Accounting Ethics (and fraud)

Postings by Art Berkowitz on ethics and fraud. Most of them are serious, but sometimes we also need to have a little fun.

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Location: Orange County, California, United States

Art Berkowitz, C.P.A. is an author, speaker, and consultant from Orange County, California. He writes ethics, fraud, and accounting courses (CPE) for accountants and other financial professionals. Art has also written a weekly online column for The Wall Street Journal and a book on the Enron debacle. To order any of his self-study courses go to

Sunday, January 22, 2006

ENRON: The Smartest Guys in the Room

I just finished watching Bethany McLean and Peter Elkind's's movie, ENRON: The Smartest Guys in the Room. The authors and the movie deserve all the credit they are receiving. Apparently it has a good chance to win the Oscar for best documentary of the year.

The Culture of Enron

The movie focuses on the culture and influence inside Enron and how such a culture can subvert many normally ethical people. It also clearly delineates the key arguments against the "holy" triumvirate of Kenneth Lay, Jeffery Skilling, and Andy Fastow.

Bethany McLean, from Fortune Magazine, was one of the very first news reporters who questioned the accepted mantra on Wall Street that Enron's business plan was above reproach.

What makes this movie (and/or) book a must for accountants and others with review or regulatory responsibility is that it so clearly shows how easily this kind of abuse can take place...and what needs to be done to prevent it from happening again. I also liked the way the director presented the subject in a very entertaining way - describing the macho trips taken by key Enron executives and comparing them to the high risks taken inside the company. I watched the movie with a friend who initially had no interest in a movie on accounting, but she loved it. That's because Smartest Guys in the Room is really a human interest story told in a business setting.

California Electric Crisis

Special attention is given to the California electric crisis as the author and director have been able to obtain copies of the actual audiotapes used by Enron traders. It is both frightening and disheartening that these traders were able to disconnect the results of their actions - that millions of people would be without power - from their sole focus - making millions of dollars for Enron and themselves. So what if they had to create artificial shortages to do it. That was all part of the deregulation game.

There are some super bonus materials in the DVD including interviews with the director and authors.

Another Story that Must be Retold

The Enron story is an important one that needs to be told over and over and over again - from different perspectives and to different audiences. This is the one version that bridges the gap between the technical insider information version and the broad ethical perspective version of what and why it happened.

We should never forget,
Power tends to corrupt and absolute power corrupts absolutely. Great men are almost always bad men, even when they exercise influence and authority; still more when you superadd the tendency or the certainty of corruption by authority.
- Lord Acton (1887)

Tuesday, January 03, 2006

Accounting Ethics vs. Life's Ethics: Is There Much Difference?

During the past few years, the accounting and business communities have been faced with huge ethical conflicts that shook the related professions to their core. What are the responsibilities of management, boards of directors, the internal accounting departments, the external auditors, the underwriters, the legal departments both internal and external, and who are they responsible to?

Enron, WorldCom, Tyco, Xerox, Adelphia, Global Crossing contained numerous ethical decisions for each of these groups and most of the public would agree that the system failed. Arthur Andersen, historically one of the most stalwart and conservative of the international CPA firms, was deemed to have failed in fulfilling their responsbility to protect the public in multiple cases of fraud and mismanagement. Two of the four largest remaining international CPA firms - KPMG and Ernst & Young have been fighting charges of developing and promoting tax shelters that have put into question the role of accounting firms in today's society.

So I ask, "Are the ethical failures highlighted by these cases much different from the critical ethical dilemmas now facing our society in general?

The Institute of Global Ethics, a Maine-based think tank, organized to promote ethical behavior in individuals, institutions, and nations through research, public discourse, and practical action recently published their Top 10 Ethics Stories of 2005"

These stories include issues that range from government corruption to the right-to-die to massive financial fraud to decisions that result in people physically suffering or dying. In other words, they did not draw a distinction between business ethics and the ethics we face in everyday life. The issues and decision making strategies we make in our personal life and in our business life are similar. That is why I often integrate life issues with business issues when I teach ethics in my accounting ethics classes and courses.

I found it of particular interest that they selected the issue of torture as the number one ethics story for 2005. For the past year I have led off my accounting ethics class with the following case study.

What is Ethical?

The year is 1983. You are a high ranking US intelligence officer. There has been substantial “chatter” that a terrorist attack will take place in the next 24 hours. You hear this from your electronic listening methods as well as your human intelligence sources. You have captured suspected terrorists in your prisons, some of which have been captured during the past 72 hours. Officially, the US abides by the rules of the Geneva Convention. In view of the imminent danger to innocent lives, what methods of interrogation would you use?

About 12 hours later, a key ally's intelligence raids a hotel just inside Lebanon and provides you with a captured suspected terrorist. The papers captured with the terrorist provide strong indications that the original chatter was correct and that the terrorist act will take place against a US facility in the next 12 hours.

You conduct your interrogations of the prisoners and the captured suspected terrorist in accordance with the Geneva Convention and US policy, which do not include torture or humiliation (including the kinds we saw at the Abu Ghraib prison); nor do you ask any of your allies to conduct the interrogations for you, since many don’t have the same restrictions you do. Twelve hours later, bombs go off in a US army barracks in Lebanon killing 241 soldiers.

Questions for Discussion

As you read through each of these paragraphs, did your views change as to what decision you would make?

How did you reconcile your decision with public policy?

How did you justify your decision with your own ethical beliefs?

Do you believe that the violation of one person's rights destroys the rights of everyone?

Ultimately, have you made the most ethical decision?

Finally, if you were faced with an ethical decision that conflicts with your personal belief of what is right and wrong, but could protect the life (or the financial well being) of one person, what would you do? Would your decision change if the number of persons saved were in the hundreds or thousands?

I have added a comment feature for this posting. Feel free to post your comments as to how you would deal with this difficult ethical issue.

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