As Seen in CFO Studio Magazine Q4 2016 Issue
ARE WE RAISING THE STANDARDS FOR FINANCIAL REPORTING – OR TAKING A STEP BACK?
“Everyone’s doing it.”
“It’s been approved.”
“I’m just following the rules.”
These are the kinds of rationalizations that were made by employees during the Enron accounting scandal of 2001, William Craig, Chief Executive and Financial Officer of Tarantin Industries, told audience members during an ethics panel discussion at the CFO Innovation Conference. “Everybody in the organization maybe felt that what they were doing wasn’t quite kosher, but they did it anyway because it was approved and part of the culture,” he said.
As proof, Craig cited a recent memo that prominent hedge-fund manager and investor Whitney Tilson fired off this spring to top financial executives after witnessing a speech delivered by former Enron CFO Andrew Fastow, who served a six-year prison sentence for multiple charges in the Enron case. By Fastow’s own admission, Tilson wrote, Enron knowingly engaged in repeated transactions that were designed to mislead investors by hiding debt and special-purpose entities. “It wasn’t one deal that sunk Enron,” Craig said. “It was the repeated use of acceptable but gray techniques that were used to pretty things up.”
In the 15 years following the scandal, has the financial world learned from Enron’s mistakes? Craig fears the answer is “no.” Again citing Tilson’s memo, he said that many companies, including Apple, “continue to engage in behaviors like tax-dodging that, while technically legal, are designed to increase profits and inflate the stock by confusing regulators and investors via a massively complex web of entities … which is exactly what happened at Enron,” he said.
In a recent survey of 400 financial executives by the National Bureau of Economic Research, 20 percent of respondents admitted to distorting their company’s earnings figures by an average of 10 percent. “That’s just scary bad,” Craig said. At the same time, he said, the Financial Accounting Standards Board recently released a proposal that might make it easier for public companies to withhold key financial information from shareholders. Current standards, he said, require corporations to provide financial disclosures of information that “could” influence investors. The FASB’s new proposal would rewrite this standard so that corporations would have to disclose information only “when there is a substantial likelihood that the information might significantly alter investor decisions,” according to Craig.
“Is the bar being raised here? No,” Craig said. “This is so much open to interpretation; I see us moving backwards.”
The issues surrounding financial reporting are not the only ethical questions that should be on financial chiefs’ radars, warned panelist Eric Wukitsch, Chief Operating and Financial Officer of Vantage Custom Classics, Inc. Companies also need stricter ethics codes in place. This applies even to private firms, who are not bound by the Sarbanes-Oxley Act, especially when they’re doing business overseas, said Wukitsch.
“What’s ethical may be illegal in some countries and what’s legal may be unethical,” he said. As an example, in the apparel industry, Wukitsch said, it’s common to pay workers in some countries with a bag of rice for a month’s worth of work. “It’s legal, but is it right?” he said. Companies need to outline specific guidelines for issues such as compensation and employee safety in their ethics codes and communicate them to all employees. Firms that fail to do this may face criticism from customers, vendors, and financial institutions.
“With all of the focus on social responsibility right now, you need to show that you’re doing the right thing,” he said.
Thus, lessons learned 15 years ago are highly relevant today.