| 2 | What We Will Cover Why Study Ethics? What are Ethics? Fraud Awareness
| 3 | | 4 |
Why Study Ethics? | 5 |
Morality
Ethics What do Americans think are the country’s most important problems?
Family Decline
Source: In U.S. Fewer Mention Economic Issues as Top Problem, Gallup, Mar. 14, 2013, http://www.gallup.com/poll/161342/fewer-mention-economic-issues-top-problem.aspx | 6 |
93% of Americans admit to regularly lying at work
25% of adults think its okay to lie to get ahead
Source: Here’s a Radical Idea – Tell the Truth, Fast Company, Aug. 31, 1997. http://www.fastcompany.com/32566/heres-radical-idea-tell-truth | 7 | Consumer Trust Report
54% feel companies only interested in 95% don’t trust selling, regardless if advertising product or service is in their best interest
71% seek additional Only 16% feel sources of information companies are because they do not genuinely interested in trust marketing or them advertising
Source: Customer Knowledge as the Wellspring of Innovation, Customer Insight Group, Inc., 2011, www.customerinsightsgroup.com | 8 | When Consumers Lose Trust…
12% Cancel Account
SOURCE: Yankelovich State 49% Spend more with of Consumer Trust Report competitor
49% Reduce visits to business
58% Stop shopping at business for awhile
94% Spend less with business | 9 | | 10 | Why Business Trust Is Lacking
Unethical Accounting Practices
“Cooking the Only 51% of Books” now Americans referred to as Trust “Aggressive Accountants SOURCE: USA Today Accounting” | 11 | Survey of 23,000 High Schoolers
36%: a 32% copy 38% person has to 74% copy 52% cheated internet 30% admit sometimes lie or cheat 20% have another’s on an exam documents to lying on lie to save sometimes in shoplifted homework at least once for the survey money order to homework succeed
Source: 2012 Report Card on the Ethics of American Youth, Josephson Institute of Ethics, www.josephsoninstitute.org | 12 | Ethics of MBA Students
56% admit to 52% would 26% would let 13% would “collaborating” buy stock on a gift sway pay someone on tests inside their off to close a information purchasing business deal decision
SOURCE: USA Today | 13 | Top Ethical Issues – Business
1. Improper Accounting Practices
2. Deceptive Sales / Marketing Practices
3. Conflicts of Interest
4. Lying on Reports / Falsifying Records
5. Dishonesty with Customers
6. Lack of Public Trust
7. Bribes and Kickbacks
8. Unfair Treatment of Employees/Customers
9. Securities / Bank Fraud
10. Discrimination
SOURCE: CMO Magazine | 14 | Gallup Poll – Honesty/Ethics in Professions | 15 | A Few Key Points
The Ethics Resource Center says we have a crisis in business ethics because of declining ethical standards
There is no universal approach for resolving all ethical issues
Many people have limited business experience and don’t know how to make, much less have formal training in making ethical decisions
Ethics are not black and white | 16 | What are Ethics? | 17 | Some Basic Reminders | 18 | What are Ethics?
Values an individual uses to interpret whether any particular action or behavior is considered acceptable and appropriate. | 19 | What are not Ethics?
Ethics are not: • Feelings • Religion • Following the law • Following culturally accepted norms • Science | 20 | Five Sources of Ethical Standards Utilitarian • Ethical action that provides the most good or does the least harm Approach
• Ethical action is the one that best protects and respects the moral Rights Approach rights of those affected
• Ethical actions treat all human beings equally-or if unequally, Fairness Approach then fairly
Common Good • Interlocking relationships of society are the basis of ethical Approach reasoning
• Ethical actions ought to be consistent with certain ideal virtues Virtue Approach that provide for the full development of our humanity
| 21 | Your Personal Ethics Framework
1. Various frameworks can aid in determining whether an action would be ethical or not.
2. Determine which framework would be most helpful to you. From this you can establish your own values.
3. Strive to act in ways that are consistent with these values.
4. Often no clear-cut answer on whether an action is right or wrong – filter thru your personal framework. Do Your Actions Reflect Your | 22 | Values?
