Conflict of Interest
Sometimes I want to scream at professionals who are just not thinking, or accuse them of complicity because what they have done is so egregious.
In a recent matter a bakery was sold and there was a dispute on what was turned over, how it was turned over and what was missing or misrepresented. The bakery had reviewed financial statements and when the bakery was purchased the management team came with the bakery. The management was more than willing to help and suggested the audit firm be brought back into review the records and find out what is wrong. The new owners correctly rejected this idea. Than management suggested they bring in a due diligence team to review what was done and to do this is two phases. First review the records for a small fee and develop a plan and bid the work to be done. One the face this seems reasonable and so it was done.
A due diligence company was brought in and reviewed the records, identified some very serious short comings in controls and reviewed what records they were able to see, as several records were part of old files that were damaged or verged on trade secretes and thus could not be disclosed. With this the due diligence firm proposed a scope of work for phase two. The report submitted for phase two was roundly panned by management as lacking in information and having not reported on items and not being in an industry standard form. The new owners listened to the management team and the management team brought in another accounting firm to do the worked for phase two.
Ok – so what just happened?
The new owner just got gamed. The same management team has always been in charge and thus if there are any problems it occurred on their watch. Why, tell me why would the management team want to get a diligent review of the past dealings if they will come up short? The due diligence team was a good choice because management thought a due diligence team was not a smart as the accountants. They were wrong in the assumption. Due Diligence experts are neither brighter or dimmer than accountants – but they ask very different questions that are focused upon core issues where the control systems can manipulated not control processes that are the target of the manipulation. Auditors are focused on control processes and if management passed a previous audit, what are the odds they can pass a less rigorous review?
I am telling the story of a bakery, but this story has happened in companies dealing with armaments, quick stop stores, car washes, land company, cattle company, small manufacturing company, etc… HEY FRAUDSTERS – this is not new!
In each an every case this has happened we took a bit of time to visit with the new owners and asked a question.
Dear sirs do you believe it is appropriate to both have both the foxes in charge of the hen house and writing their own performance reviews as well as selecting the team of blind mice as a third party to provide that independent review?
Most of the time the light goes on and ownership understands what has happened. Even if we are not retained, ownership will take a more aggressive stance on management and controls. Further, without fail – listen – without fail – the management team, in time will be found to have lied, manipulated the business and stolen from the business.
Foxes eat chickens.
Foxes cannot be trusted to keep chickens safe.
Foxes should not write their performance review on chicken safety.
Do not put foxes in charge of chickens.
Unless of course to make a profit one must loose one’s chickens and blame the loss on the owner of the hen house.
