Ethics Sage

Wal-Mart and Violations of the Foreign Corrupt Practices Act

Bribery and lack of Full Disclosure Evidences Unethical Behavior at Wal-Mart

Wal-Mart said last week that it spent $73 million on compliance with the Foreign Corrupt Practices Act (FCPA) during the first quarter of 2013. It had budgeted $40 million to $45 million. During its prior fiscal year, it spent $157 million for FCPA matters. It expects to spend $65 million to $70 million in the second quarter of 2013. The disclosures came during a conference call from Wal-Mart CFO Charles Holley to reporters.

The company has said it can't tell when its internal investigation of fraudulent payments by a Mexican subsidiary might end or when it will resolve the Department of Justice and SEC investigations. Wal-Mart started its internal investigation in 2011.

Last year, the New York Times reported in a Pulitzer Prize-winning story that the company's Mexico unit paid $24 million in bribes to speed up licensing and permitting for new stores. The paper said top managers in the U.S. covered up the bribery after learning about it.

During last week’s conference call, Wal-Mart said it spent $44 million on the investigation during the first quarter of this year and $29 million for a global compliance review, program enhancements, and organizational changes.

The details surrounding the Wal-Mart de Mexico bribery scandal include the stuffing of envelopes with cash handed off to mayors, bureaucrats and other government officials who wield the power to stand in the way of business. Wal-Mart is accused of not only participating in such bribery at its Mexican subsidiary, but also of sweeping it under the rug once it came to light.

On April 21, The New York Times published a lengthy article alleging that Mexico-based Wal-Mart officials participated in an ongoing bribery scheme several years earlier to achieve market dominance in the country, and that top executives had covered it up. The allegations are corroborated by internal company documents, according to lawmakers investigating the conduct.

A whistleblower -- a former Wal-Mart de Mexico executive -- informed a company attorney of the widespread practice via email in 2005. According to Reps. Elijah Cummings (D-Md.) and Henry Waxman (D-Calif.), who are investigating the allegations, Wal-Mart former general counsel Maritza Munich pressed the company to establish a stricter anti-bribery policy after being informed of the bribes. Munich recommended that a follow-up investigation look into "other potentially suspect transactions not yet identified." Three months after Munich resigned on Feb. 1, 2006, however, the new general counsel ended the investigation.

In its 10-Q form filed with the SEC on December 4, 2012, Wal-Mart admitted that the Company could be exposed to a variety of negative consequences as a result of the investigation into FCPA violations. These include:

• There could be one or more enforcement actions in respect of the matters that are the subject of some or all of the ongoing government investigations, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders, debarment or other relief, criminal convictions and/or penalties.
• The shareholder lawsuits may result in judgments against the Company and its current and former directors and officers named in those proceedings. The Company cannot predict at this time the outcome or impact of the government investigations, the shareholder lawsuits, or its own internal investigations and review.
• The Company expects to incur costs in responding to requests for information or subpoenas seeking documents, testimony and other information in connection with the government investigations, in defending the shareholder lawsuits, and in conducting the review and investigations. These costs will be expensed as incurred.
• The Company has incurred expenses of approximately $48 million and $99 million during the three and nine months ended October 31, 2012, respectively, related to these matters. These matters may require the involvement of certain members of the Company’s senior management that could impinge on the time they have available to devote to other matters relating to the business.
• The Company expects that there will be ongoing media and governmental interest, including additional news articles from media publications on these matters, which could impact the perception among certain audiences of the Company’s role as a corporate citizen.

As a professor of accounting ethics I was intrigued by this disclosure. It seems ironic that Wal-Mart cares about “the perception among certain audiences of the Company’s role as a corporate citizen.” This from a company that has been investigated for other bribery situations and the finding in 2006 that it violated the underage child-labor laws in its factories abroad.

I also found it curious that Wal-Mart decided not to record a contingent amount for possible loss from the lawsuits and other legal actions. In its disclosure, Wal-Mart said: “The Company’s process of assessing and responding to the governmental investigations and the shareholder lawsuits continues. The review, inquiries and investigations are ongoing; and the Company cannot reasonably estimate any possible loss or range of possible loss that may arise from these matters. Although the Company does not presently believe that these matters will have a material adverse effect on its business, given the inherent uncertainties in such situations, the Company can provide no assurance that these matters will not be material to its business in the future.”

This is a classic narrow-minded view of materiality. In accounting a material event is not only one with a significant monetary impact on earnings, but also those with a significant qualitative effect on a company. That is where Wal-Mart falls far short of making an ethical disclosure about its bribery activities at Wal-Mart de Mexico.

Wal-Mart says it “can provide no assurance that these matters will not be material to its business in the future.” I never like negative statements of no assurance. Wal-Mart is looking at its own self-interest from an egoistic point of view and not the interests of its stakeholders – shareholders, creditors, employees, and so on. The Company’s statement includes no information on why the internal controls did not prevent or detect the illegal payments sooner. Major questions exist about corporate governance at Wal-Mart.

The Company needs to step up to the plate and be transparent about the bribery, violation of the FCPA, and possible long-term damage to the Wal-Mart brand. Some indication that the Company knows what happened was wrong would be nice rather than a ‘CYA’ approach. However, given my skepticism about corporate ethics, I never expect companies to act in an ethical mannerand once the cover-up is disclosed most companies rarely decide to fully disclose the details. History has taught us otherwise.

Blog posted by Steven Mintz, aka Ethics Sage, on May 21, 2013

Threats to Independence Raise Ethical Questions for the Big-Four CPA Firms

KPMG Faces Conflict of Interest Charges in Audit of JobsOhio

KPMG is at it again. In the most recent allegation of violating independence standards of the accounting profession, KPMG’s Columbus, Ohio office was auditing JobsOhio’s books while, at the same time, an out-of-state office of the firm was seeking $1 million in taxpayer money from JobsOhio for an unnamed client. As the state’s lead economic-development agency, JobsOhio is charged with recommending financial incentives for companies seeking to relocate in the state. On November 5, 2012, about the time that the audit was being conducted, KPMG was also listed on a sheet of eight pending grant commitments from the state for fiscal year 2013, one of which was for the unnamed client.

I will return to this case later on, but first a review of the recent insider trading charges against the firm. I have previously written about about insider trading at KPMG. In that case, KPMG resigned two audit accounts and withdrew its blessing on the financial statements of Herbalife for the past three years and of Skechers for the past two. KPMG withdrew its audit opinions, a serious step for any auditor, after concluding it was not independent because of alleged insider trading.

The KPMG insider trading case is a particularly egregious one because it involves an auditor tipping off a friend about stock of audit clients. Scott London, the KPMG auditor, did not trade in the stock himself but he did gain personal wealth (“unjust enrichment”) when his friend, Brian Shaw, used the inside information to trade in stock of Herbalife Ltd. and Skechers USA Inc. Shaw benefitted by $1.27 million on the trades. Shaw paid London $50,000 cash and gave him a Rolex watch.

Looking at the JobsOhio case, as KPMG was auditing JobsOhio's books in the fall of 2012 the firm also was seeking $1 million in taxpayer money from JobsOhio for an unnamed client. JobsOhio, the state's privatized development agency, said that the grant request was handled separately from and without the knowledge of the firm's auditing division.

The ethical problem for KPMG in the JobsOhio case is independence in appearance. This is an important requirement of an independent audit because factual independence is sometimes difficult to determine. Factual independence goes to the mindset of the auditor in approaching an audit with objectivity and professional skepticism. It is difficult to assess so appearances serve as a proxy in that regard.

JobsOhio denies any conflict of interest. Laura Jones, a spokeswoman for JobsOhio, said KPMG LLP's Columbus office conducted the audit, but the grant was sought by an out-of-state office. "The fact that KPMG serves JobsOhio and countless other businesses ... from the same office here in Columbus is not a conflict in our minds," she said, adding that “the state also monitors and ultimately approves taxpayer-funded incentives to companies.”

Most observers would probably conclude that the two offices of KPMG would never collude on their own to achieve some benefit for the firm. However, the more troubling issue is whether JobsOhio might perceive some pressure on them to provide financial incentives to the KPMG audit client perhaps to make it less likely that KPMG would point out problems with the JobsOhio audit, assuming any occur.

The accounting profession has strict independence standards to protect the public interest. Shareholders, creditors, and the beneficiaries of public funds rely on the honesty, trustworthiness, and responsibility of auditors to go the extra mile to ensure that the financial statements of entities that operate in the public interest are based on an independent audit – both in fact and in appearance.

KPMG is not alone in violating the most basic and cherished independence standards. As I have previously blogged, in 2010 Deloitte and Touche was investigated by the SEC for repeated insider trading by Thomas P. Flanagan, a former management advisory partner and a Vice Chairman at Deloitte. Flanagan traded in the securities of multiple Deloitte clients on the basis of inside information that he learned through his duties at the firm. The inside information concerned market moving events such as earnings results, revisions to earnings guidance, sales figures and cost cutting, and an acquisition. Flanagan’s illegal trading resulted in profits of more than $430,000. In the SEC action, Flanagan was sentenced to 21 months in prison after he pleaded guilty to securities fraud.

On January 7, 2013, the SEC announced it is investigating whether Ernst & Young violated independence rules by letting its lobbying unit perform work for several major audit clients. The SEC inquiry began shortly after Reuters reported in March 2012 that Washington Council Ernst & Young, the E&Y unit, was registered as a lobbyist for several corporate audit clients including Amgen, CVS Caremark, and Verizon Communications.

The problem for EY is that U.S. independence rules bar auditors from serving in an "advocacy role" for audit clients. The goal is to allow auditors to maintain some degree of objectivity regarding the companies they audit, based on the idea that auditors are watchdogs for investors and should not be promoting management's interests.

Finally, in December 2012, Thomson Reuters announced it signed a three-year contract with PwC, the company’s auditor, to provide use of the Thomson Reuters ONESOURCE Corporate Tax solution for China. PwC U.K. also uses this Thomson Reuters software for its tax clients. Business alliances between a company and its auditor are prohibited under U.S. and U.K. auditor regulations. Once again an independence violation exists because such arrangements create a “mutuality of interests” as a result of the business relationship between the auditor and audit client.

I am very concerned about the actions of KPMG in the JobsOhio case, Deloitte & Touche and KPMG insider trading scandals, EY serving as an advocate for an audit client, and PwC in becoming involved in a joint business relationship with an audit client. These relationships create threats to independence and taint the audit because of conflicts of interest.

The SEC needs to look into these matters, not just individually but collectively, and determine whether the Big-4 CPA firms have built adequate safeguards to protect audit independence and whether more stringent independence and ethics standards are needed to protect the public trust in the independent audit.

Blog posted by Steven Mintz, aka Ethics Sage, on May 7, 2013

Should the SEC Permit Social Media Postings of Financial Information?

Financial Disclosures on Social Media Sites Raise Questions of Fairness and Security

On April 2, the Securities and Exchange Commission outlined new disclosure rules that clarify how companies can use Facebook, Twitter and other social networks to disseminate information provided they meet certain requirements. The SEC said that companies must inform investors in advance that those will be the outlets used to disseminate financial reports. Some have heralded the move as bringing the SEC into the 21^st century and catching up with the new era of social media. Others have criticized it including Warren Buffett’s Berkshire Hathaway-owned Business Wire.  

Business Wire said that the SEC's rule "poses a disservice to the investment community” explaining that it threatens increased fragmentation of price-sensitive information, privacy concerns as users are required to register to gain access to material news, security risks that may adversely affect market stability, and the loss of simultaneity -- and the "level playing field" -- that is at the core of Regulation Fair Disclosure, commonly known as Reg FD.

Business Wire supports the use of social media tools, web posting on company web sites and blogging as supplemental platforms to communicate material information, but it believes that a broadly disseminated news release -- distributed simultaneously and in real-time via a legitimate news wire service -- is still the most effective way to maximize investor outreach, and to inclusively serve the needs of all market participants.

The use of social media to post financial information first came on the SEC’s radar last December when the regulator warned Netflix that it could take action against the company for a 43-word message that the company’s chief executive, Reed Hastings, posted in his personal Facebook feed. In the note, Mr. Hastings congratulated his team for exceeding one billion hours of video watched in a single month.

But the SEC raised concerns that the post violated Reg FD, which requires a company to publish material information to all investors at the same time. While Mr. Hastings’s announcement was made on his publicly available Facebook page, which had over 200,000 followers, the information was not subsequently disclosed in a securities filing or news release.

At the time, Hastings and Netflix said that his message was both immaterial and readily available to investors, having been picked up by a number of blogs and news media outlets. “We use blogging and social media, including Facebook, to communicate effectively with the public and our members,” Mr. Hastings wrote — on his Facebook page, naturally — after disclosing the investigation last year.

It seems the SEC is willing to allow “the tail to wag the dog” on this matter. From an ethical perspective, one obvious problem is reliance on social media alone will likely negatively impact market fairness and investor awareness. Potential also exists for the misuse of sensitive information and, I believe, hacking into the social media sites to change the reported information. Finally, I fail to see how the new rule protects investors’ interests and need for full and fair disclosure, the mandate for the SEC in its role as market regulator.

Blog posted by Steven Mintz, aka Ethics Sage, on April 15, 2013

Related articles

SEC Approves Social Media Use for Companies' Material Disclosure

KPMG Insider Trading Scandal Damaging to the Reputation of the Accounting Profession

What Possesses an Audit Partner to Trade on Insider Information?

KPMG is embroiled in an insider trading scandal that concerns me because a pattern of such improprieties may be developing. In 2010, Deloitte and Touche was investigated by the SEC for repeated insider trading by Thomas P. Flanagan, a former management advisory partner and a Vice Chairman at Deloitte. Flanagan traded in the securities of multiple Deloitte clients on the basis of inside information that he learned through his duties at the firm. The inside information concerned market moving events such as earnings results, revisions to earnings guidance, sales figures and cost cutting, and an acquisition. Flanagan’s illegal trading resulted in profits of more than $430,000. In the SEC action, Flanagan was sentenced to 21 months in prison after he pleaded guilty to securities fraud. Flanagan also tipped his son, Patrick, to certain of this material non-public information. Patrick then traded based on that information. His illegal trading resulted in profits of more than $57,000.

The KPMG case is a particularly egregious one because it involves insider trading by an auditor of client stock. Scott London, the partner in charge of audits of Herbalife Ltd. and Skechers USA Inc., traded on inside information for personal gain.  KPMG resigned as the auditor of both companies after learning that London provided non-public information about the companies to a third party, who then used the information in stock trades. The firm fired London.  

In resigning the two audit accounts, KPMG said it was withdrawing its blessing on the financial statements of Herbalife for the past three years and of Skechers for the past two. KPMG stressed, however, that it had no reason to believe there were any errors in the companies' books. Both companies said they are moving to find new auditors.

In a statement that should raise red flags for all CPA firms that audit public companies, KPMG stated it had concluded it was not independent because of alleged insider trading. Independence is the foundation of the accounting profession and the cornerstone of an audit conducted in accordance with generally accepted auditing standards. The public (i.e., shareholders and creditors) relies on auditors’ independence, objectivity, and integrity to ensure that the audit has been conducted in accordance with such standards and that the financial statements are free of material misstatements.

I’m having a hard time understanding the stupidity and moral blindness of London in this case. Surely he knew of his ethical obligations. All audit firms supposedly have been carefully assessing independence in the aftermath of financial frauds in the late 1990s and early 2000s (i.e., Enron and WorldCom). Firms generally have quality controls in place to prevent compromises to audit independence.

Trading on insider information for cash and gifts is bad enough, and when done by an audit partner it is unforgiveable. Even more baffling to me is that the quid pro quo for passing along stock tips about clients to a friend for London was to receive cash and gifts in return. According to London, he received a discount on a watch, and the friend bought him dinners from time to time and on a couple of occasions gave him $1,000 to $2,000 in cash. A cynic might say he sold himself cheap.

So, what happens next? Both Herbalife and Skechers will need to have their financial statements re-audited, not an inexpensive proposition. Even though the companies were not at fault, the public may misunderstand and think the companies were complicit in the matter.

For KPMG, the insider trading investigation is a setback. The accounting firm has worked hard to rehabilitate its reputation after coming under scrutiny last decade in a wave of corporate accounting scandals and the firm’s role in the marketing of fraudulent tax shelters. KPMG paid large nine-figure settlements to resolve lawsuits related to accounting scandals at the drugstore chain Rite-Aid and Oxford Health Plans. In 2005, the firm paid a $456 million penalty to the government related to tax fraud.

I have to wonder whether insider trading by partners at Deloitte and KPMG portends a larger scandal on the horizon. It seems every ten years or so the accounting profession finds itself in a “pickle” and hauled before Congress to explain its actions. It is about that time following financial frauds at Enron, WorldCom and a host of other companies. I don’t know how to get the message across to those in the profession that every time such incidents occur, and now insider trading, the public loses patience with the profession and doubts begin to surface about whether the profession truly acts to protect the public interest.

Blog Posted by Steven Mintz, aka Ethics Sage, on April 12, 2013

Ban on Large Sugary Drinks: Personal Liberty vs. Personal Responsibility Issues

New York State Supreme Court Overturns Ban on Sugary Drinks

I have previously blogged about the New York City law that banned sugary drinks greater than 16-ounces because of health concerns including the increased risk of diabetes and heart disease among youngsters. The law created a major controversy about how far the government can (or should) go in protecting what might be perceived to be the public (health) interest by banning the sale of an unhealthy product. The issue has become even more controversial because on March 11 2013, New York State Supreme Court Justice Milton A. Tingling decided in New York Statewide Coalition of Hispanic Chambers of Commerce v. New York City Department of Health and Mental Hygiene, to enjoin New York City’s controversial ban on the sale of large sugary beverages.

Justice Tingle noted among other things that the Department had cited the “enormous toll” that obesity places on the “economic health” of New Yorkers. To Justice Tingle any regard for the economic consequences of obesity demonstrated that the Department based its regulation “on economic and political concerns” outside the scope of its authority. Thus the very fact that the Department considered the economic consequences of the issue it addressed, a consideration that most people would claim is a critical component of sound regulatory policy, helped to doom the ban on large sodas.

Without arguing the legal issues I want to look at some of the health consequences of over-indulging in the sugary drinks and personal liberty versus personal responsibility concerns.

A recent study by Harvard University found that two out of three adults and one out of three children in the United States are overweight or obese, and the nation spends an estimated $190 billion a year treating obesity-related health conditions. Rising consumption of sugary drinks has been a major contributor to the obesity epidemic. A typical 20-ounce soda contains 15 to 18 teaspoons of sugar and upwards of 240 calories. A 64-ounce fountain cola drink could have up to 700 calories.

Sugary drink portion sizes have risen dramatically over the past 40 years, and children and adults are drinking more soft drinks than ever. Before the 1950s, standard soft-drink bottles were 6.5 ounces. In the 1950s, soft-drink makers introduced larger sizes, including the 12-ounce can, which became widely available in 1960. By the early 1990s, 20-ounce plastic bottles became the norm. Today, contour-shaped plastic bottles are available in even larger sizes, such as the 1.25-liter (42-ounce) bottle introduced in 2011.

[What’s next – a 10-liter “big gulp” at 7-11? Where does it all end?]

Here are some more facts:

• In the 1970s, sugary drinks made up about 4% of US daily calorie intake; by 2001, that had risen to about 9%.

• Children and youth in the US averaged 224 calories per day from sugary beverages in 1999 to 2004—nearly 11% of their daily calorie intake. From 1989 to 2008, calories from sugary beverages increased by 60% in children ages 6 to 11, from 130 to 209 calories per day, and the percentage of children consuming them rose from 79% to 91%.

• On any given day, half the people in the U.S. consume sugary drinks; 1 in 4 get at least 200 calories from such drinks; and 5% get at least 567 calories—equivalent to four cans of soda. Sugary drinks (soda, energy, sports drinks) are the top calorie source in teens’ diets (226 calories per day), beating out pizza (213 calories per day).

• A 20-year study on 120,000 men and women found that people who increased their sugary drink consumption by one 12-ounce serving per day gained more weight over time—on average, an extra pound every 4 years—than people who did not change their intake. Other studies have found a significant link between sugary drink consumption and weight gain in children. One study found that for each additional 12-ounce soda children consumed each day, the odds of becoming obese increased by 60% during 1½ years of follow-up.

• People who consume sugary drinks regularly—1 to 2 cans a day or more—have a 26% greater risk of developing type 2 diabetes than people who rarely have such drinks.

• A study that followed 40,000 men for two decades found that those who averaged one can of a sugary beverage per day had a 20% higher risk of having a heart attack or dying from a heart attack than men who rarely consumed sugary drinks. A related study in women found a similar sugary beverage–heart disease link.

• A 22-year study of 80,000 women found that those who consumed a can a day of sugary drink had a 75% higher risk of gout than women who rarely had such drinks. Researchers found a similarly-elevated risk in men.

Before going on let me raise the question whether we should blame the soft drink industry for their irresponsibility in selling increasingly larger sizes of drinks without regard to the health effects? Do they have an ethical obligation to consider the health effects? Where does corporate responsibility end and personal responsibility begin?

If those who consume the soft drinks pay no heed to these fairly well-known facts by now, why should we care if they shorten their lives through consumption of unhealthy drinks? Isn’t this an affront to personal liberty? Where does it all end? Why not ban fast food over certain calorie limits?

Some will say that banning soft drinks over 16-ounces won’t stop the consumption of large sugary drinks. Those who want to drink it will find a way to do so. The alcohol prohibition ban from 1920 to 1933 didn’t stop alcohol consumption. Has the illegality of marijuana affected the level of smoking? I think not.

This does not mean we shouldn’t ban a harmful practice simply because those who are abusers will find a way to still behave in a reckless manner.

The debate over banning sugary drinks over 16-ounces reminds me of the debate over gun control. Critics claim that banning certain weapons won’t stop criminals from getting their hands on such weapons; it will only stop those who want to protect home and property from violent people who would do them harm. Still, don’t we have an ethical obligation, and an obligation to all those who died from violent acts such as in Aurora Colorado, and in Newtown, to do something; act in some way; make an effort to stem the tide of rising violence?

These are difficult issues because increasingly in our society people, especially young people, feel entitled to do whatever they want; say whatever they want; act in any (often times ridiculous and offense) way that they want. As I have blogged about before, we have an entitlement society. Frankly, I blame the parents of today’s youngsters for the problem. All too many gave their kids whatever they wanted without holding them responsible or accountable for their actions.

So, I believe the answer lies in education in our schools about the dangers of unhealthy eating practices similar to unhealthy sexual practices and other behaviors. It may not work but we have to try and our schools should provide a laboratory to influence behavior in a positive manner whether it is by teaching about ethics or about dangerous and harmful habits that can end one’s life before it is time.

Blog posted by Steven Mintz, aka Ethics Sage, on April 5, 2013

 

The Ethics of Profit Repatriation by U.S. Multinationals

U.S. Companies Using Short-Term Loans to Avoid Taxes on Repatriated Cash

I have previously blogged about the use of transfer pricing techniques by U.S. companies to shift profits away from the U.S., which has the highest corporate tax rate (about 40%), to countries with lower tax rates such as Ireland (12.5%). As long as profits made overseas are not repatriated back to the U.S., those overseas profits remain untaxed by the IRS. Critics claim that a much lower tax rate (say, 15-20%) would encourage U.S. companies to bring the profits home in the form of investments and spur economic development and job growth.

Other countries have come to realize their corporate tax rates are too high. For example, Germany has reduced its rate from a high of 45% in 2008 to 15% today. The UK has gradually lowered its rate from 52% in 1981 to a projected 20% in 2015.

Repatriation is more than an economic issue; it has ethical overtones. It also highlights a practice used by some U.S. companies to skirt the repatriation law by taking the “trapped” overseas cash and providing loans to their U.S. parent companies. Under U.S. tax rules, a foreign subsidiary can lend funds to its parent without jeopardizing its untaxed status. Here is how it works:

• The loans have to be short term and can remain outstanding throughout a fiscal quarter as long as they don't cross beyond its end. If they do cross a quarter, they can remain outstanding for a total of 30 days. And that can be done for 60 days a year by any one foreign unit.
• If the borrowing is carefully set up to comply with IRS rules and U.S. auditing standards, the funds can be used over and over without incurring taxes.
• Companies are not required to disclose these moves, which makes it difficult to assess how many use them.

According to the Wall Street Journal, Hewlett-Packard (H-P) entities lent the parent about $6 billion in the year that ended in October 2010. For the 2011 fiscal year and through July 2012, the average outstanding balance of the alternating loans was $1.6 billion.

The sums rivaled H-P's borrowings in the commercial-paper market—the traditional source of big firms' day-to-day funds. Those averaged $1.9 billion over the 2011-2012 period.

More details of H-P's transactions have emerged since a 2012 hearing conducted by the U.S. Senate. The company said it told the Senate panel it used the alternating loans for all but 85 days of the 2011 and 2012 fiscal years. In a 2008 internal presentation, H-P called the loans "the most important source of U.S. liquidity for repurchases and acquisitions."

H-P spokesman Michael Thacker says H-P has "complied fully with all applicable provisions of the U.S. Internal Revenue Code, and auditor Ernst & Young has consistently reviewed and approved the accuracy of H-P's financials." The IRS has never raised concerns about the loan programs, he adds.

American concerns have long argued they should be allowed to bring back some of the estimated $1.7 trillion in profits they hold at their foreign subsidiaries, saying the money could be put to use in the U.S. The firms claim to be deterred by the huge tax liabilities they would incur under current IRS tax rates.

The U.S. is the only major economy that taxes its companies' overseas earnings. Those taxes aren't actually incurred until the money is considered to have been transferred to the U.S. parent, giving companies an incentive to maximize their earnings at foreign subsidiaries and keep them there indefinitely.

People on both sides of the debate argue the system doesn't work, creating perverse incentives that distort companies' balance sheets and deprive the U.S. Treasury of tax revenue. The short-term loans to avoid repatriation and taxes is the main example of the practice.

During the last Presidential election, business interests called for a “tax holiday,” in which American corporations would be allowed to transfer their foreign profits to their American bank accounts at a tax rate under 6 percent for one year. Such a holiday would raise revenues and create jobs in the U.S., according to the WinAmerica Campaign, a coalition of companies including Apple, Google and Pfizer.  

But the last time such a holiday was tried, in 2004, it raised less than $19 billion and did not substantially increase jobs. Most of the repatriated profits went to corporate shareholders, through dividends or stock repurchases.

Instead of a one-off holiday, some corporations — Caterpillar and Kimberly Clark, for example — have called for a permanent fix: a territorial system for taxing foreign corporate profits, as most industrialized countries use. In a pure territorial system, the profits of multinational companies based in the U.S. would be taxed only by the country in which the profit is earned.

But none of our major trading partners takes a pure territorial approach, for two good reasons. First, almost all countries impose domestic taxes on “mobile” corporate income — for example, investment interest or royalties that can easily be shifted from one country to another. Second, many countries still collect taxes on foreign profits of domestic corporations if those profits are earned in tax havens that collect little or no taxes, like Bermuda and the Cayman Islands. These havens violate the premise of the territorial system, which is that corporate profits are taxed somewhere in the world at a reasonable rate.

The ethical issue I raise is: Does a U.S. corporation have an ethical obligation to repatriate profits to the U.S. to pay their “fair share” of taxes and help to stimulate the economy in an increasingly competitive global economic marketplace?  The answer is not a simple one because we could argue about the ethics of having the highest tax rate in the world. We could also argue and debate whether the government uses its tax revenue in an ethical or socially-desirable manner to employee the unemployed, give opportunity to those wanting to improve their economic lot, and help stimulate our economy.

For me, it is time to lower the corporate tax rate to be more competitive with other countries and challenge U.S. companies on their claim to repatriate profits with a lower rate. Without debating how low is low enough to achieve the desired goal, we need to try harder to improve the economic status and wealth of the middle and lower-classes and repatriation with taxation is one way the goal might be accomplished. At least it is worth a try. If corporations do not repatriate with lower taxes but still find ways around their obligation, then they will be exposed for all to see the hypocrisy of their position.

Blog Posted by Steven Mintz, aka Ethics Sage, on April 1, 2013

IRS "Dirty Dozen" Tax Scams

Tax Scams and Scammers Cheat All of Us

The IRS issued it “Dirty Dozen list of tax scams" Tuesday, highlighting fraudulent schemes commonly committed by and upon taxpayers. The annual warning, released to coincide with tax filing season, emphasizes the most egregious schemes involving filing false returns or return items, but it also advises the unsuspecting about practices that prey upon the unwary and uninformed.