1. Are your actions consistent with your basic duties?
2. Do they acknowledge / respect the underlying rights of all individuals impacted?
3. Would they be considered the best practice in the circumstances?
4. Do they match your overall entrenched beliefs? | 23 | Attitudinal Red Flags
1. Matter is so insignificant - no one will notice.
2. Matter is so insignificant - no one will be hurt by my actions.
3. I am not comfortable with course of action - but need to do it to advance my career.
4. Everybody else is doing it - why should I be the exception?
5. I hope that the relevant party to this decision doesn’t find out.
6. Since I was told what to do - I did it.
7. I am doing this - because I don’t want to disappoint someone.
8. If I make this decision - I won’t have to deal with this person again. | 24 | Rationalizations for Compromise
1. Questionable actions are required to achieve objectives.
2. No time and/or resources to follow an ethical course.
3. Fellow colleagues expect unethical behavior.
4. Boss wants results, not excuses.
5. Actions are neither wrong or illegal.
6. Other people would agree with decision.
7. No one can identify difference between action and more ethical course. What Makes Good People Make Bad | 25 | Decisions?
1. They do not feel loyal to the organization. 2. They feel pressure to “succeed,” as defined by the organization. 3. They feel entitled.
4. They believe rules do not apply to them.
5. They do not view act as illegal.
6. They feel pressured by peers.
7. They lack resources. | 26 | Rationalization – The Enemy of Values
Publicity Test
• Would you want this on the front page of Wall Street Journal?
Reversibility Test
• If you were in the other person’s shoes, would you still agree with the decision being made?
Generalizability Test
• Could you defend your decision using the same reasoning in similar cases? | 27 | The Publicity Test We can afford to lose money. We can afford to lose a lot of money. But we cannot afford to lose one shred of our reputation. Make sure everything you do in business can be reported on the front page of your local newspaper written by an unfriendly, but intelligent reporter.
- Warren Buffet
Russ Banham, “The Warren Buffett School,” Chief Executive, December 2002, www.robertpmiles.com/BuffettSchool.htm | 28 | High Integrity Behaviors 1. Humility 2. Concern for Greater Good 3. Truthful 4. Fulfills Commitments 5. Strives for Fairness 6. Takes Responsibility 7. Respect for the Individual 8. Celebrates Good Fortune of Others 9. Develops Others 10. Reproach for Unjust Acts 11. Forgiving 12. Extends Self for Others 13. Ethical Behavior Consistent Between Personal & Professional Life | 29 | Tone at the Top | 30 | Tone at the Top 1. Desire to Act Ethically
2. Sensitivity to Ethical Issues
3. Provides Guidance on Ethical Issues
4. Procedures for Handling Issues – Mentoring 5. No Fear of Retribution for Reporting & Resolving issues Barbara L Tofler, Final Accounting: Ambition, Greed and the Fall of Arthur Andersen, Doubleday, 2004 | 31 | Encourage Bias Recognition | 32 | Work on Minimizing the Effects of Bias
Develop systemic Search Reframe or flip review processes Seek diverse relentlessly for the problem – are that leave you a outside opinion to relevant or you being too committed "out" counter disconfirming negative or possibility when overconfidence evidence positive? trying to "cut the losses"
Redefine the Reward the Accept the "Chief problem from process and Contrarian“ as here on out and refrain from part of the team ignore the old penalizing errors problem Top 10 Corporate Frauds Since 2000 | 34 | | 35 | Accounting Scandals
1. 6.
2. 7.
3. 8.
4. 9.
5. 10.
| 36 | 10) Tyco International
| 37 | | 38 | Tyco International International manufacturer – diversified product lines, including safety, fire protection, and electrical products. The Players: CEO Dennis Kozlowski and CFO Mark Swartz – both received jail terms for grand larceny, securities fraud, and falsifying business records. Kozlowski convicted of tax evasion – art work.
