quantifiable, be able to be monitored, measured and have the ability for feedback. Tactical planning is more difficult because you need to get down in the mud and get dirty.

It’s easy to say (and every politician has said this) “I will keep our streets safe!” That is a great strategic plan and even a better political slogan since it imbues itself to the psychology of the voter; I want my family and friends safe.  However, how you get there is complicated and complex.  Your plan needs to match that complexity, but be dynamic enough to change with the situation.

A business plan needs to be dynamic.  Static plans will fail once there is a choice that was not imagined on the decision tree of the plan.  Think of the term “abort”; a computer term meaning abnormal termination.  The programmers did not think of every single possible result and the computer system, which is in some respects static, just gave up (especially older computer systems).

Living Document

Your business plan is a living document.  Simply as your business grows and changes, so too should your business plan.  As a CEO you see an opportunity that needs to be exploited.  Your business plan should be adjusted to reflect this new deviation, which in reality may be the ultimate in a dynamic system, change and that change brining profitability as a result.

“A lack of planning on your part, does not constitute an emergency on my part.” – SSgt Chad Sommers, USMC

Conclusion

Next time you are in a position to hear a pitch about a company, think about if there is any real planning behind the hyperbole.  Remember the more planning the better chance of success!

Someone didn’t like their brand new booties

I have been making budgets for way too many years in scores of industries, sectors, sub-sectors, mid sized companies, small companies, start-ups, growth, turnarounds, privately held, VC/PE held, publically held; well I guess you get the drift.

As the senior accounting/finance person (the titles have been different over the years, but the responsibly in this instance was the same), I was charged with making a budget that represents both revenues and costs for the foreseeable future (be that 12 months, 18 months or longer).  Simple task or so one would think.

Some of you would be amazed, others surprised and a smaller sub-set will chuckle when I say, I as the person who makes the budget, let’s say as the Chief Financial Officer cannot do it in a bubble, on my private island with no access to anyone save my very intelligent dog.  For those of you who are dog people, he is a cross between a King Charles Cavalier Spaniel and Cocker Spaniel.  The designer dog lovers call this breed a Cockerlier and pay big money for pups; we believe in getting dogs from rescue groups, so we just call him Mr. McQ). But I digressed.

Parts of the Budget

All businesses should have a budget for revenues and expenses.  Everyone knows how simple it is to shake that magic eight ball and ask the question “How much will revenues be this year”!  But it’s not simple and most CFO’s don’t have a magic eight ball, but they have a marketing department and maybe a CMO, a sales department and maybe a CRO and quite possibly some consultants and prior history.

Therefore, the formulation of the revenue piece of the budget just became a team approach with my job, as CFO, to be the Team Leader, the Project Manager, the Realist and Lord High Questioner.  In other words, it is nice you people gave me this number.  It’s really close to last years, or it’s really high/low; but really how did you come up with the number.  I want to see the data you used, a list of people you spoke with, etc.

Once I am satisfied that the number makes sense, remember it’s a best guess; then I will accept and use that number.  Asking them to move the number to reach a magic bottom line number is dishonest, especially if I’m asking them to inflate prospective revenues.  This also goes for the average mark-up percentage.

How can we turn around and charge more for the same item (whether we got a price increase or not from our vendor/operation) if we aren’t providing value.  So another duty is to question our value proposition vis a vis our products, or competitors and the market place itself.  Let’s not forget to factor in the geopolitical atmosphere of the locales where we operate and what or market growth plan is as well.

Moreover, since I talked about our growth plan, what is or does our strategic and tactical business plans say?  Are the revenues (and for that matter the costs) in line with what the Board has dictated?

Same sort of concepts are used for the Cost of Goods Sold, if we have inventory and all the operational expenses.  It’s a team approach with me as the CFO having the same duties, but possibly, most definitely now working with a new set of team participants who are involved in purchasing, managing other areas of the company, those who are responsible for head count and the list goes on.

So who really makes the budget?

I can honestly say it is or at least it should be a Team approach, with my role as coordinator or project manager reaching out to both internal and external subject matter experts to create a projection that it not only realistic, but attainable.

So it is not “my” budget, it is our budget.  I may have to defend it before the Board, and they may call it “my” budget, but it isn’t.  A budget done properly has a lot of different hands involved, and lots of managerial knowhow, negotiations and personality at work.  The final product is not mine it is ours!

My view on the final product

Now I always like to add some fat into my budgets, as a way to hedge our bets.  I always try to use a slightly lower revenue number and slightly higher expense numbers.   If both these numbers become reality, then the company matched the projected net income/EBITDA number of the budget.

However, if we do a better job at cost containment, then we’ve made more money.  In addition, if we sold more than anticipated, we made more money.  Moreover, if we really were lucky and spent less on expenses and sold more product or services, then we; the organization; may have had banner year!

Query: So why do Hiring Managers feel that the CFO needs so much industry or sub-sector experience to do the budget? Maybe you can enlighten me?

