Will the Crooks Get Away With It?

February 4, 2006 10:01 AM

Will the crooks get away with it?

I have some friends who are working for a company that is doing well, and they believe the company will go public or get VC money. However, I know the company has engaged in some questionable accounting practices, and I wouldn't be surprised to see the company leaders get indicted for tax fraud. What are the chances the company will get funding or be able to go public if the CEO is indicted? I'd like to warn my friends that they may be wasting their time, and they could get stuck with a questionable company on their resume. Finally, I am not at liberty to say how I know about the questionable accounting; and I'm just looking for some insight from our financial gurus.

posted by astorias to work & money (8 comments total)

Oof, this is a tricky issue. Personally I would never work for a company where I thought the CEO was about to be indicted or did things that he or she should be indicted for. I mean, how could you possibly want to work for someone you think is a crook? If the company is cheating on taxes, how do you know they aren't also cheating employees or investors?

But there's a difference between fraud and a bit of sloppiness. A lot of businesses have books that aren't perfect. If the "problem" is just an honest mistake, that's one thing. If it's deliberate fraud that's another. Tax fraud is a particularly dumb thing to be doing since there are so many records and a whole division of the government dedicated to tracking it down.

It would be very difficult for a small company to get a first VC round if the CEO has been indicted for fraud. For a new company to overcome something like that there has to be a very good story that involves the CEO being fired and having no further involvement with the company.
posted by Nelson at 10:25 AM on February 4, 2006

If the CEO gets indicted then the odds are that the VCs will distance themselves. It won't stop the company from going public, although it could delay it a while.

If the accounting practices are merely questionable, then a competent executive staff will almost certainly get away with it. If they've been foolish enough to leave a clear paper trail or in any other way blatantly violate the law, your friends should quit anyways -- working for crooks is one thing, working for incompetent crooks is another.

In my experience the type of people who start up companies are also the kind of people who like to stretch the tax laws to the limit. A certain amount of dodginess comes with the territory.

To summarize: if the execs are incompetent enough to get caught red-handed, you don't want to work for the company anyways. If they're going to get away scott free, or merely get fined, it doesn't sound too bad.
posted by tkolar at 2:59 PM on February 4, 2006

First, if a company is "doing well" and your friends feel they are paid well for their work then they should stick around and enjoy getting paid.

Second, if they're in it for the fat paycheque down the road and do not feel they are being currently paid well, THERE IS A HUGE DIFFERENCE BETWEEN GOING PUBLIC AND GETTING VC. Going public might result in a benefit for them, getting VC will probably mean more of the same. Depending on what they are currently getting out of this deal and what they are hoping to get out of this deal should tell you if they should worry about this issue at all. Unless they are in the accounting department, I cannot imagine a job with a company that later went out of business would be seen as a negative by future employers. I cannot see having a job (even with Enron) over not having a job, as ever being "a waste of time."

I would imagine lots of companies get VC while cooking the books, for what it is worth.
posted by pwb503 at 3:18 PM on February 4, 2006

Just to be clear...they have purposely evaded taxes.
posted by astorias at 6:21 PM on February 4, 2006

Erm, then that's tax evasion. Never mind the accounting scandal post-IPO - evasion is a federal criminal offense that they're guilty of right now.
posted by junesix at 7:25 PM on February 4, 2006

What are the chances the company will get funding or be able to go public if the CEO is indicted?

First, the IRS rarely asks for prosecution of first-time offenders. They'll generally settle for back taxes and penalties. At worst, the CEO will get plead guilty to lesser charges and be sentenced to probation.

Second, if it's simply tax fraud (as opposed to accounting fraud, where profits are inflated or created out of thin air), then investors are probably not going to be scared off (but see the third point). What investors want to know is what would the financial figures (income, assets, etc.) look like if there hadn't been any fraud (in other words, what are the real figures)? If the company has real products, real customers, and revenues exceed costs, then investors are always interested.

Third, investors worry about one person (in this case, the CEO) only if he/she is (a) indispensable and (b) is either going to jail, or is convicted and as part of the sentencing isn't allowed to stay with the company. Since he/she is not likely to go to jail (see (1)), and isn't likely to be forbidden to work with the company (that's typical only with publicly traded companies, and SEC punishment).

In short, if the company really is profitable, then tax fraud isn't likely to get in the way of bigger things.
posted by WestCoaster at 8:19 PM on February 5, 2006

I'd warn them. A former cow orker of my father is currently the fall guy for a company who had shady dealings. Not only did he find himself unemployed and apparently unemployable but DOJ has been dragging this on for years as they determine who to hang.

In his case he was clearly complicit to some degree, however from our knowledge of the man personally and professionally we're inclined to think he was largely a figurehead for the real decision-makers and got roped in though the old frog-in-boiling-water method - when the water slowly heats up around you, sometimes you don't notice till it's too late.

Dealing with thieves and scum is a great way to get sucked into their slime, and as others said upstream when you're screwing Uncle Sam it's doubly dangerous. Warn them to get out.
posted by phearlez at 1:42 PM on February 6, 2006

They dodge taxes, they manipulate pricing, they create fake companies to make it appear as if there is competition...it's not a good group at the top.
posted by astorias at 3:05 PM on February 7, 2006