First Friday Fraud Facts+

April 5, 2019

The Office of Idaho State Controller Brandon Woolf distributes this newsletter as a public service and as a cost- effective method of increasing awareness about ways to detect and prevent fraud, waste, and abuse in government.

Ethics

Ethics in Government Accounting At its simplest, ethics is a system of moral principles that affect how peo- ple make decisions and lead their lives. 1 Aristotle, in his Nicomachean Ethics, focused on the type of a person one should become rather than giving a set of ethical rules in how to behave. He believed that moral vir- “Happiness, then, is found to be tues required practice and repetition. In order to be virtuous, one must something perfect and self- make a conscious decision to be good and morally responsible for ones sufficient, being the end to which actions and that Eudemonia (well being or the highest good) is an action of contemplation through the use of ones reasoning abilities. 2 our actions are directed.”

Citizens, taxpayers, customers, employers, employees, investors, the - Aristotle business and financial sector, and others expect those who serve in gov- ernment to be ethical and trustworthy. Government financial management professionals have an obligation to be accountable and work at the high- est standards of professionalism regardless of others expectations. 3

How to Make Ethical Behavior a Priority? 4 1. Create a list of rules, regulations, and policies that includes the main values and priorities of your entity. 2. Detect issues that need to be addressed and train for mutual benefit to enhance success. 3. Set a proper tone at the top as the managers and supervisors are considered to be a behavioral model by default. This can have a big influential impact on staff for both good and bad. 4. Create a fair and consistent process to discipline violators. Inside This Issue: 5. Improve team communication by making it easy to transfer infor- mation between manager and staff. Ethics in Government Accounting 1

6. Implement training on ethical regulations and standards for the oppor- How to Make Ethical Behavior a 1 tunity to fully understand the mission, priorities, and vision of your en- Priority? tity. 5 Most Publicized Ethics Violation 2 Ethics is something that must be a priority both for the employees and Cases employers. Following ethical rules can have a positive influence on both communication and working process.

| Page 1 | 5 Most Publicized Ethics Violation Cases 5 Enron: Kenneth Lay, former CEO Jeffery Skilling, CFO Andrew Fastow and other high-ranking employees knowingly manipulated accounting rules and masked the enormous losses and liabilities of the company. The investigation of the Enron scandal resulted in Congress passing the Sarbanes-Oxley Act to improve corporate accountability and transpar- ency.

WorldCom: CEO Bernard Ebbers owned hundreds of millions of dollars in World- Com stock, which he margined to invest in other business ventures. As the stock price dropped, banks began demanding that Ebbers cover more than $40 million in margin calls. Ebbers convinced the board to lend him the money so that he would not have to sell substantial blocks of stock. He also began an aggressive campaign to prop up the stock price by creating fraudulent accounting entries. The fraud was discov- ered by WorldCom's internal audit department, which led to the SEC investigation that resulted in the company’s bankruptcy filing in 2002. Ebbers was convicted and charged on fraud, conspiracy and filing false documents. Ebbers is now serving a 25 year sentence.

Hollinger International: Conrad Black as a CEO of Hollinger International, one of the largest media groups in the world, had substantial control over the company’s finances. In 2003, the board of directors confronted Black for over pay- ments the company paid to him and four other directors in the $200 mil- lion range. The board called in the SEC to investigate the validity of the payments and the accounting transactions that were created to account for them. Charges were laid against Black for fraud, tax evasion, racket- eering, and more. He was convicted of four of the 13 charges against him and sentenced to 78 months in prison .

Tyco: As a massive security and electronics company CEO, Dennis Kozlowski was also caught with his hand in the corporate coffers. In 2002, the board of directors discovered that Kozlowski and Mark Schwartz, the company’s CFO, had taken unauthorized bonuses and loans in the amount of $600 million. The men were brought up on charges of grand larceny and securities fraud among others. He was sentenced 8-25 years.

Yahoo!: Scott Thompson shocked shareholders and media alike with the bra- zenness of his deception and the lack of oversight that allowed it to hap- pen. Thompson had embellished his resume by claiming he had a de- gree in computer science, along with his true accounting degree. There are two ramifications of the deception. First, the board did not fully vet him before hiring. Second, and more importantly, because the false in- formation appeared in SEC filings, the company and Thompson faced disciplinary or legal action. Thompson voluntarily stepped down as CEO in May 2013. | Page 2 | CEOs have always been expected by shareholders and investors to main- tain high ethical standards. Although it doesn’t always happen, today’s Contact Us regulatory environment makes it easier to identify transgressions and bring violators to justice. [email protected] P.O. Box 83720 Boise, ID 83720-0011 Citations 1Ethics - Introduction to Ethics: Ethics: a General Introduction.” BBC , (208) 334-3100

BBC, http://www.bbc.co.uk/ethics/introduction/intro_1.shtml. Accessed 25 January 2019. Visit us on the web at www.sco.idaho.gov 2Aristotle, “Nichomachean Ethics” http://www.classics.mit.edu/Aristotle/ nicomachaen.mb.txt. Accessed 25 January 2019.

3Code of Ethics. http://www.agacgfm.org/About/Code-of-Ethics.aspx. Ac- cessed 16 January 2019.

4Huge-IT. “Importance of Ethical Behavior in the Workplace.” Huge-IT , 5 June 2017, http://huge-it.com/importance-of-ethical-behavior-in-the- workplace/. Accessed 28 January 2019.

5Mohr, Angie. “5 Most Publicized Ethics Violations by CEOs.” In- vestopedia, Investopedia, 21 Dec. 2018, www.investopedia.com/financial- edge/0113/5-most-publicized-ethics-violations-by-ceos.aspx. Accessed 30 January 2019.

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