Ok, so Corporate America is corrupt: Now what?

Great Debates
61

I don’t know how many times I have to say it. A “company” is not a person. It does not care if it “gets away with murder”. If you want to punish someone, punish the leadership who makes the decisions. Punish VPs and managers who knowingly keep silent as assessories. Wouldn’t Enron employees be better off

“Goodwill” are intangible assets. For example when one company acquires another, the purchase price is often more than the sum of the companies assets on the balance sheet. The reason for this is the value of assets on the balance sheet is usally not the same as the market price. That diference in price is captured on the balance sheet as “goodwill”.

Just to make a point, it takes a little more than a 7th grade education to really understand the balance sheet. After all, you didn’t know what “goodwill” meant, did you?

I don’t know if anything was going on with your company or not, but if there was and it was so easy to see in the balance sheet, it certainly should have been addressed by your auditors, your investors, the investment bank taking you public and SEC. If one or any of those groups dropped the ball, they should be the ones punished.

In any event, I think I am close to being done with this thread. I can’t have a reasonable discussion with people who advocate such extreme punishments like capital punishment for white collar crimes or capriciously disolving entire corporations.

To sum up, disolving the corporation as punishment for the corruption of its leadership wouldn’t work because:

  1. It would hurt the very people the law was trying to protect. Employees, shareholders and other interested parties.

  2. It would lead to greater organiazational secrecy as employees are faced with the decision to come clean and lose their livelihood or keep silent and continue working.

  3. By organizational structure or physical separation, 99.9% of employees have no access to relevent information or decision makers.

  4. It takes employees away from their job so they can waste their time looking over each others shoulders

  5. Shalmanese thinks its unsettlingly like the Hitlers youth plan

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I see more people choose to ignore my question. How decidedly unsurprising.

63

Ok gang, I’ve been trying to steer this thread back into felt-hat territory, but it’s been difficult.

That’s ok. What disappoints me is that msmith then has the chutzpah to complain about the nuttiness of the conversation.

M: 1) Read my post again and you will see that I didn’t advocate the death penalty for investors. Rather, I quoted a reader off the Wall Street Journal’s website who did.

  1. I also documented that most (all?) of my ideas in the OP are in no way “done deals”. They are, admittedly, boring. Which explains the popularity of the Squink plan from all sides of the political spectrum. (Yes, all sides. You either love to love it or love to hate it.)

Eris: “I see more people choose to ignore my question.”

Let me try. Your McDonalds peon has no leverage with the front office. But Squink has admitted that the plan is “not particularly well fleshed out”. Furthermore, one point remains salient: employees (as a group) have enhanced ability to observe wrongdoing. Eris’ peon can’t spot nonsense occurring in the head office, but he may notice product mislabeling and the like.

The trick is facilitating information flows between managers/workers and the appropriate financial authorities/overseers.

I agree that the Squink plan is wasteful. Destroying the human capital, personal contacts and social capabilities of an entire organization (not to mention the organization’s suppliers and creditors) is something which should not be taken lightly, especially when the wrongdoing accounts for a thin sliver of the operation. I’ve noted that the Squink plan can be tweaked, however, to eliminate this problem.

Crusoe Thank you. What you are advocating is actually fairly aggressive.

a) I don’t think auditors need to be rotated every year: that seems to me to be a waste of expertise. However, I support the Democratic plan to mandate rotation every 4-5 years.

b) I’m not sure what sort of liability you are attaching to the audit firm and partner. It goes without saying that they shouldn’t be held liable for company bankruptcy as long as the company stated its figures correctly. And if there’s fraud, the auditors should be punished whether or not the company collapses.

Summary (for Sam Stone, especially)
The key problem is overlapping market failures in US capital markets. Corporate governance is a joke: owners lack sufficient incentive to oversee their property when it’s easier to simply sell the stock to someone else.

Now if the stock market were devoid of “animal spirits” or excessive exuberance, this wouldn’t be a problem. Alas, it can actually be defendable for an investor to trade on the basis of market perception of a stock rather than on underlying fundamentals. In practice, traders who based their craft on a company’s ability to hit and exceed earnings targets had a good run during the 1990s. That is, those who rewarded corporate shenanigans -I’m sorry, “earnings management”- did pretty well.

The solution lies in tweaking the US system so that it reproduces some of the elements of German bank-driven capitalism, where the bankers keep a close eye on their clients. [sub]Though I understand that Germany has had accounting scandals as well. Sigh.[/sub]

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:smack: …I mean the WSJ article advocated capital punishment for white collar crimes; I didn’t.

