A story about an unqualified CFO

One of my stories about a CFO who was not a qualified accountant, could be made into a case study about internal controls and priority setting.

It happened when we had four separate unconnected IT systems to run the company: manufacturing, inventory management, sales and accounting, but what was important was there were insufficient, even no controls on the information passing from one system to the other, and most of the transfers were done manually. Internal controls were more or less nonexistent.

The CFO had never heard of the term ‘internal control’ and did not understand the concept. As a consultant my explanations, worries and warnings were too abstract and I could give no $ amount to show how bad the situation was. There were many other more important and more interesting things to do, so internal control was not a priority. As a result the CFO did not give me the resources in people or money to put in place some basic checks, even the most fundamental.  I did what I could to put in controls with the resources I had. I could do nothing to analyse the past to see what could have been missed.

But we didn’t have to wait long until an incident arose.

We received a customer complaint about one of our products which was deficient and the customer wanted to return and replace it. After investigation, we discovered that the inventory system showed us that this product was reported as still in the local warehouse and had never been invoiced to the customer! All of a sudden my CFO understood the concept of internal control. We had shipped a product to a customer and not recorded it as a sale: one of the most basic controls of them all.

We were two weeks away from the year end. So what was the priority now? Make sure that we had no more of these errors for the previous eleven and a half months or correct the current process or both?  And what other errors were there in the system? With this error, he realised that the financial statements and internal reporting were perhaps not accurate. 

We received the resources to correct the problem, but we had to delay the annual report, work in haste, and pay the auditors more, because they correctly decided to make more extensive audit checks to ensure that nothing had been missed.  And in many ways we were lucky that that the incident came up before the end of the accounting year.

Had the CFO been a qualified accountant, there is no doubt in my mind that he would have recognised that the accounting system was deficient and would have immediately put into place a team to manage and correct the internal controls. Not being a qualified accountant, he had no way of judging the quality of the systems.