As you read thought the 2013 list, think about all the scams and scammers and how they cheat all of us who pay the correct amount of our taxes due and, while we may not agree with the way the government uses our tax dollars, we do see paying taxes as a civic responsibility.

1. Identity theft: The IRS spotlighted its measures, including its new Identity Protection we portal, to prevent and combat the growing problem of tax fraud involving stolen identities, which it called one of its top priorities. During 2012, the IRS prevented issuance of $20 billion in fraudulent refunds including those related to identity theft, up from $14 billion in 2011, it said. The IRS also noted that its identity theft enforcement sweep in January led to nearly 300 indictments, complaints, and arrests, on top of thousands of enforcement actions against identity theft tax fraud in 2012.

2. Phishing: The IRS again this year warned against fake electronic communications designed to obtain recipients’ information, reminding that the IRS does not initiate contact with taxpayers by email, text messages, or social media to request personal or financial information.

3. Return preparer fraud: In addition to suggesting taxpayers make sure paid preparers sign returns and enter their preparer tax identification number (PTIN), the IRS this year included information about using Form 14157, Complaint: Tax Return Preparer, to report abusive tax preparers.

4. Hiding income offshore: This warning also updated the number of participants in the IRS’s Offshore Voluntary Disclosure Program to 38,000 and its collections to $3.4 billion from the 2009 program alone (March 23, 2009, through Oct. 15, 2009) and $1 billion so far in “up-front” payments from the 2011 program (Oct. 16, 2009, through Sept. 9, 2011). In 2012, the program was extended indefinitely.

5. “Free money” from the IRS and tax scams involving Social Security: With fliers and advertisements “appearing in community churches around the country,” promoters of schemes promising refunds for returns with little or no documentation have enticed “unsuspecting and well-intentioned” victims, some of whom have spread the word to friends and relatives, the IRS said. One scheme falsely advises taxpayers to claim the American opportunity tax credit even if they have no current qualifying educational expenses.

6. Impersonation of charitable organizations: Some fraudsters have doubly victimized people hit by a natural disaster by claiming to be working on behalf of the IRS to help them claim a tax casualty loss but instead steal their financial and personal information. This replaced “abuse of charitable organizations and deductions” from the 2012 list.

7. False/inflated income and expenses: Exaggerating wage or self-employment income is a common ploy by some unscrupulous preparers to inflate refundable credits, including the earned income tax credit, by more than any additional tax.

8. False Form 1099 refund claims: One scheme involves issuing a bogus information return, often Form 1099-OID, Original Issue Discount, to the IRS. A refund is then claimed on a corresponding tax return. The IRS says this is based on the theory that “the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.”

9. Frivolous arguments: The IRS maintains a webpage describing some of the more common and legally fanciful of these theories.

10. Falsely claiming zero wages: A Form 4852, Substitute Form W-2, or “corrected” Form 1099-MISC, Miscellaneous Income, is fraudulently filed to reduce or eliminate income on a legitimate information return. Sometimes it is accompanied by a frivolous argument regarding the income.

11. Disguised corporate ownership: The IRS said it works with state authorities to identify entities by which taxpayers underreport income, claim bogus deductions, and engage in other misconduct.

12. Misuse of trusts: The IRS said it has seen an increase in improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses.

As frequent readers of my blog know, I like to use famous quotes to make a point.

James Madison, the "Father of the Constitution," "Father of the Bill of Rights," 4th President of the U.S. stated the purpose of income taxation:

"The power of taxing people and their property is essential to the very existence of government.''   

A poignant statement that expresses a philosophy held by some today (whether you agree with it or not) dates back to 400 B.C. and was expressed by Plato, the Greek philosopher:

“Where there is an income tax, the just man will pay more and the unjust less on the same amount of income.” 

I leave you with a quote from Ben Franklin: “…but in the world nothing can be said to be certain except death and taxes."

Blog posted by Steven Mintz, aka Ethics Sage, on March 29, 2013

Instagram’s Terms of Service and Privacy Issues

Ethical Issues and Instagram

Social networking websites (such as Facebook, MySpace, Google+, Twitter, and LinkedIn) have become the established norm for communication and maintaining relationships. While these websites are useful tools for exchanging information, many users are concerned that their personal details are being circulated far more widely than they would like. The growing concerns over privacy breaches have resulted in a number of class action lawsuits. In this blog I address the situation at Instagram.

Instagram is a mobile photo sharing app which allows people to add filters and effects to photos and share them easily on the Internet. Instagram was acquired by Facebook in 2012. Instagram is a free service that allows users to share their photos with friends and family. Of course, one never knows where is the photo goes once it is posted on the Internet.  

On December 17, 2012, Instagram announced several changes to its Terms of Service. The new Terms of Service suggested Instagram would be allowed to use pictures in advertisements without notifying or compensating users, and to disclose user data to Facebook and to advertisers. Instagram also proposed that the parents of minors implicitly consent to the use of their childrens' images for advertising purposes. The new Terms of Service also introduced a mandatory arbitration clause which would force users to waive their rights to file a class action lawsuit in most circumstances. The changes were to take effect on January 16, 2013 and would not apply to pictures uploaded before that date.

Many users expressed outrage. As a result, a few days later, Instagram again revised the Terms of Service announcing that it would withdraw some of the proposed changes. Instagram backed off a plan to use the names, images, and photos of users for advertising purposes by deleting language about displaying photos without compensation. However, Instagram kept language that gave it the ability to place ads in conjunction with user content, saying "we may not always identify paid services, sponsored content, or commercial communications as such.” It also kept the mandatory arbitration clause.

Instagram's new terms include a clause asserting that users under the age of 18 imply by their agreement that a parent or legal guardian has also read and agreed to the terms. The word “imply” is key. These days if any organization expects users under the age of 18 to follow through a guideline with ethical action…well, that organization has had its head in the sand the past few years.

The new terms require users with a legal complaint to submit to arbitration rather than sue Instagram in court, and it prohibits them from joining a class-action lawsuit under most circumstances. That didn’t go very far.

A class action lawsuit was filed in the U.S. District Court for the Northern District of California on December 21, 2012 which accused Instagram of violating the property rights of its users and breaching its existing terms of service. The class action lawsuit seeks to preserve valuable and important property, statutory, and legal rights, through injunctive, declaratory and equitable relief before such claims are forever barred by adoption of Instagram’s New Terms. The lawsuit takes particular issue with Instagram’s ownership of user images, especially in the situation where a user quits the service and, according to Instagram’s Terms of Service, loses ownership of their photos to the company.

On February 13, 2013, Instagram asked the federal court to dismiss the class action lawsuit filed over changes to Instagram’s Terms of Service. Instagram argued that the plaintiff, Lucy Funes, had no right to bring her claim because she could have deleted her Instagram account before the changes in the Terms of Service went into effect on January 19, 2013. According to Instagram's filing, Ms. Funes filed the lawsuit on December 21, nearly a month before the changes in the Terms of Service went into effect and she continued to use her account after that day. Instagram also disputed Funes' claims that the new terms required her to transfer rights in her photos to the company. Furthermore, Instagram took the position that both the old service terms and the new terms "emphasize that the individual owns the content he/she posts through Instagram's service."

Numerous ethical questions arise in a case like Instagram. Here is one as food for thought:

Do social networkers have a right to privacy? More and more users of Facebook and MySpace are finding that prospective employers are perusing their sites, despite the fact that they may conceive of their online presence as personal space. Also, what is a private person’s right to control the images and information about them available on line? I will address these issues in an upcoming blog.

One final thought. I went to the Instagram website and read its short version of its Community Guidelines. That pretty much told me all I needed to know. When an online photo-sharing service has to tell its members “to keep your clothes on” it implies the site has had such issues before and the users have no idea about the consequences of their actions. A word to the wise: What we do today affects who we are tomorrow.

Blog posted by Steven Mintz, aka Ethics Sage, on March 18, 2013

 

Accounting for Nuts

Diamond Foods Fraud Illustrates the Danger of overly-optimistic Earnings Projections

Management does it all the time – set overly optimistic earnings and earnings per share projections to motivate financial analysts to give positive recommendations to current and potential investors with respect to stock holdings. It was the fuel that engineered the accounting frauds at Enron, WorldCom, et al. A recent example is Diamond Foods.

On November 14, 2012, Diamond Foods Inc. disclosed restated financial statements tied to an accounting scandal that reduced its earnings during the first three quarters of 2012 as it took significant charges related to improper accounting for payments to walnut growers. The restatements cut Diamond’s earnings by 57 percent for fiscal 2011 to $29.7 million and by 46 percent for fiscal 2010 to $23.2 million. By December 7, 2012, Diamond’s share price had declined 54 percent during 2012.

Diamond Foods, long-time maker of Emerald nuts, and subsequent purchaser of Pop Secret popcorn (2008) and Kettle potato chips (2010), became the focus of a SEC investigation after The Wall Street Journal raised questions about the timing and accounting of Diamond’s payments to walnut growers. The case focuses on the matching of costs and revenues. At the heart of the investigation was the question of whether Diamond senior management adjusted the accounting for the grower payments on purpose to increase profits for a given period.

The case arose in September 2011, when Douglas Barnhill, an accountant who is also a farmer of 75 acres of California walnut groves, got a mysterious check for nearly $46,000 from Diamond. Barnhill contacted Eric Heidman, the company’s director of field operations, on whether the check was a final payment for his 2010 crop or pre-payment for the 2011 harvest. Diamond growers are paid in installments, with the final payment for the prior fall’s crops coming late the following year. Though it was September 2011, Barnhill was still waiting for full payment for the walnuts he had sent Diamond in 2010. Heidman told Barnhill that the payment was for the 2010 crop, part of fiscal 2011, but that it would be “budgeted into the next year.” The problem is under accounting rules you cannot legitimately record in a future fiscal year an amount for a prior year’s crop. That amount should have been estimated during 2010 and recorded as an expense against revenue from sale of walnuts.

An investigation by the audit committee in February 2012, found payments of $20 million to walnut growers in August 2010 and $60 million in September 2011 that were not recorded in the correct periods. The $20 million payments to growers in 2010 caught the eye of Diamond’s auditors, Deloitte & Touche. However, it does not seem that the auditors lived up to their professional responsibilities in detecting and/or reporting the fraud.

The disclosure of financial restatements in November 2012 and audit committee investigation led to the resignation of former CEO Michael Mendes who agreed to pay a $2.74 million cash clawback and return 6,665 shares to the company. Mendes’ cash clawback was deducted from his retirement payout of $5.4 million. Former chief financial officer Steven Neil was fired on November 19, 2012 and did not receive any severance.

An interesting aspect of the case is the red flags including unusual timing of payments to growers, a leap in profit margins, and volatile inventories and cash flows. Moreover, the company seemed to push hard on every lever to meet increasingly ambitious earnings targets and allowed top executives to pull in big bonuses, according to interviews with former Diamond employees and board members, rivals, suppliers and consultants, in addition to reviews of public and nonpublic Diamond records.

Nick Feakins, a forensic accountant, noted the relentless climb in Diamond’s profit margins including an increase in net income as a percent of sales from 1.5 percent in fiscal 2006 to more than 5 percent in fiscal 2011. According to Feakins, “no competitors were improving like that; even with rising Asian demand…it just doesn’t make sense.” Reuters did a review of 11 companies listed as comparable organizations in Diamond’s regulatory filings and found that only one, B&G Foods, which made multiple acquisitions, added earnings during the period.

Another red flag was that while net income growth is generally reflected in operating cash flow increases, at Diamond the cash generation was sluggish in fiscal 2010 when earnings were strong. This raises questions about the quality of earnings. Also, in September 2010 Mendes had promised earnings per share growth of 15 percent to 20 percent per year for the next five years. In fiscal 2009, 2010, and 2011, $2.6 million of Mendes’ $4.1 million in annual bonus was paid because Diamond beat its EPS goal, according to regulatory filings.

The ethical issues in this case are fairly obvious: misleading financial results; improper accounting; and a corporate governance system that did not work. The earnings projections raise questions whether auditors should include these projections in their audit work. In accounting, they are referred to as “forward-looking” statements and cautionary language is assigned to the amounts. However, this is insufficient to protect the public in an environment of capitalism run amok.

Blog posted by Steven Mintz, aka Ethics Sage, on February 18, 2013

What is the Value of Ethics Education?

Are Universities Successfully Teaching Ethics to Business Students?

Last week I read an article on the failure of ethics education of business students to change the dynamic in the business world where the pursuit of self-interests trumps all else. We certainly have been through a decade or so of glaring unethical business practices at companies such as Enron and WorldCom, Bernie Madoff’s insider-trading scandal, and the financial meltdown of 2008-2010 from which we still have not recovered.

As a professor who teaches ethics I was struck by the reasoning given for the failure of ethics education. Some claim ethics is taught only in a separate course rather than integrated throughout the curriculum creating a perception in the minds of students that ethics is only important tangentially rather than as an integral part of business practice. I agree with this perspective but realize, having been an academic administrator for many years, the problem lies in not being able to get faculty from various business disciplines on board to incorporate ethics into their individual courses. Some feel unequipped to do so; others do not believe we should be “preaching” to college students.

I did some research on how ethics is taught to business students and their perspectives on business responsibilities and found some interesting results. Surveys conducted by the Aspen Institute, a think tank, show that about 60% of new M.B.A. students’ view maximizing shareholder value as the primary responsibility of a company; that number rises to 69% by the time they reach the program's midpoint.

There is nothing wrong with maximizing shareholder value – it is a basic tenet of capitalism. The problem lies when that is the only driver of corporate behavior to the exclusion of broader stakeholder approaches that would include customers, suppliers, and employees in the mix. Though maximizing shareholder returns isn't a bad goal in itself, focusing on that at the expense of societal interests can lead corporate decision-makers down the road of greed. By maximizing shareholder value, bonuses increase and stock options are worth more.

Some schools are experimenting with a more integrated approach. This fall, Boston University's School of Management will introduce a required ethics course for freshman business students, and is also tasking instructors in other business classes to incorporate ethics into their lessons. It may also overhaul a senior seminar to reinforce ethics topics.

"We need to hit the students hard when they first get here, remind them of these principles throughout their core classes, and hit them once again before they leave," says Kabrina Chang, an assistant professor at Boston University's business school, who is coordinating the new freshman class.

Another school with a serious attempt to teaching ethics to business students is Kansas State University. Kansas State has developed a Business Ethics Education Initiative designed to help strengthen business ethics education internationally, nationally, and locally. The goals include enhancing public awareness of the importance of business ethics coursework and identifying effective models of ethics education for relevant stakeholders. Without tying ethics to a business curriculum, "we are graduating students who are very myopic in their decision-making," says Diane Swanson, founding chair of the Business Ethics Education Initiative at Kansas State University.

Interestingly, K-State strives to achieve those goals through external and internal (campus) outreach activities, including affiliations with profit and not-for-profit organizations. I particularly like the stakeholder-influenced approach to business ethics education. It should be a two-way street between the college and greater business community to move the effort more towards the practical implications of business ethics education.

I could mention additional business ethics programs but the fact is the value of such programs is unclear. The whole issue of business ethics education has not been aptly dealt with by AACSB – International, the worldwide accrediting agency for business schools in colleges and universities. AACSB’s task force addressed this issue in 2004 and came up with what can best be described as weak and ineffective standards. I can tell you first-hand that business schools generally will not follow standards set by AACSB unless they are mandatory, and AACSB’s are not. Here are excerpts from the standards:

“While the task force does not prescribe a particular curriculum or course, it recommends that AACSB encourage its member schools and their faculties to renew and revitalize their commitment to ethical responsibility at both the individual and organizational levels. Schools should be encouraged to demonstrate this commitment throughout their academic programs, assessment processes, research agendas, and outreach activities.”

This is "academic-speak" for we do not want to hold the schools accountable for ethics education. AACSB's failure to set specific goals for business ethics education speaks volumes about the political pressure from accredited schools that were brought to bear on any new standards that require specific education. Academic administrators do not want to be tied down to a specific course of action or program; they want a more "flexible" approach. The result is a meaningless standard that fails to address the critical problems that face us today in graduating business students who become tomorrow's future abusers of the capitalist system because of narcissitic behavior.

So, what should be done about the failure of business ethics education over the years to stem the rising tide of corporate fraud and wrongdoing? I believe the emphasis of business ethics education has to change from teaching philosophical reasoning methods that rarely work in practice to a more values-based approach that emphasizes ethical leadership. Ethical leadership is a must in any discipline -- accounting, finance, information systems, management and marketing. Therefore, all college instructors should buy into the need to slant their teaching methods to incorporate leadership -- ethical leadership.

Blog posted by Steven Mintz, aka Ethics Sage, on February 12, 2013

 

How to Prepare for a Behavioral Interview

Behavioral Competencies Assessed by Employers through the Behavioral Interview

Behavioral based interviewing is interviewing based on discovering how the interviewee acted in specific employment-related situations. The logic is that how you behaved in the past will predict how you will behave in the future (i.e. past performance predicts future performance).

In a traditional interview, the potential employee is asked a series of questions which typically have straight forward answers like "What are your strengths and weaknesses?" or "What major challenges and problems did you face? How did you handle them?" or "Describe a typical work week."

In a behavioral interview, an employer has decided what skills are needed in the person they hire and will ask questions to find out if the candidate has those skills. Instead of asking how you would behave, they will ask how you did behave. The interviewer will want to know how you handled a situation, instead of what you might do in the future.

In a survey of 1,400 chief financial officers by Robert Half International, the following question was asked:

“Other than technical ability and willingness to do the job, what quality impresses you the most when hiring a candidate?”

The answers may surprise some as behavioral characteristics account for 92 percent of the responses:

•Honesty & Integrity 58%

•Enthusiasm 14%

•Communications Skills 12%

•Professional Appearance 7%

•Sense of Humor 1%

•Other 8%

Behavioral interview questions will be more pointed, more probing and more specific than traditional interview questions:

• Give an example of an occasion when you used logic to solve a problem.
• Give an example of a goal you reached and tell me how you achieved it.
• Describe a decision you made that was unpopular and how you handled implementing it.
• Have you gone above and beyond the call of duty? If so, how?
• What do you do when your schedule is interrupted? Give an example of how you handle it.
• Have you had to convince a team to work on a project they weren't thrilled about? How did you do it?
• Have you handled a difficult situation with a co-worker? How?
• Tell me about how you worked effectively under pressure.

Follow-up questions will also be detailed. You may be asked what you did, what you said, how you reacted or how you felt.

Keep in mind that you won't know what type of interview will take place until you are sitting in the interview room. So, prepare answers to traditional interview questions.

Then, since you don't know exactly what situations you will be asked about if it's a behavioral interview, refresh your memory and consider some special situations you have dealt with or projects you have worked on. You may be able to use them to help frame responses. Prepare stories that illustrate times when you have successfully solved problems or performed memorably. The stories will be useful to help you respond meaningfully in a behavioral interview.

Finally, review the job description, if you have it, or the job posting or ad. You may be able to get a sense of what skills and behavioral characteristics the employer is seeking from reading the job description and position requirements.

It's important to keep in mind that there are no right or wrong answers. The interviewer is simply trying to understand how you behaved in a given situation. How you respond will determine if there is a fit between your skills and the position the company is seeking to fill. The key is to listen carefully, be clear and detailed when you respond and, most importantly, be honest. If your answers aren't what the interviewer is looking for, this position may not be the best job for you anyway.

The Virginia Tech University provides useful questions for behavioral interviewees to prepare for the interview including:

Describe a time when you were faced with problems or stresses at work that tested your coping skills. What did you do?

Give an example of a time when you had to be relatively quick in coming to a decision.

Give me an example of an important goal you had to set and tell me about your progress in reaching that goal.

Describe the most creative work-related project you have completed.

Give me an example of a problem you faced on the job, and tell me how you solved it.

Tell me about a situation in the past in which you had to deal with a very upset supervisor or co-worker.

Give me an example of when you had to show good leadership.

At the end of the day the interview process is designed to see if a potential employee’s values and work ethic are a good fit for the company. Remember,

Technical gets you the interview, Behavioral gets you the job !

Blog posted by Steven Mintz, aka Ethics Sage, on February 4, 2012

Does Everyone Lie?

Are we a Culture of Liars?

In the aftermath of the Lance Armstrong fraud perpetrated on the entire world we have to question whether everyone lies. Has it become so ingrained in our national psyche that lying has become the right way to behave?

I watched the Katie Couric interview a week ago Thursday and saw Manti Te'o commit a common lie. Katie asked whether he was truthful about his relationship with Lennay Kekua and Manti responded he never lied because whenever he was asked if he had ever met her, he skirted the issue. He admits to being less than forthcoming. But, a lie by omission is still a lie.

We say it is wrong to lie our kids and claim we don’t do it ourselves, yet lying is common, used to get out of tight situations, and part of the narcissistic behavior pattern that has enveloped Americans during the past twenty years or so. It has become part of our self-esteem – who we are and what we believe in. We live in a society where deception is thought of as nothing wrong. So what if we take advantage of others so long as it advances our own self-interests.

Liars think they have good reasons to lie, or good intentions. But the people being deceived don’t necessarily feel that way. I always tell my students that lying is wrong on many levels not the least of which is you are using people for your own personal gain. It goes against the basic “Golden Rule” that we should treat others the way we want to be treated. No one wants to be lied to so why should we lie to others?

On a practical level once we begin to lie or cover-up, we begin the slide down the proverbial ethical slippery slope where one lie leads to another and we struggle to get our story straight and consistent when we are questioned about our actions. This is the classic way police detectives catch criminals. They ask them to repeat their stories many times and in different ways to respond to probing questions. It’s hard to remember the initial lie and subsequent cover-ups, but not so with truthful statements.

"People do it because it works," said Robert Feldman, dean of social and behavioral sciences at the University of Massachusetts in Amherst and a leading researcher on the psychology of lying. "We get away with lies all the time. Usually they're minor: 'I love your tie.' 'You did a great job.'

“The reality is, people lie all the time — ‘I love the report you gave,’ for instance — and tell you what you want to hear. Most of us lie, and most of us don’t get caught. If others hadn’t come forward, I’m sure Lance Armstrong still be living the lie.”

According to Feldman, Bill Clinton is a prime example of a public figure who lied to protect himself — by denying he had sexual relations with White House intern Monica Lewinsky — and later, after confessing, reclaimed some vestige of his credibility and moral standing. Clinton is now one of the country’s most admired public figures, if by no means universally beloved.

The popular television show House features a character who always tells people “everyone lies.” The statistics seem to bear this out. A variety of studies have been conducted about lying. One that was published in the Journal of Basic and Applied Social Psychology found that during a 10-minute conversation between two strangers, 60% lied at least once. Those liars told an average of two to three fibs.

According to a 2012 Gallup poll, 43 percent of Americans rate the country’s state of moral values as “poor,” and 73 percent indicate it’s getting worse. Dishonesty, deception, and integrity (or lack thereof) are part of the problem, respondents said, along with loss of religious faith and a breakdown in family structure.

Moral philosopher and author Sissela Bok, whose books include “Lying: Moral Choice in Public and Private Life,” agrees that lying is prevalent throughout this society and others, often starting with small steps and at a young age. Step by step, the lies can build to what seems like the point of no return.

From a liar’s perspective, “You’re very optimistic about not getting caught,” adds Bok. “Also, you think you have good reasons to lie, or good intentions. But the people being deceived — investors, public citizens, whoever — don’t necessarily feel that way.”

So ask yourself whether you, too, lie all the time. Do you tell people what they want to hear rather than the truth? Do you deceive by obfuscating the truth?  Do you lie by omission?

Here are five common forms of lying in serious matters:

• The potential worker who lies on his/her resume to get a job or get ahead
• The husband who says he is working late when he is having an affair
• The worker who takes long-term disability for a serious injury, only to be found puttering around the golf course
• The guy who says his car broke down because he is late for work
• The dog who ate your homework.

Lying has become endemic to our society. Perhaps the best way to deal with it is to assume whatever a person says to us when questioned about a serious matter that the opposite is true.

Blog posted by Steven Mintz, aka Ethics Sage, on February 1, 2013

Should the Monday After the Super Bowl be a Holiday?

Super Bowl Monday and Work Ethic

Perhaps you have heard there is a petition circulating to send to President Obama to make next Monday, the day after the Super Bowl, a national holiday.

" Declare the Monday following the Super Bowl a national holiday" is the brain child of the Fantasy Football site, 4for4.com. Here is the petition:

“In 2012, an estimated 111 million American citizens watched the Super Bowl, making it the most- viewed television braodcast in history and one of the largest location-independent gatherings of American people to date. 

We at 4for4.com Fantasy Football petition the Obama Administration to consider  declaring the Monday following Super Bowl Sunday a national holiday. By doing so, the Obama Administration can promote camaraderie among the American people, keep the streets safer for our children on Sunday night and Monday morning, promote a productive workplace when work resumes on Tuesday, and honor the most popular event in modern American culture.”

Now, the fact that a Fantasy Football site initiated the petition detracts from the seriousness of the effort since there can be no doubt Fantasy Football hopes the PR effort leads to more sign-ups for its newsletter, betting, and other self-promoting activities. Nevertheless, the fact that many Americans have already signed the petition and more are seriously considering it speaks volumes about the declining ethical values in our society.

The rationale typically given to have Super Bowl Monday as a holiday is that people do not want to go to work after eating and drinking for four hours on a Sunday -- so let's make the Monday after the Super Bowl a national holiday. I suppose given our work-ethic-challenged society many already call in sick that Monday while others are unproductive at work. Still, that doesn’t mean we need to set new lows for work effort and caring about the quality of work one does in the workplace.

One important ethical value is the pursuit of excellence. Having a national holiday after the most watched show of the year elevates laziness and the declining work ethic in our society to new heights (or lows!). When sports gets priority over keeping the engine of economic development and capitalism going even for one day, we have morphed into selfish society of the first order.

Glassdoor.com surveyed employees asking what the Super Bowl does to the workplace the Monday after the game. They found:

• 20% of employees say that employee morale is typically better in the office the day after the Super Bowl.
• 22% of employees notice, however, that the Monday following the Super Bowl is commonly a less productive day than usual.
• 8% of employees plan to take the day off following the Super Bowl.
• 9% of employees plan to take the Monday off as a vacation day.  
• 3% of surveyed employees admit that they plan to call in sick the day after the Super Bowl.

Glassdoor.com also asked employees if their employers offer any type of perks for the Monday after the Super Bowl. Several employees said that they are either allowed to work from home or use the Monday as a flex day. Another employee noted that their weekly Monday morning meeting gets bumped until later in the day on the Monday after the Super Bowl. Other survey respondents said that their employers buy breakfast for employees on the Monday after the game.

In a broader survey that illustrates laziness in society, two-thirds of U.S. workers who call in sick at the last minute do so for reasons other than physical illness, according to the findings of the 17th annual CCH Unscheduled Absence Survey. CCH is a leading provider of human resources and employment law information and services.

Is worker absenteeism a problem for business in general? Yes, according to the 2007 CCH Survey. It found that while 34 percent of people call in sick to work at the last minute due to “personal illness,” 66 percent are taking time off to deal with personal or family issues.

“Most people today are juggling the demands of busy personal and professional lives, and are trying to do their very best in both places,” said CCH Employment Law Analyst Pamela Wolf. Employers, however, have failed to make significant headway against the costly absenteeism problem that takes billions of dollars off the bottom line for U.S. businesses. The nation’s largest employers estimate that unscheduled absenteeism costs their businesses more than $760,000 per year in direct payroll costs, and even more when lower productivity, lost revenue and the effects of poor morale are considered.

The CCH Survey also found that for many employers, it’s no surprise when employees are likely to be no-shows. More than two-thirds (68 percent) report finding a discernable pattern in unscheduled absences, with 37 percent of organizations reporting the most noticeable pattern is people calling in sick on Mondays and Fridays, followed by 17 percent recognizing the most noticeable pattern occurring around holidays such as Christmas or the Fourth of July and 13 percent reporting their most noticeable pattern of unplanned absences occurs during flu and hay fever seasons.

Our country runs the risk of falling behind China as the world’s largest economy. We need to get serious about the importance of staying competitive in an increasingly globalized world economy with countries like China chomping at the bit to overtake us as the world leader.

You can bet the Chinese government has not declared a national holiday for the day after the country’s national Ping Pong Championship.