This is an open letter to the Chief Executive Officers of the world. cfo qualification

There seems to be a great amount of confusion on the part of those who are, or who think they are and those who really aren’t, but say they are; as to what qualities and qualifications are necessary to hold the position of a Chief Financial Officer.

There are accountants, controllers/comptrollers, VPs of Finance, public accountants, auditors and Chief Financial Officers.  Just because you are a member of one or more of the aforementioned groups, even if you have the title of CFO, does this qualify you as a CFO?

Who determines what a CFO is or does?

Now, there are many definitions of what is a CFO.  These definitions come from disparate constituencies such as CFOs themselves, Human Resources, Recruiters, Academia and public accountants.  Each constituency has their own reasons for creating these definitions.  Some based in reality, some not.  Some to increase their perceived power or prestige, others out of sheer ignorance.

However, the faction we seldom hear from are those who are actually the people who need to work with their CFOs day in and day out, the CEOs.

Now there are many different types of CEOs.  There are the entrepreneurial CEO, who is the owner, a partner and/or founder.  All-powerful and controlling their businesses could literally be morphing on a daily basis.  They have their unique definition, based on their perceived needs.

Then there is the CEO of the more mature mid-cap company.  While the company may have many attributes of an entrepreneurial atmosphere, the company has more structure with official policies, rules, procedures and processes.  These CEOs have their definition as the CFO role has probably changed.

Lastly, there are the larger mid-cap to large-cap companies who are steeped in bureaucracy, structure, where policies and procedures are foremost in the mind, even when they are crippling at best.  And yes, the definition of a CFO may be unique here as well.

Let us not overlook that any one of the CEOs may have to take a step to the left (thank you Richard O’Brien) because they are owed and/or controlled by Venture Capital or Private Equity.  That changes the dynamic and the definition of who the CFO may report to, and thus the qualities and qualifications of CFOs in this space.

We can’t overlook the public companies either, which may be of any size as well.  These companies and their CFOs have similar but different requirements.

Which definition is right?

So who is right?  I can say, from what I’ve seen, who is usually wrong, but I won’t. Why?  Because that would be tainting the conversation.  I want to hear from the Chief Executive Officers themselves.  I am not hiring me (the CFO), but you, the CEO should be (hopefully it is the CEO/Board, not HR).

I want to hear what the CEOs think and why they think their requirements are correct.  I want to know why “industry experience” is so crucial, where over 90% of all businesses are similar, that a smart person (we hope we all agree that the CFO should be a smart person) either can learn or lean on subject matter experts (SME) for what they don’t know, in the short term, but in reality always, because that is the definition of a SME, they are the experts.

Given the sheer span of the responsibilities of a CFO, regardless of company size, how can one person be an expert on it all?  I mean, no one demands that an attorney know everything (that is why they specialize).  Same thing for the medical profession and believe it or not, public accounting.  Think about it, you as the CEO rely on your C-Suite to assist you in performing your job.

Isn’t the role of the CFO to make informed decisions on all available information?  Wouldn’t a smart CFO seek out information and opinion to either inform themselves on an issue they don’t know as well as they should or just to broaden their grasp on an issue.  Whom do they seek out?  SME’s.

Let us return to industry experience for a second.  If you only want to hire from within an industry, sector, or sub-sector, how do you gain diversity in thought and experience in your business?  I mean, if I only worked in the widget industry and everyone makes left-handed widgets; where is the innovation.  Who would ever think of making a right-handed widget and if they did, could someone steeped in the culture of the left even give anything but a short shrift to the right-handed business case?

Diversity of experiences which includes education, work experiences, post-nominals for what they are worth, are part of what makes that a single CFO better than the next for a particular position.  Their (the CFOs) ethics, ethos, working paradigms and management style are just as important.  Nothing can be worse than hiring an individual who clashes, thereby diminishes or eliminates all value add.  Even in change management, it is easier to succeed with the project by winning the hearts and minds of the employees as opposed to being dictatorial.

Is hiring to company culture important?  It depends on what the CEO and Board need to get accomplished.  The same is true as to whether one needs a tactical CFO or a strategic CFO.  However, if you are hiring a tactical CFO, what are the other members of the accounting/finance leadership team doing?  While all strategic CFOs do get involved in tactical issues, that is a far cry from hiring someone who becomes mired in the day to day events to the exclusion of the strategic issues that businesses must tackle.

Let us start the discussion!

So Mr. and Ms. Chief Executive Officer.  What do you see in the general sense, the macro big picture scenario of your ideal CFO?  Then, since the ideal is usually a utopian concept, make it a real definition.  Flush it out with what would make the real candidate for your industry, sector or business.  Then look at some of the definitions you find describing the job description and qualifications needed for a particular CFO.

Just like school, compare and contrast.

As the discussion grows, and I truly hope it does, has your point of view changed?

Please let those of us who are CFOs today or aspire to be the CFO tomorrow know what is real and what is not, so we know where we stand or need to stand to make positive contributions to your companies and our [professional] lives.