LEAD 60 - INC. - NOVEMBER 2017
Norm Brodsky is a veteran
entrepreneur. He is the co-author
of Street Smarts: An All-Purpose
Tool Kit for Entrepreneurs. Follow
him on Twitter: @normbrodsky.
The Temptation to Lie
Sooner or later, most of us get
into difficult situations. And
that’s when character is tested
“Don’t do anything now,” I said. “Get me your
fnancial statements. I’ll tell you what I think.”
He seemed desperate, but I didn’t hear from
him. Six weeks later, the person who introduced
us said Clarence needed to see me urgently. He
brought me his fnancials. I took one look at the
balance sheet and said, “I hope you didn’t give this
to anyone else. These are fraudulent numbers.”
“I gave it to the bank,” he said. “I have a meet-
ing with them Monday. What’s wrong with it?”
“According to this balance sheet, your current
assets exceed your current liabilities by more than a
million dollars,” I said. “Why don’t you just pay the
bank the $750,000 you owe them?” Clarence admit-
ted that he couldn’t, even though the balance sheet
showed he could. I asked how much inventory he
had. At frst, he said $150,000 worth—the amount
he claimed he could sell it for, an irrelevant number.
“How much did you pay for it?” I asked.
“Sixty thousand dollars,” he said. The balance
sheet showed $970,000 in inventory. “That’s fraud,”
I said. Clarence protested that the accountant had
told him he had to provide a bigger number to the
bank. “Did you read the frst page?” I asked. “It says
all the numbers come from the client and haven’t
been audited or verifed. What about this number—
prepaid expenses of $600,000?” He said that he
had paid certain expenses in advance. “You paid
$600,000 in advance?” I said. “Baloney. I’ll bet the
Accounting rules allow you some choice about
revenue recognition, inventory treatment, amor-
tization, and the like. You can be aggressive but must be legal. In his desperation to save his
business, Clarence crossed a line that could land him in jail. Failure may be humiliating, but
isn’t it preferable to prison? Indeed, bankruptcy is almost a right of passage in Silicon Valley.
You can rebound from a bad deal or a bankruptcy. You are unlikely to rebound from a jail cell.
Clarence was beyond my help. Get the best criminal lawyer you can fnd, I advised,
and tell the truth. “If you meet with the bank before seeing an attorney,” I said, “you’re out of
your mind.” He left, clearly shaken. Our mutual friend later asked why I hadn’t suggested
that Clarence just tell the bank he’d erred, and have him produce a corrected balance sheet.
“Because then I’d become part of a conspiracy to commit fraud,” I said.
The lesson here is this: No matter how much pressure you’re under, don’t ever lie on your
fnancial statements to your bank. I just hope Clarence can learn that lesson without having
to pay a heavy price.
RUNNING A BUSINESS is a series of decisions: where to locate, what to produce, what to charge, how to distribute. There are consequences—perhaps bad ones—to whatever decisions you make. You must ake responsibility for the consequences, or you’ll never learn from your mistakes. That’s why I’m reluctant to dole out advice to young entrepreneurs. Occa- sionally, though, I am confronted with
a situation where I do ofer very clear and frm advice. I ran into
one recently with an entrepreneur I’ll call Clarence.
His company sold a consumer product with a unique twist.
(I won’t be more exact, for reasons that will become obvious.) He
was in dire straits when he came to see me. Clarence was being
hounded by creditors and couldn’t repay his $750,000 bank line
of credit. When I questioned him about his sales and margins, his
answers were a little too vague. I asked to see his fnancial statements. “But I have to meet with the bank,” he said. “My lawyer