65

Flowbark: You’re preaching to the choir. There WERE failures here. The financial press didn’t do its job. The institutional investors didn’t protect their clients or exercise due diligence in researching these companies. Accounting practices seem to have lost their grounding in ethics to some degree. The CEOs are now being paid in options and short-term instruments which may give them incentive to play fast with the company. Etc.

Some of these problems are undoubtedly self-correcting - the market isn’t perfect, and it can fail. But usually, it only fails in the same way once. Or maybe only one disaster happens that way. From now on, I’m guessing that the dynamic will change - the financial press WILL start doing its job, because people are now interested in this issue. Companies that engage in creative accounting will see their value discounted because of it, and therefore they won’t gain the benefit they were looking for. This is already happening, BTW. GE’s stock is getting hammered despite their exceeding all of their numbers, because GE as a mega-conglomerate is *suspected of the same kind of stuff. GE is now going through flips and twists to open their books and clarify their accounting practices, because of the damage to the stock.

And their may be a role here for the government to step in and impose new rules. I’m not a free-market fanatic - it’s just that I prefer it to any alternatives because it’s generally more efficient and more rational. But when there’s an honest-to-god market failure, it needs to be corrected.

I’m just not sure where that line is in this case.

66

Perhaps you have experience with companies vastly larger than the ones with a few hundreds or thousands, but in companies I’ve experience with certain attitudes toward customers, finances, charging, “proper” benefits are very much a part of corporate culture. Even with Enron, I remember many typical company employees coming on TV and saying they knew something was wrong.

It’s also an exceptional way to lie outright. The key is the word “intangible”. Our company bought a pig-in-a-poke, and wrote it up as “Goodwill”, instead of “We just made a horrible business decision that will probably bankrupt the company.” That is what normal people call a LIE.

I’m in favor of whatever punishment it takes to stop this from happening. Punishment that matches the crime, that’s up to judges. Sending thousands of retiring employees into poverty isn’t a victimless crime, it stands to reason somebody should be punished or make amends.

As for employees not being responsible…why shouldn’t they be? Since when are people in the United States allowed not to be responsible for their actions? Or are employees only responsible if they choose to be educated about finances, or if they make over $100,000 / year, or if the company has fewer than 10 employees? Make all employees responsible; if necessary, have legal counsel represent them.

I’ve worked for several companies, and, after the first year or two, never had much doubt how stable the company was in the short-term. It was pretty clear where they were cutting corners, stretching the truth, etc. Maybe not every detail, but a company that’s hoodwinking people on the scale of millions isn’t going to be able to hide all of the traces.

Nor do I see that this problem is self-corrective. All pyramid schemes are illegal (as I understand it), but that doesn’t stop people from participating with eyes wide open, and getting a big kick out of it when somebody else later gets stuck with the bill. Exactly the same mentality will come up with the next “creative” business planning, or the next change to accounting methods, or the next tax dodge. And the way things are run now, nothing’s done until the scam is too big to hide under the carpet.

67

Flowbark:

Regarding auditor rotation, I think that 4-5 years isn’t necessarily a short enough interval; the audit firms would be angling for ways to make more money from the relationship even with that in mind.

Also, regarding this:

…is surprisingly not the case. I can only speak for UK regulations, but auditors are not and have not been responsible for detecting fraud. The Companies Act 1985 makes it a clear duty of company directors to prevent and detect fraud; auditors are expected to report it if they find it, but not to go hunting for it.

partly_warmer: if goodwill bothers you as a concept, prepare to be shocked by a lot more in corporate accounts. How else do you account for the difference in the sum total of a business’ assets and what someone pays for it? I’m genuinely open to suggestions; this is certainly problematic when accounting for partnerships. When a new partner joins, they inevitably pay more for the privilege than the value of the share of the assets. I’m not sure how best to account for that purchase of ‘reputation’ or ‘image’.

68

I’m going to have to make a stab at this by quoting:

“As a concession, the FASB will no longer require goodwill to be written off unless the assets became impaired (which means it becomes clear that the goodwill isn’t worth what the company paid for it).” from this site.

So, in the case of my company I guess what stunk was not that there was goodwill, but that it was such an outrageous amount. If I understand this article, a company has 40 years to amortize goodwill. Since all of our company officers would have retired some 35 years before, that means would have avoided almost all the responsibility for their purchase.

But my naivete about goodwill (it was explained to me as purchasing customers or market share) seems to underline that one doesn’t need to be an expert to spot certain kinds of business subterfuges?

