10. The Auditors Have a Thing or Two to Say
If there’s one thing a CFO candidate shouldn’t take for granted these days, it’s the opinion of the outside auditor.
Larry Reinhold never spoke with Critical Path’s outside auditor, PricewaterhouseCoopers — in part because he was tapped for the job while a partner at PwC. Though Reinhold never audited Critical Path himself, knowing that members of Critical Path’s management served on the audit team gave him comfort. (For that matter, everything seemed to check out: Reinhold knew Critical Path’s president and outgoing CFO, the management seemed experienced, the board members were big-time VCs, analysts were bullish, and many people didn’t know Enron from an end run.)
The next time around, when Reinhold interviewed at Greatbatch, he made sure to speak with the external law firms and outside auditors. In addition, he gave extra attention to “areas of integrity and ethical behavior.”
When a company’s outside auditors speak with a prospective employee, they aren’t going to badmouth a client outright, but they might have a warning or two. “Auditors generally enjoyed talking to me about their client companies,” says Greer. “I’m not sure they’re supposed to, but it was usually a good source of information.”
For a CFO who can reads between the lines, that good source can reveal some bad circumstances. If the auditor says, for instance, that they’ve been doing a lot of work on their cash flow or cash statements, “it tells me maybe cash is a big problem,” notes Greer. These days, that would be enough for Greer to lose interest very quickly.
It might also be wise to see if the audit committee is displaying active and effective oversight, says Ernie Lorimer, a partner at corporate law firm Finn Dixon & Herling. If it’s not, the incoming CFO may well need to unwind a series of hedges or some off-balance-sheet transactions that aren’t fulfilling their purpose, or didn’t have much of a purpose in the first place. Furthermore, an ineffective audit committee that “is not backing that effort,” adds Lorimer, “will make the CFO’s judgments less tenable.”
For that matter, independent directors may have a completely different take than management does on the company’s state of business. “If the board sees it differently, you can pretty much be assured that there are going to be big issues down the road,” says eUniverse’s Varraveto. (Although today, some companies that are “Tuning In to Cash Flow” often find that they may be better off than they seemed.) But sometimes, says Varraveto, “you can’t reconcile it”; you have to “walk away.”
Have any “sure signs” of your own? Send them to CraigSchneider@cfo.com.