Blog posted by Steven Mintz, aka Ethics Sage, on January 28, 2013

Transocean Settlement of Deepwater Horizon Spill and Ethical Responsibility

Transocean Settles with US Government

On January 3, Transocean whose floating Deepwater Horizon oil rig blew out in 2010, causing a massive oil spil in Gulf of Mexico agreed to settle civil and criminal claims with the federal government for $1.4 billion.  

The Deepwater Horizon exploded, burned and sank in April 2010. Eleven men were killed and millions of gallons of oil flowed into the Gulf of Mexico and fouled the shores of coastal states. The well, known as Macondo, was owned by British oil giant BP, which settled its own criminal charges and some of its civil charges in November for $4.5 billion.

While this settlement resolves the government’s claims against Transocean, that company and the others involved in the spill still face a civil case, which is scheduled to begin in February in New Orleans. Stephen J. Herman and James P. Roy, lawyers who represent the steering committee of plaintiffs in the cases, said that Thursday’s settlement did not change the case, and that the plaintiffs thought that BP, Transocean and Halliburton “will be found grossly negligent” at trial.

In a deal filed in federal court in New Orleans, a subsidiary, Transocean Deepwater, agreed to one criminal misdemeanor violation of the Clean Water Act and will pay a fine of $100 million. Over the next five years, the company will pay civil penalties of $1 billion, the largest ever under the act.  Under a law passed last year, 80 percent of the penalty will be applied to projects for restoring the environment and economies of Gulf States.

As part of the criminal settlement, Transocean also agreed to pay the National Academy of Sciences and the National Fish and Wildlife Foundation $150 million each. Those funds will be applied to oil spill prevention and response in the Gulf of Mexico and natural resource restoration projects. The agreement will be subject to public comment and court approval. The company agreed to five years of monitoring of its drilling practices and improved safety measures.

The company announced in September that it had set an “estimated loss contingency” of $1.5 billion against the Justice Department’s claims.

The multistate trial over claims in the Deepwater Horizon cases that have not been settled are scheduled to begin in February.

BP continued its longstanding argument that the accident, in the words of the spokesman Geoff Morrell, “resulted from multiple causes, involving multiple parties,” and that other companies had to shoulder their share of the blame. This attitude continues BP’s approach of trying to lay off blame to other parties. Whatever happened to the buck stops here?

Looking back at was has happened since the spill, federal inspectors do share much of the blame for not catching safety problems before they got out of hand. on December 2, 2010 the staff of the presidential commission looking into the Horizon Deepwater oil spill issued a report critical of the way federal inspectors handled their role in dealing with what has become the largest oil spill in U.S. history.  While some safety experts investigating the causes of the spill lay blame on human error, it goes much deeper than that and reflects the general malaise in the way federal agencies oversee such activities. As I see it, the causes of the spill can be attributed to the following factors: (1) poorly trained inspectors; (2) lack of resources to adequately oversee and inspect oil rig operations; (3) failure of inspection procedures to keep up with the advanced technology of oil rigging operations; (4) starting salaries for college graduates that pale in comparison to what Engineering school graduates make ($47,448 versus $94,000); (5) a failure of management to devote the resources necessary to prevent oil spills and a cutting corners mentality as was the case with BP; (6) and, perhaps, the most significant cause, the conflict of interests that exists between inspectors and their managers and oil industry executives who develop social ties with the inspectors and pressure them to not look as closely as they should at potential problems.

Looking at the ethics of the matter, I believe the root cause of the BP oil spill was an attitude that has become pervasive in our society that we don’t have to look to closely at oversight because the worst won’t happen. Let’s just go through the motions, document what we have found, and move on to the next assignment. The failure of savings and loan institutions in the late 1980s and early 1990s and the meltdown of financial services companies starting in 2008 can be blamed partly on regulator incompetence or at least, indifference to the possible crises that could arise in the institutions being regulated. In other words it is a failure of work ethic.

Also, it is a lack of ethics in the sense of failing to exercise a reasonable level of care in doing one’s job that contributes to disasters happening such as the Horizon Deep Water Oil Spill. We must get back to pursuing excellence in whatever we do, accepting responsibility for our actions, and being accountable. BP has not learned that lesson as yet. I guess they feel the dozens of commercials they have funded about how clean the coast now is and “come on down” statements from representatives of Alabama, Florida, Louisiana and Mississippi have satisfied its corporate social responsibility and mitigates its horrific response to the Horizon disaster.

Blog posted by Steven Mintz, aka Ethics Sage, on January 7, 2013

U.S. in 19th Place in Corruption Perceptions Index

Transparency International Results Troubling for the U.S., China and India

The well-respected international ratings service, Transparency International (TI), just came out with its annual rankings of its Corruption Perceptions Index (CPI).

The CPI ranks 176 countries based on how people in those countries perceive the severity of corruption at all levels of government. It is a composite index, a combination of polls, drawing on corruption-related data collected by a variety of institutions. The CPI reflects the views of observers from around the world, including experts living and working in the countries/territories evaluated.

Corruption is the abuse of entrusted power for private gain. This is the working definition used by TI, applying to both the public and private sectors. The CPI focuses on corruption in the public sector, or corruption which involves public officials, civil servants or politicians. The data sources used to compile the index include questions relating to the abuse of public power and focus on: bribery of public officials, kickbacks in public procurement, embezzlement of public funds, and on questions that probe the strength and effectiveness of anti-corruption efforts in the public sector. As such, it covers both the administrative and political aspects of corruption. In producing the index, the scores of countries/territories for the specific corruption-related questions in the data sources are combined to calculate a single score for each country.

According to Transparency International, corruption generally comprises illegal activities, which mainly come to light only through scandals, investigations or prosecutions. It is thus difficult to assess absolute levels of corruption in countries or territories on the basis of hard empirical data. Possible attempts to do so such as by comparing bribes reported, the number of prosecutions brought or court cases directly linked to corruption cannot be taken as definitive indicators of corruption levels. Rather they show how effective prosecutors, the courts or the media are in investigating and exposing corruption. One reliable method of compiling comparable country data is to capture perceptions of those in a position to offer assessments of public sector corruption in a given country.

The 2011 CPI draws on 17 data sources from 13 institutions. The information used for the 2011 CPI is survey data from these sources gathered between December 2009 and September 2011. The CPI includes only sources that provide a score for a set of countries/territories and which measure perceptions of corruption in the public sector. TI ensures that the sources used are of the highest quality. To qualify, the data collection method must be well-documented and the methodology published to enable an assessment of its reliability.

Here is a listing of the top 25 countries and their scores.

Worldwide Corruption Perceptions ranking of countries published by Transparency International

Rank Country Index 2012 2012 [20] 2011 [21] 2010 [22] 2009 [23] 2008 [24] 2007 [25] 2006 [26] 2005 [27] 2004 [28] 2003 2002 1  Denmark 90 9.4 9.3 9.3 9.3 9.4 9.5 9.5 9.5 9.5 9.5 1  Finland 90 9.4 9.2 8.9 9.0 9.4 9.6 9.6 9.7 9.7 9.9 1  New Zealand 90 9.5 9.3 9.4 9.3 9.4 9.6 9.6 9.5 9.5 9.4 4  Sweden 88 9.3 9.2 9.2 9.3 9.3 9.2 9.2 9.3 9.3 9.0 5  Singapore 87 9.2 9.3 9.2 9.2 9.3 9.2 9.3 9.4 9.4 9.4 6  Switzerland 86 8.8 8.7 9.0 9.0 9.0 9.1 9.1 8.8 8.5 8.4 7  Australia 85 8.8 8.7 8.7 8.7 8.6 8.7 8.8 8.8 8.6 8.5 7  Norway 85 9.0 8.6 8.6 7.9 8.7 8.8 8.9 8.8 8.5 8.6 9  Canada 84 8.7 8.9 8.7 8.7 8.7 8.5 8.4 8.7 9.0 8.9 9  Netherlands 84 8.9 8.8 8.9 8.9 9.0 8.7 8.6 8.9 9.0 8.8 11  Iceland 82 8.3 8.5 8.7 8.9 9.2 9.6 9.7 9.6 9.4 9.2 12  Luxembourg 80 8.5 8.5 8.2 8.3 8.4 8.6 8.5 8.7 9.0 8.7 13  Germany 79 8.0 7.9 8.0 7.9 7.8 8.0 8.2 7.7 7.3 7.4 14   Hong Kong 77 8.4 8.4 8.2 8.1 8.3 8.3 8.3 8.0 8.2 7.9 15  Barbados 76 7.8 7.8 7.4 7.0 6.9 6.7 6.9       16  Belgium 75 7.5 7.1 7.1 7.3 7.1 7.3 7.4 7.6 7.1 6.6 17  Japan 74 8.0 7.8 7.7 7.3 7.5 7.6 7.3 7.0 7.1 7.1 17  United Kingdom 74 7.8 7.6 7.7 7.7 8.4 8.6 8.6 8.6 8.7 8.3 19  United States 73 7.1 7.1 7.5 7.3 7.2 7.3 7.6 7.5 7.7 7.6 20  Chile 72 7.2 7.2 6.7 6.9 7.0 7.3 7.3 7.4 7.5 7.5 20  Uruguay 72 7.0 6.9 6.7 6.9 6.7 6.4 5.9 5.5 5.1 5.1 22  Bahamas 71 7.3                   22  France 71 7.0 6.8 6.9 6.9 7.3 7.4 7.5 6.9 6.3 6.7 22  Saint Lucia 71 7.0   7.0 7.1 6.8           25  Austria 69 7.8 7.9 7.9 8.1 8.1 8.6 8.7 8.0 7.8 7.8

 

Greece, which is the recipient of aid and loans from Europe and the International Monetary Fund totaling nearly €250 billion ($327 billion), dropped to 94 from 80, and replaced ex-communist Bulgaria at the bottom of the list of 27 EU members. Bulgaria now ranks 75th.

The ranking also shows that Italy, which hasn't received a bailout but has been struggling with high interest rates on its government debt, slipped to 72nd, below Romania, at 66.

Portugal and Ireland, which along with Greece have received euro-zone bailouts, were placed 33rd and 25th, respectively. It is not surprising that many countries in the euro zone are struggling from a corruption point of view given the internal financial pressures that exist.

Denmark, Finland and New Zealand tied for first place, helped by strong access to information about government activity and rules governing the behavior of public officials. Sweden, Singapore and Switzerland ranked fourth, fifth and sixth, respectively. Somalia once again ranked last, behind North Korea, Afghanistan and Sudan.

The report also notes that Egypt, where frustrated citizens overthrew the authoritarian government in last year's Arab Spring, is now perceived as more corrupt than before the revolution. Egypt slipped to 118 from 112.

The United States ranked 19^th, just behind Japan and the United Kingdom. I do not view these results as positive for the U.S. given countries like Chile and Uruguay were almost tied with the U.S. There is no glory in saying we are only four rankings ahead of France, a country known for corruption in government.

China ranked 80th and that should be of concern to a government, already perceived as corrupt, with respect to global economic development and growth. I believe the point will be reached in the future where foreign businesses become more reluctant to do business in China if it doesn’t conform to international norms with respect to anti-corruption and transparency, especially in the financial results of state-owned enterprises.

The news is not much better for India, the other rapidly developing economy, that is ranked 94^th. Corruption is endemic in virtually all aspects of government in India. A culture of bribery has existed for a long time. I wonder whether India will ever achieve all of its promise as an economic powerhouse given the culture of corruption.

On a broader level, I believe the TI CPI results are important because they measure countries against a common standard and provide benchmarks for comparison. They highlight the importance of transparency and echo the concerns expressed by President Obama in his 2009 inaugural address that emphasized the importance of transparency in government practice and its value in holding government accountable for its actions “… And those of us who manage the public's dollars will be held to account, to spend wisely, reform bad habits, and do our business in the light of day, because only then can we restore the vital trust between a people and their government.”

I hope the President revisits the issue in his second inauguration on January 21, 2013. He needs to acknowledge that the trust between the public and our government has worsened during the past four years. I do not blame him. I blame mainly Congress – on both sides of the isle – as its members sought out their own narrowly-perceived self-interests to the detriment of what is in the best interests of society and the public good.

Blog posted by Steven Mintz, aka Ethics Sage, on December 28, 2012

 

Limitations on H1-B Visas Harm Economic Growth in the U.S.

What are the Costs and Benefits of Limiting H1-B Visas?

I recently finished reading the book The Immigrant Exodus: Why America Is Losing the Global Race to Capture Entrepreneurial Talent, by Vivek Wadha. Wadha’s book is a wake-up call for America that its economic malaise is not going to change any time soon in part because of the artificial limits placed on the H1-B visa program that has been responsible for bringing in foreign-born and well educated entrepreneurs that build businesses and fuel economic growth.

Everything changed for the U.S. after September 11, 2001, after which time the immigration process slowed down to a frustrating pace, and became unpredictable and unpleasant that migrants stay away.

Life in immigration limbo is awful. Immigrants on H1-B visas, which are issued to workers, must be sponsored by a specific employer. This visa can be used to employ a skilled foreign national for up to six years. They cannot change jobs without jeopardizing their application. Their careers stagnate. They do not know whether they will be deported, so they hesitate to put down roots, buy a house or start a company. Sometimes their spouses are barred from working. More and more immigrants look for alternatives and places such Canada, Australia and Singapore are ready to welcome them with open by handing out visas swiftly and without hassle.

Wadhwa’s finds are alarming. Since no nationality may receive more than 7% of employment-based green cards, Chinese and Indian applicants are treated more harshly than citizens of less populous nations. The time they must spend in limbo has shot up. If they have a great idea for a new company, they can go home and start it straight away. In America, if they quit their day job, they may be deported.

In a survey, Wadhwa found that most Indian and Chinese students in America expect problems in obtaining a work visa when they graduate, regardless of the demand for their skills. An unprecedented number now plan to go home. Wadhwa believes that immigration policy has halted the surge in high-tech firms founded by immigrants, and possibly reversed it. In Silicon Valley the proportion of high-tech start-ups they founded has fallen from 52% in 2005 to 44% this year.

In October, the US Citizenship and Immigration Services began receiving petitions for the H-1B visas for the fiscal 2013 beginning October, 2012. The congressionally mandated numerical limitation on H-1B petitions for the fiscal year 2013 is 65,000, as has been in the previous years. Additionally, the first 20,000 H-1B petitions filed on behalf of individuals who have earned a US master's degree or higher are exempt from the fiscal year cap.

The numerical limitation for H-1B could be filled up very soon than previous years. This isn't surprising, with the unemployment rate in the technology sector below 4 per cent. Ironically, these are the fields of study least desired by U.S. college students, all too many of whom, I believe, do not want to put in the extraordinary amount of time and effort to master those fields.

According to an informative study by the National Venture Capital Association (NVCA), over the past 15 years immigrants have started 25% of U.S. public companies that were formerly venture backed. In addition, more than 50% of the employment generated by U.S. public venture-backed companies has come from immigrant-founded companies including companies like Intel, eBay, Yahoo!, Sun Microsystems, Juniper, NVidia and Webex.

There is no question that immigrants have played an important role in driving many of the major innovations that have occurred in the technology, manufacturing and medical sectors—all important and fast-growing areas of the U.S. economy. Moreover, immigrant-founded venture-backed public companies today employ an estimated 220,000 people in the United States and over 400,000 people globally.

India, with 32 companies (22 percent), ranks first as the country of origin for immigrant-founded venture-backed public companies, followed by Israel with 17 companies (12 percent), and Taiwan with 16 companies (11 percent). Canada, France, the United Kingdom, Germany, Australia, China, Iran, and two dozen other countries are also represented.

Here are some examples of leading immigrant-founded companies by country of origin and employment from the NVCA study.

Company                                    Country of Founder                Employment #

Intel                                           Hungary                                        99, 900

Solectron                                   Taiwan                                          53, 000

Sanmina                                    Bosnia, Croatia                              48, 621

Sun Microsystems                     Germany, India                               31, 000

E-Bay                                       France                                           12, 600

UT Starcom                               China                                             6, 300

Google                                      Russia                                           5, 680

The top industry sectors for private immigrant-founded firms are software, semiconductors, and biotechnology. Nearly all the immigrant founders (95%) would start their companies in the U.S. if given the choice today.

The question for me as a blogger on ethics is whether the restraints placed on the H1-B visa program are ethical. On the one hand, it clearly limits the number of talented people who come to the U.S., start profitable venture-capital based firms, and employ thousands of people. Putting aside the issue of national security that has been of great concern since 9/11, the question remains whether the 65,000 immigrants who come into the U.S. are taking jobs away from our home-born students. I say the results are clear and the answer is no. A study by the Institute of International Education indicates a different pattern of fields of study with U.S, students opting for “soft” subjects while international students look more to engineering, the hard sciences, and math and computer science.

 

The take-away for me is that American students see the college degree as a path to a job while foreign-born students see it as more of a career choice. We have serious problems in the U.S. because of the disconnect between what’s needed going forward to drive our economic engine in an increasingly globalized world and what U.S. students choose to study. All the while China waits in the wings to replace the U.S. as the largest economy.

Blog posted by Steven Mintz, aka Ethics Sage, on December 17, 2012

 

 

 

Should Ohio State be in the BCS Championship Game?

Notre Dame v Ohio State or Alabama v Ohio State: You make the Call

Now that the Bowl bids have gone out and we know Notre Dame will play Alabama for the BCS National Championship, I thought it was a good time to reflect on whether Ohio State University should be in that game instead of one of the other teams.

The case against Ohio State came into the news again on December 5 when The Ohio Supreme Court suspended for one year the law license of an attorney whose emails to Jim Tressel triggered an ongoing scandal and NCAA investigation that cost the football coach his job at Ohio State.

At issue was whether Columbus attorney Christopher Cicero violated professional rules of conduct that prohibit revealing (confidential) information from meetings with a client or a prospective client.

The 5-2 court decision followed the recommendation of a disciplinary board that argued Cicero wrongly discussed interviews with tattoo parlor owner Edward Rife, a potential client. However, the court overruled the board's recommendation for a six-month suspension.

Cicero sent emails to Tressel in April 2010, warning him that players were selling memorabilia or trading them for tattoos. The email traffic sparked the scandal and ended Tressel's Ohio State tenure.

An NCAA investigation also led to a bowl ban this year, reductions in scholarships and the loss of Ohio State's $389,000 share of the Big Ten bowl pot a year ago. The entire 2010 season also was vacated.

Ohio State just completed a 12-0 season and is ranked No. 4 in the AP poll. Quite frankly, I thought they should have been ranked #1 or #2. They beat four ranked teams, as did Notre Dame, including one of the Rose Bowl contenders (Wisconsin), as did Notre Dame (Stanford). But, that is another issue for another time.

Some equate Ohio State’s suspension with the two-year suspension of USC in 2010 and 2011. In June 2010, after a prolonged four-year investigation into whether former USC running back Reggie Bush and his  family had accepted financial benefits and housing from two sports agents in San Diego while he was a student athlete at USC, the NCAA imposed sanctions against the Trojan football program for a "lack of institutional control," including a two-year postseason ban, the loss of 30 scholarships over three years, and the vacation of all wins in which Bush participated as an "ineligible" player, including the 2005 Orange Bowl, in which the Trojans won the BCS National Championship.  It was a much stiffer penalty for an infinitely worse offense than the “tattoo parlor” scandal at Ohio State.

Back to Ohio State and the issue of the former players who took benefits. The real crime, I think, is not that it was a stupid action by stupid players, but the university administration that downplayed it and Jim Tressel’s cover up (similar to Penn State). When will offenders realize the cover-up is always worse than the crime? The answer is probably never and that is why they commit offenses in the first place that warrant suspension or some other penalty.  

The Ohio State situation is less about scandal itself and even damage control and more about the way an institution responds to a crisis. This is why the penalty imposed on Penn State in its sexual abuse scandal was, appropriately, so harsh. When viewed from that perspective, perhaps Ohio State got what it deserved with the one year suspension and lost opportunity, perhaps, to play for the BCS Championship. Actions have consequences and people and institutions must be held accountable for their actions (or inactions). Unfortunately, the viewing public loses out by not seeing Ohio State play in the BCS Championship game. I fear the final score will be a blow out: Alabama 31 – Notre Dame 10. But, don’t take it to the bank.

Blog posted by Steven Mintz, aka Ethics Sage, on December 14, 2012

 

Toyota’s Past Ethical Challenges: Signs of an Ethical Collapse

Is it Ethical if it is Legal?

In her book The Seven Signs of Ethical Collapse Marianne Jennings analyzes the indicators of possible ethical collapse in companies and provides advice how to avoid impending disaster. She starts with a description of ethical collapse saying it "occurs when any organization has drifted from the basic principles of right and wrong." She points out that "not all companies that have drifted ethically have violated any laws." According to Jennings, "When an organization collapses ethically, it means that those in the organization have drifted into rationalizations and legalisms, and all for the purpose of getting the results they want and need at almost any cost." I agree because there is a difference between following the law and being ethical in business. A good example is how Toyota mishandled its problems with the shift gears on its 2002 Lexus sedan.  It has been ten years since the incident and a good time to look back at the ethical failings at Toyota.

Five months before the new 2002 Lexus ES hit showroom floors, the company's U.S. engineers sent a test report to Toyota City in Japan: The luxury sedan shifted gears so roughly that it was "not acceptable for production."

The warning was sent to Toyota Executive Vice President Katsuaki Watanabe on May 16, 2001. Days later, another Japanese executive sent an e-mail to top managers saying that despite misgivings among U.S. officials, the 2002 Lexus was "marginally acceptable for production." The new ES went on sale across the nation on October 1, 2001.

In years to come, thousands of Lexus buyers would discover firsthand that the vehicle's transmission problems, which caused it to hesitate when motorists hit the gas, or lurch forward unintentionally, were far from fixed.

The 2002-2006 ES models would become the target of lawsuits, federal safety investigations and hundreds of consumer complaints, including claims of 49 injuries. Toyota was fined a record $16.4 million for delays in notifying federal safety officials about defects that could lead to sudden acceleration.

Internal Toyota records reviewed by the L.A. Times show that the automaker sought to cut costs by limiting the scope of repairs. "The objective will be to limit the number of vehicles to be serviced to those owners who complain, and to limit the per-vehicle cost," a Toyota staff attorney wrote in an August 15, 2005, memo explaining the automaker's legal defense strategy.

In statements to the Times, Toyota Motor Corp. officials said they followed industry practice for notifying customers about repairs. The documents released show that Toyota repeatedly tried to solve the lurching problem by modifying the car's computer software. But Toyota rationalized the problem by saying that the Lexus ES issues concerned "drivability" and were not related to the sudden-acceleration problems experienced in other vehicles.

In an August 3, 2005, e-mail to a superior, then-Toyota staff attorney Dimitrios Biller described a meeting he had with the then-head of Lexus in the U.S., Bob Carter, on whether to notify ES owners about a new software update. "Bob is opposed to the idea of sending such a letter out to all owners of all 2002 to 2005 ES 300 and ES 330 vehicles because a substantial majority of these people are satisfied with their vehicles," Biller wrote. "Once they become sensitized to the hesitation and/or lurching, they will become 'dissatisfied' Lexus owners."

Two weeks later, Biller wrote a memo indicating that Toyota's "objective will be to limit the number of vehicles to be serviced to those owners who complain, and to limit the per-vehicle cost."

Toyota sent the letter to the 3,000 customers "who have actually complained about the performance of the transmission" in their cars, the documents show. In its statement, Toyota said that issuing a technical service bulletin "versus direct notification to customers" is "commonplace for addressing issues such as this" and is a practice used by other manufacturers.

Notice all the rationalizations for unethical conduct offered up by Toyota. The company made the same mistake dozens before it had made, including the Ford Pinto in 1970 that is the classic example of ethical legalism taught in all business ethics classes. What Ford and Toyota failed to do was to admit the mistake right away instead of rationalizing its compliance with existing saftey standards and correct the problem. Of course, the Lexus is still a popular car and the Toyota brand does not seem any the worse off for its ethical crisis. Still, I have to wonder about the culture at a company that includes the following statement in its code of ethics while reacting to a crisis in the opposite fashion: “honor the language and spirit of the law.”

Blog posted by Steven Mintz, aka Ethics Sage, on December 7, 2012

Groupon Reports Troubling Financial Results

Problems for the Company and Stock Price Declines Continue

Groupon just released its 3^rd quarter 2012 earnings report, marking its first full-year cycle of earnings reports since its initial public offering (IPO) in November 2011. While the net operating results show improvement year-to-year, the company still shows a net loss for the quarter. Moreover, while its revenue has been increasing in fiscal 2012, its operating profit has declined over sixty percent. This means its operating expenses are growing faster than its revenues, a sign of impending disaster. The company’s stock price on Nasdaq has gone from $26.11 per share on November 5, 2011, the end of the IPO day, to $4.14 a share on November 30, 2012, a decline of more than 80 percent in one year. The company did not meet financial analysts’ expectations for the 3^rd quarter of 2012.

Groupon blamed the disappointing results on its European operations. Some analysts took solace in the fact that Groupon reported it has 39.5 million active customers, an increase of 37 percent from the previous year. But, what good does it do to have a larger customer base if it also leads to larger-than-expected operating costs? This is the question Groupon needs to answer.

I want to go back awhile to the day of the IPO to show how Groupon’s problems first started. On November 5, 2011, Groupon took its company public with a buy-in price set at $20 per share.  Groupon shares rose from their IPO price of $20 by 40% in early trading on Nasdaq, and ended at the 4 p.m. market close at $26.11, up 31%. The closing price valued Groupon at $16.6 billion, making it more valuable than companies such as Adobe Systems and nearly the size of Yahoo.

At a size of up to $805 million, Groupon ranked as the third-largest Internet IPO sold in the U.S.in 2011, after a $1.4 billion issue by Russian search-engine operator Yandex NV in May and a $855 million issue by China social networking platform Renren, according to Dealogic. It was the ninth-largest ever on a list topped by the $1.9 billion sale by Google in 2004.

Less than five months later on March 30, 2012, Groupon announced that it had revised its financial results, an unexpected restatement that deepened losses and raised questions about its accounting practices. As part of the revision, Groupon disclosed a “material weakness” in its internal controls (accounting speak for we blew it, were caught, and now admit it), saying that it had failed to set aside enough money to cover customer refunds. The accounting issue increased the company’s losses in the fourth quarter to $64.9 million from $42.3 million. The news that day sent shares of Groupon tumbling 6% to $17.29. Shares of Groupon had fallen by 30 percent since it went public and the downward trend continues.

In its announcement of the restatement, Groupon explained that it had encountered problems related to certain assumptions and forecasts the company used to calculate its results. In particular, the company said it underestimated customer refunds for higher-priced offers such as laser eye surgery.

Groupon collects more revenue on such deals, but also carry a higher rate of refunds. The company honors customer refunds for the life of its coupons, so these payments can affect its financials at various times. Groupon deducts refunds within 60 days from revenue; after that, the company has to take an additional accounting charge related to the payments.

As Groupon prepared its financial statements for 2011, its independent auditor, Ernst & Young, determined that the company did not accurately account for the possibility of higher refunds. By the firm’s assessment, that constituted a “material weakness.” We did not maintain effective controls to provide reasonable assurance that accounts were complete and accurate,” Groupon said in its annual report.

In an interesting twist, in response to the conclusion that the company’s internal controls contained a material weakness, Groupon said it’s been working for several months with an accounting firm, not Ernst & Young, and will report on the effectiveness of those controls by the end of 2012. This could be because the company blames Ernst & Young for not finding the problem earlier. In fact, it was management’s own report on internal controls over financial reporting that first disclosed at the problem.  

In a related issue, on April 3, 2012, a shareholder lawsuit was brought against Groupon accusing the company of misleading investors about its financial prospects in its IPO and concealing weak internal controls. According to the complaint, the company overstated revenue, issued materially false and misleading financial results, and concealed how its business was not growing as fast and was not nearly as resistant to competition as it had suggested.

These claims bring up a gap in the sections of the Sarbanes-Oxley Act that deal with companies’ internal controls. There is no requirement to disclose a control weakness in a company’s IPO prospectus. Groupon would have no obligation to disclose the problem until it filed its first quarterly or annual report as a public company – which is what it did.

What should we make of the financial results at Groupon? I see a company that hasn’t reigned in its operating costs while it expands into new markets. This may be a disaster ready to happen if Groupon doesn’t get a handle on these costs and soon. One area to look at is executive compensation. Groupon wouldn’t be the first company to overpay its top executives while it struggles to develop a sustainable market. I can just see LivingSocial and Amazon chomping at the bit as it reads about the continuing problems at Groupon.