69

Absolutely. I would argue–and I bet msmith537 would too–that to the extent that they reasonably can (in terms of expertise, time and access) employees should be vigilant. Some kinds of fraud can be very easy to spot. My disagreement is that employees should be expected to spot and understand more complex accounting fraud. Expecting the McDonald’s clerk to spot, say, understatement in the corporation’s tax liability is as unrealistic as collectively holding all McDonald’s employees responsible for failing to do so.

70

That still doesn’t make it a good idea. I think the death penalty is a little extreme for making a lot of people poor. That is something that can be reversed easily enough.

I didn’t mean to imply all your 9 steps are done deals. For the most part I’ve been focusing on the Squink plan.

I have experience with all size companies. And one thing I’ve noticed is that employees always think the boss in a dope or a crook or something along those lines. If these typical employees truly belived there was something going on, why didn’t they do anything about it? At the very least I would have been out looking for another job or minimized my contribution to the retirement plan. Sounds more like “I told you so” after the fact.

The Squink Plan seemed pretty fleshed out to me, right down to the minimum amount.

The biggest problem with the plan is that it only applies to companies that are so large (able to fudge amounts of a billion dollars or more) that it is impractical.

Example:
Take General Electric, a company with 200,000 employees and $30 billion in revenues. What do you think would happen if you suddenly liquidated this company and all its assets?

71

I agree in part with a good part of your last message.

One doesn’t leave these companies on moral grounds (particularly after years of experience), as one realizes the next company probably won’t be any better. That still doesn’t absolve people of responsibility. When people in my company talked (bragged!) about spending the weekend in Paris on company money I wasn’t surprised. Nor could I think of anything to do about it. If there’d been a corporate watchdog working on my behalf…

The question of why employees tend to think their bosses are stupid or corrupt almost warrants its own thread. Having played on both sides of the fence, some reasons are:

  1. Difference in goals. Managers are trying to hold things together, complete things at a good rate, look out for longer-term organization needs, employees, less so.
  2. People who seek power, such as many managers, will tend to break more rules than other employees, particularly ones that affect subordinates, who can’t fight back effectively.
  3. Once you’re promoted, you focus is less on daily matters, and pretty soon you aren’t up on all the latest nuances of daily problems (that lower employees spend endless time debating). Result: you look like you don’t understand the problem, when you actually just don’t understand a small, and often insignificant part of it.
  4. Many managers, not incredibly talented in the first place, take promotion to mean they can stop trying.

How can an employee sort these things out? Well, there’s a difference between a brain-dead decision to discontinue a project that’s nearly finished, and spending a weekend in Paris on company money (when the company’s in serious debt). An anonymous note to a company watchdog might be the solution.

At my university there was a “Course Review Catalog”, where students reviewed content of courses, homework load, and quality of teaching. Needless to say, the lousy teachers worked incessantly–not to improve the areas they were criticized in–you could tell because there were the same criticisms year after year–but to have the publication stopped. Maybe it could have been more effective at improving teacher behavior, but I can tell you the bad classes had a tendency to disappear. When the publication was finally stopped, it may have made a few teacher happy, but it lost one of the genuine competitive advantages I felt the university had.

72

No, but one does leave a company (if they can) if they suspect that staying there will result in financial distress. I am always amazed when I hear stories of “my company hasn’t paid me in x weeks”. Well, for me x is one missed paycheck without a valid explaination why. If I’m not getting paid, I’m not working.

Managers have to consider the big picture. Individual contributors only have their own needs to worry about.

[QUOTE]
*Originally posted by partly_warmer *
2) People who seek power, such as many managers, will tend to break more rules than other employees, particularly ones that affect subordinates, who can’t fight back effectively.

[/quote

That is an overgeneralization. Depending on the corporate culture, people do not generally get ahead by being rule breakers or loose cannons.

This is true. It is not the managers job to understand every detail of widget making. He needs the ability to organize the widget makers so they can do their jobs effectively.

Maybe at your company. Where I work, promotions go hand in hand with much greater responsibility. If you are a manager billing at 3x the rate of a staff person, you better be showing a return or you will quickly find yourself councelled out. I have had managers when I worked in “industry” however who did jack shit except for sitting in their office all day.

It isn’t a problem or illegal unless your boss thinks so. We expense questionable stuff all the time - drinks, dinners, etc. As long as we can turn a profit and don’t get out of control, it isn’t a problem.

In corporate America, its called 360 feedback. It allows employees to anonymously give feedback to their managers. I have not seen it to be particularly successful.

73

Could you expand on this? Why don’t audit fees generate enough profit? Aren’t the audit firms working with essentially a “captive audience” of clients?

