more-arw search

Q&A Forum

When is a "pro forma" really cooking the books?

Sharon Desser's Profile

I was tasked with preparing pro forma financial statements for 2013-2015 by a Board Member who is responsible for secure capital investment. I prepared these reports, which in excel, without wholesale changes to the QuickBooks file. I prepared the spreadsheets with columns labeled As Reported, Adjusted and Pro Forma. Previously prepared normalized financials for this organization were prepared in the same way and distributed in 2015 to potential investors. The Board member was dissatisfied and I was ordered to completely rebuild the books from 2013- to YTD 2016, wiping out many millions of dollars in income and COGS accounts. These number would not conflict with 3 years of K1's and tax returns. Would I be in violation of my professional ethics should I have caved to the Board member's demands?

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Sharon - a little confused. Are you saying the "new" and improved numbers would "NOT" or would conflict with 3 years of K1's.

I assume you made a typo and that they would.

So your question is, if you changed existing real data that was reported to the IRS for this Board member and then created projections going forward, would this be an ethical violation?

Not only would it be a violation, but fraud, which in my book is more serious. While you can say almost anything in projections, because they are really guesses, prior years are not guesses, they are facts.

I would call your General Counsel and then a Board Meeting and discuss this issue.

As Harold Hill would say, "there's trouble in River City!"

Sharon Desser
Title: Director of Finance
Company: sharondesser
(Director of Finance, sharondesser) |

Dear Wayne, yes I meant to write the numbers WOULD conflict!

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

IF (that is a big IF) labelled, highlighted or emphasized properly and accompanied by the ORIGINAL/SOURCE audited financial statements, I think you are okay. The main concern here is that the readers KNOW and UNDERSTAND what they are reading and that they have the audited financials to compare it to. You might even want to include a SUMMARY of what you have taken out (one-time/extra ordinary items).

However, by doing this the company can be saying several things....
1. Our audited financials are in accordance with GAAP but here's a non-GAAP interpretation.
2. Our CPA's are incompetent, here's a different interpretation/presentation.

Pro-Forma (latin, for "for the sake of form"), is generally used to refer to projections or modelling. Also, there is a reason why External Auditors say "presented fairly" in their attestation.

In short, it is NOT the act of producing the pro-forma that will be the issue (a lot of people do this)....the intent and purpose is.

BTW, "normalized" (i mean smoothed out and not taking the extra ordinary items out) statements does NOT give investors the right picture to make an informed decision to invest. That is where the company can get into trouble.

"The Board member was dissatisfied and I was ordered to completely rebuild the books from 2013- to YTD 2016, wiping out many millions of dollars in income and COGS accounts" <<< THIS is a whole different story and if the current investors were able to get hold of the financials you have distributed the last time...and they were different, then FRAUD will be a concern.

Sharon Desser
Title: Director of Finance
Company: sharondesser
(Director of Finance, sharondesser) |

Dear Emerson, a clear and concise response with which I agree completely. Thank you!

Topic Expert
Jaime Campbell
Title: Chief Financial Officer
Company: Tier One Services, LLC
(Chief Financial Officer, Tier One Services, LLC) |

I had a similar situation a few days ago with a client - they are in the process of raising capital, and their intrenal management was directing the CFO to produce pro forma financial statements which made the company look better by reclassifying items as income and by removing certain aspects of the business. And yes, the financials had been audited.

It comes down to this:
What information will help an investor make a decision?

Reclassifying transactions does not.

If a company had multiple business units and an investor will only be investing in one or some of them, then it might make sense to present those business units only, as a pro forma.

However, it's also true that someone invests not only in a business unit, but also in management. In the case of the poorly performing business unit, it makes sense for an investor to learn about how management dealt with challenges. In this case, they realized that the market wasn't responding and they stopped throwing good money after bad, and shrank the unit.

It's a more authentic and effective presentation than just showing the rosy side.

What is also intriguing here is the emotional context: ordered / violation / caved / demands. Worth exploring.