Blog posted by Steven Mintz, aka Ethics Sage, on December 3, 2012

SEC Receives 3,000 tips from Whistle-blower Program

Is the Dodd-Frank Whistle-blower Program Successful?

As someone who follows whistle-blowing in business and accounting carefully, because of the obvious implications for ethical behavior, I was drawn to the Securities and Exchange Commission’s Annual Report on the Dodd-Frank Whistleblower Program for Fiscal Year 2012.

The “Report” was released on November 15 and reveals a number of interesting data.  The SEC has received a lot of tips, complaints, and referrals:  A total of 3,001 in fiscal year 2012 with the lowest number (166) in November 2011 and the highest number (313) in May 2012.  Those tips, complaints, and referrals came from all 50 states, the District of Columbia, Puerto Rico and 49 countries, primarily from tipsters located in states with proximity to major markets.

Just over 10% of the tips were received from individuals outside of the U.S.  And, the 3,001 tips primarily were concentrated in three areas:  Corporate Disclosure and Financials (18.20%); Offering (IPO) Fraud (15.50%); and Manipulation (15.20%). 

What the Report does not tell us, except in the most general terms, is what the SEC is doing with the tips. I mean, isn’t that the more important piece of information? I can just imagine how many employees send in tips to get back at the company for some perceived bad treatment or “discriminatory” behavior.  For example, how many of the 3,001 tips actually identified fraud or wrongdoing?  How many were duplicative?  How many were referred to the Division of Enforcement?  How many resulted in the initiation of investigations by the Division of Enforcement?  How many related to investigations that already were ongoing? 

The Report does describe the first, and only, award under the program made in August 2012 to a whistleblower that reportedly helped the SEC stop an ongoing multi-million dollar fraud.  The whistleblower will receive nearly $50,000 for evidence of securities fraud. I have previously blogged about this incident.

According to the SEC, judgments and orders issued during fiscal year 2012 have exceeded the statutory threshold of $1 million in 143 cases, for which Notices of Covered Action have been posted so that individuals may apply for whistleblower awards.  The Report notes, however, that the posting of such notices does not indicate that a whistleblower tip, complaint, or referral led to the SEC initiating an investigation or filing an action or that an award to a whistleblower will be paid in connection with the case.  Thus, the Report does not reveal whether the SEC utilized a whistleblower’s assistance in any of the 143 cases; nor, does it disclose whether whistleblowers have brought compelling cases to the SEC that have resulted in judgments and orders below the statutory threshold.

One startling bit of information revealed in the Annual Report is that there are only 14 total employees working for the Office of the Whistleblower.  Although the Report suggests that these employees are receiving assistance from the Division of Enforcement’s Office of Market Intelligence, it is unclear how the Whistleblower Office or the SEC as a whole can effectively administer a program that generated 3,001 tips and, according to the Report, required the staff to return over 3,050 phone calls from members of the public in its first full year.  The Annual Report does not answer this question, nor reveal the average length of time between the filing of a tip and review of the information of purported wrongdoing.  Congress included an enhanced whistleblower program in Dodd-Frank not only to help the government root out fraud but also to encourage corporations to better police themselves and address illegal conduct head on.

The most controversial provision of Dodd-Frank is the whistle-blowing award that some believe is akin to a “bounty hunter” fee. I believe the potential is there for unsubstantiated claims as a result of the award. My fear is that a disgruntled employee will report alleged fraud and hope the SEC will uncover enough details in its investigation to justify receiving the award. On the other hand, if it helps to stem the tide of financial fraud, then the program will serve as a valuable deterrent to crime in business and financial operations. Somehow I doubt that will be the case given the long history of financial fraud in the U.S.

My favorite fraud, and on that set the tone for many years to come, occurred in 1963. Anthony “Tino” De Angelis was a commodities broker who had run into trouble with the law for supplying improperly prepared meat to the federal school-lunch program. In the early sixties, he finagled an initial ­contract with the U.S. government’s Food for Peace program, which sold excess foodstuffs to poor countries. And on the basis of his stunningly large, almost totally fake inventory—De Angelis claimed 1.8 ­billion pounds of soybean oil, but had only 110 ­million—the swindle raised at least $180 million from investors.

De Angelis filled some of his tanks with water, leaving only a thin film of oil on top in case of inspection—­perhaps the most literal Wall Street slickster of them all, at least in the day. The problem was the soybean prices tumbled when the Soviet market didn’t open up as De Angelis had expected, and when panicked investors came knocking to collect on their investments.

Sometimes I’m amazed the lengths to which some people will go to pull the wool over the eyes of others and commit financial fraud. Bernie Madoff comes to mind as the biggest fraudster so far in  the 21^st century.

Blog posted by Steven Mintz, aka Ethics Sage, on November 30, 2012

Accounting Fraud at Autonomy Perplexing to H-P and Me

Where were the auditors?

Lily Tomlin once famously said: No matter how cynical I get, I can’t keep up. I was reminded of how true this is on November 20 when I read about Hewlett-Packards’ disclosure that it had discovered an accounting fraud and has written down $8.8 billion of the value of Autonomy, the British software company it bought last year, after discovering that Autonomy misrepresented its finances. H-P said it has asked U.S. and U.K. regulators to launch criminal and civil investigations into the alleged fraud. The developments drove H-P’s already beaten-down stock because of disappointing earnings reports down another 12% to 10-year lows.

What I find amazing is no one seemed to know about the fraud – not H-P, not the external auditors, and certainly not the regulators. How is it that a major accounting fraud could occur and the auditors were kept in the dark? Didn’t audit firms learn their lesson after the frauds at Enron, WorldCom, Tyco and a multitude of other financial frauds? Apparently not. One again the refrain should be: Where were the auditors?

Now for the unbelievable details. H-P said its internal probe and forensic review had uncovered “accounting improprieties, misrepresentations and disclosure failures” in the financial statements of Autonomy, the U.K. and San Francisco-based enterprise software company H-P acquired in August 2011 for a final price of $11.1 billion.

HP’s earnings for the quarter ending on October 3, 2012, showed troubling results. Revenue is down 7 percent to $30 billion compared to the same quarter in 2011. But the real problem comes from so-called GAAP net income [Income based on Generally Accepted Accounting Principles], with a net loss of $6.9 billion, or $3.49 per share, compared to a slim net profit of $0.2 billion for the fourth quarter of 2011. Non-GAAP diluted earnings per share is at $1.16 compared to $1.17 year-over-year. Most of the bad news comes from a huge $8.8 billion write-down related to the Autonomy accounting fraud.

The Autonomy disclosures are the latest efforts by CEO Meg Whitman to clean up the mess she inherited from former CEO Leo Apotheker, who H-P reminded shareholders presided over the disastrous Autonomy deal.

In a statement, Apotheker said he is both "stunned and disappointed to learn" of the alleged accounting improprieties and the developments "are a shock to the many who believed in the company, myself included." 

Apotheker said the due diligence process was "meticulous and thorough" and "it's apparent that Autonomy's alleged accounting misrepresentations misled a number of people over time -- not just HP's leadership team, auditors and directors."

Once again, how can this happen and top management was unawares? Where was the controller and CFO while the fraud was occurring? I can’t believe lower level accountants cooked up the fraud without the knowledge of higher-ups in H-P.

The Autonomy investigation began after an unnamed “senior member” of Autonomy’s leadership alleged there had been a “series of questionable accounting and business practices” prior to the acquisition. H-P said the whistleblower gave “numerous details” that H-P previously had no “knowledge or visibility” of.

In response, H-P tapped PricewaterhouseCoopers to do a forensic review of Autonomy’s historical financial results and put John Schultz, the company’s general counsel, in charge of the investigation.

The probe determined that Autonomy was “substantially overvalued at the time of its acquisition” due to misstatements of financial performance, including revenue, core growth rate and gross margins.

A spokeswoman for Mike Lynch, the former CEO and co-founder of Autonomy, told Reuters that the H-P allegations are "false" and Autonomy's management was "shocked to see" the fraud charges. Lynch said H-P's due diligence was intensive and the larger company's senior management was "closely involved with running Autonomy for the past year," Reuters reported. 

Lynch further commented that:

• HP is using this as a ruse to distract investors from its bigger problems: "People certainly realize I'm not going to be used as Hewlett-Packard's scapegoat when it's got itself in a mess."

• HP's numbers don't add up. It's questioning about $100 million in revenues, yet blaming $5 billion of the write-off on fishy accounting.

• He wants HP to explain in detail how it came up with the $5 billion in write-offs from alleged fraud.

• He not only denies all wrongdoing but says he has backup because Autonomy was audited quarterly and every invoice over 100,000 euros ($129,000) was approved by auditors.

He says some of the accusations are misleading because Autonomy was following International Financial Reporting Standards, as British companies do, not the GAAP standard used by HP, which means it recognizes revenue differently in certain situations from U.S. practices. I doubt that claim because IFRS is not that different from U.S.-GAAP although the devil may be in the details.

H-P said it has alerted the Securities and Exchange Commission’s Enforcement Division in the U.S. and the U.K.’s Serious Fraud Office. Further, H-P said it is preparing to aggressively “seek redress against various parties” in civil courts to recoup what it can for shareholders.

On a conference call, Whitman said the board, which approved the Autonomy transaction, relied on audited information from Deloitte & Touche and additional auditing from KPMG, though she said she’s not blaming the accountants.

"Neither of them saw what we now see after someone came forward to point us in the right direction," Whitman said. 

Deloitte, which was the auditor for Autonomy in the U.K., said in a statement that it "notes the allegations" made by H-P and that the charges have been referred to regulators. We cannot comment further on this matter due to client confidentiality. We will cooperate with the relevant authorities with any investigations into these allegations.”

In my experience as an accounting professor and ethicist I have found all too many audit firms cut corners in the audit and even send out less-than-qualified auditors in order to keep audit costs at a minimum and match the sometimes “low-ball” bid to gain the client. Independence problems abound and it appears the audit firms were guilty of it in their examination of the financial results of Autonomy. When will the accounting profession learn the public expects them to find fraud?

Blog posted by Steven Mintz, aka Ethics Sage, on November 26, 2012

THE PENN STATE SCANDAL REVISITED

A CONSPIRACY OF SILENCE

New charged filed on November 6 accusing three former Penn State administrators of engaging in a "conspiracy of silence" to cover up child sexual abuse allegations against Jerry Sandusky raise questions about whether iconic football Coach Joe Paterno could have been charged if he were still living.

If former President Graham Spanier, university Athletic Director Tim Curley, and former administrator Gary Schultz had been charged while Paterno escaped prosecution, the former administrators probably might have complained that the coach was getting special treatment.

WHY DO GOOD PEOPLE SOMETIMES DO THE WRONG THING

Those who have watched the case said the grand jury deliberations paint Paterno as an active participant in the conspiracy. "The reality is that he knew. He knew early on, and he chose to protect the image of the football program and to protect Penn State," said Jennifer Storm, an advocate for victims who has worked with two of the young men Sandusky molested when they were boys.

But Bruce Antkowiak, a former federal prosecutor, said that without knowing everything that state prosecutors in the case know, it's not fair to conclude that there was probable cause to charge Paterno. "Once the case is tried and all the evidence has come out, it might be possible to make that kind of retroactive assessment, but right now it's too difficult," Antkowiak said.

For me, this is a good time to review the facts of the Penn State scandal and raise ethical questions. I have no doubt there was a cover-up and Paterno was the primary participant. Based on my assumption, I raise the following ethical questions:

What motivates an otherwise ethical person to do the wrong thing when faced with an ethical dilemma? Why did Joe Paterno and leaders of Penn State University look the other way and fail to act on irrefutable evidence that former assistant football coach Jerry Sandusky had raped and molested young boys, an offense for which Sandusky is serving a 30-to-60- year sentence?

According to the independent report by Louis Freeh that investigated the sexual abuse, four of the most powerful people at The Pennsylvania State University including Spanier, Curly, Schultz, and Paterno, failed to protect against a child predator harming children for over a decade by concealing Sandusky’s activities from the Board of Trustees, the University community and authorities.

The Freeh report characterizes the inactions as lacking empathy for the victims by failing to inquire as to their safety and well-being in addition to which they exposed the first abused-child to additional harm by altering Sandusky, who was the only one who knew the child’s identity, of what assistant coach Mike McQueary saw in the shower on the night of February 9, 2001.

REASONS FOR UNETHICAL ACTIONS

The following explanations are given in the Freeh report for the failure of University leaders to take action to identify the February 9, 2001 child victim and for not reporting Sandusky to the authorities:

• The desire to avoid bad publicity by reporting the incident
• The failure of the University’s Board of Trustees to have reporting mechanisms in place to ensure disclosure of major risks to the University
• A President who discouraged discussion and dissent
• A lack of awareness of child abuse issues, the Clery Act that requires all colleges and universities that participate in federal financial aid programs to keep and disclose information about crime on and near their respective campuses
• A lack of whistleblower policies and protections
• A culture of reverence for the football program that is ingrained at all levels of the campus community

EXPLANATIONS FOR UNETHICAL ACTIONS

Former Penn State President Graham Spanier is quoted as saying in an interview about how the University worked that “honesty, integrity and always doing what was in the best interests of the university (italics added) was how everyone agreed to operate and …”we’ve always operated as a family. Our personal and social and professional lives were all very intertwined.

At Penn State a culture existed that placed the interests of the University, as perceived by its leadership, ahead of the interests of the abused children and the public trust. The tone that was set by Paterno and Spanier was one of the cover-up of potentially damaging information about the institution and its football program.

The culture of an organization should be built on ethical values such as honesty, integrity, trust, responsibility and accountability. While Penn State may have espoused to follow such principles, the reality was its actions did not match these stated goals of behavior.

ETHICAL BLIND SPOTS

Leaders of organizations who may be successful at what they do and see themselves as ethical and moral still cultivate a collection of what Max Bazerman and Ann Trebrunsel call blind spots. Blind spots refers to the gap between who you want to be and the person you actually are. In other words, most of us want to do the right thing – to act ethically – but internal and external pressures get in the way.

The authors attribute blind spots to the concept of bounded ethicality, that is, psychological processes that lead even good people to engage in ethically questionable behavior that contradicts their own preferred ethics. As in the Penn State situation, bounded ethicality comes into play when individuals make decisions that harm others even though that harm is inconsistent with these decision makers’ conscious beliefs and preferences.   

The moral of the Penn State saga is not to allow one’s loyalties to others and an institution get in the way of doing the right thing. The Penn State officials acted as if ethics is situational and in that situation it was more important to protect the image of the university than put an end to and prosecute child abuse.

A person who acts wrongly in one instance out of greed or self-interest forfeits the right to call him or herself an ethical person. That doesn’t mean all of us do the right thing all the time. But what it does mean is we aspire to do the right thing; we know the difference between right and wrong; and we act accordingly.

Blog posted by Steven Mintz, aka Ethics Sage, on November 7, 2012

Are Banks Finally Being Held Accountable for their Lax Mortgage Lending Practices?

Wells Fargo and Bank of America Sued for Faulty Mortgages

Have you lost thousands of dollars in retirement money due to stock market declines since the financial meltdown started in 2007? Is your mortgage underwater because lenders made ill-advised loans only to find risky homeowners defaulting on their mortgages? Well, you are not alone in your misery. The recent recession wiped out nearly two decades of Americans’ wealth, according to government data released in June, with ­middle-class families bearing the brunt of the decline.

The  Federal Reserve Bank said the median net worth of families plunged by 39 percent in just three years, from $126,400 in 2007 to $77,300 in 2010. That puts Americans roughly on par with where they were in 1992.

I have previously blogged about the failure of the U.S. government to hold mortgage companies accountable for their lax and even fraudulent mortgage-lending activities in the early part of the 2000s that ushered in a period of financial distress from which we still haven’t recovered. If you are looking for institutions to blame for our financial meltdown, look no further than the mega-financial institutions such as Banks of America and Wells Fargo.

On October 9 the government sued San Francisco-based Wells Fargo accusing the biggest U.S. mortgage lender of "reckless" lending and leaving a federal insurance program to pick up the pieces. The action, filed in federal court in Manhattan, is the latest use of the Federal False Claims Act against a lender accused of fraud against the government-backed mortgage insurer, Federal Housing Administration, which has historically backed loans to first-time buyers and those with low incomes.

The Federal False Claims Act has often been used as an effective legal tool because the government can collect treble damages if violations are proven. Back in February, Bank of America agreed to a $1 billion settlement of False Claims Act fraud allegations involving FHA-backed loans without admitting wrongdoing, and three other large banks have agreed to pay more than $490 million total in similar cases, each accepting responsibility for "certain conduct."

Wells Fargo's internal reviews identified more than 6,500 deficient loans it was required to report from 2002 to 2010, including more than 3,000 that were 60 days into default within the first six months, yet only reported about 300 of them to the department, allowing it to avoid repayment on about $190 million in benefits, according to the complaint.

Prosecutors are seeking "hundreds of millions of dollars" in damages on behalf of the FHA. The complaint alleges nearly a decade of misconduct dating back to May 2001. The lawsuit contends that Wells Fargo engaged in "regular practice of reckless origination and underwriting" of government-backed loans. The company said that more than 100,000 FHA loans met federal guidelines when more than half of them didn't, according to complaint.

The U.S. is also seeking compensatory damages for claims including breach of fiduciary duty, gross negligence and unjust enrichment for the insurance claims that the department has paid and expects to pay for mortgages wrongfully certified by Wells Fargo.

The lawsuit is the third federal mortgage-related case this year for Wells Fargo. The current complaint alleges that the bank knew that in at least half the cases those loans didn't meet federal requirements that would allow them to be insured by the government.

Wells Fargo denied the allegations in the complaint. In a statement in response to the charges, a company spokesperson said it acted in "good faith and in compliance" with federal rules. Many of the issues in the lawsuit had been previously addressed with federal agencies, the company also said. "The bank will present facts to vigorously defend itself against this action."

Wells Fargo is not alone in being sued by the government.  In February, the Bank of America  settled a $1 billion action brought by the U.S. attorney in Brooklyn that sought penalties over loans sold to the FHA. More recently, on October 24, federal prosecutors in New York filed a lawsuit against Bank of America, seeking at least $1 billion in damages for mortgage fraud.

According to the suit, after acquiring Countrywide Financial in 2008, Bank of America continued that firm's practice of rapidly issuing mortgages without safeguards that could have weeded out unqualified applicants, then sold the bad mortgages to the federal agencies Fannie Mae and Freddie Mac, sticking them -- and in turn U.S. taxpayers -- with heavy losses and foreclosed properties.

The collapse of the housing market goes far beyond just the people who lost houses and the federal agencies that ended up stuck with the tab for the bad loans.The results include steep decreases in home prices, underwater mortgages, a slim market for home sales, and fewer people now qualifying for loans. Nevertheless, I have to wonder whether banks truly have learned their lessons or will another catastrophe occur sometime in the future after the mortgage-meltdown-dust has settled.

I raise these questions because of the following story. Annette Alejandro  emerged from bankruptcy in April; she doesn’t have a job; and her car was repossessed in 2011. Still, after spending her days job hunting, she returned to her apartment in Brooklyn where, in disbelief, she sorted through the piles of credit card and auto loan offers that have come in the mail. “Even I wouldn’t make a loan to me at this point,” Ms. Alejandro said.

In the depths of the financial crisis, borrowers with tarnished credit like Ms. Alejandro were almost entirely shut out by traditional lenders. It was hard enough for people with stellar credit to get loans.

But as financial institutions recover from the losses on loans made to troubled borrowers, some of the largest lenders to the less than creditworthy, including Capital One and GM Financial, are trying to woo them back, while HSBC and JPMorgan Chase are among those tiptoeing again into subprime lending.

Albert Einstein’s immortal words sum up the recent trend of banks getting back into the risky mortgage-lending business. Einstein defined insanity as doing the same thing over and over again and expecting different results.

Blog posted by Steven Mintz, aka Ethics Sage, on October 29, 2012

Do we need more Regulation of Corporate America?: Romney vs. Obama

Is our Free-Market Economic System Morally Bankrupt?

Mitt Romney argues that business must be free to follow free-market principles unfettered by regulations such as the 2010 Dodd-Frank Financial Reform Act while President Obama believes regulation is needed to prevent another meltdown of our financial system such as the one that occurred five years ago. Who is right? The answer is both are right and that is why it is so difficult to know where the true answer lies to recent questioning of the capitalistic system such as we witnessed by the ‘Occupy’ movement.

Our free market economic system depends on the exercise of ethical behavior by corporate officials to provide for the public good. Absent decision making based on ethical values such as honesty, objectivity and integrity, and transparency the system cannot be trusted to allocate resources in the best interests of society. The root cause of such problems is the pursuit of self-interests to the exclusion of all others. The way it is supposed to work is corporate America would regulate itself and the government would stay out of its way – Romney’s position. Clearly, that has not worked for some time.

The financial crisis that started in 2007 resulted in large part from unethical conduct including making home mortgage loans when financial institutions knew (or should have known) that borrowers were not qualified – a fact that was ignored (or overlooked) so that these institutions could earn large fees from closing and other transaction costs. This scandal came on the heels of accounting frauds in the early 2000s at companies such as Enron, WorldCom, Tyco and Health South that shredded billions of dollars of shareholder wealth while top management pay packages at these companies were in the multi-millions and led to passage of the Sarbanes-Oxley Act of 2002. 

It is important to remember that Adam Smith connected ethics to economics. Smith came to his philosophy of economic behavior described in The Wealth of Nations through his view of moral behavior espoused in his first book, The Theory of Moral Sentiments. Smith, who is generally regarded to be the founder of free market economics, posited that rational self-interest informed by moral judgments based on fairness and justice would lead to promoting the best interests of society guided by the invisible hand of the marketplace. What is missing from the calculation of recent economic decision making is ethical decision making.

Corporate actions should be guided by the question: What are the rights of shareholders and other stakeholders and what are the obligations of CEOs and boards of directors to those parties? A case in point is multi-million-dollar severance packages. How is it in the best interest of shareholders for CEOs to walk away with multi-million severance packages? Perhaps the most glaring example of unfairness is the $130 million package given to Michael Ovitz in 2005, after he was fired as CEO of Walt Disney & Co. by Michael Eisner, the chair of Disney’s board of directors, just fifteen months after being hired. Notwithstanding the fact that the Delaware Chancery Court upheld the legality of the payment, boards need to be held ethically accountable for such actions.

The nature of the present economic crisis illustrates the need for departures from uncontrolled self-dealing for the good of society.  Smith had a diagnosis for this: he called such promoters of excessive risk in search of profits "prodigals and projectors,” an appropriate description of many of the promoters of credit swap insurances and sub-prime mortgages in the recent past. Yet, more government regulation is not the answer – Obama’s position. Recent efforts at financial regulatory reform may stem the tide in the short-run. However, in the long-run we should expect new and “creative” attempts at financial engineering to benefit the few to the detriment of the many. Unmitigated greed is not what Smith had in mind in writing “Sentiments.”

Do we need more corporate regulation? Yes, and the more important point is to investigate abuses and hold the perpetrators accountable for their action. I am heartened by the fact that on October 9 the U.S. government filed a civil mortgage fraud lawsuit against Wells Fargo & Co. According to the lawsuit, the Federal Housing Administration was compelled to pay Wells Fargo hundreds of millions of dollars in insurance claims on defaulted mortgages upon false certifications of more than 100,000 loans for FHA insurance, with the full knowledge that underwriters had failed to verify information directly related to the borrower’s ability to repay.

Manhattan U.S. Attorney Preet Bharara said, “As the complaint alleges, yet another major bank has engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance.” The suit against Wells Fargo has charges under the False Claims Act and under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

The bottom line, however, is that ethical behavior cannot be legislated. It comes from within and a desire to do what is right for society and not to act solely in one’s own self-interests. Dodd-Frank, Sarbanes-Oxley, and other financial regulations are needed not so much because they will prevent, or even slow-down financial fraud. That won’t happen any time soon because our society has morphed into one where there no longer is a moral compass to guide our actions.

We need regulations to provide the ground rules with which business should be conducted in the public interest. We need regulations to punish the abusers of free-market capitalism – to hold them accountable for their actions. Finally, as a college professor who teaches ethics I know we need regulations to discuss in class the pitfalls of capitalism and exhort our students to act more responsibly after they graduate and join corporate America. The real meaning of corporate social responsibility is to contribute to the betterment of society by starting with the notion “do no harm” and then progressing to taking concrete steps to leave an ‘ethical footprint’ every step of the way and in all decision-making.

Blog posted by Steven Mintz, aka Ethics Sage, on October 26, 2012  

The Bigger they are, the Harder they Fall: The Lance Armstrong Story

What do Lance Armstrong and Michael Milken have in Common?

Barry Bonds, Roger Clemens, and now Lance Armstrong are superstars who reached the pinnacle of their sport only to be taken down by allegations of using performance-enhancing drugs. We know there are dozens like them yet to be exposed. We know it is wrong on many levels not the least of which is it compromises the level playing field that should exist in sports. The real questions are: Why did they do it? And, in the case of Armstrong: How should he be viewed in the public eye given the fact he has done so much good through his cancer-fighting foundation, Livestrong, and he, himself, successfully recovered from advanced testicular cancer that was first diagnosed in 1996?

For the record, neither Barry Bonds nor Roger Clemens has been convicted of using the drugs; Clemens was found not guilty of perjury; and Bonds guilty of obstructing justice. As for Armstrong, the Tour de France has indicated it would vacate all of his victories from 1999-2005 unless the decision is appealed by the International Cycling Union. 

Even Nike has had enough of Lance Armstrong. On October 17 the company announced its split with the cyclist even though it stood by Tiger Woods and Kobe Bryant after their sexual escapades. Nike’s statement explaining its decision was: "Due to the seemingly insurmountable evidence that Lance Armstrong participated in doping and misled Nike for more than a decade, it is with great sadness that we have terminated our contract with him.” Over the years, Nike paid Armstrong about $40 million for his endorsement.

With regard to Livestrong, Armstrong announced that he had stepped down as chairman of his cancer-fighting foundation so that the organization can focus on its mission instead of doping allegations against its founder.

Nike wasn't the only company to part ways with Armstrong. Trek, the company that supplied the bikes that he rode to seven Tour de France victories, severed ties as well. "Trek is disappointed by the findings and conclusions in the US Anti-Doping Agency (USADA) report regarding Lance Armstrong," the company said in a statement. "Given the determinations of the report, Trek is terminating our long-term relationship with Lance Armstrong.”

Armstrong strongly denies doping, but did not fight the USADA accusations through arbitration, saying he thinks the process is unfair.

Cheating is wrong on any level. It is dishonest; violates the public trust; and compromises the integrity of the person and the sport. There is no excuse for such behavior, only a rationalization such as everyone does it or a moral blindness in the sense that these athletes believe they are above the law.

Armstrong's inspiring story is a compelling one. He not only recovered from cancer that had spread to his lungs and brain but then won the world's best-known bike race. He helped the Livestrong foundation grow from a small operation in Texas into one of the most popular charities in the country. In 2004, the foundation introduced the yellow "Livestrong" bracelets, selling more than 80 million and creating a global symbol for cancer awareness and survivorship.

Armstrong’s story reminds me of another person who fell from grace – financier Michael Milken. Milken played a key role in the development of high-yield bonds, called “junk bonds,” during the go-go years of the 1980s. He earned the moniker of “Junk Bond King.” These bonds financed the merger boom during those years that coincided with the start of a telecommunications boom and an explosion of Internet users.

Milken was indicted on 98 counts of racketeering and securities fraud in 1989 as the result of an insider trading investigation. He reached a plea bargain with SEC to six securities and reporting violations but was never convicted of racketeering or insider trading. He was sentenced to ten years in prison and permanently barred from the securities industry. Milken’s sentence was influenced by testimony against him by Ivan Boesky, an arbitrager who had financed corporate takeovers and amassed personal wealth of more than $200 million. Boesky provided evidence against Milken to reduce his own sentence in an SEC case and received a meager sentence of 3.5 years and a fine of $100 million.

Milken has been called a philanthropist because since the 1980s he has funded research into cancer and other life-threatening diseases through the Milken Family Foundation and Milken Institute. Milken himself beat prostate cancer. (Where did he get the money to finance the Foundation, I wonder?).

