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Top lessons from recent accounting scandals for current CFOs.

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TLDR:

  • There are two high-profile scandals with finance chiefs in the spotlight: Chemours and Archer-Daniels-Midland.
  • The scandals involve financial reporting practices, violation of ethics, and internal control weaknesses.

In the recent events involving Chemours and Archer-Daniels-Midland (ADM), finance chiefs have been under scrutiny for their involvement in accounting scandals that have shaken the financial world. Jonathan Lock, the CFO of Chemours, along with CEO Mark Newman and Camela Wisel, the controller and principal accounting officer, were placed on administrative leave during an internal investigation of financial reporting practices. The investigation revealed that they violated the company’s code of ethics by delaying payments to vendors and speeding up the collection of receivables to meet free cash-flow targets and incentive compensation metrics. On the other hand, Vikram Luthar, the CFO of ADM, agreed to resign amid an ongoing investigation into internal control weaknesses related to the company’s nutrition segment.

These scandals highlight the importance of ethical behavior in the accounting process and the need for strong internal controls within organizations. John M. Veitch, Dean for the School of Business and Management at Notre Dame de Namur University, emphasized the concept of the “fraud triangle,” which includes opportunity, incentive, and rationalization as contributing factors to fraudulent activities. While the motivations behind the scandals at Chemours and ADM differ, the common thread is the pressure to meet financial targets and the potential personal gain that executives may benefit from.

Lessons can be learned from these scandals for other finance chiefs. According to Shiva Rajgopal, a professor of accounting and auditing at Columbia Business School, external factors such as the cost of capital, macroeconomic conditions, and board-set compensation targets can increase the pressure on CFOs to meet financial goals. The key is to maintain ethical standards, implement strong internal controls, and resist the temptation to manipulate financial results for personal gain or to meet unrealistic targets.

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