74

Disagree, it isn’t even a defensible, coherent stance. Who exactly has a right to go to Paris on company money? Anybody who’s boss says so? Is that only as long as all their bosses agree, or does it also take the agreement of peer management? Or is it really (as you and I know it is) a little ploy for somebody to line their own pocket? Steal office supplies, get fired; steal a trip to Paris, nothing. Just because some manager has “signing authority” for $10,000 doesn’t mean he can misappropriate up to $10,000 without comment.

I know personally another case where, while a company was on the verge of failing, the company president took several prolonged and hugely expensive trips abroad, letting his company drift into the red. This isn’t breaking trust with investors???

**
[/QUOTE]
In corporate America, its called 360 feedback. It allows employees to anonymously give feedback to their managers. I have not seen it to be particularly successful. **
[/QUOTE]
If it’s at the “suggestion box” level, I would imagine it would have a marginal effect.

The idea is that an independent person collects all the input, creates a summary report with specific citations, and hands copies to the board of directors.

75

Sorry, missed a “/”

Disagree, a trip to Paris isn’t on the level of a business lunch to impress clients.

Who exactly has a right to go to Paris on company money? Anybody who’s boss says so? Is that only as long as all their bosses agree, or does it also take the agreement of peer management? Or is it really (as you and I know it is) a little ploy for somebody to line their own pocket? Steal office supplies, get fired; steal a trip to Paris, nothing. Just because some manager has “signing authority” for $10,000 doesn’t mean he can misappropriate up to $10,000 without comment.

I know personally another case where, while a company was on the verge of failing, the company president took several prolonged and hugely expensive trips abroad, letting his company drift into the red. This isn’t breaking trust with investors???

If it’s at the “suggestion box” level, I would imagine it would have a marginal effect.

The idea is that an independent person collects all the input, creates a summary report with specific citations, and hands copies to the board of directors.

76

Partly_warmer: You know, the more you talk about what happens in large companies, the more I have to believe that you don’t know what you are talking about.

Take this business about people just scooting off to Paris on the company’s nickel. I work for one of the largest companies in the world. I’m in lower management (project management). If I want to spend the company’s money, I have to get approval from my immediate manager. But he’s only authorized to approve $1,000. And he’d better be careful what he approves, because at the end of the year all of these types of expenses are audited. To approve my expense, I have to fill out a form and sign it. Then he has to sign it. Then HIS manager has to sign it. Then it gets shipped off to head office, where it is entered into the computer system. The main managers WILL be bringing up all these records and going through them. I sit through meetings every quarter in which these expenses come up and are summarized and analyzed.

The same thing occurs all the way up the chain. With each level of management, the amounts you are allowed to sign for go up, but you still need signatures from the next-highest manager, and it’s all still scrutinized. Even more so when the amounts get larger.

Sure, you might get away with fudging the occasional personal book as a business expense, or take a friend out to dinner and claim he was a client and use the company credit card. But then, you can also walk into the supply room and steal $500 worth of stuff. It’s unethical, illegal, and against company rules.

And I see that this silly notion of making all employees responsible still hasn’t died. Let me explain something: Big companies manage complexity by compartmentalizing. It’s not just difficult for me to know what’s going on in another division - it’s IMPOSSIBLE. Their day-to-day books are not open to me any more than are the books of the company down the street.

The company I work for has hundreds of thousands of employees. I know exactly 154 of them. The business unit I work for has about 500. The division it in turn is in has maybe 5,000.

I would not be allowed to examine the books even in the local office I work in, for the simple reason that there is private information in them. For example, the salaries of my co-workers. The only books that are available to me other than the ones I am directly responsible for maintaining are the same public documents that are available to anyone else.

It is simply NOT my job to become a sleuth within the company. What IS my job is to report unethical behaviour that I observe. If, in the course of my regular duties, I have a suspicion that someone is doing something unethical, I am SUPPOSED to report it. Failure to do so can be a termination offense in the right circumstances. All employees are required to sign an ‘integrity’ form which details this. In addition, we have to take periodic integrity training. Having gone through several of these sessions, I can tell you that our company takes this stuff very seriously.

Now, if there are shenanigans in the head office, perhaps there are some people there who are turning a blind eye to it, who may hold some responsibility for what’s going on. If a mid-level accountant sees strange transactions and doesn’t act on it, perhaps he would be found liable of negligence. That’s the way the system works today, and it’s as it should be.

There’s nothing special about working for a company that should make me have to become my brother’s keeper, any more than buying a house makes you responsible for the actions of your neighbor.

77

Sam Stone: very well said indeed. I’m in exactly the same position with regard to being compartmentalised.