How should we view Lance Armstrong in light of the doping charges? As with most wrongdoings, it’s the cover-up that gets you in the most trouble and not the crime (i.e. Nixon and Watergate). Does that mean if Armstrong had come out right away and admitted his failing and was remorseful the public would have accepted it and let it go at that? I believe the answer is “yes.” I’m not saying I would agree with this response to my hypothetical. Unethical (and illegal) behavior is wrong and should be punished regardless of the reaction of the offending party. However, forgiveness is a virtue that should influence our view of someone who sincerely admits a mistake and asks for it.

What might have Armstrong said to restore his image? Here is my take: “I started taking performance-enhancing drugs after my battle with cancer. I continued to take long after because it helped provide the strength to continue to compete in cycling. I was wrong. My actions were unfair to my competitors and the sport. I admit my mistakes and accept the punishment.”

Had Armstrong reacted this way he would have been viewed differently in the public eye. Yes, he still would have been stripped of his Tour de France titles. However, and most important, he would have retained his integrity and honor as a person. The moral of Armstrong’s story is that in the end all we have in life is our reputation for honesty and trustworthiness. It takes a long time to build a reputation of trust but not very long to tear it down.

Blog by posted by Steven Mintz, aka Ethics Sage, on October 22, 2012

 

 

Social Media, Ethics, and the Workplace

Managing the Workplace Ethics of Social Media

Online social media applications are quickly gaining the mindshare of company employees and changing just as rapidly.  With all the benefits that social media is bringing to the corporate world, a company faces numerous risks in its use, from misuse of company resources, to conflicts of interest and disparagement of others. Social media is a challenging topic because it crosses over so many ethics and compliance issues.  But like any other ethics and compliance topic, it must be proactively managed for a company to safeguard its reputation and provide its employees with the tools to manage their own personal and business activities.

For many companies, social media tools can provide new ways of connecting with potential and current customers, employees, suppliers and other stakeholders.  They offer companies the opportunity to speed up the pace of business, better establish the message that a company wants to convey, strengthen a company’s relationships with customers and others and further facilitate a continuous conversation about the business.

But social media when not well managed opens the door to numerous risks – breach of confidentiality, conflicts of interest, misuse of company resources, to name a few of the more obvious ones. A company without an initiative to effectively identify, assess and manage its approach to social media and its various tools not only loses out on its many opportunities they offer but faces numerous risks to and improper business practices and activities that may damage the business.  A program to harness these risks does not need to be onerous or intrusive, but it does need to be proportional to the company’s exposure.  Further, a company should expect the social media arena to continue to change both in technologies, their uses, business providers and ways social media impacts the business landscape.

The social media dimension is broad including:

• Communication, such as blogs, micro-blogs, social networking and events.
• Multimedia, including video, photography, music/audio sharing and presentation sharing and livecasting.
• Entertainment, for example, media platforms, virtual worlds and game sharing.
• Collaboration, like wikis, social news and bookmarking/tagging.

Company management may be familiar with some of the most prevalent applications – Facebook, Twitter, LinkedIn, YouTube, and MySpace – but how many know about Open Diary, Tumbler, BigTent, Wetpaint, Mixx, Vimeo, meetup.com, ccMixter, MouthShut.com, or Forterra? Chances are that a company’s younger employees know about many of these applications and more – and are actively using them. Further, as smartphones become more ubiquitous in the workplace, employees’ access to the Internet and its social media applications will speed up the media’s adoption – and create more difficulty for a company to monitor workplace use.

Currently, a number of U.S. laws and regulations are being applied to the media’s applications. Regulation FD responds to the communication of company financial or other key operational information outside of the company. Intellectual property laws address how employees may communicate a company’s IP across social media. FINRA, the securities self-regulatory organization, recently adopted a regulatory notice on use of blogs and social networking sites.  But companies should expect the legal and regulatory environment to continue to broaden around social media as its impact on the business world becomes better understood.

Each company needs to consider three ways in which social media can impact it. First, it needs to address how employees use social media for their personal, non-company use.  Second, it should consider how it and its employees use social media for the company’s business objectives. Third is the use of social media where a company needs to set rights and responsibilities for the non-employees it invites to engage in its social media activities.

A review of numerous companies’ social media policies³ indicates numerous risks that a company may face with employees’ use – whether for their personal or business purposes – of social media.

• Accessing social media, like Facebook, for personal use while at work.  Using a company computer, personal digital assistant or Smartphone to access social media, with risks of excessive bandwidth use, equipment ‘wear and tear’ or breakage, or access to improper social media (such as ‘adult’ or ‘hate’ sites). Using
• Using without permission the company name, logo, trademarks, copyrighted information or other intellectual property in blogs, discussion boards or other social networking sites that can infringe on the company’s rights to and control over these assets.
• Using one’s company email address or a username that refers to one’s employment with the company.
• Using a company computer, network, personal digital assistant or smartphone to access social media, with risks of introducing possible malicious software or other rogue applications, especially for social media that involves accessing or downloading files.
• Disclosing this information a) on discussion boards or in chat rooms, or b) as part of professional social networking activity though, not authorized to disclose it.
• Inappropriately discussing colleagues, customers, suppliers or other stakeholders or competitors with colleagues or individuals outside the company on discussion boards, in chat rooms or through blogs. 
• Posting or discussing others or displaying certain social media at work that can lead to claims of harassment.
• Conflicts of interest can take many forms and can cross with other forms of misconduct, from use of company resources, use of one’s work position and other personal interests that conflict with one’s duty to the company.
• Blogging or maintaining a website favorable to or critical of or posting information about an industry, company or related issues without disclosing one’s employment with an interested company.
• Serving in an outside professional role such as an expert on a topical discussion board that conflicts with one’s duty to his or her company.
• Maintaining a blog that accepts advertising from his or her company’s competition.
• Using instant messaging, a chat room, a discussion board or other social media to make recommendations or otherwise market to current or prospective customers, in violation of company policy (whether the message or the channel).
• Communicating critically about a competitor’s product or service on a discussion board and without disclosing one’s employment with a competing company.
• ‘Shopping’ a competitor by pretending to be a potential customer and misrepresenting oneself in doing so.
• Posting a false review about a competitor’s product or service.
• Posting personal information or about personal activities that leads one’s company, a recruiting company or others to believe that the individual is acting unprofessionally or otherwise inappropriately.  This situation can hurt the employer where the employee’s personal reputation is tarnished and so affects the individual’s business reputation.

Companies should establish clear policies and procedures with respect to the use of social media including: (1) clarifying the distinction between use of social media for company versus personal use; (2) monitoring and auditing of employee use; (3) assessing proper company use of social media; (4) compliance with laws and regulations; and (5) educating employee regarding proper and improper use of social media.

The ethical question about social media use in the workplace is whether the benefits of its use outweigh the security challenges. A key is to help people manage the fuzzy boundaries between their public/private and personal/professional lives. Social networking sites can be used in the workplace to collaborate and share ideas. However, sensitive company information might be transmitted to inappropriate parties creating a security risk. The confidentiality rights of the company may be violated and employee rights exploited. The latter must be managed for the benefits to outweigh the costs.

Blog posted by Steven Mintz, aka Ethics Sage, on October 16, 2012

The Ethics of Awarding Military Uniform Contracts to Prison Inmates

Is Federal Prison Industries Stealing Jobs?

It's hard to compete with workers willing to take pay as low as 23 cents an hour. Do I mean workers in Guatemala or Vietnam? No. I mean Americans in federal prisons.

Two American companies which make military uniforms are laying off hundreds of workers as the federal government decides to use prison inmates to make soldier fatigues. American Apparel currently charges $29.44 per uniform. The cost will increase by 15 percent when Federal Prison Industries (FPI) convicts begin sewing the clothing at a cost of $34.18 each. FPI also functions under the name UNICOR. The convicts are reported to receive between 23 cents and $1.15 per hour. That’s quite a markup for FPI. The ethical question is whether it is right to take work away from private industry to support a prison-based program with the government’s blessing?

Under the law, FPI receives preference for contracts up to a certain percentage, about 7%, before they have to compete against private industry. My concern is an item such as the army combat uniform is earmarked directly for FPI without competitive bidding. American taxpayers pay more for it, but the bottom line is each soldier is paying more for their uniform.

FPI currently operates approximately 80 factories with more than 13,000 convict workers. The correctional institute factories are not permitted to sell goods to the private sector. The law mandates that federal agencies buy the products, even when they are not the least expensive available option.

Critics accuse UNICOR which last year pulled in $900 million in revenue, of shifting its focus from the betterment of inmates to profits. Those profits, they allege, have largely come at the expense of small business which are already struggling to secure government work. A bipartisan group of lawmakers has proposed new rules that would change the way prison manufacturing companies do business, subjecting them to stricter standards that would lead to higher prices.

In my mind it is difficult to ethically justify the program when so many US businesses are suffering from the great recession. I recently read that Alabama-based American Apparel was forced to close one plant and downsize at others due to the loss of contracts to prison inmates, according to company spokesman and retired Air Force Colonel Kurt Wilson. A total of 190 employees had their hours cut, and 255 others were laid off this year.

Also, I can’t think of any other situation where the government awards a contract to a private company without competitive bidding. I don’t like the government picking winners and losers with respect to government contract work when the playing field is not level.

One way to justify the FPI program is that it teaches inmates a skill and aids in their adjustment back to society. Some claim it also can decrease crime because that skill will enable them to become productive members of society. I’ll withhold judgment on that claim until the program has had several years or so to follow inmates in the program who have subsequently been released back to society. However, I can’t help but wonder whether the adjustment “reason” is a rationalization for an unfair action that knowingly harms private companies making military uniforms.

It seems to me if we want to teach inmates a marketable skill it should start with computer skills. These are in great demand and are transferable to any numbers of jobs and occupations.

I can’t imagine what would be the uproar from the public if we were importing goods manufactured by prison labor in someplace like China? That leads me to my final point. How can we argue against outsourcing manufacturing overseas to countries like India and the Philippines when we insource manufacturing in the US to companies chosen by the US government and not by free-market principles? It seems to run counter to our capitalistic system that relies on non-interference by the government. You know the “laissez-faire” concept!

Blog posted by Steven Mintz, aka Ethics Sage, on October 9, 2012

Are U.S. Corporate Tax Rates Stifling 'Ethical' Behavior?

Are Lower Corporate Income Rates the Answer to Increased Economic Activity?

Given the focus on ‘paying your fair share’ of taxes this election cycle, I want to bring attention to the controversial issue of whether the U.S. corporation tax rate is too high, leading to the outsourcing of jobs overseas; motivating companies to set up shop abroad and; skirting U.S. taxes. If this is the case, are U.S. corporations following ethical practices or, more specifically, acting like socially responsible businesses. It seems an appropriate topic for my blog since the Presidential debates start tonight and it is a contentious issue between the candidates.

As you may know, the U.S. has the highest corporate tax rate in the world. The U.S. rate stands at 39.2% when both federal and state rates are included. The second highest is Japan with a 36.8% rate after lowering it from 39.8 this past April. We all know how Japan’s economy has been in a malaise in the last two decades. Perhaps high corporate tax rates are part of the reason.

In comparison, France has a 33.3% rate [and a top rate of 75% on individual income of more than €1 million ($1.25 million)]; the United Kingdom, a 26% rate, China, 25%, and, at the low end, both Canada and Germany with a 15% rate. Finally, Switzerland’s rate is 8.5%. Perhaps not coincidentally, Canada, Germany, and Switzerland have fared better during the Great Recession of the past five years than other countries.

Loopholes and other special treatment for different kinds of businesses mean that businesses in the United States pay an effective rate of only 29.2% of their income, which puts the U.S. below the average of 31.9% among other major economies, according to analysis by the Treasury Department. However, the effective rate is not known until tax deductions are determined and it doesn’t affect the decision whether to shift profits overseas or keep it in the U.S.

Should corporations act in a ‘socially responsible’ manner and pay the highest corporate tax? Our capitalist economic system relies on the belief that corporate managers should act in the best interests of shareholders. And, as noted economist Milton Friedman stated in a 1970 essay in the NY Times Magazine, the only social responsibility of business is to maximize profits to enhance shareholder wealth. Friedman believed the basic doctrine of "social responsibility" involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce re­sources to alternative uses.

I believe the issue of social responsibility should be couched in the avoidance of taxes by U.S. businesses that keep their profits overseas. Under the U.S. tax system, corporate profits are not taxed until they are repatriated back to the states. Further, companies use a technique known as transfer pricing to shift more profits overseas to countries with low tax rates. Ireland is a popular destination for U.S. businesses with its low 12.5% rate. Essentially, parent corporations charge artificially low prices to overseas subsidiaries for goods shipped overseas thereby minimizing taxable income in the U.S. while those subsidiaries charge market prices for their sales to customers in overseas markets.

It has been estimated that the deferral of tax payments may be costing the U.S. Treasury $100 billion or more each year. Republicans contend that a lowering of the corporate tax rate would encourage U.S. businesses to repatriate profits and it could stem the tide of outsourcing jobs. There is no hard evidence to believe this to be so. However, I contend we are in desperate economic times in the U.S. and need to think outside the box to improve the economy.

My suggestion is to institute a lower rate of 15% to be competitive with other industrialized countries, and keep it in place for two years. If this leads to repatriated profits, higher taxes paid to the U.S. government, and the in-sourcing of jobs, then the 15% rate should be made permanent. If, however, U.S. businesses do not send their profits overseas and continue to outsource jobs, it means one or more of three things: (1) they are motivated by lower wage rates outside the U.S.; (2) they may feel stifled by the excessive regulatory system in the U.S.; and (3) they may truly want to be closer to their expanding overseas markets.

Corporate America reacts to incentives to maximize profits that can lead to higher personal income through bonus and other incentive compensation, and rising stock prices. There is nothing wrong with it. It is a part of our system. However, we must begin to initiate policies to reduce the growing number of people in poverty, bring more into the middle class, and do what is necessary to reverse years of stagnant growth that has lowered the overall income of far too many currently in the middle class. In my view this is an ethical issue, not one based on paying a “fair share” of the taxes. Corporations have an ethical obligation and social responsibility to do what it takes to improve the economic circumstances of all members of its community -- a community that depends on jobs and economic activity. Our society cannot prosper without an ever-expanding middle class and lowering of the poverty rate in this country.  

Blog posted by Steven Mintz, aka Ethics Sage, on October 3, 2012    

Are Ethics Courses Failing to Produce Ethical Business People?

What is the Goal of Business Ethics Education?

As a professor who teaches ethics routinely in my Accounting classes, I was intrigued to read an article by Ray Fisman, a professor at Columbia Business School, and Adam Galinsky, a professor at Northwestern University, about why ethics courses fall short in business schools. My first reaction was it is no surprise to me. The purpose of teaching ethics to college students is not to make it less likely they will commit fraud or go along with it during their business careers. There is no way to guarantee that will happen or even expect the goal to be achieved. A more realistic purpose is to get students to develop and act on a set of values that enable them to speak out when wrongdoing exists so it doesn't go that far. There is a college curriculum that approaches the teaching of ethics in that way. It’s called Giving Voice to Values. The approach was developed by Mary Gentile.

Gentile is a Babson College educator and consultant who draws on her business experiences to challenge the conventional notion of business ethics at companies and as taught in business schools. Dr. Gentile uses stories about the actions of exemplars to illustrate the kinds of values that enhance ethical behavior. Her goal is to help young people who want to stand up for their values when confronted with pressure imposed by a boss, customers, peers or shareholders to do the opposite.

I have found in my own teaching that students and young employees need a frame of reference to help make ethical decisions when faced with pressures to do otherwise. I emphasize that once you deviate from your values, it's just a small step down the proverbially ethical slippery slope and it becomes very difficult to regain the high ground later on if (and when) you realize your mistake of going along with or sanctioning wrongdoing in the first place.

Gentile’s approach is a good one because most college students know the right thing to do but have a difficult time doing it – expressing their thoughts and feelings -- because of their personal and organizational purposes are not aligned and pressures exist to deviate from ethical decision-making. Gentile starts with the premise that students do know the right thing to do but have trouble voicing their values. It’s one thing to say “I can’t go along with financial fraud”. It’s another to do something positive to prevent it from happening when your boss is pressuring you to do otherwise. In other words, to do something to voice your values in a way that changes behavior.

A useful approach to teaching business ethics is to help students identify the enablers and disablers of action. I ask students to think about the factors that would encourage them to take action on their values as well as those that discourage them. The goal is to develop a strategy to strengthen the enablers and counteract the disablers. Pressures such as a threatened job loss might lead to silence whereas a strong set of core values (i.e. integrity) should motivate students to speak up and use the enablers by taking the matter to higher-ups in the organization, assuming the CFO persists.

I have found that a useful perspective is to ask students to think about what might happen in the future if they go along with the CFO; use a long-term perspective in voicing values rather than focus on short-term gains. Some understand right away that they might be expected to go along with financial wrongdoing again in the future. Some realize top management can play the “gotcha” game down the road if, all of a sudden, they decide to act on their values but management reminds them of their past acceptance.

The bottom line is there is no way of knowing whether business ethics education has made a difference. A graduate of a prestigious school might commit fraud in the future, but it doesn’t mean business ethics has failed them or even all students. Organizational pressures and the culture of a firm can create barriers to ethical behavior. The key is to find a way to work through the obstacles and voice your values.

I’m asked all the time why I teach ethics and am challenged whether it is even possible to change one’s ethics by a college course. After all, some argue, ethics is formed at a very early age. I don’t dispute that but do point out that my goal is to get students to reflect on their actions in a safe setting so they can better develop the tools to deal with ethical challenges in the workplace. I am not a guarantor of ethical action.

Teaching ethics should not rely on having one college course in business ethics and that is it. I see the failure of business ethics education to be one of not integrating ethics into each course and each decision in business. When colleges rely on one course to teach ethics, they are not sending the message that ethics counts.  If they cover it in all courses and in the context of functional courses, then they send a completely opposite signal that it is an important part of every business decision.

I can teach business ethics – I know it from past experiences including grading papers, exams, and student presentations and papers on the topics. What I don’t know is whether students will really learn the lesson. Similarly, I can teach Intermediate Accounting to my students but I don’t know if they have truly learned the material and will be successful on the CPA Exam or in their accounting careers.

There is old African proverb: “It takes a village to raise a child”. It is quite appropriate to say that it takes an organization to raise an ethical employee.

Blog posted by Steven Mintz, aka Ethics Sage, on September 21, 2012

UBS $104 Million Whistle-blower Award Raises Ethical Issues

Motivation and Role in the Wrongdoing are Key to the Ethics of Whistle-blowing

Whistle-blowing creates ethical issues because the motivation and intention of blowing the whistle is the key to whether it is a courageous act or one undertaken for self-enrichment purposes. The case of Bradley Birkenfeld is a case in point. I’ve read several articles about the former UBS employee’s whistle-blower’s award and in none did I see a purpose for blowing the whistle. Compare that to the case of Cheryl Eckard, a quality-assurance manager at Glaxo, who had blown the whistle on the safety of products made in its Puerto Rico plant. As I have previously blogged, Eckard had a real concern about public health and safety and was willing to risk her job to live up to her ideals.

I have several concerns from an ethical perspective with respect to the UBS case. Motive is one and another is the process followed to gather and report the wrongdoing.

Birkenfeld was a former UBS banker who provided information on the firm's vast business of helping wealthy Americans hide their assets from the Internal Revenue Service. He has received a $104 million whistleblower reward, which his lawyers said was the largest in U.S. history.

Birkenfeld, began cooperating with U.S. authorities in 2007, while still at UBS. He provided prosecutors with detailed descriptions of the bank's efforts to promote tax evasion and confessed to running errands for rich clients, including one instance when he sneaked diamonds into the U.S. in a toothpaste tube. He wasn’t exactly an innocent ‘dupe’ in the fraud.

My guess is Birkenfeld started to cooperate in return for leniency for his role in the fraud. Not a very ethical position; more of a pursuit of self-interests approach to whistle-blowing. I am concerned that whistle-blowers implicated in the wrongdoing get away with a slap on the wrist while, at the same time, become millionaires for their whistle-blowing efforts.

There have been positive effects of Birkenfeld’s whistle-blowing. The case lifted the veil of Swiss bank secrecy that for decades had allowed wealthy people world-wide to evade taxes. UBS in 2009 agreed to turn over the names of more than 4,000 account holders who were U.S. taxpayers and pay $780 million to resolve a criminal case involving secret offshore accounts.

Since then, more than 33,000 U.S. taxpayers have confessed to holding undeclared overseas accounts and paid more than $5 billion in taxes and penalties.

It’s a good thing that controls are finally being put in place and enforced by the Swiss with respect to secrecy accounts. Alois Pirker, a research director at Boston consulting firm Aite Group, estimates that Swiss private-banking fees have fallen at least 25% in the past two years because foreign clients no longer see an advantage to stashing money there.

Unfortunately, other destinations are ratcheting up their efforts to draw money from the wealthy and mega-wealthy under the guise of secrecy. Pirker says wealthy Americans are moving funds to other tax havens, such as the Cayman Islands, Monaco and some Asian countries.

Birkenfeld pleaded guilty in 2008 to one count of conspiracy to defraud the U.S., a felony, and was given a 40-month sentence. He currently is in New Hampshire finishing his sentence in home confinement.

At his sentencing hearing, Justice Department official Kevin Downing said, "Without Mr. Birkenfeld walking into the door of the Justice Department in the summer of 2007, I doubt as of today that this massive fraud scheme would have been discovered by the U.S. government."

The $104 million award is 26% of the $400 million in tax paid by UBS to the IRS as a result of the 2009 settlement. The large-awards program pays between 15% and 30% of proceeds collected, which can be hard to determine.

The massive award, paid out last week to a felon still serving time, shows the lengths the agency now is willing to go to collect unpaid taxes, experts said. "If Brad Birkenfeld can get an award, then many company insiders will have no problem getting one," said Scott Knott, an attorney in Washington who specializes in tax whistleblower lawsuits. This is my concern as well and recent whistle-blowing legislation that was part of the Dodd-Frank Financial Reform Act may exacerbate the problem.

The law doesn't preclude paying money to convicted felons, as long as they didn't plan or initiate the evasion. I’m not sure how the planning criteria can be known short of a ‘smoking gun,’ such as an e-mail to that effect. Do we really believe someone like Birkenfeld would admit to planning the act? He certainly was complicit in carrying it out.

"The IRS encourages courageous actions," said Sen. Charles Grassley (R., Iowa), who sponsored the law. "An award of $104 million is obviously a great deal of money, but billions of dollars in taxes owed will be collected that otherwise would not have been paid as a result of the whistleblower information." This is an ends justifies the means approach to ethical reasoning and shows the lack of ethical sensitivity by Grassley. I’m also concerned about spying on one’s employer to whom employees owe a confidentiality obligation.

According to the Wall Street Journal, the IRS has collected more than $1 billion in taxes through whistleblower cases since the new program was launched targeting major offenders. Don’t get me wrong. I am not against whistle-blowing. I merely raise ethical issues as I might in a classroom discussion.

Oh, by the way, in case you are wondering, IRS whistleblower awards are fully taxable.

Blog posted by Steven Mintz, aka Ethics Sage, on September 17, 2012

Why Good People Sometimes Do Bad Things

Our Ethical Blind Spots Inhibit Ethical Behavior

In my study of ethical behavior I have come across many instances when otherwise good people do bad things. They may succumb to the pressure of a supervisor to go along with financial wrongdoing or they may defer to the judgment of others even though they are convinced of the right thing to do.

Ethical blind spots refer to the gap between who we want to be and the person we really are. Many researchers have studied the psychological processes that lead even good people to engage in ethically questionable behavior that contradicts their own preferred ethics. Bazerman and Tenbrunsel identify bounded ethicality as an explanation for the phenomenon when individuals make decisions that harm others and when that harm is inconsistent with these decision makers’ conscious beliefs and preferences.

We all deal with ethical challenges. Some of us may be better able to identify the ethical issues and take ethical action more than others. Take the case of Betty Vinson. In 1996, she took a job as a midlevel accountant at WorldCom, a company that had a meltdown caused by an $11 billion financial fraud. Asked by her bosses to make false accounting entries, Vinson balked -- and then caved. Over the course of six quarters she continued to make the illegal entries to bolster WorldCom's profits at the request of her superiors. Each time she worried. Each time she hoped it was the last time. At the end of 18 months she had helped falsify at least $3.7 billion in profits. Her rationalization was that the CFO and higher-level accountants who pressured her must have known the accounting was correct. She deferred to their judgment even though she questioned the entries from the beginning.

At her trial, Vinson admitted "I was very concerned about the order to make the adjustment." The fact is she was afraid to go against her superiors for fear of losing her job and not being able to support her family. On August 5, 2005, Vinson was sentenced to five months in prison and five months of house arrest for taking part in the telecommunications company's accounting fraud.

By all accounts, Betty Vinson was a good person who did a bad thing. She played on the high-school tennis team and translated her love of math into an accounting major at Mississippi College. She lived at home and spent the summers working in her father's typewriter shop. Shortly after she graduated in 1978, she married Tom Vinson, her college sweetheart. The Vinsons moved to a quiet, manicured neighborhood on the outskirts of Jackson, Mississippi. They attended their daughter's soccer games, took on home-improvement projects and played with Cupcake, their curly-haired mutt. In her spare time, Ms. Vinson taught Sunday school and devoured John Grisham novels.

When she joined WorldCom, it was a small long-distance company on the verge of becoming a star of the Wall Street telecom boom. Vinson developed a reputation for being hardworking and diligent. She was known as a loyal employee who would "do anything you told her," says a former colleague. Many nights after dinner, she would retreat to her den to work on WorldCom's books until nearly midnight. On vacations, she squeezed in some work on her laptop.

Vinson was a victim of what Bazerman and Tenbrunsel call bounded awareness. In other words, she placed arbitrary and dysfunctional bounds around her definition of the problem. Much of the reason for her “ethical blindness” came from systemic causes. WorldCom had a culture of getting the stock price up as high as possible. Top management wanted big bonuses and were insistent on meeting or exceeding Wall Street analysts’ financial projections. Superiors exerted immense pressure on Vinson and others to go along with the financial wrongdoing.

The key to ethical action in such situations is to remove the blinders and do what is right upon greater reflection. Vinson's story is a cautionary tale for good corporate soldiers everywhere who find themselves ordered to do something wrong. Saying that you were "just following orders" is not an excuse for breaking the law. As Vinson's experience at WorldCom shows, sometimes it's hard to tell right from wrong in the heat of a workplace battle. And when an employee's livelihood is on the line, it's tough to say no to a powerful boss.

Our ethical intentions are put to the test virtually every day as we encounter conflicts in our lives about how we should behave and thoughts of how we want to behave.  We believe it is inappropriate to go along with financial wrongdoing. We predict that we will not go along with it. Yet, something happens to alter the perception and reality. Self-deception allows us to behave self-interestedly while, at the same time, falsely believing that one's moral principles were upheld. The end result is that the ethical aspects of the decision fade into the background, the moral implications obscured.

Blog posted by Steven Mintz, aka Ethics Sage, on August 24, 2012

Pfizer Admits Bribery Overseas to Gain Business

Pfizer’s $60.2 Million Settlement under the FCPA Illustrates Ethical Lapses in Pharmaceuticals

On August 7, 2012, Pfizer agreed to pay the federal government $60.2 million to settle allegations that its employees bribed doctors and other foreign officials in Europe and Asia to win business and boost sales. The charges against Pfizer were brought under the Foreign Corrupt Practices Act (FCPA), which bars publicly traded companies from bribing officials in other countries to get or retain business.

The Securities and Exchange Commission said that Pfizer's overseas subsidiaries made illegal payments to health care workers in China, Italy, Russia, Croatia and other Eastern European countries. As early as 2001, Pfizer sales representatives tried to conceal the bribes by recording them as legitimate business expenses for travel, entertainment and marketing purposes, the agency said.

Pfizer subsidiaries in several countries had bribery so entwined in their sales culture that they offered points and bonus programs to improperly reward foreign officials who proved to be their best customers," said Kara Brockmeyer, chief of SEC's foreign enforcement division.

Pfizer's China operation created a point program that allowed doctors to purchase gifts based on points earned for prescribing Pfizer medications. In other cases, Pfizer would invite high-prescribing doctors to club-like meetings as a reward for choosing Pfizer products. (This sounds like the New Orleans Saints bounty hunter program that led to suspensions of coaches and players by the NFL).

