Financial Shenanigans Versus Incompetence

The Wall Street Journal and others recently reported about an accounting expert who had predicted the Madoff Ponzi scheme and recently went after GE for what he said are their deceptive accounting practices (of course, GE responded this person didn’t know what he was talking about). But this is not about GE but rather about accounting irregularities in general.

We have a government with annual deficits of $1 trillion and with a lot more “off the books” because there are non-budget items. On August 26, 2019 the WSJ had an article about how CEO pay is often much higher than disclosed (due to stock appreciation and clauses that escalate compensation).

And then we get to my world of small business where it’s usually not malicious but is accounting incompetence. Too many owners think their accounting department is like Cinderella – the weak little stepsister who must be tolerated at as little cost as possible. Sometimes it’s because they’d sooner “play” with their product than worry about the numbers and often it’s because they’re doing so well it becomes “management by checkbook,” as in, there’s plenty of money so who cares about cash flow, metrics, etc.

I’m working on a potential deal where the owner (and his advisors) setup five companies, two operating, one management, one for real estate, and one for equipment. They are so intertwined it will take a good CFO or forensic accountant to figure out exactly what their earnings are. And, it’s management by checkbook when the owner says, “we bought too much equipment and too many vehicles last year, so we’ll have to sell some.”

Tip to owners – one of the top three things you can do is have solid financial systems, accurate statements, good management reports, know your KPIs, and other metrics. It makes your life easier, especially as it seems we’ll have an economic correction soon, and when it’s time to sell, increases your value and attracts better buyers.

“The simple truth is that truth is hard to come by, and that once fount it may easily be lost again.” Karl Popper

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