I think that auditors and investors should pay more attention to sociopathic behaviour.
I used to follow a FTSE 100 company whose accounts I was deeply suspicious of. There was no smoking gun but lots of warning signs, including very weak cashflow, implausible performance claims and a flow of increasingly expensive acquisitions.
The company then went on to close a big merger with a cash-rich competitor and issue a profit warning, which drove the shares down 40% in one day – but that’s another story.
No corporate bully works alone; he will have to browbeat possibly hundreds of employees and auditors
Shortly after I started publishing negative reports, I talked to a journalist who had recently interviewed the CEO. The monthly budget meeting had just ended and the journo asked how it had gone. The CEO replied: ‘We’re just bayoneting the wounded.’
The comment struck me as mildly amusing at the time but, with hindsight, it was a warning sign that something was badly wrong with the corporate culture.
Consider the choices facing a junior executive with bad news to report. Even if he or she is blameless, there is a huge temptation to sugarcoat the news. Longer term, there is a more subtle temptation to report distorted numbers.
Then add to the mix a CEO who is busy fabricating fictitious growth and profit numbers, which is widely known among senior managers.
You very quickly find yourself in a situation where the CEO will be the last person to hear when things are going wrong, which makes the inevitable profit warning a huge shock to gullible observers.
Looking back at the companies I have seen fiddling their numbers, there is one striking common thread: a bullying, alpha-male CEO. It is almost always a man – I can think of only one female anecdotal example – and people tend to overlook the behaviour and focus on the short-term results.
I have never been in a senior management meeting where accounting chicanery is discussed, but my guess is that almost no management team starts out with a plan to deceive. They probably have an excess of enthusiasm and a sense of optimism, which is laudable rather than worrying.
It’s the combination of ambitious claims, disappointing reality and the bully at the top that is so dangerous. The temptation to abuse the flexibility that all accounting affords can be irresistible when faced with the alternative of a bayonet.
A minor over-statement in year one becomes larger and larger in subsequent years, and the bubble will of course eventually burst. By that time, the CEO may well be very rich, and the careers he destroys will be unlikely to trouble him.
Bullying is getting a higher profile these days, but mainly related to social media and gender issues. I think we need to pay more attention to corporate bullying.
No corporate bully works alone; he will have to browbeat dozens and possibly hundreds of employees and auditors. I experienced this myself when the FTSE 100 CEO asked my bank’s corporate finance department to get me sacked. Fortunately for me, my employer declined to be bullied.
House of cards
The house of cards depends on two things: no credible whistleblowers and, more importantly, no non-executive director or senior auditor standing up to the bully. Look at the damage done to the auditing profession by recent scandals and ask yourself how many could have been averted if sociopathic behaviour was treated as a major warning sign.
Not all bullies commit accounting fraud but almost all the perpetrators are aggressive bullies. Even if the accounts are clean, no organisation can thrive in an environment where dissent is crushed.
Auditors have a strong vested interest in combating bullying behaviour. It is perhaps the biggest risk of all.