The settlement includes alleged violations by Wyeth, the New Jersey-based drugmaker which Pfizer acquired in 2009. Wyeth gave up more than $17 million in profits, plus $1.6 million in interest. Pfizer agreed to disgorge $16 million in profits and interest of $10.3 million

As part of the settlement, Pfizer's HCP subsidiary agreed to pay $15 million to resolve similar bribery allegations with the Department of Justice. In addition to the settlement fee, the Pfizer unit agreed to a two-year deferred prosecution agreement.

New York-based Pfizer first disclosed the misconduct to SEC and Justice Department officials in October 2004, and “cooperated” with the government's investigation. Pfizer, the largest pharmaceutical company by sales, neither admitted nor denied the allegations.

Pfizer's general counsel, Amy Schulman, said of the settlement, "The actions which led to this resolution were disappointing, but the openness and speed with which Pfizer voluntarily disclosed and addressed them reflects our true culture and the real value we place on integrity and meeting commitments."

I take issue with the statement that the “voluntary” disclosure reflects Pfizer’s true culture. The government was already investigating Pfizer and a number of pharmaceutical companies dating back to about 2004.

The fact is the culture of pharmaceuticals seems to be a breeding place for illegal activity. I have previously blogged about the problem. For example, on July 2, 2012, a federal judge approved an agreement by British drugmaker GlaxoSmithKline to pay $3 billion for criminal and civil violations involving 10 drugs, the largest health care fraud settlement in U.S. history. GlaxoSmithKline pleaded guilty to promoting the popular antidepressants Paxil and Wellbutrin for unapproved uses.

Prior to the Glaxo settlement, the record-setting case involved Pfizer. It paid the government $2.3 billion in 2009 in criminal and civil fines for improperly marketing 13 different drugs, including erectile-dysfunction drug Viagra and cholesterol fighter Lipitor, the top-selling drug in the world for years. Pfizer was accused of encouraging doctors to prescribe its drugs with free golf, massages and junkets to posh resorts.

In May 2012, Abbott Laboratories settled for $1.6 billion over its marketing of the antipsychotic drug Depakote. And an agreement with Johnson & Johnson on June 11, 2012, the company agreed to pay up to $2.2 billion, including a criminal penalty portion of as much as $600 million, to settle U.S. investigations and lawsuits into abusive marketing practices involving the antipsychotic Risperdal and other prescription drugs.

What is about the culture in pharmaceutical companies that seems to create a breeding ground for illegal activity? Eight of the world's top 10 drugmakers have warned of potential costs related to charges of corruption in overseas markets, according to a Reuters examination of U.S. filings.

One reason is the executives that approve the payments never seem to be held to account whether through federal prosecution or by their companies. In the case of Pfizer, the SEC said the company payoffs were made “without the knowledge or approval of officers or employees of Pfizer, but the inaccurate books and records of Pfizer subsidiaries were consolidated in the financial reports of Pfizer.” I find this hard to believe. How can no one know about millions paid in bribes?

The culture of an organization sets the tone for the behavior of its employees. By ‘voluntarily’ disclosing the illegal payments, Pfizer is not acting with integrity. It was trying to head off an extensive government investigation that might have cost more to litigate than the $60.2 million paid to settle government charges of illegal payments under the FCPA.

Let’s not give Pfizer, or any other company for that matter, credit for disclosing an illegal activity that never should have occurred in the first place. It’s easy to confess in advance of the expected disclosure of an illegal act and make it seem as though the company is getting ahead of the problem. It’s an entirely different matter to prevent such activity from occurring in the first place.

Blog posted by Steven Mintz, aka Ethics Sage, on August 21, 2012

On line Dating Scams Spreading like Wildfire

How to protect yourself against on line Dating Scammers

The total number of single people in the U.S. has been estimated at 54 Million. The total number of people in the U.S. who have tried online dating is about 40 Million. The two largest on line dating services are eHarmony with 20 Million members and Match.com with 15 Million members. According to the Association of Psychological Science, online dating is now the second most common way people find one another. Introductions from friends and family are still the most popular methods for finding love, but online dating sites now surpass churches, fitness clubs and bars as meeting places for those seeking friendship or romance.

So it’s not surprising that recent reports of on line dating scams are causing consternation among singles looking for the right partner with whom to share their lives. On August 15, 2012, the Better Business Bureau issued a warning that complaints about on line dating services have increased by 108% in the past year. While the report covers the Chicago and Northern Illinois area, it does raise some important points that would-be-on line-daters should heed.

Steve J. Bernas, president & CEO of the BBB in the Chicago area cautions: "With matchmaking contracts, it's important to know exactly what you're getting into and what the service offers. Be sure to read all agreements, guarantees, and instructions before signing and be wary of vaguely worded provisions, exclusions or limitations which could pose a problem later."

The BBB offers the following advice to avoid dating scams:

• Know and recognize the red flags. Be wary if someone claims any of the following: to be in love right away, to be from the U.S. but traveling or working overseas, or to be a member of the military. Another red flag is if someone's profile lacks a photograph and/or information in their "About Me" section.
• Create a new e-mail account to be used just for online dating. The advantage of having a separate account is that you can filter information in your dating inbox and it doesn't become mixed with work or personal e-mails.
• Don't give out personal information online. It is not necessary to reveal any of the following on your online dating profile: full name, address, phone numbers, link to your Facebook page, work information or financial details. This information can be revealed later if you meet in person and develop trust. Avoid anyone who pushes you to disclose personal information.
• Talk on the phone before meeting in a public place. It can be easier to spot a fraud over the phone rather than online. If you decide to meet someone after the initial phone conversation, always meet in a public.

The anonymity of the Internet makes dating sites easy places for con artists to find victims, especially with so many people are willing to share personal information with strangers. But beware that scammers can set up fake profiles with legitimate online dating services. As a romantic relationship progresses, often for many months or even years, the communications usually leave the dating site and switch to personal emails. Victims receive pictures, which they are led to believe are of their new love interests, and the thieves tell elaborate stories about “their” families and personal lives. Most often none of their stories are true. The real people behind many of the fake profiles are Nigerian scam artists, and eventually the fake gentlemen and ladies come up with “emergencies” and ask for money.

A Lincoln, Nebraska woman recently reported to the BBB that she was a victim of a dating scam via Match.com. She had a 16-month online relationship with a man who told her that he was an American working in Nigeria on a construction job. He sent pictures of (supposedly) himself with (supposedly) his son and told her he was building an orphanage. He claimed he would be receiving a payment of $16 million for the project in the near future and he even said he planned to share $1 million of that with her.

How to Recognize a Scam Artist

The relationship may not be what you think, especially if your sweetheart:

• wants to leave the dating site immediately and use personal email or instant messaging
• claims love in a heartbeat
• claims to be from the U.S., but is traveling or working overseas
• plans to visit, but is prevented by a traumatic event or a business deal gone sour

Scammers also like to say they’re out of the country for business or military service.

What You Can Do About It

You may lose your heart, but you don’t have to lose your shirt, too. Don’t wire money to cover:

• travel
• medical emergencies
• hotel bills
• hospital bills for a child or other relative
• visas or other official documents
• or losses from a temporary financial setback

Don’t send money to tide someone over after a mugging or robbery, and don’t do anyone a favor by making an online purchase or forwarding a package to another country. One request leads to another, and delays and disappointments will follow. In the end, the money will be gone along with the person you thought you knew.

Relationship scams should be reported to the Federal Trade Commission, the FBI’s Internet Crime Complaint Center, and your state Attorney General. To access a list of possible scams, click on this link to the Fraud Aid victim advocacy website.

Blog posted by Steven Mintz, aka Ethics Sage, on August 17, 2012

Holding CEOs Responsible for Fraud at their Companies

Tyco & Kozlowski

You remember Dennis Kozlowski, the former CEO of Tyco International, who was convicted in 2005 of crimes related to his receipt of $81 million in purportedly unauthorized bonuses, the purchase of art for $14.725 million for his $30 million New York City apartment which included $6,000 shower curtains and $15,000 "dog umbrella stands," and numerous other diversions of company funds. Kozlowski's North Hampton, NH. estate was auctioned off for $4.135 million after he was sent to jail. It looks like something out of Hearst Castle.

Who can forget the $2 million spent for the 40th birthday party for his wife by flying friends and corporate hotshots to the Italian island of Sardinia for fun and games including a Roman toga party complete with entertainment by Jimmy Buffet. There was a board meeting on the last day of the week of fun and frolic, and Kozlowski billed Tyco for ‘only’ $1 million.

Kozlowski is a non-repentant individual who not only used company funds for personal reasons but told Morley Safer in a 60Minutes interview that he did nothing different than prior CEOs of Tyco. He was playing by the ‘book.’ Kozlowski’s approach to ethics is called “ethical relativism.” This is when a person believes ethical decision-making is relative to the situation. In other words, everyone is free to define his or her ethics in situations encountered based on the prevailing facts – and pressures – at the time. Most ethicists would scoff at the suggestion that I define my own ethics.

Ethics is based on certain immutable ideas that include a set of core ethical values to be followed in all situations. For example, honesty and truthfulness are core values. Once a person starts to lie, deceive, or cover-up past actions, that person begins the slide down the ethical slippery slope and oftentimes there is no turning back. I always encourage my students to tell the truth when they have made an error in judgment – admit it; be remorseful and promise never to do it again; and change your behavior to avoid repeating the mistake.

I was pleased to learn that on Friday, August 10, Tyco and Kozlowski reached a tentative settlement in litigation over compensation before he was convicted and jailed in 2005 for a massive fraud. The civil litigation was filed in 2002 in U.S. District Court in Manhattan. Tyco accused Kozlowski of fraud and breach of fiduciary duty. Two years ago, a judge found Kozlowski liable on most claims and a trial scheduled to start this week would have decided any damages owed to the company.

Kozlowski, who is in his mid-60s, was convicted in June 2005 of securities fraud, grand larceny and falsifying business records in New York State Supreme Court. A jury found that Kozlowski and former chief financial officer Marc Swartz stole $137 million from the conglomerate.

Kozlowski was sentenced to 8-1/3 years to 25 years in prison. The New York State parole board denied him parole in April.

Goldman Sachs & all the President’s Men

It’s high time we started to hold CEOs responsible for fraud at their companies. The buck should stop with those at the helm of these companies who knew, should have known,  and/or looked the other way while the fraud was committed. That is why I was dismayed to learn last week that the Justice Department won’t prosecute Wall Street firm Goldman Sachs or its employees in a financial fraud probe.

In a written statement, the department said it conducted an exhaustive investigation of allegations brought to light by a Senate panel investigating the 2008-2009 financial crisis. "The department and investigative agencies ultimately concluded that the burden of proof to bring a criminal case could not be met based on the law and facts as they exist at this time." But the department added that if additional or new evidence were to emerge, it could reach a different conclusion about prosecuting Goldman.

A Senate subcommittee chaired by Sen. Carl Levin in April 2011 found that Goldman marketed four sets of complex mortgage securities to banks and other investors but that the firm failed to tell clients that the securities were very risky. The Senate panel said Goldman secretly bet against the investors' positions and deceived the investors about its own positions to shift risk from its balance sheet to theirs.

The Obama administration is infested with people with ties to Goldman Sachs. Goldman was Obama’s biggest campaign contributor ($994,795) in 2008 and before that as a candidate to the Senate. Moreover, I can’t help but wonder whether ties to Robert Rubin, former co-Chairman of Goldman, head of Citicorp, and U.S. Treasury Secretary in the Clinton Administration, biased the decision. After all, protégés of Rubin include Larry Summers, Obama’s chief economic adviser and head of the National Economic Council, and Timothy Geithner, current Treasury Secretary and past president of the Federal Reserve Bank of NY.   

It’s ironic that the Democrats accuse Mitt Romney of being an unfeeling capitalist while crony capitalism is practiced by the current administration. We, the People, deserve better from our elected officials. To allow Goldman executives to escape unscathed by a scandal they were part and parcel of, is, quite frankly, an outrage.

Blog posted by Steven Mintz, aka Ethics Sage, on August 13, 2012

What Motivates Medical Billing Fraud?

Medicare Billing Fraud Costs to Society

We all will need it at some time in our future. The costs keep rising and the loss to the government (i.e. we, the People) is staggering. Medical billing experts estimate that the U.S. Government loses 30 cents of every dollar earned from fraudulent practices and medical billing scams. You may recall that the Obama Health Care Reform Act that was signed into law on March 23, 2010, cited about $500 billion in Medicare fraud that is supposed to be recovered to help pay for the Act. I believe this is the tip of the iceberg.

Medicare's war on fraud went high-tech on August 1, 2012, with the opening of a $3.6 million command center in Baltimore that features a giant screen and the latest computer and communications gear. The idea is to have the tools to prevent the annual $60 Billion cost in Medicare fraud and recover as much as possible from the fraudsters. The government expects the system to eventually pay for itself, although as with most statements of this kind the glaring omission is how much is spent to run the system and pay the employees charged with its operation.

I’ve often wondered what motivates a highly-skilled and well-educated medical professional to commit Medicare fraud. These are reasonably well paid individuals who, supposedly, receive a great deal of self-satisfaction from doing their job well. Very few professions can match those benefits.

I believe there are a variety of factors involved including an indifference to ethical transgressions. I like to think of it as the absence of a moral compass or a compass that is not pointed true north. In my last blog I spoke of this phenomenon.

We all know people who seem to be amoral – but we expect medical professionals to be better than that. You know, The Hippocratic Oath historically taken by physicians, physician assistants' and other healthcare professionals swearing to practice medicine ethically and honestly.   

Alas, I am forced to conclude that physicians are no better or worse than the “average” American. Not all, of course, but way too many have morphed into greedy individuals who pursue self-interests above all else and rationalize unethical actions. Perhaps they feel entitled my low Medicare reimbursement rates to pad their billings, bill for nonexistent services, or perform and bill for unnecessary procedures. Unfortunately, the end result is we all pay higher health care costs to cover the over-billings for unsubstantiated Medicare services.

I’ve done a bit of research on actual cases of Medicare fraud and am alarmed at the lengths to which some medical professionals go in billing the government for fraudulent services. I describe just a few below to educate the reader about the extent of the problem.

Medicare fraud generally refers to willfully and knowingly billing medical claims in an attempt to defraud the Medicare program for money. Anyone found guilty of Medicare fraud is subject to exclusion from participation in the Medicare program in addition to fines and possibly imprisonment. Most Medicare fraud occurs in four areas:

1. Medical Equipment Never Provided The most common area of Medicare fraud is billing for Durable Medical Equipment (DME). DME refers to any medical equipment necessary for a patient's medical or physical condition. It includes wheelchairs, hospital beds, and other equipment of that nature. The provider will bill Medicare for equipment that the patient never received. Mobility scooters have been particularly popular for Medicare fraud schemes.
2. Services Never Performed In this instance, the provider bills for tests, treatment or procedures never performed. This can be added to the list of tests a patient has actually received and never be noticed. A provider may also falsify diagnosis codes in order to add on unnecessary tests or services.
3. Upcoding Charges Misrepresenting a level of service or procedure performed in order to charge more or receive a higher reimbursement rate is considered upcoding. Upcoding also occurs when a service performed is not covered by Medicare but the provider bills a covered service in its place.
4. Unbundling Charges Some services are considered all inclusive. Unbundling is billing for procedures separately that are normally billed as a single charge. For example, a provider bills for two unilateral screening mammograms, instead of billing for 1 bilateral screening mammogram.

Two examples illustrate particularly egregious behavior. On January 12, 2012, Jorge Pineiro pleaded guilty for his participation in a $25 million home health Medicare fraud scheme. Pineiro was a registered nurse who worked for ABC Home Health Care Inc. and Florida Home Health Care Providers Inc., two Miami home health care agencies that purported to provide home health and therapy services to Medicare beneficiaries. Pineiro and his co-conspirators operated ABC and Florida Home Health for the purpose of billing Medicare for expensive services that were not medically necessary and/or were never provided. The medically unnecessary services were prescribed by doctors, including, but not limited to, Pineiro’s co-defendant, Dr. Jose Nunez.

According to court documents, beginning in approximately June 2008, and continuing until approximately March 2009, Pineiro and his co-defendant nurses falsified patient files for Medicare beneficiaries to make it appear that they qualified for home health care and therapy services. Pineiro knew that the beneficiaries did not actually qualify for and did not receive the services. Pineiro and his co-defendant nurses described in nursing notes and patient files symptoms that were non-existent, such as tremors, impaired vision, weak grip and inability to walk without assistance. They included these symptoms to make it appear that the patients were unable to self-inject insulin and were homebound, thus appearing to qualify for home health care benefits under Medicare.

Lana Le Chabrier, a physician in Santa Barbara, California, was sentenced on July 12, 2012 to six and a half years in prison for conspiring to commit health care fraud. Le Chabrier was responsible for close to a million dollars in fraudulent billings submitted to Medicare and more than $400,000 in payments made on false claims. During the period of February 2006 through August 2008, Vardges Egiazarian, 63, of Panorama City, owned and controlled three health care clinics in Sacramento, Richmond, and Carmichael. Egiazarian and others recruited doctors to submit applications to Medicare for billing numbers. Le Chabrier assumed the role of co-owner and practitioner at the Richmond clinic, and claims were submitted to Medicare under her name for medical services purportedly rendered at the clinic.

In fact, Le Chabrier never treated a single patient at the clinic. Clinic patients, almost all of whom were elderly and non-English speaking, were recruited and transported to the clinics by individuals who were paid according to the number of patients they brought to the facilities. Rather than being charged a co-payment, the patients were paid for their time and the use of their Medicare eligibility, generally $100 per visit. False charts were created stating that each patient received comprehensive exams and a broad array of diagnostic tests. Few of these tests were ever performed, none were performed based on any medical need, and clinic employees filled out other portions of the charts using preprinted templates. Some clinic employees admitted to performing various tests on themselves, and placing the results in patient files.

Fraud is endemic in our society. It infects the business world including financial institutions, the health-care services profession, and our government. The total costs of fraud to society are difficult to determine. I believe it ranges in the trillions, not billions, and certainly not millions. Imagine if we had that money to pay off our national debt. Imagine if that money were returned to the taxpayer to stimulate the economy. Imagine if we lived in a society where people followed their inner voice rather than ignore it. We can hope, we can dream, but in the end “it takes a village” to raise a society that is led by a moral compass pointing due North.

Blog posted by Steven Mintz, aka Ethics Sage, on August 4, 2012  

Let Your Conscience be Your Guide…Or Not

Conscience, Moral Compass, and Ethical Behavior

I’ve blogged about it before – the lack of a moral compass. I’ve spoken out about fraud in our society. Business fraud contributed to financial meltdowns in the early 2000s because top executives in companies such as Enron and WorldCom played fast and loose with the accounting rules while auditors looked the other way. It happened again in the 2007-2008 period when some of the largest financial institutions granted risky mortgages and allowed for unclear/misleading statements in home mortgage loans. Fraudulent medical billings, the topic of my next blog, has infected the Medicare program and cost society anywhere from $600 billion, an amount estimated in the Affordable Health Care Act (Obamacare), to trillions of dollars. And, of course, some politicians use their office for personal gain while others accept bribes and kickbacks. Do they all lack a moral compass?

A moral compass is generally thought of as, "Anything which serves to guide a person’s decisions based on morals or virtues."  The common understanding is one’s conscience. Most of us from an older generation remember the phrase “Let your conscience be your guide.” An interesting side note about this statement is it appears prominently in Disney’s story of Pinocchio. I’m always amazed how we can learn so much about ethics from literature. Now, some might now consider Pinocchio literature but it does illustrate how the movies and television used to be a force to promote good behavior rather than today’s emphasis on offensive behavior, immature attitudes, and just being a jerk.

For those of you who have forgotten the famous exchange in Pinocchio, here it is:

“Well it's a good thing you didn't get to wrapped up in it" Jiminy Cricket said walking her home; Pinocchio had already gone home after his game with the other boys ended and asked Jiminy to take his sister home.

"I know Jiminy" Gizela said "I don't wanna end up like my brother" she said "like you told me."

"Don't worry Gizela that won't happen to you" he said." “Just let your conscience be your guide"…

Jiminy started to dance while twirling his umbrella

"When you get in trouble and you don't know right from wrong

Give a little whistle!"…

"When you meet temptation and the urge is very strong, give a little whistle! Give a little whistle!"

Gizela started to dance along

"Take the straight and narrow path" she sang. "And always let your conscience be your guide" he sang. 

Now, most people know that their actions should be guided by their conscience.  Some take this to mean, "I think this is right," or, "I think this is what I should do."  Some take it to an even easier level and say things like, "I need to listen to my heart," or, "I need to follow my heart." 

But, here is the problem with that mind-set. Everyone is doing what they think is right (or at least seemed right to themselves), but the underlying action is not necessarily guided by moral values.

The problem is one of formation, which results in orientation.  If one’s conscience is not properly formed, then it will not point (or orient) you in the correct direction.  Hence, the analogy of conscience to a compass – it must be properly oriented.  If a compass is not pointing to true North (or the markings on the compass indicate that the needle is off-North), it doesn’t matter how closely it is being followed – you are still going to go the wrong way, and the longer you continue in that wrong path, the more wrong you will be.

So essentially, our conscience already knows right from wrong, much like a child already has the instinct to walk – however, the conscience must be strengthened by act of the will/mind to follow what is right, and not just what is felt. 

The concept of morality is also relatively simple at its absolute core. It denotes conduct or duties based on what is right and wrong. Morality is considered to be the basis of character and is wrapped around ethics.

But while both the concept of a moral compass and the definition of morality are simple and clear, the concept of what constitutes morality is not. One person’s moral compass may not point in the same direction as another’s as far as right and wrong conduct and belief are concerned.

I always tell my ethics students that there is a difference between knowing the right thing to do and doing it. Our conscience guides us but it is our inner strength of character, or virtue to the ancient Greeks, that leads to moral action. The moral values that enable such action include truthfulness, trustworthiness, fair-mindedness, and integrity.

I always have a goal in mind when I lecture to my students. It is to get them to the point where they know the right thing to do before being faced with an ethical dilemma. It’s often too late, after the fact, to do the right thing because pressures build up by external forces to go along with wrongdoing. In other words, it is our inner conscience that drives to act one way or another informed by moral values and a desire to do the right thing not because of any personal gain but, instead, because it is the right thing to do.

Blog posted by Steven Mintz, aka Ethics Sage, on July 31, 2012

Bank Financial Fraud Goes Global

The LIBOR scandal infects Global Financial Markets

Last week it was disclosed that Barclays, a 300-year-old British bank, rigged the LIBOR rate. The LIBOR is a borrowing rate set daily by a panel of banks for ten currencies and for 15 maturities. The most important of these, three-month dollar LIBOR, is supposed to indicate what a bank would pay to borrow dollars for three months from other banks at 11am on the day it is set. The dollar rate is fixed each day by taking estimates from a panel, currently comprising 18 banks, of what they think they would have to pay to borrow if they needed money. The top four and bottom four estimates are then discarded, and LIBOR is the average of those left. The submissions of all the participants are published, along with each day’s LIBOR fix.

Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to (and typically higher than) LIBOR. The LIBOR is among the most common of benchmark interest rate indexes used to make adjustments to adjustable rate mortgages. So, it affects virtually all people around the world and the scandal described below threatens to infect the global financial system if left unchecked.

Over the past week strong evidence has emerged in documents detailing a settlement between Barclays and regulators in the U.S. and Britain that employees at the bank and at several other unnamed banks tried to rig the number time and again over a period of at least five years. Investigations by regulators in several countries, including Canada, America, Japan, the EU, Switzerland and Britain, are looking into allegations that LIBOR and similar rates were rigged by large numbers of banks. Corporations and lawyers, too, are examining whether they can sue Barclays or other banks for harm they have suffered. That could cost the banking industry tens of billions of dollars.

As many as 20 big banks have been named in various investigations or lawsuits alleging that LIBOR was rigged. The scandal also corrodes further what little remains of public trust in banks and those who run them. Still, the fraud is bigger than just LIBOR manipulation.

A second sort of LIBOR-rigging has also emerged in the Barclays settlement. Barclays and, apparently, many other banks submitted dishonestly low estimates of bank borrowing costs over at least two years, including during the depths of the financial crisis. In terms of the scale of manipulation, this appears to have been far more egregious—at least in terms of the numbers. Almost all the banks in the LIBOR panels were submitting rates that may have been 30-40 basis points too low on average. That could create the biggest liabilities for the banks involved.

As the financial crisis began in the middle of 2007, credit markets for banks started to freeze up. Banks began to suffer losses on their holdings of toxic securities relating to American subprime mortgages. With unexploded bombs littering the banking system, banks were reluctant to lend to one another, leading to shortages of funding system-wide. This only intensified in late 2007 when Northern Rock, a British mortgage lender, experienced a bank run that started in the money markets. It soon had to be taken over by the state. In these febrile market conditions, with almost no interbank lending taking place, there were little real data to use as a basis when submitting LIBOR. Barclays maintains that it tried to post honest assessments in its LIBOR submissions, but found that it was constantly above the submissions of rival banks, including some that were unmistakably weaker.

At the time, questions were asked about the financial health of Barclays because its LIBOR submissions were higher. Back then, Barclays insiders said they were posting numbers that were honest while others were fiddling theirs, citing examples of banks that were trying to get funding in money markets at rates that were 30 basis points higher than those they were submitting for LIBOR.

Regulators around the world are concerned that global financial markets may have been rigged by a large number of banks. The list of institutions that have said they are either co-operating with investigations or being questioned includes many of the world’s biggest banks. Among those that have disclosed their involvement are Citigroup, Deutsche Bank, HSBC, JPMorgan Chase, RBS and UBS.

The U.K. Serious Fraud Office (SFO) opened a criminal probe into the attempted rigging of interest rates that led to a record fine against Barclays, adding to pressure on banks already under investigation by regulators around the globe. (As a side point, I never could understand why, in certain countries, large scale frauds ware distinguished from tamer ones by having the “Serious Frauds Office” do the investigation. It seems to me all frauds are serious on their face.)

Politicians including Chancellor of the Exchequer George Osborne and Opposition Labour leader Ed Miliband called for a criminal probe after Britain’s second-biggest bank was fined $451 million two weeks ago in the UK and U.S. for submitting false LIBOR rates. Chief Executive Officer Robert Diamond and Chief Operating Officer Jerry Del Missier resigned over the scandal.

The SFO joins the U.S. Department of Justice in criminally investigating how derivatives traders and rate submitters colluded to rig interbank offered rates. The U.K. Financial Services Authority is seeking civil penalties against banks and has said its criminal powers don’t include Libor rigging.

As part of the U.S. and U.K. settlements, Barclays admitted rigging the LIBOR as well as Euribor, its equivalent in euros, as early as 2005. In testimony to the British Parliament last week, Diamond apologized and said 14 Barclays traders were involved.

Citigroup Inc., Royal Bank of Scotland Group Plc, UBS AG, ICAP Plc, Lloyds Banking Group Plc and Deutsche Bank AG are among the firms regulators are investigating. About 18 banks are surveyed as part of the process of determining LIBOR rates.

The bottom line is now global interest rates and the global financial system is coming under attack. If we can’t trust that system, then the global transfer of money may be in doubt. In the US, we have our own problems with the financial system. Now, we have to consider the LIBOR-rigged rate problem to determine how, and to what extent, it has affected the actions and performance of US banks. US regulatory authorities should investigate as quickly as possible to assure investors the scandal has been controlled.

Blog posted by Steven Mintz, aka Ethics Sage, on July 14, 2012

GlaxoSmithKline Fraud Leads to Settlement of Whistle-blower Lawsuits

Health Care Fraud a Growing Problem

On July 2, 2012, a federal judge approved an agreement by British drugmaker GlaxoSmithKline to pay $3 billion for criminal and civil violations involving 10 drugs, the largest health care fraud settlement in U.S. history. GlaxoSmithKline pleaded guilty to promoting the popular antidepressants Paxil and Wellbutrin for unapproved uses.

Prior to the Glaxo settlement, the record-setting case involved Pfizer Inc., the world’s biggest drugmaker. It paid the government $2.3 billion in 2009 in criminal and civil fines for improperly marketing 13 different drugs, including erectile-dysfunction drug Viagra and cholesterol fighter Lipitor, the top-selling drug in the world for years. Pfizer was accused of encouraging doctors to prescribe its drugs with free golf, massages and junkets to posh resorts.

In May 2012, Abbott Laboratories settled for $1.6 billion over its marketing of the antipsychotic drug Depakote. And an agreement with Johnson & Johnson on June 11, 2012, the company agreed to pay up to $2.2 billion, including a criminal penalty portion of as much as $600 million, to settle U.S. investigations and lawsuits into abusive marketing practices involving the antipsychotic Risperdal and other prescription drugs.

