Background

  • Small, privately held manufacturing conglomerate with 37 different operating companies spread around the world.
  • One of the Parent’s operating companies is a specialty manufacturing company located in Beijing, China.
  • The company was a manufacturer of highly engineered industrial trucks.
  • The Chinese site was one of three similar operations with the others in the U.S. and Latin America.
  • The U.S. operation was running at near break-even while the Chinese company was losing significant money.
  • Since power and labor costs were more favorable in China than in the U.S., the losses were a major red flag.
    This situation had been occurring for over three years without any Board questioning.
  • The previous General Manager of the China plant had engaged in fraudulent activity and had been fired.
    Executive management had hired a new GM for the China.
  • The Board approved this hire and the related compensation package without any formal due diligence on the new GM.
  • Over a number of months the CEO and the Board did virtually nothing to address the poor operating results of the manufacturing company located in Beijing.
  • The poor financial results, however, were alerting the conglomerate’s bankers that action was needed to address what appeared to be a distressed situation.

 

My Role

  • I had just assumed the position of CFO and a member of the Board of Directors of the Parent Holding Company.
  • Had serious conflict with several members of the Board, over the issue of questioning their actions and inactions regarding the Chinese operations.  It was made clear to me that my credibility was on the line.

Actions Taken

  • After a strategic financial review of the Chinese Operating Company, I recommended to the Board that an extensive on-the-ground inquiry be conducted into the Chinese operations and the senior personnel.
  • A team of forensic accountants were sent in to pour through 4 years of records and transactions.
  • An outside Law Firm was retained to conduct reputational inquires and background checks into the senior Chinese personnel.
  • It was discovered that the new GM was the nephew of the former GM.
  • This information was unknown to the Holding Company’s CEO and the Board.
  • The GM and the Senior Accountant were dismissed and replaced with a temporary GM recommended by a well respected Chinese consulting firm.

Results

  • The forensic auditor uncovered an embezzlement that exceeded $1m.
  • The former GM and the Senior Accountant were arrested by Chinese authorities.
  • Under new management the company returned to profitability.

Lessons Learned

  • Board of Directors involvement cannot be passive or hands off. The Board had hired the new GM without doing a proper background check, without checking references and without realizing that he was related to the prior GM.
  • The Board must demand that management recognize the cultural and social differences that are still very much in play when operating an off -shore manufacturing plant.
  • Absentee senior management rarely works in establishing proper controls over foreign operations.
  • Attentive Board oversight supported by frequent independent audits as well as demand by the Board for frequent in-person senior manager visits to overseas operations are key to preventing future fraudulent activity.