Fun facts about corporate accounting scandals

Regular readers will know that we have a soft spot for corporate responsibility infographics. The one below, which recently crossed our desk courtesy of Accounting-degree.org, provides a nice overview of some of the big corporate accounting scandals of the last 15 years or so. The title may be misleading - it hardly seeks to capture the biggest scandals of "all time" - but it does give a good summary of those that have happened in recent memory. And the sources of the details they provide are cited - most of which (but not all) are pretty reliable. So if you want a five minute summary of all that's wrong in the world of accounting fraud, and you don't mind a strong US bias, this is a good place to start.

One thing we particularly like are the "fun facts" accompanying each scandal. OK, so most of these are not really much fun at all - is anyone laughing about the introduction of Sarbanes-Oxley after the Worldcom and Enron scandals? - but they do point to some of the absurdities of the system in which the accounting scandals have taken place. Enron being voted most innovative company six times in a row by Fortune magazine, Lehman brothers being honored with "Most Admired Securities Firm" a year before its collapse, AIG execs getting $165m in bonuses just after posting the largest quarterly loss in American corporate history and getting a government bailout? It doesn't say much about how well we scrutinize or reward supposedly "successful" companies, does it?

It's also interesting that the infographic has been created by an organization promoting online accounting degrees (we might add that their other Featured Article is titled "10 Accounting Tricks the 1% Use to Dodge the Taxman", which is also worth a look). Are they saying that an accounting degree will help avoid some of these problems in the future? That what we need are better accounting degrees? That an on-line offering is in any way more or less likely to lead people to engage in shady accounting practices? Clearly there is an important role for accounting education in here somewhere, but we're not too sure about the offerings being recommended by Accounting-degree.org, or even who the organization is or what its methodology is. In the spirit of good accounting, a little more transparency would be a good thing. But don't let that stand in the way of enjoying a nice infographic.

Source: Accounting-Degree.org

Photo by AJC1. Reproduced under Creative Commons Licence

Crisis? What Crisis?

In the latest edition of ‘Business Ethics’ we referred to the events of 2008 (Lehman, AIG, RBS etc.) as the ‘financial crisis of the late 2000s’. Well, at the time we did not expect this to be useful for the reasons it now makes total (non-)sense: we are quite likely to having witnessed the beginning of the next instalment these days.

Following the budget compromise in the US and the downgrading of US government bonds by Standard & Poors (S&P), we have seen markets plummeting and shareholder’s wealth wiped out in the billions. Again. Rather than being a distinct event from 3 years ago, the ‘financial crisis’ – as it is still commonly referred to – seems more of an ongoing concern than a one-off. This also seems to be the message from Europe: Greece is hardly on the safe side, and new bad news is coming out of Italy, Spain, and even France, of all places!

So let’s put it frankly: there is no such thing as ‘the financial crisis’ or ‘a new financial crisis’. What we see these days is just the new normality in global economics and politics.

What does that mean? We think the last two weeks have given us a little taster of the some major features dominating economic, social and political life for the foreseeable future. First, it was blatantly obvious how the recent turmoil, once again, got induced by the plotting of rating agencies. The initial spark for the fall of stock prices was the downgrading of US bonds by S&P. Now, this is in itself hilarious. As Paul Krugman pointed out, this was not only the company that in 2008 ‘gave Lehman Brothers, whose collapse triggered a global panic, an A rating right up to the month of its demise’. As he also reports, the initial downgrading report contained an error of $ 2trillion – and when it was discovered they downgraded those US bonds anyway.

While we do not want to speculate about the motivations of S&P this clearly points to the fact how global political developments are now directly shaped by private, unaccountable corporations. When we started to write about the role of ‘corporations as governments’ in the early 2000s many of our colleagues deemed this ‘an idea whose time has not yet come’. We have much less of a hard time to make this point these days – and we say this not without some regret. It is not only a statement regarding corporations in general. Readers of our text will have noticed that we included a section on the ethics of rating agencies in chapter six of the 3^rd edition in 2010. These players have escaped the scrutiny by both the public and academics alike for all too long.

Parallel to this, the last two weeks surfaced a culmination of public unrest and violence. We got a little appetizer over the summer from Greece, Italy or Spain already. But what happened on the streets of London, Manchester or Birmingham these last two weeks, takes it to a new level. The anger and veracity of violence against persons and property is quite shocking. One of the most thought provoking analyses by many commentators was summarized in an article in Der Spiegel this week. He argues that societies which just had witnessed theft, misappropriation of funds or invasion of privacy by bankers and other corporate players on a massive scale, with next to no consequences for these people, loses its sense for fairness of institutions and trust in the rule of law. 