Sharon Desser
Title: Director of Finance
Company: sharondesser
(Director of Finance, sharondesser) |

Dear Jaime,

Thanks very much for your insights. Businesses pivot from one model to another every minute of the day, and that is worth reporting. It shows skilled and forward looking management. In my case, they want to pretend something never happened and show a topline growth trend as only moving up. I understand that, but and normalized reports prepared in excel is the way to handle that, not to create a new set of books in QB. I parted ways with this organization after many conversations with the COO regarding my concerns.

Topic Expert
Jake Feldman
Title: Managing Director
Company: Global TaxFin Advisory Group LLC
(Managing Director, Global TaxFin Advisory Group LLC) |

Hi Sharon and all the other contributors,

Along Emerson's thought, is it possible that the Board Member just wants to prepare a Non-GAAP metric (a different angle expression for Pro Forma) like just about every public company is doing nowadays to make themselves look better than GAAP and is not intending a fraudulent presentation? If you discuss with the Board Member that this is the intention and it's properly disclosed in the presentation with explanation of the adjustments that were made, I think this would be fine. If this is not his/her intention, then indeed it's time to say no.

Jake

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Well said Jake!

Sharon Desser
Title: Director of Finance
Company: sharondesser
(Director of Finance, sharondesser) |

Dear Jake, you make a good point. However I am sure this is not his intention. I was told that I needed to get behind these "numbers" as I would be the one having to face all potential investors to defend the financials. I resigned next day.

Christopher Moe
Title: CEO
Company: ProBrass Inc.
(CEO, ProBrass Inc.) |

Where is the CEO is all of this? I assume you report to the CEO and the CEO reports to the Board. Also, when you say "rebuild" were the original ledger entries permanently wiped out or are you just preparing an alternative scenario which models a "what if" Division X or product Y had never existed? The CEO should be controlling your actions, not a Board member, and the CEO should be explaining to you why this effort is reasonable and appropriate.

Topic Expert
Jake Feldman
Title: Managing Director
Company: Global TaxFin Advisory Group LLC
(Managing Director, Global TaxFin Advisory Group LLC) |

Thanks Wayne and Sharon,

Now that it's clear that this is a case of financial reporting fraud, I think we get into the touchy subject of whistleblowing. The public record seems to indicate that whistleblowers generally do not fare well and face retaliation and disruption to their lives. Courts have also been mushy on whether whistleblower laws (e.g., SOX) apply to private companies, which seems to be the case here. Since you resigned already, there isn't much more direct monetary downside to becoming a whistleblower but there could be lawsuits and other unpleasant effects from this unethical Board member and, I speculate, like-minded CEO/owners/Board who are also in on this.

So, what's an ethical finance person supposed to do beyond resigning?

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Jake -

Not much, unless you have proof that is "beyond reasonable doubt) for criminal prosecution, you will have a tough time proving to law enforcement that fraud has taken place.

If you go public you face the possibility of a civil law suit for libel and/or slander.

Anonymous
(Corporate Controller) |

Wow, when did it become clear that this is fraud? That was not clear to me at all. I would caution against jumping to any conclusions, and particularly against making any accusations, without all of the facts.

Anonymous
(CFO) |

Maybe this statement from the poster had something to do with it?

" I understand that, but and normalized reports prepared in excel is the way to handle that, not to create a new set of books in QB."

It is a forum, not an Investigative Committee.

11013 views
Topics

Get Free Membership

By signing up, you will receive emails from Proformative regarding Proformative programs, events, community news and activity. You can withdraw your consent at any time. Contact Us.

Business Exchange

Browse the Business Exchange to find information, resources and peer reviews to help you select the right solution for your business.

Learn more

Contribute to Community

If you’re interested in learning more about contributing to your Proformative community, we have many ways for you to get involved. Please email content@proformative.com to learn more about becoming a speaker or contributing to the blogs/Q&A Forum.