We may think fraudsters are rare to find and that we will not ever experience one, however, the risk they pose is so high we must be on guard to keep potential cons, fakes, and phonies, out of our business.  Anyone who is involved in hiring senior people in an organisation must be committed to understanding how to avoid hiring a candidate who will commit fraud. Herein lies the importance of identifying what constitutes a red flag, and asking the right questions during an interview to prevent a fraudster CEO from even crossing the threshold of your organization

Before tapping into the areas to look out for during your executive search, let me highlight some common tactics a fraudster CEO will employ.  A common approach is first, they will come in and slash costs, firing 15% to 30% of the staff to reduce the salary staff expense on the P&L, and will change the management information and accounting systems to prevent legacy employees and board members from logging in to check the accounts.  They want to make it as opaque as possible for anyone to really see what is happening with the cash flow.  Another approach they will employ is slashing costs by liquidating assets, for instance, by selling a building owned by the company and then leasing it back in an attempt to inject cash into the business. Second, they will fire people from all control functions, such as the CFO, the Head of Audit, and the Head of Legal, and they will hire people who are loyal to them. The next step for them would be to open fake companies which they will put on the preferred supplier list, sign contracts with, and send invoices to bill the mother company and syphon money out by paying these dummy invoices into these fake shell companies they set up. 

From the board’s perspective, they look at the bottom line at the end of year one and think that the company’s position has improved drastically: profitability is up, the accounts are flush with cash, and board members are earning the best dividends in years.  The CEO is their white knight in shining armour who has saved the day.   

The reality is that the company will go into a nosedive by year two because the CEO would have fired all the good stuff, meaning they are unable to adequately service their customers, customer satisfaction will nosedive to an all-time low, and top-line revenue will slowly start to contract, and the cash would have been completely syphoned out into the accounts of the dummy companies. If the board tries to hold the CEO and CFO accountable, they will say that nothing could have been done, citing exogenous factors such as market conditions, to buy themselves time to close the companies, liquidate them, hand in their resignation, and start looking for their next victim. 

That is a common scenario, but the number and style of frauds are only limited by the boundless creativity of these white-collar criminals.  Now that you know the true potential of the actions of a fraudster, there are specific areas that you can watch out for, and look into to ensure your organization never falls into the hands of a conman CEO:

  1. Citing unrealistic results: This would sound something like “The company was losing money for 3 years and then I joined and I made the company profitable in 3 months”. It’s impossible to get that kind of result in 3 months, so you can be sure a slash and burn is in the works, or perhaps that profitability may be attributed to a market turn or other factors that had nothing to do with the CEO. The bottom line is: that you cannot start a strategy, execute it, and get profitable in 3-6 months, so this is a clear sign that you need to take a closer look at the P&L.
  2. Lack of emotionality and details: When a CEO is turning around a company that is losing several million dollars a year, their first meeting with the company’s bankers is an emotional experience. Ask them “What was it like, when you met with your creditors for the first time? Who was the banker who helped you turn things around?” The point is to take it to the level of seemingly mundane and silly questions like “were they a tea drinker or coffee drinker” to get details and emotionality because a conman will lack emotionality and will not be able to provide details.

If you have a candidate that checks the boxes in these three areas, it warrants further investigation and taking a closer look. Looking for more questions to ask a CEO? Read “CEO Assessment and Selection” to learn more about the 7 universal success factors for the Chief Executive Officer and unlock over 450 fail-safe questions that allow you to recruit top performers. Get more free CEO Assessment tips at https://tpgleadership.com/ceo-assessment-selection-book/ .

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