Warren Buffett, Management, and the Temptation to Fabricate Numbers

There's a quote from Warren Buffett that I like to repeat in client meetings:

"Managers that always promise to 'make the numbers' will at some point be tempted to make up the numbers."

This shouldn't be translated literally. The play on words between make the numbers and make up the numbers is the icing on the cake. In Portuguese, the idea would be: managers who always promise to deliver the numbers, sooner or later, may be tempted to make up the numbers.

Heavy, but true.

I firmly believe that the biggest corporate frauds in the world did not necessarily originate from malicious individuals. They largely stemmed from good people who were overly pressured by numbers that simply didn't fit the operational reality.

I read this quote in The Essays of Warren Buffett. I confess that for a long time I thought the book would be boring — after all, it's a compilation of letters to Berkshire Hathaway shareholders. It seemed like a recipe for sleep. I was terribly mistaken.

The book is full of stories, ironies, and practical observations from someone who spent decades buying companies, choosing managers, making mistakes, succeeding, and thinking about incentives. For those who work with M&A in Brazil, it's almost mandatory reading.

The Problem with Misaligned Incentives

Every management system communicates priorities. If a company only rewards revenue growth, it might end up making poor sales. If it demands margins without considering the customer, it destroys relationships. If it sets impossible targets for its employees, it creates dangerous shortcuts.

Buffett's quote is insightful because it shows that manipulation rarely begins as explicit fraud. Often, it starts as pressure for results, excessive optimism, and small concessions. A tweak here. A postponement there. A target stretched too far.

Before you know it, the numbers stop reflecting reality and start reflecting the organization's political needs. The whole thing went south.

Real-world examples that clearly illustrate the point

Just look at the case of Wells Fargo. For years, the American bank prided itself on a culture of cross-selling. The goal was to sell eight products per customer — the famous "eight is great". Looked good on PowerPoint. In practice, thousands of employees started opening fake accounts, issuing unauthorized cards, and creating phantom products. Why? Because what mattered was make the numbers. In 2016, the fraud was exposed: over 3.5 million fake accounts. Fines, dismissals, destroyed reputation. The CEO was ousted.

Here in Brazil, the most recent and impactful case is that of Americanas. Accounting inconsistencies estimated at over R$ 25 billion. Supplier finance operations dubiously accounted for over the years. It wasn't a technical problem from one quarter — it was the result of a culture that rewarded delivering results at any cost. When then-CEO Sérgio Rial took office and looked at the numbers with fresh eyes, he resigned. Within days, the scandal broke.

Another illustrative case is IRB Brasil RE. In 2020, the company became a market darling, with a narrative of spectacular growth. Until Squadra Investimentos published a letter detailing inconsistencies. Shares plummeted, CVM investigations followed, and executives were dismissed. The case showed that pressure for guidance and to deliver numbers to the market can contaminate accounting in the blink of an eye.Read more about the CVM and IRB case]

Finally, it's worth recalling Jack Welch's GE. Welch is revered as an icon of American management, but part of his legacy is controversial. During his twenty years, GE beat guidance quarter after quarter — something statistically almost impossible. How? Earnings management aggressive, asset sales at the end of each quarter to plug holes, inter-divisional transactions suspected of being artificial. When Welch left, the edifice proved fragile. The GE of yesteryear no longer exists.

What does this have to do with M&A

Everything. And this is the part that interests me most.

Anyone working in mergers and acquisitions deals with these incentives all the time. When the seller knows they will be valued by a multiple of EBITDA, they might be tempted to stretch the EBITDA. When there's an earn-out, someone might accelerate revenue or defer expenses to "make" the numbers for the measurement period. When the seller wants to close the deal before year-end, the temptation arises to "adjust" small things on the balance sheet.

That's why due diligence exists. That's why the SPA has lengthy representations and warranties clauses. That's why good buyers conduct quality of earnings seriously, with independent auditors scrutinizing every line of the P&L. It's not baseless distrust. It's basic protection against exactly what Buffett described in a single sentence.

Read more: Company Valuation: When the Number Becomes a Trap.

I've seen sell-side advisors present an Info Memo with an EBITDA "adjusted" so creatively, with so many add-backs, that the number represented an increase of over 100% compared to the accounting figure. I've seen buyers, during the LOIphase, discover that one-third of the target's margin depended on a single client who was leaving. I've seen closing postponed because the due diligence uncovered insufficient provisions. Almost entirely because someone, at some point, promised numbers that the operation couldn't deliver.

Another problem is that many of these adjustments don't appear in the teaser, nor in the initial negotiations. They appear during the due diligence. And when they do, either the price drops, or the deal dies. There's no way around it.

Back to basics

The business world loves novelty. Every so often, an acronym, a thesis, a framework, a savior technology. Artificial intelligence, ESG, blockchain, now AI agents. Everything matters. But the fundamentals don't change.

Buffett built much of his genius by doing the basics with discipline: real cash generation, margin of safety, good managers, aligned incentives, and patience. Nothing very glamorous. Perhaps that's why it works so well.

In M&A, this lesson is invaluable. Before getting carried away by growth, multiples, or narrative, it's worth asking: are the numbers reliable? Is the cash flow real or merely accounting-based? Are management and shareholders aligned? Does the culture favor long-term decisions or applaud shortcuts?

Without these answers, the buyer risks buying a pig in a poke. And the pig, sooner or later, will squeal.

Read more: Organizational Culture: Behavior Drives Strategy.

How to Protect Your Side of the Table

For those considering selling their company: prepare seriously. Conduct a vendor due diligence. Clean up inconsistencies before the buyer discovers them. Present defensible numbers, without exaggeration. The market punishes those who overpromise. [See more: KPMG Guide to Sell-Side Due Diligence.]

For those buying: trust, but verify. Hire an M&A advisory firm that understands the operation, not just the deal. Conduct a due diligence of quality. Negotiate protective clauses in the SPA: MAC clauses, indemnities, escrow, earn-out well-structured. Don't rush to close.

If you're in the middle of a sales process, remember: each NDA signed, each MOU or LOI negotiated, each meeting with an investor, is an opportunity to build trust or to undermine it. And trust is worth more than a multiple.

Simple, but difficult

Complicating things is easy. Simplifying can be difficult — because it requires clarity, and clarity requires reliable data and courage.

Buffett reminds us that good businesses depend less on financial magic and more on well-executed fundamentals: cash, good people, correct incentives, and intellectual honesty. It seems simple, but getting there requires a lot of vision, both for the present and the future.

My skepticism about doctored numbers is not without reason: I've seen many deals die in the due diligence because someone, in the past, chose to overpromise. The buyer can purchase the company. But before the company, they purchase trust. And trust cannot withstand accounting creativity.