Government officials said in the original complaint against Glaxo that the company promoted Paxil as safe for children and adolescents, even though the U.S. Food and Drug Administration (FDA) hadn’t approved it for those patients and the company’s clinical trials raised concerns about an increased suicide risk.

Prosecutors had charged that the drugmaker promoted Wellbutrin for unapproved uses that included treating attention deficit disorder, bipolar disorder, obesity, sexual dysfunction and anxiety when it wasn’t shown to be safe and effective for those uses.

The company also admitted that it failed to report to the government some safety problems with Avandia. In 2010, the diabetes drug was restricted in the U.S. and banned in Europe after it was found to sharply increase the risks of heart attacks and congestive heart failure.

I have previously blogged about the GlaxoSmithKline case in the context of a whistleblower lawsuit brought against the company. In October 2010 it was reported that Cheryl Eckard, a quality-assurance manager at Glaxo who had blown the whistle on the safety of products made in its Puerto Rico plant, had been fired as a result of what the company called a “redundancy” related to the merger of Glaxo Wellcome and SmithKline Beecham a couple of years before. Of course, the suspicion was that Eckard was fired because she refused to go along in a cover-up of the quality assurance and compliance problems at the plant.

Eckard filed a federal lawsuit against Glaxo under the U.S. False Claims Act. The law prohibits people or businesses from defrauding the government, and provides incentives for people who suspect wrongdoing to come forward. Lawsuits are typically filed confidentially and the Justice Department determines whether the case has enough merit for it to take over. If the Justice Department is successful in recovering money – usually through a settlement – the whistleblower is generally entitled to receive from 15% to 25% of the award. Cheryl Eckard won $96 million as part of an initial $750 million penalty against Glaxo.

Last week it was announced that the company had settled lawsuits from claims made by four employees of GlaxoSmithKline, including a former senior marketing development manager for the company and a regional vice president, who tipped off the government about a range of improper practices from the late 1990s to the mid-2000s.

Prosecutors said the company had tried to win over doctors by paying for trips to Jamaica and Bermuda, as well as spa treatments and hunting excursions. In the case of Paxil, prosecutors claim GlaxoSmithKline employed several tactics aimed at promoting the use of the drug in children, including helping to publish a medical journal article that misreported data from a clinical trial.

A warning was later added to the drug that Paxil, like other antidepressants, might increase the risk of suicidal thoughts in teenagers. Prosecutors said the company had marketed Wellbutrin for conditions like weight loss and sexual dysfunction when it was approved only to treat major depressive disorder.

They said that in the case of Avandia, whose use was severely restricted in 2010 after it was linked to heart risks, the company had failed to report data from studies detailing the safety risks to the FDA.

The Glaxo settlement is the latest in a string of settlements related to pharmaceutical companies that put profits ahead of patients. In recent years, the government has cracked down on drugmakers’ aggressive tactics, which include marketing medicines for unapproved uses. While doctors are allowed to prescribe medicines for any use, drugmakers cannot promote them in any way not approved by the FDA.

The actions against pharmaceutical companies raise serious questions about the safety of medicines that are increasingly marketed to, and taken by, children and adolescents. It is a problem that should not be tolerated and threatens the health of young people in the US.

I have to wonder about the business ethics at companies like GlaxoSmithKline. I went online to look at its code of conduct. Here it is:

 

GSK Code of Conduct   �    GSK Staff must always  act with integrity  and honesty  and must protect  the Company’s public  image  and  reputation   in  relationships   with  customers,   competitors,   suppliers, business partners and staff. �    GSK Staff must promptly raise any concerns about possible unethical or illegal conduct. GSK will investigate  all genuine concerns and take appropriate  action, while maintaining confidentiality and protecting reporting individuals from retaliation. �  GSK Staff are expected to be free from actual or potential conflicts of interest that might influence, or appear to influence their judgment or actions when performing their corporate duties on behalf of GSK. The employment of a close relative within a reporting line or the existence of a personal relationship within a reporting line is a conflict of interest.

�    GSK’s reputation and the respect of those who deal with GSK must not be put at risk by Staff acceptance of any entertainment, gifts or favors intended or perceived by others to influence their business judgment.

�    Communications with external audiences, i.e., Investors and the Media, should be managed through appointed company spokespersons to minimize risk to GSK’s reputation.

Why do we have this policy? GSK is committed to the highest standards of conduct in all aspects of its business.

 

The actions of Glaxo violate just about every provision of its code. Unfortunately, all too many companies look at their code as a piece of paper that serves as a PR document and then it is filed away never to be seen again.  A code of conduct should be a living document that guides the actions of company employees and top management. Ethics training is essential to inform employees of the importance of the code and the ethical expectations in the workplace.  An effective code requires oversight including management involvement, a hot line and whistle-blowing procedures. Most important is for top management to set the proper ethical tone by their actions and to “walk the talk” of ethics.

Blog posted by Steven Mintz, aka Ethics Sage, on July 10, 2012

 

What to do if you are a Victim of Financial Elder Abuse

Elder Fraud a Growing Problem

In Tuesday’s blog I talked about elder fraud and recounted the fraud perpetrated against Jim and Miriam Parker who lost nearly $200,000 of their retirement savings to a fraud scheme. In this blog I look at the techniques used against seniors and what can be done to prevent and report elder fraud.

Financial fraud is the fastest growing form of elder abuse. Broadly defined, financial elder abuse is when someone illegally or improperly uses a vulnerable senior's money or other property. Most states now have laws that make elder financial abuse a crime and provide ways to help the senior and punish the scammer.

Elder financial abuse is tough to combat, in part because it often goes unreported. Many elderly victims are often too confused, fearful, or embarrassed by the crime to report it. One recent study reported by Consumers Digest estimated that there are at least 5 million cases of this financial abuse in the United States each year, but law enforcement or government officials learn about only 1 in 25 cases.

Frauds and thefts against the elderly by people they know and trust are surprisingly common. Examples cited by the Justice Department and other sources include stealing money; cashing checks without permission; transferring the ownership of property; committing identity theft; "borrowing" funds without intending to repay; and denying services to the elderly person – even medical care – to pocket the money.

Friends and relatives also have convinced senior citizens to add their name onto bank accounts, living trusts or wills (perhaps as the sole beneficiary) or grant a power of attorney (giving total control over the person's financial affairs).

Signs of Financial Fraud against Elders

Seniors and their loved ones should be very suspicious if they notice any of the following:

• A relative or caregiver becomes extremely interested in the elderly person's financial affairs.
• A caregiver is reluctant to spend money on necessary medical treatment.
• Someone prevents the elderly person from talking on the phone or doesn't pass along phone messages.
• There are unauthorized withdrawals from checking or savings accounts.
• The caregiver claims that some money is "missing." Or, there are new or recently changed legal documents, such as wills or "powers of attorney" that give this other person rights to conduct transactions.

A recent study by the American Association of Retired Persons (AARP) highlighted characteristics of people older than 50 that make them easy targets for financial abuse. In general, they: expect honesty in the marketplace, are less likely to take action when defrauded, and are less knowledgeable about their rights in an increasingly complex marketplace. And as people over 50 are more likely to be home than their younger neighbors, they are often within easy reach of devious telemarketers and home solicitors.

Scammers target elders that they perceive to be vulnerable -- those that are isolated, lonely, physically or mentally disabled, unfamiliar with handling their own finances, or have recently lost a spouse.

The scam artists often pose as trustworthy helpers. They can be strangers, such as telemarketers and tradespeople, or have a relationship with the targeted victim, such as friends, family members, doctors, lawyers, accountants, and paid or volunteer caregivers. Abusers who are family members often have money troubles that may be made worse by unemployment, gambling, or substance abuse problems.

Common Financial Schemes

Financial scams perpetrated against older people include a broad range of conduct. Here are some common examples.

Telemarketing or mail fraud. The U.S. Department of Justice estimates that dishonest telemarketers take in an estimated $40 billion each year, bilking one in six American consumers -- and the AARP claims that about 80% of them are 50 or older. Scammers use the phone to conduct investment and credit card fraud, lottery scams, and identity theft. Scammers also use the phone to sell seniors goods that either never arrive or are worthless junk.

Getting unauthorized access to funds. In "Sweetheart Scams," alleged suitors woo older people, convincing them that love and care are their motivations for being included on bank accounts or property deeds; the suitors usually disappear along with the property.

Charging excessive amounts of money. Smooth-talking scammers first convince seniors that they need some goods or services and then overcharge them -- often hiding the high cost in extravagant schemes involving interest and installment payments. This tactic is often used for products that many older people might find essential to their quality of life, such as hearing aids and safety alert devices.

Selling bogus items. In the "Rock in a Box" scam a senior is sweet-talked into buying an item, such as a new color television, at a bargain price, that comes in a box that's suspiciously sealed. What the box actually contains is a well-padded rock.

Getting money or property through undue influence or fraud. Many seniors have been duped into parting with their homes or other property because a scammer convinces them it is for their own good. In one infamous case, three officials from the Detroit-based Guardian Inc. were found guilty of embezzlement and fraud after selling a client's house for $500 -- to the mother of a company officer. The company also collected excessive fees from its wards, sometimes as high as 70 percent of their Social Security checks.

Using fraudulent legal documents. Many scammers cloak their actions in legal authority, procuring a power of attorney or will or other legal document giving them access to a senior's property. They get seniors to sign these documents by lying to, intimidating, or threatening the seniors.

Faking an injury scenario. In this situation, a scammer claims to have a connection to law enforcement and tells an elder that a child or other close family member has been seriously injured or is in jail. The scammer then convinces the senior to give him or her money for medical treatment or bail.

Offering false prizes. A good example of this is the "You have won the lottery" scam operating out of Canada. In this scam, thousands of older people were bilked into believing they became wealthy overnight, but had to wire money in "fees and taxes" before they could collect the grand prize. In another version of this scam, con artists tell an elder that he or she has just won a huge cash prize, but needs to send in some money -- usually in money orders -- to free it up from customs officials. This is what happened to the Parkers.

What to do to protect yourself and Loved Ones

The National Fraud Information Center (NCL) provides tips about how to identify common scams and avoid telemarketing fraud. In addition, NCL has information about identity theft, how to get off marketing lists by signing up for the national “do not call” registry at 888-382-1222, and how to protect your personal privacy.

To better understand legal rights for seniors, the National Center on Elder Abuse (NCEA), has prepared a report which focuses on four components of the legal system: the state and criminal justice system, federal investigative and regulatory agencies, the civil legal system, and the victim witness assistance network. Professionals from each system describe challenges they face in handling financial abuse cases and made recommendations for improving each system's response. To view, click here to download it from the NCEA web site.

Other resources include AARP’s website, the Journal of Elder Abuse & Neglect which has one issue is solely devoted to elder financial abuse [(Volume 12 Number 2 (2000)], and. A/PACT: Aging Parents and Children Together. This video is produced by AARP and the Federal Trade Commission and focuses on consumer fraud, daily money management, alternatives to guardianship, and so on.

Fraud against the elderly is a cowardly and despicable act that takes advantage of a vulnerable group of people, and it is one that violates every ethical standard imaginable. Unfortunately, it is likely to continue and grow over time because of our aging population. The fact that we have lost our moral compass as a society feeds into the fraud.

Blog posted by Steven Mintz, aka Ethics Sage, on July 7, 2012

Elder Fraud

Fraud Schemes Bilk Elderly out of Savings

This is the first of a two-part blog on elder fraud. Part two will be posted on Saturday.

CNN Money reported the results of a study last week that senior citizens have been getting swindled out of billions of dollars a year, and the trend is only getting worse.

The majority, or 84%, of experts who deal with financial fraud of elders -- including financial planners, medical professionals and social workers -- have noticed an increase in financial abuses this year, according to a survey released by nonprofit organization Investor Protection Trust.

About 58% of the 762 respondents reported that they encountered investment fraud or financial exploitation of seniors "quite often" or "somewhat often." And 96% of experts said elderly fraud is a serious problem.

Meanwhile, research from insurance provider MetLife has found that Americans over the age of 60 lost about $2.9 billion to financial abuse in 2010 -- up 12% from the $2.6 billion lost in 2008.

About half of that fraud was perpetrated by complete strangers, while family, friends and neighbors accounted for about 34% of financial abuse, according to the report. In many cases, fraudsters stole seniors' Medicare or Medicaid benefits -- resulting in losses of $38 million in 2010.

Childhood actor, Actor Mickey Rooney, now in his 90s, elevated the profile of the problem earlier this year when he won a restraining order against his stepchildren. He claimed they used intimidation to get access to his money and later told Congress how that can happen to a vulnerable senior.

According to the Richard Cordray, director of the Consumer Financial Protection Bureau, "Many seniors have routines, and their predictable patterns make them easier targets for predators. They can be lonely or overly trusting, and we now have many methods by which perfect strangers can communicate with them, often anonymously or posing as someone they are not."

A MetLife Mature Market Institute study also found that elderly women are nearly twice as likely to be victims as men. The majority are between 80 and 89 years old, lived alone and were dependent on some sort of help around the home or with their health care. Caregivers are often in a position where they can easily take advantage of seniors, especially if they have access to their finances, said Cordray.

Most elderly victims of financial abuse don't report fraud because they are either too ashamed, don't realize they are being duped until it's too late to get their money back, or their adult children fail to recognize the problem in time to intervene.

The case of Donna and Jim Parker illustrates how easy it is to scam seniors. The couple ended up on what people in the industry call the "sucker list" perhaps because of donations to some group. Then the scammers proceeded to "reload" them. You've won this multimillion-dollar lottery, they'd say. All you need to do is send us money to cover taxes, and we'll send you your prize.

So on Dec. 8, 2004, Miriam Parker – then 80 – drove herself to the Wal-Mart down the road to send a MoneyGram to Montreal, Quebec.

And so, over a series of calls, Howard Clark – a man with a warm voice who called her "dear" and "sweetheart" – had learned enough personal information about Miriam to convince her that he was the family's ticket to riches.

Other MoneyGrams followed. Then, on Jan. 12, 2005, Miriam sent a Federal Express package to a "Mr. Stewart" on Papineau Street in Montreal. Inside, as instructed, was a magazine with $12,550 in cash sandwiched between its pages.

By May 2005, the Parkers had blown through their savings. They had tapped into their home equity line and had maxed out several credit cards. They were running out of things to give.

Unwittingly, their children had contributed to the problem. When Miriam asked Donna for a $7,000 loan, the daughter thought little of it.

Through most of their marriage, Charles Parker had taken care of the couple's finances. But in 1989, shortly after his retirement, he suffered a heart attack. That was followed by colon cancer. As her husband's health declined, Miriam stepped to the fore.

Faced with mounting debt – and clinging to assurances that a big payday was coming – she was determined to right their financial ship. That's when she became a "money mule." Clark told Miriam that she'd been "hired" by the Canadian sweepstakes company.

On May 5, 2005, a package from Bloomingdale, N.J., containing $8,275 in cash arrived at the Parkers' home. Others followed and in about a week, Miriam Parker would receive and repackage $60,000 in cash for delivery to Mr. Stewart.

Sometimes, there would be two stacks of bills tucked into magazines. The smaller pile was Miriam Parker's "commission."

Howard said she wasn't to tell her children about their dealings. But the kids had already become alarmed by changes in their mother's behavior.

During visits, her son, Jim, noticed that Miriam would race him to the phone, then prevent him from listening to the conversations.

And then there was the need for loans. When Donna asked what for, her parents were evasive.

When the children finally persuaded their mother to get a credit report, the news was jaw-dropping. Their thrifty parents were nearly $200,000 in debt.

The daughter went to the state Attorney General's Elder Fraud Unit. In April 2006, sitting around the family table, the door-bell rang. A FedEx driver handed Jim a crinkly envelope. He knew without opening it what was inside and turned it over to Kirkman, manager of the Elder Fraud Unit in the Attorney General’s office.

When authorities opened the envelope, they found an old issue of Martha Stewart Living magazine. It contained $5,725 in cash from a Visalia, Calif., widow.

Kirkman called a contact at Federal Express, who ordered a stop on deliveries and pickups at the Parker home. But the crooks just switched to United Parcel Service.

And now, in addition to money, they were delivering and picking up car tires and custom rims, and laptop computers worth thousands of dollars — all purchased by other elderly victims.

Ultimately, with the help of the Royal Canadian Mounted Police, a visit was paid to Dave Stewart. The Jamaican native acknowledged accepting numerous packages from the American lady on behalf of a man whom he knew as "Roger." Stewart said he was paid $100 per package. Professing ignorance of any illegal activity, Stewart agreed to cooperate.

Howard, meanwhile, gave Miriam a new address to which she should forward items. On Aug. 17, 2006, laptops valued at more than $7,200 arrived from Hayward, Calif. She sent them to a "Joseph Reid" in Montreal. Parcels kept coming.

In December 2006, the Parker kids persuaded their parents to grant Donna a limited power of attorney. A month later, she accompanied them to the credit union, where they took out a 30-year, $179,000 mortgage on their home.

The scam unraveled when the FBI ran a sting operation on Howard.

In Raleigh, North Carolina, a federal grand jury handed up a 35-count indictment against Clar, whose real name was Clayton Atkinson, and two co-defendants – Dave Stewart and Jamaal McKenzie, aka "Joseph Reid." The three were charged with one count each of conspiracy and interstate transportation of stolen property, seven counts of wire fraud and 26 counts of mail fraud.

In my next blog I will address the issue of what seniors can do if they feel targeted by elder fraud.

Blog posted by Steven Mintz, aka Ethics Sage, on July 3, 2012

 

Are we raising a Generation of Educational Dummies?

A Culture of Incompetence

You’ve heard it before. The test scores and skill level of U.S. students today is abysmal. Results of a global education survey in December 2010 show U.S. high school students come in 26th out of 65 places worldwide in combined scores for math, science and reading tests. The Organization for Economic Co-operation and development (OECD) Program for International Assessment (PISA) suggests that while America lags, Asia soars: Out of the top 10, eight are in the Asia-Pacific region -- led by Shanghai and Hong Kong in China, Singapore, South Korea and Japan. The rise of education in Asia is no accident. It reflects deliberate policies and long-term investments that recognize the centrality of quality education to a nation's economic growth.

Does that mean if we throw more money at the problem the scores of U.S. students will rise? No. It goes a lot deeper than to say teachers are underpaid; classrooms are too full; funding is lagging. There is no question that recent cuts in education budgets in many states have led to a declining education experience. But the problem goes much deeper. It goes to the core of the value-system that now exists in the U.S. that has infected our school children. We have a value system that rewards outrageous behavior by focusing media attention (social/news) on it and knowingly or unknowingly encouraging young people to act out in the same way.

How else can we explain the attention paid to the likes of Charlie Sheen? Have you seen his new commercials about being under house arrest? What about You Tube videos that glamorize stupidity by giving those who post on it their 15 minutes of fame? Then there is reality TV that depicts incivility and we see it in politics all the time such as when a reporter interrupts the President before he can finish a statement.

Today’s high school kids would rather text and surf the Internet for entertainment than buckle down, study the books, and advance their intellect. The hard sciences and math are not valued for the discipline they teach as was the case years ago. Where will we get the leaders in these fields for the future growth and development of our country and will we ever be able to catch up with the Chinese? I don’t think so because the problem goes much deeper.

On June 20, 2012, a Gallup poll was released that shows confidence in America’s public schools has hit a record low, with only 29 percent of respondents expressing “a great deal” or “quite a lot” of confidence in them. The number is down 5 percentage points from last year, and represents a 4 percent decrease from the previous low of 33 percent in 2007 and 2008.

It’s true that the declining confidence in America’s public school system follows a year of budget cuts across the country that have forced the elimination of jobs in the education sector, student transportation and after-school programs. Parents nationwide have also been vocal in expressing their frustration with excessive standardized testing and “teaching to the test.” Some place the blame on President George W. Bush’s “No Child Left Behind Program” for teaching to the test rather than developing the skills needed for success in the 21^st century. But the problem goes much deeper.

A survey of business executives released on February 13, 2012 from medium and large companies across the country shows they believe a growing skills gap combined with drastic increase in college tuition and fees could have negative effects on the American economy. The survey Hiring and Higher Education was conducted by Public Agenda, a research organization focused on public engagement and national problem-solving, and the Committee for Economic Development, an organization of business leaders and university presidents, which focuses on addressing economic and social issues. The executives said education and the workforce is often the first response they give when asked about keeping the U.S. competitive and innovative, and they don’t feel comfortable with the state of either.

What it boils down to is the “mismatch” between what the system is producing and what the economy needs. While other countries produce more science, technology, engineering, and math graduates, the U.S. might be producing “too many liberal arts graduates.” All types of graduates in general lack the skills employers seek: character, interpersonal skills, motivation, and work ethic, and many come with a very undesirable quality: entitlement. Many are incapable of writing a coherent memo, of having a professional conversation, and of dressing appropriately for the workplace.

So, there we have it. Today’s youth do not want to put in the time and effort with their studies to develop the globally-competitive-skills needed to keep America the leader in innovation and advancement in technology and the sciences. The work ethic that made this country great for about 250 years no longer exists. The problem is one of character and immaturity fueled by social media, television, and the movies.

Can we turn things around before it is too late and we find ourselves lagging not only Asian economies but emerging ones such as in the former Soviet Union? I think that train has left the station. Our politicians seem to have no clue and continue to debate old solutions to continuing problems with our education system. The first step in recovery is to admit you have a problem and that hasn’t happened as yet. The discussion is at the margins and not with the core problem of the lack of a work ethic.

Blog posted by Steven Mintz, aka Ethics Sage, on June 25, 2012

Creepy Facial Recognition App Raises Privacy Concerns

SceneTap Scans Patrons and Transmits Age and Gender Information in Real-Time

You’re single and looking for someone to meet so you go to one of the bars in your home town. You decide to use a new app to scan the faces of patrons in the bars in the downtown area to determine the ages and genders of customers in the bars. You then check your smartphone for real-time updates on the crowd size, average age and male-to-female mix to decide whether the scene is to your liking. Then, you pick out the bar that best suits your needs and off you go to mingle with the crowd. Is it fact or fiction?

It is happening right now. On May 17, the Austin, Texas-based makers of SceneTap launched an app that can do just that. The app doesn't identify specific individuals or save personal information. SceneTap's ability to guess how old people are and whether they're men or women relies on advances in a field known as biometrics. A camera at the door snaps your picture, and software maps your features to a grid. By measuring distances such as the length between the nose and the eyes and the eyes and the ears, an algorithm matches your dimensions to a database of averages for age and gender.

SceneTap’s CEO Cole Harper claims that the app doesn't invade patrons' privacy because the only data it stores is their estimated ages and genders and the time they arrived - not their images or measurements. My question is how long will it be until the information does become personalized, available to the highest-bidder, and yet another area of our privacy invaded?

Whether the company's promises are true or not, it opens the door to a situation where when any camera-equipped smartphone will have the ability to recognize faces with a click of the virtual shutter. The threat to privacy from an app like SceneTap depends not just on what's being stored but how easily the system could be manipulated to invade our privacy, whether by a hacker or under a court order.

I have asked myself the question: Why is SceneTap doing it? I guess the company hopes advertisers will pay to gain access to the data and then use it to promote their own products to a target audience. The problem is customers become part of a user base and are not customers anymore.

SceneTap is already in use in six other cities across the U.S., including Chicago and several college towns. It became part of the California bar scene in San Francisco ostensibly to give potential customers another way to interact with the business. The launch was met with severe criticism by the local media, somewhat unexpected in a city that has a reputation for anything goes. Some bars refused to use the system even though they had agreed to do so. They feared the backlash from customers who rightly felt their privacy would be invaded and they had no chance to “opt-out” as is done by many other social media personal data-gathering websites.

I wonder where all of this will lead. In April, Facebook started using facial recognition to suggest the names of friends who appeared in newly uploaded photos. You can opt out of tagging, and only friends would be able to tag each other in albums. Facebook has a history of acting first and then asking for permission later. Its new face-recognition feature seems harmless on the surface but could morph into a serious threat to the privacy of our (visual) data. And, as usual, some Facebook users will like the convenience of the new features so much that they will forget the privacy trade-off altogether, or just choose not to worry about it.

The SceneTap app and Facebook facial recognition are unethical practices because there is no provision for informed consent in advance prior to using the features. How would you like it if the Department of Motor Vehicles sent information about the car you drive – make, model and year – to all major car manufacturers? Just imagine what might happen.

And now Google just revealed plans to link user data across its email, video, social-networking and other services. The changes will piece together information from Gmail to YouTube to the Google Plus social network. Imagine if you spend an hour signed in to a Google account searching the Web for downhill skiing equipment, the next time you log into YouTube, you might get recommendations for videos featuring Bode Miller, along with ads for his merchandise and the nearest place to buy them.

However, this could also apply to searches relating to sensitive topics such as – well, the bar scenes you frequent in your home town.

Blog posted by Steven Mintz, aka Ethics Sage, on May 23, 2012

Social Responsibilities of a U.S. Company Doing Business Abroad

Ethics and Social Responsibility go Hand in Hand

Should use companies adhere to U.S. standards of health and safety in the workplace of a foreign supplier? Or, is the old adage true: "When in Rome, do as the Romans do."

Corporate social responsibilities come from ethical obligations including acting responsibly and being accountable to the stakeholders of an organization, including employees, and practicing full disclosure. Transparency is important as is adhering to relevant laws and regulations. A code of ethics provides support for these ethical obligations.

It is in this light that I was intrigued to learn that a major Apple Inc. supplier agreed to change its labor practices following an outside audit of its Chinese factories by the global nonprofit organization -- the Fair Labor Association. It found widespread breaches of work rules including 60-hour work weeks in violation of the FLA code and Apple’s own standard, and other health and safety violations. The investigation of manufacturer Hon Hai Precision Industry Co., known as Foxconn, is the latest to document workers-rights violations in Apple's supply chain.

It is worth noting that the audit was at the request of Apple. However, Apple launched the initiative not out of a sense of social responsibility but in response to recent concerns over labor practices and reported abuses in the Chinese factories of its suppliers. In other words, Apple was not concerned about the disgraceful working conditions until it created negative publicity for the company.

Foxconn, with 1.2 million Chinese employees, is one of China’s largest employers and a major supplier of Apple. It assembles an estimated 40 percent of the smartphones, computers and other electronic gadgets sold around the world. Foxconn’s decisions set standards other manufacturers must compete with.

Evidence gathered from news reports and other sources indicates that 17 Foxconn workers have killed themselves. What had seemed to be a series of isolated incidents has become a worrisome trend. When one jumper left a note explaining that he committed suicide to provide for his family, the program of remuneration for the families of jumpers was canceled.

Reports from inside the factories warned of “sweatshop” conditions and allegations of forced overtime came to life. Foxconn and its partners—notably Apple—found themselves defending factory conditions while struggling to explain the deaths. Some saw the Foxconn suicides as a damning consequence of our global hunger for low-cost electronics.

In a plant in Wuhan, central China's Hubei province, up to 200 workers from the Microsoft Xbox production line of Foxconn, staged a strike. They were not demanding sleek new gadgets, but simply decent pay in return for making them. To drive their point home, they had threatened to kill themselves by jumping off a building.

The Foxconn suicides that started in 2010 are due to oppressive work conditions that include standing for eight hours or more without a break. One worker said that he constantly wanted to drop something on the floor so he could bend down to pick it up while working. Due to the long hours standing, if he had the chance to lie or squat down on the floor, it would be the most enjoyable moment during the work day so he could get the chance to rest.

Foxconn has been criticized for running "blood and sweat" plants in China. Plants depend on workers’ being at assembly lines six or seven days a week, often for as long as 14 hours a day. In one instance where Foxconn makes computer cases for Acer, a Taiwanese computer company, workers all had blisters and the skin on their hands was black. The factory was also really choked with dust and no one could bear it. Such facilities have made it possible for devices to be turned out almost as quickly as they are dreamed up.

In February, following a prolonged period of criticism about the working conditions, Foxconn raised wages for its Chinese workers by 16 to 25 percent according to a report by Taiwan's Central News Agency. In the Shenzhen plant, which has been the initial production location for Foxconn since 1988, the basic wage will be raised to no less than 2,200 Chinese Yuan (about $348) a month from 1,800 ($285) Chinese Yuan. Before the series of wage hikes, the basic salary in the Shenzhen complex stood at 900 ($138) Chinese Yuan three years ago.