Stormfield: apologies for the slow response. I’m afraid I don’t know exactly why audit fees are low, but I can take a guess. Generally there is a captive audience of clients–particularly large clients who need the resources and global reach of large audit firms–and the quality of audit work, whatever the press implies, is pretty much the same across the Big Four. Charging more than ‘the going rate’ would push clients to your competitors very easily. Additionally, to maintain an image of objectivity audit firms are loathe to overcharge or to bill at anything more than time + expenses + minimal profit. If massive fixed fees were at stake it might be seen to compromise the audit firm’s independence.

Also, in a bizarrely circular situation, audit fees are often discounted or not even profit-making to entice the client to purchase consulting services–leading to a position where audit fees are too low to sustain the audit firm because they’re trying to secure non-audit work because audit fees are low [etc].

78

That’s pretty much it. An audit is something companies do because they have to, not because they want to. It’s like paying your taxes. You have to do it, but you want to save as much money as possible.

Consultants, on the other hand, have the potential to reduce costs by streamlining operations or increase revenue by offering strategic advice. They often have specialized skills or experience that are not readily available. Companies are willing to pay a premium for these services because they contribute to the bottom line.
Partly_warmer - I don’t know what kind of company you worked for where people are able to just jet off to Paris for the weekend and no one bats an eye. Rather than reiterate what Sam Stone
has already said, let me just say this: if I were to fly to Paris and then try to expense the trip on my timesheet, I would either be laughed at, fired, or both. Either way, the trip won’t go through and I would still have to pay out of my own pocket.

79

I mentioned not one company, but two, where private junkets to Paris happened. And I’m just referring to these tangible and obvious situations for the sake of discussion. There are plenty of other scams. (Maybe you guys are just too high-minded to know about them?)

I understand that there are companies where buying yourself a pair of socks without authorization could have major repercussions. Presumably, those aren’t the companies or situations we’re talking about.

So what the advocates of the current system are saying is:

  1. One person can’t know the details of more than a very small part of purchases.
  2. Even so, a small group of executives and/or auditors actually DOES know the details of all purchases.
  3. Employees aren’t allowed in company books, and there is absolutely no other manifestation of things like mis-charging customers, charging for unfair business expenses, violating health regulations, etc.
  4. Employees aren’t responsible for keeping companies honest, and apparently companies themselves aren’t either, so we’ll just have to live with dishonest companies.

I’ve (casually) proposed to set up an employee/shareholder advocate (since they’re SO powerless to stop their company’s misdoing that lead to bankruptcy, they must need representation, right?) The government has very intrusive auditing agencies (The Offices of the Inspector General), why shouldn’t private industry have these, too?

It seems some of you are oblivious that many (most?) companies and many managers want to cheat, and that without better auditing, they will find some new way to do it that will bilk the unsuspecting public out of billions (again, and again, and again…)

80

How to Go to Paris on Company Funds:

A “hypothetical” situation:

I believe I do good work for the company, and it’s appropriate they give me perks. I frequently travel. I’m in Benelux, and go to Paris on a day off (hypothetically, of course). My trip is finished, but it’s not quite clear that I won’t be needed again in Benelux in 3 days. If that happened, I’d have to book a very expensive plane flight back to Benelux from California. There’s some chance of that happening, but no one’s quite sure. So I tell my boss things may not finished, but there are a couple of slack days. By an incredible coincidence and stroke of luck, my girlfriend is also in Paris and has these days off. Since we’re saving the company plane fare, and since they’re forcing us to be in this hardship situation away from home, we should get money for expenses, too.

So (still entirely hypothetically, of course), I tell my boss to put us up at this hotel I found in downtown Paris. It was the only thing I could find in the middle of tourist season! True, it’s a first class hotel, but I’m still saving the company money. I think. Well, it’s too late to change our minds, now. They should really thank me, though.

My boss, who’s working 20 hours a week overtime, and is trying to keep projects worth millions under control, has a lot more important things to worry about than whether I found the cheapest possible hotel. He accepts my argument. He passes the bill to accounting, pointing out that the company has saved money by me staying in Paris.

As it happens, they don’t need me back in Benelux. But that’s the way it goes. (Note that this hypothetical has nothing to do with a real telecommunications business trip to Paris about three years ago.) What’s the problem? It’s not like I was stealing office supplies or anything!

There was no real opportunity for the boss, or for accounting, to gainsay the Paris trip. (Had they wanted to, which I doubt.) Their only option was to say “fly home”, and they believed that was more expensive.

mssmith537, this sort of thing may never have happened in your company, but…they aren’t by any chance a government contractor who could get a visit from the IG?