Real estate tycoon Nicholas Schorsch was forced to resign on December 15, 2014 as head of the $30 billion commercial real estate empire he created. His resignation from the boards of American Realty Capital Properties, along with 15 other related companies, comes in the wake of revelations in late October that first and second quarter cash flows reported in the company financial statements were overstated by $12 million and $11 million respectively.
In addition to Schorsch, the company’s recently installed CEO, David Kay, and Chief Operating Officer Lisa Beeson also surrendered their positions, essentially leaving the company without its three top executives.
Based on statements made by the company’s audit committee, it appears that the accounting overstatements were the result of deliberate decisions, not inadvertent errors. In the recent past, Mr. Kay referred to the company as run by an ethical team.
This story bears watching as it unfolds. It has all the ear-marks of a classic corporate disaster: a man-made avoidable disaster created by decisions that were bad from the moment made–no hindsight required.
Time will tell the details of the decision making that went into the accounting overstatements, and we and others can autopsy those failed decisions to determine what went wrong. But for now this story serves to underscore the harm caused by bad decisions that result in corporate disasters. Since the accounting irregularities were revealed in October, the company stock has slid by 34 percent, for a $3.7 billion loss. And at least three executives career’s are in shambles. The inevitable law suits have started, as well as a possible criminal investigation.
The accounting overstatements amounted to 8 percent and 5 percent of cash flow for the first two quarters of the year, or as stated above, $12 million and $11 million. This in the context of a company worth $30 billion was nothing. The harm to shareholders, employees, and others from an honest accounting of cash flow at the time would have been miniscule in relation to the harm caused by the attempt to make things look better than they were.
So why do smart talented executives make this kind of bad decision? It will be fascinating to learn the story. No doubt, conflicted-self interest, which robs decision makers of objectivity, played a role. Corporate culture often is a factor in these kinds of cases. This was a company with a spectacular story of growth and success. There must have been great pressure to keep the winning streak going.
Stay tuned as the story unfolds. It will be worth watching.