Produced by Julie Garland-McLellan, Consultant at AltoPartners Australia and non-executive director and board consultant based in Sydney, Australia.

Contribution by Kevin Hall, is an AltoPartners Global Board Member and Canadian Managing Partner at AltoPartners, he is also a board member of STAT Healthcare Corporation, Calgary Highlanders Regimental Funds Foundation and YouthLink Calgary. He is based in Calgary, Canada

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The Director’s Dilemma - May 2022

This month we look at what to do when you detect fraud, even if it doesn’t involve money, and people want to turn a blind eye.

Ryan chairs the remuneration committee of a large private business. The Chair is the son of the founder and has been in the role for almost twenty years. The management team are professional and family involvement, apart from the board chair, is minimal.

The CFO recently announced a desire to retire and the CEO was authorised by the board to search for a replacement. The replacement was speedily found and appointed. The new CFO’s CV was circulated to the remuneration committee with details of his salary and incentives package. Ryan was surprised the CEO had found such a highly qualified and skilled individual in such a short time.

The new CFO has settled in quickly and seems to be doing a good job.

Ryan asked if reference checking had been completed and was told that it hadn’t because the candidate was so stellar an offer was made while he was still available. Remuneration committee policy is that all members of the senior leadership team have their references checked and undergo a police check upon appointment unless they are internal promotions. The CEO engaged a consultant to perform the checks.

The results were shocking. The new CFO does not have all the qualifications he claimed and was Finance Controller at his previous company, not CFO as both his CV and LinkedIn profile state. The CEO asked the board chair if they could keep the CFO as he is popular with the team and has made good improvements to processes. The chair agreed. Ryan is not sure this is a good idea.

What should Ryan do?

Kevin’s Answer

There has been a serious breakdown in hiring policy and procedure by the CEO and certain Board Members (CFO was likely interviewed by the Audit Committee) all of whom should have requested/reviewed background checks and references on the CFO candidate. Increased importance as the CFO is also most likely an officer of the company.

Untruths and exaggerations are common on approx. 70% of resumes. Miss-stating credentials and professional designations is a much more serious issue which can have legal consequences. Both demonstrate a lapse in personal integrity, ethics, and trustworthiness.

Position titles can vary between organizations. Some candidates use the CFO title (or equivalent to wording) where they are/were the most senior financial person in an organization which, for example, might only use the title Comptroller. Candidates make an argument that the CFO title better communicates their level of financial responsibility.

It is important to obtain the new CFO’s written explanation of his misrepresentations. This could also then support a “termination with cause” decision.

It was inappropriate for the Chair and CEO to agree that the CFO should be retained without a review and discussion by the full Board (breach of hiring policy; CFO credential misrepresentation and resume inaccuracies). Ryan should request that the Board be immediately convened to review the CFO Hiring.

With the facts as presented, the Board cannot be complicit and it must terminate the CFO’s employment for lack of integrity and unethically miss-stating his credentials. If the Board fails itself to act with integrity, then Ryan should resign from the Board.

Julie’s Answer

Ryan should first fix his policy by changing the wording from reference check upon appointment to reference check before appointment. That is the easy bit done.

The new CFO has likely perpetrated a fraud. That is not something that should be rewarded or ignored. The harder tasks are finding out how big the fraud is and what is the potential danger to the company.

Ryan should arrange to talk with the CEO or Chair of the previous company and find out what exactly led to the CFO seeking alternative employment. He can also use that conversation to ascertain if there were any irregularities in the accounts or controls during the CFO’s tenure.

He should then arrange for someone independent to check the accounts. People who misrepresent their qualifications and experience are not to be trusted to make ‘improvements to processes’. Ryan should ask an auditor to check whether these changes may have introduced controls weaknesses and whether these weaknesses could be exploited for personal gain by a senior staff member such as the CFO and/or CEO.

Fraudsters and con-artists achieve their aims by being charming and likeable; if the new CFO is a fraud it is not surprising that the staff like him. That liking is not enough to outweigh the risks.

Hopefully the CFO is still on probation and these misrepresentations are sufficient to terminate the employment without any legal repercussions. If the employment is already permanent, Ryan should ask the whole board to consider some legal advice on the pros and cons of keeping this CFO. My assessment is that it is worth some unpleasantness now to remove him from the company before he corrupts the ethos of those around him.