What the Mazars Bombshell Reminds Me

Mazars’ announcement, last week or the week before, that the last ten years of the financial reporting for Trump should not be relied upon and that they were bowing out as his accounting firm was a bombshell. That bombshell reminded me of other financial news in the past, serving me as a warning as to how financial professionals can really destroy a program, division or even company. We finance professionals need to walk a straight path or we will lose the trust of customers and investers.

The granddaddy of all financial implosion is probably the Enron debacle of 2001 which also led to the destruction of Arthur Andersen, the accounting/consulting firm. Enron engaged in systematic accounting fraud and Arthur Andersen, as its accounting firm, was deemed as complicit in “approving” those accounting fictions and was also involved in document shredding. Whenever I hear of accounting fraud, I always think back to this one because it was a Richter scale reverberation that destroyed two companies. I think accounting fraud can really destroy companies.

The other major event, while not an accounting fraud, but was just general bad behavior is the one that stemmed from the housing market: giving out expensive loans to those who could not afford it. This cumulative bad behavior built up rickety infrastructure that came tumbling down in a cascading domino effect when people started walking away for their houses, due to the inability to pay their loads. This is the event that led to the Great Recession. Instead of a single company playing a role, it was Wall Street, the derivatives players, and the mortgage lending market: all financial players that participated in building up an unstable infrastructure. In this instance, the entire economic system teetered on the edge of a meltdown back in 2008.

Those are the two major events that stand out in my mind, but I have had the misfortune of working for companies where either senior managers did not do the responsible thing or a financial person was doing dirty accounting.

The first one that comes to mind is the Dutch company that bought out a small tech company that I was working at. This Dutch company installed new financial managers who focused too much on the short term rather than planned on the long-term health of the company. We were deep in the shareholder era where everything was done for the shareholders. The first ill-advised action taken was to not pay our suppliers for at least 3 months. No announcements were made so I was fielding calls from our vendors wondering why their invoices were getting paid. I tried calling the corporate office, but they never answered or as they say today, “crickets”. It was not until much later they whispered over the phone the rule about paying only 3 months later.

That was the first thing that our new financial managers did but they didn’t stop there. They also stopped giving out raises, and bonuses. I had a client who asked us to pay our employees bonuses and the client would reimburse us for those bonuses. However, I had a hard time getting our corporate office to give out the bonuses: corporate office had me bill the client for the bonuses and still, they wouldn’t pay the employee. Finally, I told corporate that our client had told our employees that they should expect a bonus.

Then there was the lack of infrastructure investment for our Network Monitoring and for our Helpdesk. I tried looking to see if maybe corporate had created new capital accounts for investments, but I couldn’t find any. Instead, I saw the capital investments decline to zero. I wasn’t sure if that was real but at least one of our clients did not ask us to rebid the contract when the contract expired but instead went to another service supplier because they felt we weren’t making investments in our technological infrastructure.

Whew, that’s bad when a client notice that.

And there were lots of other things going on that I was finally compelled to leave the company. Then maybe about 6 to 9 months later, I find out from someone that my old company lost two major contracts – the one that I was on (I started out with this team from the get-go, and the team built the program to be the leading contract in the company) and the other larger desktop type of contract. The two contracts were so large that there was no hope of replacing them during that year, at least according to my assessment.

I don’t know the reason for the loss of those two contracts but based upon how the financial management was running things, I would not be surprised if our clients decided that the quality of service was going downhill. At the same time that the company lost the two biggest contracts, an Italian program had some accounting irregularities. I think the Dutch company couldn’t handle two major implosions at the same time and so decided to retrench from the American theater and focus on fixing the European theater. The American company was sold to another company.

That story was a long one, but it had such an impact on me as I realized how lucky I was to escape that company.

The next story is a story of a single controller causing a half a million dollars in revenue write-down. I don’t know the exact story but based upon how we did our work, I can pretty much guess how it happened. We had billing agents who developed the invoices each month and then email them to us for review and approval. The controllers had to make sure the invoices were correct: in general, verify the time and materials rate (T&M) and the markup rates. We also had accountants who accrued the revenue for each closing. The billing agents had a whole month to do their billing, but the accountants had only a few days to close, and we had hundreds of projects to do the revenue accounting. The accountants thus depended on an inhouse system maintained by the controllers and this system calculated the expected revenue.

My guess is that this single controller approved invoices utilizing one set of T&M rates and then inputted another set of higher T&M rates in the inhouse system; thus, the accountant booked a higher revenue than what was billed. When the project was finished, my guess is that in closing the project, the accountant said, “Hey, you didn’t bill out all of the revenue. The amount billed do not match what I accrued.” And that probably precipitated an investigation, which led to the huge revenue write down, led to the firing of that controller and led to putting our commercial business on the selling block.

So yes, finance can really cause massive destruction.

And I think that is why Mazars had to do what they did. They were trying to save themselves. If they have even an appearance of doing something illegal, they could be destroyed.

It doesn’t mean that financial shenanigans were done; the court system has to decide if improper accounting or reporting had been done.

But the story of Arthur Andersen tells us that it is better to back off or fix the reputation before it gets seriously damaged. Here’s what I didn’t know about Arthur Andersen: after Arthur Andersen was convicted of obstruction of justice, the Supreme Court reversed that conviction due to serious errors in instructing the jurors. Of course, by the time this conviction was overturned, the company was no more.