By bowing to such demands, Foxconn has conceded that employees and consumers have gained a sway once possessed only by Chinese bureaucrats and executives at the global electronics firms that hire Foxconn to build their products. For the system to genuinely change, Foxconn, its competitors and their clients — which include Apple, Hewlett-Packard, Dell and the world’s other large electronics firms — must convince consumers in America and elsewhere that improving factories to benefit workers is worth the higher prices of goods.

This is the way capitalism is supposed to work. As nations develop, wages rise and life theoretically gets better for everyone. China has been slow to realize the changing landscape even though it is promoting a more western style of capitalism albeit state controlled. The question is whether the Chinese government and business leaders are ready for the change. My guess is if it occurs at all, it will happen grudgingly at best.

The question raised earlier was should U.S. companies like Apple apply the same standards of workplace health and safety as expected in the U.S., or do they rationalize a lower set of standards in the name of cultural differences? Some argue that Apple is providing a service by hiring many Chinese workers that might otherwise be unemployed and/or be forced to live the life of a peasant. After all, the Chinese worker is not used to more advance working conditions and the government is in no hurry to adopt them.

The bottom line is if China wants to move toward a western model of capitalism it should adopt western-style working conditions as the norm that protects worker rights and not react in a knee-jerk fashion only after well-publicized incidents of attempted suicide. With greater profits come greater social responsibilities to contribute to the betterment of society.

Blog posted by Steven Mintz, aka Ethics Sage, on May 17, 2012

Moral Blindness

Why Good People Sometimes Do Bad Things

The noted moral psychologist James Rest developed a Four-Component Model of Moral Development that identifies four essential characteristics of moral behavior. If we examine the model, we can see why good people sometimes do bad things. I'm talking about people who would otherwise act ethically but for pressures either self-imposed (i.e., desire to be a "team player" even though you are asked to do something you know is wrong) or imposed by an outsider (i.e., a superior who threatens your job if you don't go along with something you know is wrong).

In order to make an ethical decision and act ethically, the first step is to identify that an ethical issue exists for you, or what Rest called ethical sensitivity. This is not so easy since many people who want to do the right thing -- try to do the right thing -- do not realize they are involved in an ethical situation. I tell my students a good perspective is that you are faced with an ethical issue whenever your actions affect others. These are the stakeholders potentially affected by what you do or do not do. It is a matter of ethics how you treat them (remember "The Golden Rule"). If you treat others with respect, caring and empathy, fairness, and with honesty and trustworthiness, then you are sensitive to the ethical issues. Since Accounting is my field a good analogy is to recognize that the financial statements must be accurate and reliable to protect the position of shareholders and creditors.

Once the ethical issues have been identified, the next step is to apply moral judgment to reason out what is the most ethical action to take. We should consider how our actions affect others using ethical reasoning methods such as harms and benefits (Utilitarianism) and not violate the rights (Rights Theory) of others. It would be wrong for an accountant or auditor to go along with materially misleading financial statements because it violates the rights of shareholders and creditors to receive accurate and reliable financial information. These stakeholders make decisions based on the information so it must be in accordance with generally accepted accounting principles and be transparent.

It is not enough to have the skills to reason out what is the most ethical action. Rest points out that ethical intention must follow ethical reasoning to turn decisions into action. In other words, do you want to be an ethical person? Do you want to do the right thing? Let's be honest, not everyone is concerned about whether they make an ethical choice/decision. Some people don't care -- John Edwards is a good example. Others believe they won't get caught so they ignore ethics. I believe Tiger Woods works well here.  Also, you can pick any one of a number of corporate executives involved in financial fraud at Enron, WorldCom, and so on.

Even the desire to do the right thing and act ethically is not enough because of the pressures previously mentioned. Young people get caught up in giving in to peer pressure and they go along with something they know is wrong. In accounting, a supervisor (i.e., Chief Financial Officer) might pressure an accountant (i.e., Controller) to go along with materially misstated financial statements. The accountant knows his or her job may be on the line. An expected promotion may be withdrawn or a demotion forthcoming unless that person agrees to manipulate the statements or at least be silent about it.

So how can an otherwise ethical person combat these pressures and follow through with ethical judgment and action? The key is integrity. Integrity is an ethical value that summons up the courage to take an ethical action despite pressures to do otherwise. It means we have the courage to act in accordance with our principles which should be to:

Treat Others the Way We Want to Be Treated.

Respect the Rights of Others.

Never take an Action that Does More Harm than Good.

I could go on but you get the point. Ethics is not easy. Being committed to your values takes moral strength. The key is not to take the first step down the proverbial ethical slippery slope. Once we agree to be silent; to go along with wrongdoing; and go along to get along; then we have begun the slide and it becomes very difficult, should we gain a conscience, to turn around to reclaim the high road.

I leave you with something said by W. Clement Stone, a businessman, philanthropist, and self-help book author: "Have the courage to say no. Have the courage to face the truth. Do the right thing because it is right. These are the magic keys to living your life with integrity."

Blog posted by Steven Mintz, aka Ethics Sage, on May 3, 2012

Financial Reporting Practices of Chinese Companies Investigated by SEC

Can We Trust Financial Reports of Chinese Companies?

It's déjà vu all over again as the famous philosopher Yogi Berra once said. The Securities and Exchange Commission in the U.S. has sued yet another China-based company and two of its executives, charging them with lying to investors about the value of the company's assets and how it used $120 million in proceeds from its initial public offering on the Nasdaq. In a complaint filed on April 23, the S.E.C. also charged that the chairman of the company, SinoTech Energy, secretly siphoned $40 million from the company's account at the Agricultural Bank of China last summer.

I have previously blogged about accounting and ethics problems at Chinese companies such as Longtop Financial. The legal action against SinoTech, an oil field services company de-listed by the Nasdaq in January, is the latest example of a continuing crackdown on accounting fraud and other financial crimes at Chinese companies listed in the United States. The S.E.C. also charged 11 investors in AutoChina International, including a senior executive and director, with market manipulation. The Commission also secured a court order freezing the assets of six Chinese citizens and an offshore holding company after accusing them of insider trading in the shares of Zhongin Inc, a pork processor based in China.

In its complaint against SinoTech, the S.E.C. charges that the company “grossly overstated the value of its primary operating assets,” including hydraulic drilling equipment. The company claimed in its listing document it would spend $120 million on such equipment, but the Commission found that it bought less equipment than it said it would, lied about the equipment it did buy and overstated the value of its purchases by nearly fivefold in its financial statements.

The S.E.C. alleged that the chief executive, Guoqiang Xin, 47, and the former chief financial officer, Boxun Zhang, 35, were behind the equipment purchasing fraud. In addition, the Commission accused the company’s chairman and controlling shareholder, Qingzeng Liu, 50, of stealing $40 million from a company bank account and lying about it to investors.

SinoTech Energy raised $167.8 million in an initial offering on the Nasdaq in November 2010. The company caught the attention of regulators after it was criticized last August in a negative report. The company’s auditor, Ernst & Young Hua Ming, resigned in September.

Many questions exist about Chinese accounting principles and the reliability of the financial statements produced by state-owned and private enterprises.  Questions continue to be raised about the value of those statements to investors looking to obtain a piece of the growing Chinese economic pie. For the most part, accounting rules are ignored; financial disclosures lacking; and transparency seems to be a word not in the disctionary of Chinese companies.

An important point is that China must play by SEC rules if it is to audit affiliates of US companies that are subject to inspection by the Public Company Accounting Oversight Board and if Chinese companies are to list their stock on U.S. exchanges. All foreign c companies that list stock in the US are subject to such inspections. China should not be treated any differently. If China wants to be a key player and become a force in the international financial markets, then it must learn to play by the rules of regulators outside their own country even if it seems to run counter to cultural norms whereby such regulations and inspections might be interpreted as demonstrating a lack of trust in Chinese management.

Blog posted by Steven Mintz, aka Ethics Sage, on April 27, 2012

 

Good Leaders Model Underlying Core Ethical Values in Decision Making

What Does it Take to be a Good Leader?

I recently read a book From Values to Action: The Four Principles of Values-Based Leadership by a professor at Northwestern University’s Kellogg School of Management. He believes leadership must be rooted in who you are and what matters most to you. When you truly know yourself and what you stand for, it is much easier to know what to do in any situation. It always comes down to doing the right thing and doing the best you can.

Mary Gentile who advocates for a values-based approach to leadership asks: How to you know your inner self and what drives you to make decisions? How do you know your decisions are the right ones to make? She believes values-based leadership starts with identifying the values that drive you to do what you do. Values and ethics overlap in the sense that values are underlying core beliefs that influence the decisions we make. The difference is the term ethics generally refers to a code of conduct that establishes rules for acceptable behavior. However, values are only ethical values when they deal with right and wrong behavior.

I may value having power, fame, and wealth but that doesn’t mean these are ethical values. They are underlying beliefs that drive me to succeed, perhaps at all costs, and achieve my goals. Now, if I act honestly, with integrity and trust, fair-mindedness, responsibility and accountability, then I can say that ethical values drive my actions. The goal of leadership in an organization is to get employees to buy into the values that are set by top management. Most important, good leaders must model values-based decision-making to enforce their importance to the organization.

Gentile’s approach known as Giving Voice to Values is a new way of thinking about and teaching business ethics that focuses on pre-scripting and rehearsal for action that addresses issues such as: “How to speak up when you know something needs to be addressed perhaps because some issue contradicts ethical values such as honesty, respect, responsibility, fairness and compassion. Gentile’s approach takes as a given that the person at the center of a decision already has already decided what is the ethical choice. What that person needs to do next is “give voice to her values” and follow-up ethical choices with ethical action.

Core values don’t change like the wind blowing from east to west; north to south. Values are part of underlying ethical principles such as: (1) Treat employees, suppliers and customers with respect; (2) Be candid in all your dealings with stakeholders;  (3) Accept responsibility for your actions; (4) Be accountable for your decisions; and (5) Maintain your integrity in the face of countervailing forces. The values-based approach of Gentile helps in this regard. Creating an ethical corporate culture is the key to enabling those values, as I have blogged about before.

Core values provide the underlying foundation for values-based leadership in an organization. I believe a good leader identifies and clarifies the values of the organization; explains how they should impact decision-making; holds employees to these values in carrying out their responsibilities; and rewards values-based decision-making. Why not include it in the performance evaluation system? It may take more time and effort than to simply say a manager receives a bonus based on divisional sales or profitability. But, isn’t it more important how those goals were achieved rather than that they were achieved?

A basic ethical tenet is that “the ends do not justify the means.” How we get to our goal is just as important as the goal itself. If we use and misuse people; if we treat them unfairly; if we pressure them into taking actions that are motivated by greed and not in the best interests of the stakeholders of the organization (i.e. investors, creditors, employees, suppliers and customers), then we are following values driven by the pursuit of self-interest, a form of decision-making known as egoism, and not one that respects the rights of others.

Value based leadership is as much a management philosophy as it is an execution practice. As leaders, you want to encourage employees to buy into the underlying core values of your organization. The journey begins by identifying, explaining, and providing examples of values-based leadership.

Warren Bennis, who is widely regarded as a pioneer of the contemporary field of Leadership Studies, once said: “The most dangerous leadership myth is that leaders are born -- that there is a genetic factor to leadership. This myth asserts that people simply either have certain charismatic qualities or not. That's nonsense; in fact, the opposite is true. Leaders are made rather than born.”

Gentile believes the all-important question for ethical leaders is how we voice our values—skillfully, tactically, persuasively, thoughtfully.

“The emotional proclamation, spoken in anger or frustration, is often accusatory, ill timed, and uncomfortable for the audience. But in my conversations with individuals who have found ways to express their values effectively in the workplace, they tend to do their homework; to provide face-saving outs for the listeners; to raise issues early and often; to gather allies; to research both good and bad exemplars and to generate alternatives. In other words, they approach a question of ethics the same way they approach making the case for any other business decision.”

I couldn’t agree more. The problem comes when the organization’s values do not coincide with those of the decision-maker. In that case we must learn to stand up for our values (“give voice) because if we don’t then actions may be taken that are harmful to others; inconsistent with our core beliefs; violate the rights of others; and/or just plain unethical. Once we start down the road of compromising our values rather then giving voice to them, it’s just a short trip down the proverbial “ethical slippery slope” and it becomes very difficult to reverse course and head for the high ground because your employer can then play the “gotcha” game with you.

Blog posted by Steven Mintz, aka Ethics Sage, on April 25, 2012

Skilling’s “Honest Services” Argument Fails in the US Supreme Court

Enron Redux

You remember the Enron failure. It ushered in a sustained period of financial statement fraud where earnings restatements totaled in the billions. It has been estimated that financial statement fraud caused a decrease in market value of stock of approximately 500 to 1,000 times the amount of the fraud so that, for example, a $10 million fraud might cause a $5 billion loss in market value.

The perpetrator of the Enron fraud was Jeff Skilling, the former CEO of Enron. Skilling blessed the off-balance sheet, special-purpose entities (SPEs) set up by its financial wizard, Andy Fastow. This maneuver enabled Enron to keep billions of debt off its Balance Sheet and shift it to the entity. Many of these entities were shells set up to hide debt. In return for cash received by Enron from bank loans made to the SPEs, these entities agreed to accept unwanted assets on Enron’s books.  In some cases Enron even recorded a gain on the exchange thereby boosting income because the cash received from the SPE was greater than the book value of Enron’s asset transferred to it.

On October 23, 2006, Skilling was sentenced to 24 years and 4 months in prison and fined $45 million. That means he wouldn’t get out until 2030. By then he’d be 74 years old.

Skilling has filed a serious of appeals of his sentence. On April 3, 2008, Skilling’s defense attorney argued with government prosecutors that Skilling’s trial and the conviction itself was based on “honest services fraud” that he said did not apply to Skilling.

Honest services fraud refers to a 28-word sentence of 18 U.S.C. Section 1346 (the federal mail and wire fraud statute), added by the US Congress in 1988, which states: "For the purposes of this chapter, the term, scheme or artifice to defraud includes a scheme or artifice to deprive another of the intangible right of honest services."

The statute has been applied by federal prosecutors in cases of public corruption as well as in cases in which private individuals breached a fiduciary duty to another. In the former, the courts notably have been divided on the question of whether a state law violation is necessary for honest services fraud to have occurred. In the latter, the courts notably have taken differing approaches to determining whether a private individual has committed honest services fraud – a test based on reasonably foreseeable economic harm and a test based on materiality.

The statute, which has been a target of criticism, was given a narrow construction in the case of Skilling v. United States. In order to avoid finding the statute to be unconstitutionally vague, the Court interpreted the statute to only cover "fraudulent schemes to deprive another of honest services through bribes or kickbacks supplied by a third party who ha[s] not been deceived."

Skilling’s basic argument was that even though he committed illegal financial maneuvers, he did so in order to save the company and did not profit from it. This sounds to me like a “delusional” defense approach.

On January 6, 2009, the US Court of Appeals for the Fifth Circuit affirmed Skilling’s conviction, but vacated the sentence and remanded for resentencing. I believe there were procedural errors in the original trial that led to the decision.

On October 13, 2009, the Supreme Court agreed to hear the appeal. A key question was whether the federal “honest service” fraud statute required the government to prove that Skilling’s conduct was intended to achieve “private gain” rather than to advance the interest of his employer, and, if not, is the statute unconstitutionally vague.

Let’s not forget our Enron history. On May 25, 2006, Skilling was found guilty of conspiracy, insider trading, making false statements to auditors, and securities fraud. It seems to me Skilling’s motivation for the fraud was both to advance the company’s interests and increase his own individual wealth. It’s a common theme that ran throughout the many frauds at the time including Enron, WorldCom, Tyco, and Global Crossing.

On April 16, 2012, the Supreme Court left intact Jeffrey Skilling’s conviction for leading the Enron Corp. accounting fraud, refusing to grant a second hearing to the imprisoned former chief executive officer. Let’s hope it stops right here and right now. Skilling should accept responsibility for his actions and not look for loopholes in the law to escape serving his sentence. He was a main contributor to the fall of the 7^th largest company in the US back in 2001.

A long time ago Sophocles, one of three ancient Greek writers of tragedy said: “It is a painful thing to look at your own trouble and know that you yourself and no one else has made it.”

Blog posted by Steven Mintz, aka Ethics Sage, on April 20, 2012

 

What is the Basis for Ethical Decision-making?

Ethical Standards, Values, and Moral Judgment the Keys to Ethical Behavior

Most people think they know what ethics is. However, from my experience that knowledge is limited to statements such: Knowing the difference between right and wrong. Ethics is much deeper because it is diffi­cult to judge what may be right or wrong in a particular situation without some frame of reference. 

The term ethics is derived from the Greek word ethikos which itself is derived from the Greek word ethos, meaning custom or character.   In philosophy, ethical behavior is that which is “good.”  The field of ethics or moral philosophy involves developing, defending, and recommending concepts of right and wrong behavior.  These concepts do not change as one’s desires and motivations change.  They are not relative to the situation.  They are immutable.

In a general sense, ethics (or moral philosophy) addresses fundamental questions such as: How should I live my life? That question leads to others such as: What sort of person should I strive to be? What values are important? What standards or principles should I live by?

Ethics must be based on accepted standards of behavior.  For exam­ple, in virtually all societies and cultures it is wrong to kill someone or steal property from someone else.  These standards have developed over time and come from a variety of sources including:

(A)       The influence of religious writing and interpretations.

(B)       The influence of philosophical thought.

(C)       The influence of community (societal) values.

Ethics deals with well-based standards of how people ought to act.  Ethics does not describe the way people do act.  It deals with the way people should act. Ethical people always strive to make the right decision in all circumstances.  They do not ration­alize their actions based on their own perceived self-interests.  Ethical decision-making entails following certain well established norms of behavior. The best way to understand ethics may be to differentiate it from other concepts.

Values are basic and fundamental beliefs that guide or motivate attitudes or actions. Values are concerned with how a person will behave in certain situations whereas ethics is concerned with how a moral person should behave.  A person who values prestige, power, and wealth is likely to act out of self-interest whereas a person who values honesty, integrity and trust will typically act in the best interests of others.  It does not follow that acting in the best interests of others precludes acting in one’s own self-interest.  Indeed, the Golden Rule prescribes that we should treat others the way we want to be treated. 

Being ethical is not the same as following the law.  While ethical people always try to be law-abiding, there may be instances where your sense of ethics tells you it is best not to follow the law.  These situations are rare and should be based on sound ethical reasons. Here’s one example:

Assume you are coming home from the store one day and see a fast moving fire approach your neighbor’s house. You notice that the neighbor’s car is in the garage. The garage door entrance to the house is locked as is the main entrance. You bang on the door and no one answers. You call the neighbor on your cell phone and no one answers. You don’t think there is enough time to call the fire department ten miles away before serious damage is done to the house. What would you do next and why? If you break into the house to save your neighbor, you have broken the law. However, you have acted out of concern for the safety of your neighbor in a life-threatening situation thereby acting ethically.

Benjamin Disraeli (1804-1881), the noted English novelist, debater, and former prime minister, said that, “When men are pure, laws are useless; when men are corrupt, laws are broken.” A person of good will honors and respects the rules and laws and is willing to go beyond them when circumstances warrant.  As indicated by the above quote, such people do not need rules and laws to guide their actions.  They always try to do the right thing. On the other hand, the existence of specific laws prohibiting certain behaviors will not stop a person who is unethical (e.g., does not care about others) from violating those laws. Just think about a “Ponzi” scheme such as the one I previously blogged about whereby Bernie Madoff duped others to invest with him promising huge returns that, unbeknownst to the investor, would come from additional investments of scammed investors and not true returns.

Ethical people often do less than is permitted by the law and more than is required.  A useful perspective is to ask:

        What does the law require of me?

        What do ethical standards of behavior demand of me?

        How should I act to conform to both?

An ethical society is one that values a commitment to do the right thing regardless of personal costs. It’s not an easy standard to live by but one worth pursuing.

Blog posted by Steven Mintz, aka Ethics Sage, on April 12, 2102

Groupon Restatement of Earnings a Cause for Concern

The Signs are there: Market Stability at Risk

You may have heard that Groupon restated its “earnings” to reflect a larger fourth-quarter loss after failing to set aside enough money to account for customer refunds. Groupon’s stock has been falling since it revealed last Friday that it was revising its first quarter earnings to reflect a larger than expected loss. With its past accounting problems, some of which I have previously blogged about, Groupon is now a prime target for shareholder lawyers who believe the company may be liable for the losses investors have suffered since Friday. The stock is currently down about 12% and falling.

Groupon’s restatement increased the company’s fourth-quarter losses from $42.7 million to $64.9 million, more than a 50% increase in the reported loss. Moreover, the company had $500 million revenue last year so the amount of restatement is significant, or material as accountants would say.

According to Groupon’s accountant, Ernst & Young, the accounting error came from a “material weakness in its internal controls”. This means other transactions may be at risk since poor controls in one area tend to cause problems elsewhere. More important, the internal control problems raise questions about the management of the company and its corporate governance.

The red flags have been waving even before the company went public last year. In preparing its IPO, the company used a financial metric it called “Adjusted Consolidated Segment Operating Income”. The problem was that figure excluded marketing costs, which make up the bulk of the company’s expenses. The net result was to make Groupon’s financial results appear better than they actually were. After the SEC raised questions about the metric — which The Wall Street Journal called “financial voodoo” — Groupon downplayed the formulation in its IPO documents.

Groupon’s latest restatement is partially a consequence of the “Groupon Promise” feature of its business model. The company pledges to refund deals if customers aren’t satisfied. Because it has been selling those deals at higher prices lately — which leads to a higher rate of returns — it needs to set aside larger amounts to account for refunds — something it hasn’t been doing. It’s another example of Groupon failing to accurately account for a part of its business that reduces its financial performance. That shouldn’t inspire investor confidence.

In an updated filing with the SEC, Groupon said it is working to “remediate the material weakness,” in its internal financial reporting controls, and will hire “additional finance personnel.” But it warned: “If our remedial measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results.”

In a statement, Groupon tried to put a positive spin on the whole matter. “We remain confident in the fundamentals of our business, as our performance continues to highlight the value that we provide to customers and merchants,” said Groupon Chief Financial Officer Jason Child.

This is right out of the Enron playbook when former CEO and chair of the board of directors, Ken Lay, stood in front of a meeting of employees, many of whom bought Enron stock for their 401-Ks, and touted the viability of the company’s unusual business model that had served Enron so well for so long albeit because of falsified financial statements.

Groupon's latest missteps, combined with its previous accounting issues, call into question whether the start-up was ready to be a public company that has to produce reliable financial reports, said Sandra Peters, head of financial reporting policy for the CFA Institute, which represents chartered financial analysts who work with individual investors.

"It really demonstrates, for an IPO, were they really ready to go?" she said. "Did they have the financial systems, did they have the processes and procedures in place?"

Similar concerns were echoed by people who track the company on Wall Street. "It's going to definitely unsettle a lot of investors," said Ken Sena, an analyst covering Groupon for Evercore Partners.

What is the lesson to be learned from Groupon’s experience? It is that we are vulnerable once again to a market meltdown because there are many companies like Groupon that want to cash in on Google’s phenomenal stock growth since its IPO. A better economic outlook and rising stock market are heating up the market just weeks before Facebook's highly anticipated IPO.

Congress, meanwhile, is lessening restrictions on IPOs in an attempt to make it easier for younger companies to raise money. Where have we heard this before? Was it when the Congress repealed the Glass-Steagall Act that had served the market so well by preventing commercial and investment banks from combining? Let’s not forget that the repeal in the law ushered in a period of over-selling in the market and, ultimately, the financial meltdown of 2008.

Let’s also not forget that famous line from Albert Einstein about insanity. Einstein defined insanity as “doing the same thing over and over again and expecting different results.”

Blog posted by Steven Mintz, aka Ethics Sage, on April 5, 2012

New Orleans Saints Bounty Program: The Tip of the NFL Ethical Iceberg

Bounty Program: Who is Being Held Accountable?

Are you interested in being paid $1,500 for a “knockout” in which an opposing football player is unable to return to the game, and $1,000 for a “cart-off” in which opponents are carried off the field? Did you know payments double or triple during the playoffs? It’s all true. What I find so astounding is the league is just now finding out about such practices by the New Orleans Saints. My guess is other teams do the same although they are obviously more subtle about how they implement sanctioned violence against one’s competitors.

Last week the National Football League suspended New Orleans Saints coach Sean Payton for a year without pay for his role in the team’s bounty program, which promised money to players if they knocked opponents out of games. The unprecedented punishment was a stunning blow to one of the N.F.L.’s most recently successful and long beloved teams, but also a strong message about how seriously the league takes the threat to player safety. That’s the party line. There is more to the story and the bottom line is that the NFL has shirked its responsibilities to provide for the safest and healthiest environment for players for years.

Some of you may be too young to remember David Duerson, a former four-time Pro Bowl safety and member of the 1985 Super Bowl champs Chicago Bears. Duerson was found dead at his Florida home on February 17, 2011. The Miami-Dade County medical examiner reported that Duerson died of a self-inflicted gunshot wound to the chest. He sent a text message to his family saying he wanted his brain to be used for research at the Boston University School of Medicine, which is conducting research into chronic traumatic encephalopathy (CTE) that is allegedly caused by playing pro football. On May 2, 2011 researcher neurologists at Boston University confirmed that Duerson suffered from a neurodegenerative disease linked to concussions.

On December 22, 2011, Jamal Lewis, Dorsey Levens and two other former NFL players say in a federal lawsuit that brain injuries have left them struggling with medical problems years after their playing days ended. Some 12 former football players, including former New Orleans Saints receiver and four-time Pro Bowler Joe Horn, filed a lawsuit against the NFL about its concussion policies, saying there was widespread pregame use of an anti-inflammatory drug that could put someone with a head injury at increased risk.

A group of seven players, including former Chicago Bears Super-bowl winning quarterback Jim McMahon, accused the league of training players to hit with their heads, failing to properly treat them for concussions and trying to conceal for decades any links between football and brain injuries. Later in the month, another group of 18 former NFL players sued the league and helmet makers over head injuries suffered during their careers. To its credit, the league now penalizes "leading-with-your helmet hits."

Earlier, in July 2011, 74 former players sued the NFL, claiming the league intentionally withheld knowledge of the damaging effects of concussions for 90 years.

The NFL’s response about hiding their knowledge of potential quality-of-life issues was: “Any allegation that the NFL intentionally sought to mislead players has no merit. It stands in contrast to the league's actions to better protect players and advance the science and medical understanding of the management and treatment of concussions.” Seriously!

First of all, the NFL did nothing to protect players until highly-publicized medical catastrophes occurred such as what happened to Dave Duerson. In that respect the NFL’s response has been similar to Major League Baseball’s initially turning a blind eye to the use of performing-enhancing drugs. Even after public disclosure in infamous cases such as Mark McGwire, Sammy Sosa, and Rafael Palmeiro, it took a long time for MLB to develop a valid drug-testing program. As for the NFL, it took a long time to come to the table with a plan to better protect players including quarterbacks who are susceptible to multiple concussions.

Let me return to the Saints “bounty hunter” program. The NFL suspensions included one year for Coach Sean Payton, the banning of General Manager Mickey Loomis for eight games, and indefinitely barring former assistant coach Gregg Williams for running the bounty program that paid players for injuring opponents.

The punishment for Williams is not severe enough. He should be banned for life from the NFL. As for Payton, he and the Saints should have been fined a lot more than the miserly $500,000. This compares to the lowest salary paid to an NFL player in 2011 of $295,000, and those are third-stringers.

The Saints owner, Tom Benson, should demonstrate integrity and send a clear signal that such violence will not be tolerated in the Saints organization and fire Payton. While Williams is mostly to blame, Payton had to know (or should have known) what was going on. What ever happened to “the buck stops here?” Joe Paterno came to understand that he should have taken action when he had the chance in the same way Payton should have as soon as he learned about the program.

We live in a violent society and the violence has worked its way into sports. We live in a cheating culture and cheating has found its way into sports. We live according to a pursuit of self-interests mentality and it has infected sports. Just ask Bill Belichick, coach of the New England Patriots, who was caught videotaping opponents defensive signals. Just ask Sean Payton. Both of these coaches have brought shame to the great cities they represent. Both have tainted their Super Bowl victories. Both have been guilty of taking and/or tolerating actions that lowers the ethics in sports to yet another low level.

Blog posted by Steven Mintz, aka Ethics Sage, on March 26, 2012