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What current CFOs can learn from a pair of ‘qualitatively different’ accounting scandals

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Good morning. Ideally, CFOs should approach the accounting process ethically, but there are currently two high-profile scandals with finance chiefs in the spotlight—but for different reasons. While one CFO appears to have been directly motivated by personal gain, another may have been trying to keep up with a strategic initiative.

At Chemours, a global chemistry company, CFO Jonathan Lock resigned on April 23. Lock, along with CEO Mark Newman, and Camela Wisel, controller and principal accounting officer, were placed on administrative leave in February during an internal investigation of financial reporting practices. Lock is not entitled to "any severance, equity award vesting, or other compensation in connection with this resignation," according to the SEC filing.

In March, Chemours announced the audit committee’s review, with the assistance of independent outside counsel, which found that the three leaders had violated the company’s code of ethics in delaying payments of up to approximately $100 million to certain vendors from Q4 2023 to Q1 2024. And the execs sped up by one quarter the collection of up to about $260 million of receivables into Q4. Both actions, the review found, were done to meet free cash-flow targets that the company had publicly announced, “which also would be part of a key metric for determining incentive compensation applicable to executive officers,” the company said in a statement.

Meanwhile, at Archer-Daniels-Midland, CFO Vikram Luthar agreed to resign effective Sept. 30, according to an April 19 SEC filing. He was placed on administrative leave in January amid an investigation tied to ADM’s nutrition segment. An internal probe found “a material weakness” in its internal control over financial reporting. A Department of Justice investigation is ongoing. Luthar will receive his annual cash performance incentive award of $743,419 for 2023 and the shares earned for his 2021 performance share unit award. He’ll also receive his paid base salary during the transition period.


But are there lessons here to be learned for other finance chiefs? I reached out to John M. Veitch, dean for the School of Business and Management at Notre Dame de Namur University, to learn more. He pointed to the concept of the "fraud triangle," which outlines three key contributing factors: opportunity, incentive, and rationalization.

"ADM and Chemours are qualitatively different circumstances," Veitch said. With Chemours, the "manipulation was much more about personal gain by defrauding shareholders to get a bigger payout for themselves," he said. There was “a significant bonus scheme tied to a non-GAAP number,” Veitch explained, adding that the executives' willingness to manipulate the numbers also may have included some sort of “rationalization that they weren't really cheating, just altering timing of things.”

“ADM’s accounting problems arise from difficulties in implementing a strategy for the company,” Veitch continued. ADM CEO Juan Luciano announced in 2021 a goal of $1.25 billion to $1.5 billion in operating profit for the firm's nutrition segment by 2025. Veitch's assessment is that the incentive for the CFO was to "rearrange accounting categories to mask weakness in the strategy’s results, and the rationalization was that it was supporting what the management team ‘knew’ was going to be a successful strategy—except it wasn’t."

Although Luthar's actions as CFO, compared with the group at Chemours, were less directly related to his personal gain, "undoubtedly, he did benefit as a result,” Veitch concluded.

There’s always pressure to meet financial targets, Shiva Rajgopal, a professor of accounting and auditing at Columbia Business School, told me. “Pressure heightens when supply of capital is under stress or cost of capital goes up," Rajgopal added. "Pressure also goes up when the board sets compensation-related KPIs that are stretch goals and somewhat harder to meet, given a deterioration in the macroeconomic climate, such as a slowdown or a recession.”

Sheryl Estrada

María Soledad Davila Calero curated the Leaderboard and Overheard sections of today’s newsletter.

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