Some CEOs are great at execution. They develop products that customers truly desire. They know how to increase sales and generate profits. They are consistently rewarding shareholders by maximizing their investment.
Then there are other CEOs who aren’t as adept at executing on a business plan, but instead possess superb culinary skills. Only instead of whipping up a mean chicken cacciatore, they spend their time cooking the books.
How can investors tell if a CEO is really a chef in disguise? It’s simple. But it requires investors to examine a company’s financials – ingredient by ingredient by ingredient.
If something doesn’t smell right, it probably isn’t a rotting onion. You’d be amazed at some of the shenanigans companies have pulled to conceal losses or make their financials appear more attractive than they actually are.
I remember in the dot com heyday of the 1990s, financial statements were littered with barter transactions and “Lazy Susan Deals” which were deceptively being recorded as real revenue. Essentially, companies would register revenue from a barter transaction as if real cash was received. Then they would simultaneously record the same amount as an expense – regardless of the fact that no cash was ever paid out. And in the case of “Lazy Susan Deals”, a well branded cash-rich corporation would invest in an emerging cash-strapped Dot Com, and in exchange the Dot Com would promise to give back the capital in the form of some services payment. The corporation would record the cash as revenue while the Dot Com would recognize it as an investment and benefit from the ensuing PR surrounding the announcement. In both cases, shareholders were misled and millions were ultimately lost.
There’s always some chef in a CEO’s clothing trying to bake up some new scam or find ways to exaggerate revenue in order to mask her failure to execute. Watch out for the cook who manages to record some of the money raised from a financing round as revenue derived from sales. Or the baker who raises his salary in order to purchase his company’s flawed products.
Remember, being exempt from public reporting is not a license to conceal information from shareholders. Even shareholders of private companies possess information rights. Some information rights are detailed in shareholder agreements. Others are enforceable through State and Federal laws. Know your rights and demand to examine the books.
If you have to, hire an accounting firm to conduct an audit, or pay to have an independent evaluation performed on the company. It could save your investment. Or it could at least provide you with the documentation required by the IRS to write-off a bad investment.
This article was originally published on LinkedIn Pulse
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