This is exacerbated by the fact that in all countries affected by the financial crisis the bill, by and large, is footed by cuts in welfare, health and education for middle and lower income segments of society. The latest US budget takes this to an even comical level: tax breaks for private jet owners, but cuts for the sick, old, young, and poor. The fact that the UK is leading in the riot department just reflects that Cameron’s Tories, despite all the smooth talk about the ‘big society’, has not changed a bit from the ‘nasty party’ that they were dubbed under Margret Thatcher in the 1980s.

This wider effect of ‘white collar’ crime has also been re-iterated by the whistleblower Harry Markopolos, who warned the SEC about Bernie Madoff’s Ponzi scheme years before it blew up. In an interview on which the new documentary ‘Chasing Bernie Madoff’ is based he talks about the blatant asymmetry we see between prosecuting million dollar corporate misappropriations and, say petty theft or small time bank robbery. This interview is worth watching also as Markopolos – more a nerdy accountant than an anti-corporate activist – elaborates on the corporate capture of the political system which has for decades refused to adequately police Wall Street. While his is a largely American argument the recent scandal around Rupert Murdoch’s phone hacking scandal has shown that this phenomenon is by no means confined to this side of the Atlantic.

There are little signs of change – which in theory should come from governments and regulators. The haphazard and amateurish handling of the Greek finances by EU leaders, or the dealings and compromises in US politics to fix the budget though provide little hope from this direction. It leaves us all to wonder how the world will develop. What is clear though is that the current situation is not just an ephemeral ditch – a ‘crisis’ - in which the economy is stuck for a short period of time. We should get used to the thought that it is in fact becoming the normal state of affairs.

Artwork by studebaker2008 (top) and takomabibelot (bottom right), reproduced under the Creative Commons licence.

A major day in business ethics

June 29, 2009, might go into the annals as a big day in the history of business ethics. Right on top of many US news sites, we learn, first, that Bernie Madoff got his whopping 150 years sentence and, second, the US supreme court ruled in a landmark case in favor of 18 white firefighters who were suing their employer for what is often called ‘reverse discrimination’.

The Madoff case is in some ways your run-of-the-mill textbook case for unethical behavior in business – if it were not on such a biblical scale and in these dire times. And for a change not only hitting poor or middle class people but the wealthy. For us this example of fraud and theft points to the clear limits and boundaries of business ethics: the strong approach to deregulation and self-regulation of the financial industry in the US (and elsewhere) in the past has delegated a lot of ethical issues into the realm of the voluntary.
Funnily, they interviewed Harry Markopolos, a stockbroker, recently on 60 Minutes who as early as in the year 2000 had filed a complaint to the Securities and Exchange Commission (SEC), the self-regulatory body overseeing Wall Street. Four more he filed over the years, mostly because he was mad at Madoff as a competitor who offered these fairy tale returns. Remember, this was the time of Enron etc, where one would have expected the SEC to take complaints about unethical behavior seriously. Based on mathematical modeling Markopolos ("It took me five minutes to know that it was a fraud. It took me another almost four hours of mathematical modeling to prove that it was a fraud.") could prove back then what the SEC never took serious. Madoff was just too respected and too powerful on Wall Street for the SEC to even daring to question his practices. It shows that ethical behavior in business still is very dependent on strong institutions, independent regulators and, no less, skilled and professional oversight. The ‘Case Madoff’ in that sense is in fact a ‘Case SEC’.

The second incident is equally important and will have massive consequences. The case is about the fire department of New Haven (a small town north of New York City) which had made their firefighters pass a test as the basis of promotion. None of the black firefighters passed the test. Out of fear to appear racist, the City of New Haven then refrained from promoting all the (white) guys who did pass. These 18 white guys (one of them Hispanic) went to court and now finally won fighting their case through all the levels.
For a long time, the business ethics literature has actually addressed these issues of retributive justice in rather favorable terms. Because of past injustices against a particular group, that group should now receive preferred treatment. The black guys, so the argument goes, did not fail the test for reasons in their control, but because they belong to an ethnic group, which in the US still struggles in education, family stability and other factors which make people successful. The problem here is though that in doing so, you discriminate against other groups in a similar way. The fact that a court now rules against this in some ways is a sea change in the way we will deal with affirmative action in years to come. The ruling will have massive implication for business too, as it is based on laws that apply not only to the public sector. It will surely lead to many complex discussions and tricky decisions in business.