| 39 | Tyco International Execs misappropriated $137 million through unauthorized bonuses and abuse of company loan programs Also took $410 million through illicit stock sales Lavish lifestyles . $6,000 shower curtain / $15,000 umbrella stand . Multi-million $$ parties | 40 | 9) Health South Corporation
| 41 | Health South Corporation Leading healthcare service provider based in Alabama Main Player: Richard Scrushy, CEO – convicted of a host of criminal and civil charges, including bribery of former Alabama governor Lavish lifestyle
| 42 | Health South Corporation Massive accounting fraud lasting 7 years Income overstated by as much as 4,700% and $1.4 billion to meet investor expectations Four finance executives involved in the conspiracy . Falsified cash, contractual allowance accounts, reserve accounts Employee letter to audit team and sent email to firm HS employees were previous employees of audit firm | 43 | 8) Satyam Computer Services
| 44 | | 45 | Satyam Computer Services Indian outsourcing firm – back office accounting, IT, customer service functions for more than 1/3 of Fortune 500, including GE and GM $1.5 billion fraud Fraudulently boosted revenue in one quarter by 20% ($1.04 billion) by falsifying loans receivable
| 46 | Satyam Computer Services Started as a small discrepancy that grew over time Nonexistent bank accounts and loans receivable were on books Company grew too quickly for its infrastructure Concerns regarding regulatory oversight in foreign countries
| 47 | 7) AIG
| 48 | AIG $1.7 billion accounting scandal involving loans improperly booked as revenue (insurance premiums) Ex-CEO Hank Greenberg ousted over controversy – ultimately paid $15 million to settle fraud charges with SEC AIG paid over $126 million in fines – but no admissions Valuation issues
| 49 | 6) Waste Management
| 50 | Waste Management Income inflated by $1.9 billion by understating depreciation from use of extended depreciable lives Had to restate earnings for 5 years Paid $26.8 million to settle lawsuit brought by SEC against 4 former top executives Audit firm paid $7 million to settle with SEC over allegations it aided WM execs in fraud | 51 | 5) Freddie Mac / Fannie Mae | 52 | Freddie Mac / Fannie Mae Government-sponsored entities (GSEs) Freddie understated $5 billion in profits to smooth earnings over four years Fannie overstated profits by 40% ($9 billion) over a number of years Top executives were removed and fined
| 53 | 4) Parmalat
| 54 | Parmalat Huge Italian dairy and food conglomerate Parmalat lost $12 billion, investors another $14 billion Understated debt on balance sheet by half ($14 billion) Falsely said it had cash accounts it didn’t have ($3.95 billion) Inflated revenues through fictitious sales to retailers Invented a bogus milk producer in Singapore that supplied nonexistent milk powder to a Cuban importer via a Cayman subsidiary that held a fake Bank of America account | 55 | Parmalat Investment disaster Non-existent cash in bank Fake transactions Hidden debts Use of derivatives and accounting fraud to hide facts | 56 | 3) Madoff
| 57 | Madoff $21.2 billion in cash losses Ponzi scheme / “smoke and mirrors” “Auditor” pled guilty to “rubber stamp” audits . Firm only had 3 employees Still fallout concern with larger CPA firms auditing the “feeder funds” Can’t assume the regulators will catch issues
| 58 | 2) WorldCom
| 59 | WorldCom Players: Bernie Ebbers (CEO), Scott Sullivan (CFO), David Myers (Controller) Whistleblower: Cynthia Cooper (Internal Audit) $11 billion accounting fraud Hundreds of millions in personal loans to Ebbers Cost about 30,000 jobs Total cost to investors: $180 billion
| 60 | WorldCom Underreported “line costs” (interconnection expenses with other telecomm companies) by capitalizing them on the balance sheet instead of properly expensing them (“prepaid capacity”) Inflated revenues with bogus accounting entries from “corporate unallocated revenue accounts”
| 61 | 1) Enron Corporation
| 62 | Enron Players: Kenneth Lay, Jeffrey Skilling, Andrew Fastow Shareholders lose $74 billion USA’s 7th largest company, collapsed in 2001 Complex accounting / used hundreds of special purpose entities to move debt off balance sheet Understated liabilities, overstated equity, inflating revenue | 63 | Enron Demise of Arthur Andersen – destroyed documents after SEC launched inquiry – “obstruction of justice” conviction / later overturned Gave rise to Sarbanes-Oxley Act and PCAOB
| 64 | Bonus Round… Lehman Brothers?
