By Howard Birnberg
In a recent column, I wrote about the failure of a design firm I worked for earlier in my career (http://tinyurl.com/projectprofit-oct17). I firmly believe MT& +Y failed due to poor leadership. MT&Y had good systems, excellent project managers, and strong technical skills, but was headed by an egocentric and stubborn president who believed he was always right and refused to listen to reason nor pay sufficient attention to financial issues. As a result, I was particularly interested in a July 16 Viewpoint article in Engineering News-Record (ENR) magazine by Thomas C. Schliefer, Ph.D.
Schliefer wrote: “A construction company (and design firms!) has three primary functional areas: get the work, do the work, and account for the work. All three are critical to success. After you get the work, you still have to do it efficiently, and if you don’t accurately account for the first two functions, you won’t be in business very long — in which case the first two won’t really matter. Therefore, accounting for the work is just as important as getting and doing the work. However, too few managers respect the accounting function as the critical element it is to the firm’s success.”
He continued: “…the CFOs warned management: ‘We have some serious financial issues’ or problems or exposures. Management’s reactions often were: ‘You don’t understand’ or ‘You don’t know what you are talking about. It’s just one bad job…’ These contractors saw the problem as an “event” when it was actually a “symptom.”
Schliefer points out that, “In the majority of failed companies, the CFO was not on the organization’s executive committee — or even included in senior management team meetings. Construction professionals need to remember that numbers don’t lie: They tell the entire financial story. The financial problems revealed by the numbers can’t be waived aside with ‘Yes, but,’ and they cannot be explained away. Words don’t change mathematics.”
In my experience, not listening to the financial people is just one side of the problem. Another is not effectively supervising the bookkeeper, accountant, or CFO. Over the years, I have personally seen several business failures and near failures that could have been prevented by effective supervision.
Case No. 1: A well established and successful 40-person Midwest architectural firm that survived the event and continues to this day.
When I became an industry management consultant, this firm was my first client. In fact, they asked me to consult on the installation of their computerized financial management system. As a result, I worked closely with the firm’s long-time bookkeeper and accountant. A very religious, middle-aged woman, she was completely trusted by the firm’s founder and president. Working with her and the president on the installation of the software and subsequent training of the project managers, I never sensed any malfeasance on the part of the accountant. After completing my assignment, I would periodically follow-up with the firm’s president.
About a year later, I was speaking with him on the telephone and he was clearly upset. The new software had identified some irregularities and the firm’s outside CPA brought these to the president’s attention. Apparently, the in-house accountant had been stealing small amounts regularly for many years, eventually totaling nearly $250,000. With the firm’s old accounting system (largely manual), this was easy to conceal, especially as no one ever looked at the financial statements in detail (the outside CPA simply prepared tax returns based on information supplied by the bookkeeper/accountant).
The president of the firm and the CPA confronted her on a Friday afternoon and she was told no prosecution would be sought and that an arrangement would be made to recover some of the money if possible. It was all kept friendly and non-threatening. They were to meet again on Monday morning and work something out. She went to church that Sunday morning, went home, and ended her life.
Case No. 2: A small family construction company in Chicago that survived the event, but is no longer in business.
This construction company was started and owned by a friend of mine who specialized in residential and small commercial projects. As it grew, a bookkeeper was hired to handle the business aspects of the firm. The owner had no financial background, but was a successful marketer, having worked with well-known television personality Bob Vila of This Old House fame. All financial operations were delegated to the bookkeeper.
The owner was presented with an opportunity to purchase a property at a substantial below-market price and believed he had sufficient funds in his company account. He was shocked to learn there was no money in his business account as the bookkeeper had stolen more than $100,000 during the previous two years. Prosecution was attempted but dropped when the owner learned the time and costs involved.
Case No. 3: A substantial and successful Midwest financial services company.
The founder and primary owner of this firm was a well-known financial industry professional who retired and moved across the country. The operation was turned over to the long-time deputy and part owner of the firm, who in turn brought in a CFO and hired a chief investment officer. For a few years, the business continued as it always had and no red flags were raised. The Great Recession had no impact on the firm — indeed, it created opportunities the new CEO/president failed to seize.
Over time, marketing ceased, client service slipped, business declined, and the operation was in chaos. Financial statements were provided to the founder that raised questions. The CEO was questioned and promised to find the answers, but never seemed to find the time. When the founder came for periodic meetings, the obscurantism continued.
Eventually, the CEO/president fired the CFO after providing a substantial termination payment and assumed the financial aspects herself. One morning without warning, the CEO walked out leaving a floundering business behind. The founder returned from retirement to try and salvage the business, found substantial funds missing and clients leaving in droves. The damage to the firm was so substantial that despite a large investment by the founder and an outside investor, the company could not be saved.