| 65 | Lehman Brothers $50 billion in loans disguised as sales Accounting gymnastics – “Repo 105” . Designed to temporarily remove (bad) securities inventory from balance sheet along with publicly reported leverage . Repurchased assets with debt at beginning of new quarter Whistleblower Auditor knowledge
| 66 | | 67 | Goldman Sachs Synthetic collateralized debt obligation (CDO)s Subprime residential mortgage-backed securities (RMBS) Role that a major hedge fund played in the portfolio selection process
| 68 | Goldman Sachs Hedge fund had taken a short position against the CDO (made $1 billion profit) Goldman settled with SEC for $550 million in July 2010 No admission of guilt and no individuals named in settlement | 69 | | 70 | 2012 Report to the Nations Typical entity loses 5% of annual revenue to fraud . Globally $3.5 Trillion . Median loss $140,000/entity, 20% > $1 Million . Corruption and billing schemes > 50% of all frauds . Most common industries ▫ Banking and financial services ▫ Government and public administration ▫ Manufacturing Reported frauds last 18 months before detected Most common frauds . Asset misappropriation ~ 87% . F/S fraud ~ only 8% but greatest losses (median $1 Million) Source: Association of Certified Fraud Examiners 2012 Report to the Nations On Occupational Fraud and Abuse
| 71 | 2012 Report to the Nations Executive perpetrators = Much larger losses . Owner/executive - $573,000 . Managers - $180,000 . Employees - $60,000 Long employment = Greater losses . > Ten years - $229,000 . = First year - $25,000 Vast majority (77%) of all frauds in following areas . Accounting . Operations . Sales . Executive/upper management . Customer service Source: Association of Certified Fraud . Purchasing Examiners 2012 Report to the Nations On Occupational Fraud and Abuse | 72 | 2012 Report to the Nations Most fraudsters are 1st time offenders with clean histories . 87% never charged or convicted of a fraud offense . 84% never terminated or punished by employer for fraud conduct At least one red flag in 81% of cases . Living beyond one’s means – 36% . Financial difficulties – 27% . Unusually close with vendors or customers – 19% . Excessive control issues – 18% Detection most likely from employee tips Nearly half of victims never recover any losses
Source: Association of Certified Fraud Examiners 2012 Report to the Nations On Occupational Fraud and Abuse 2012 Report to the Nations | 73 | Recommendations Actively encourage reporting of suspicious behavior . Anonymous / confidential hotlines . Non-retaliation policies . Don’t rely on external audit alone – 3% detection • Preventative value hard to measure • Serves other important purposes Targeted fraud prevention training critical . Small business particularly susceptible to fraud • Fewer resources, less effective controls, greater impact • Focus on most effective controls – hotlines, education, tone at top Source: Association of Certified Fraud Examiners 2012 Report to the Nations On Occupational Fraud and Abuse 2012 Report to the Nations | 74 | Recommendations Emphasize identification of behavioral Red Flags
Continually assess risks and institute preventative measures
Source: Association of Certified Fraud Examiners 2012 Report to the Nations On Occupational Fraud and Abuse | 75 | Why & How Does Fraud Occur? Pressure . Financial problems Gambling, drugs, heavy debt . Unrealistic deadlines & goals Rationalization . Justification(s) for fraudulent activity
Opportunity . Generally weak controls Supervision & review Segregation of duties System controls Common Causes of Fraud - | 76 | Opportunity Weak internal control system Poor or inadequate training Few or no monitoring controls Transactions without proper authorization High management turnover Collusion among employees
| 77 | Behavioral “Red Flags” Job frustration Low Resentment of superiors morale Adversarial attitude High turnover Never takes vacation Disregard for internal controls High personal debt Management by Excessive gambling intimidation/secrecy Substance abuse Unusual working hours Territorial/protectionism Ignoring complaints Lavish lifestyle vs. salary Poor communications
| 78 | Organizational “Red Flags” Lack of segregation of duties Unrestricted/unmonitored access to assets/data Unrecorded transactions/lack of accountability Not reconciling accounts Unauthorized transactions Unimplemented controls because of the lack of or unqualified personnel Employees with little to no supervision | 79 | Accounting “Red Flags” Fictitious/altered/photocopied receipts Missing documents Stale/increasing reconciling items Unusual bank statement items Excessive voids/credits Second endorsements on checks Duplicate payments Things that just don't make sense | 80 |
Ethical errors end careers more quickly and definitively than any other mistake in judgment or accounting.
- Robert C. Solomon, philosopher | 81 | Thanks for Listening!!!