Ethics in a Post-Enron World


As Seen in CFO Studio Magazine Q4 2016 Issue




“Everyone’s doing it.”

“It’s immaterial.”

“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.

—Melinda Ligos

Financing Growth in a Slump


As Seen in CFO Studio Magazine Q4 2016 Issue



The timing couldn’t have been worse. It was the morning of September 21, 2015, and Andrew Einhorn, CFO for EdgeTherapeutics, a biotech firm, was prepping for the first full day of the company’s IPO roadshow, when he heard the news: Presidential hopeful Hillary Clinton had declared war on escalating drug prices.

In a Tweet that sent biotech stock prices tumbling, Clinton stated that price gouging in the specialty drug market was “outrageous” and that she was going to lay out a plan to take on overcharging such as Turing Pharmaceuticals exemplified when it raised the price of Daraprim from $13.50 to $750 per pill.

“What followed in the days after the Tweet was the worst sell-off in biotech since 2008, and we were on the road meeting with our investors,” Einhorn told audience members at the 2nd annual CFO Innovation Conference, in May at MetLife Stadium in New Jersey. Although Edge Therapeutics ended up going public in a deal that “was priced quite well,” the increased scrutiny on drug prices is one of a few factors that weakened the biotech and pharma IPO markets in late 2015. According to Einhorn, in 2016 there have been just seven deals raising $600 million total, which is down 60 percent from the same period in 2015.

So what are IPO investors looking for in a softer market? Less risk, for one. “There’s been a trend toward investing in later-stage programs, whereas in frothy markets, a lot of early-stage deals got done,” he said.

Because of the fickle investment market and increased pricing pressure, biotech and pharma companies must scrutinize costs across the board, said fellow panelist Jim Mastakas, Senior Vice President and CFO at Amneal Pharmaceuticals, the industry’s fastest-growing manufacturer of generic drugs. “Lenders are all of a sudden saying, ‘Hold on, we’ve gotten too comfortable here. . .’ and are being more vigilant in questioning pricing and costs,” he said.

Brian Zietsman, President and CFO of Enteris BioPharma, a privately owned company backed by a venture capital firm, told audience members that Enteris has had to provide a highly detailed accounting of future costs every time it asks its investor for more equity.

“We’d come up with a number that is bare bones. . .and our investor would turn around and say, ‘Well, you have 60 percent of your ask.’ That obviously puts us under a lot of pressure.”

In response, Zietsman said, the company has sped up the research process and reduced costs by eliminating rats from its pre-clinical experimental models, focusing only on dog models at this time.

Indeed, improving speed is one way to help clamp down on costs, said Einhorn. “Time equals cash,” he added. “We need to keep in mind the levers we can pull if, for example, enrollment in our clinical trial takes longer than we think.”

At Halo Pharma, a privately owned firm that provides services and products to pharma companies, cost control is all about managing customer expectations, said Barry Lederman, CFO. Halo works with some pharma companies that are early in the development process and are not attuned to the reality of a cost-sensitive market. While these companies could turn out to be very profitable customers for Halo, he said, “it becomes a very challenging situation.”

Einhorn said CFOs who focus on cost controls will be in a better position when the investment market rebounds: “When that window opens back up, you want to be able to go through it.”

Melinda Ligos

“Rainmakers” Small Market Companies CFO Thinking Big Award


As Seen in CFO Studio Magazine Q3 2016 Issue


Innovators are men and women who make a difference in their chosen endeavors. Through their energy, leadership, identification of opportunities and risks, big thinking, unwavering dedication, and farsightedness, the 12 CFOs being honored this year are bettering 12 companies or tax-exempt organizations. Their bold actions have brought increased resources and/or respect to their employers. We asked each of the winners what they would say about CFOs as innovators. Several spoke about creating or carrying forward the company’s strategy. Others mentioned getting the most from their team. What these CFOs do every day is not unique, but it is highly successful because they have clear goals, leadership agility, and a plan for dealing with risk.


The CFO who has overcome the small company mind-set, has instilled a sophisticated management style into the company, and has inspired leadership, employees, and other partners to grow and succeed, despite limited resources and against larger and more formidable competitors.




“Innovation is often synonymous with risk-taking, which on the surface might seem counterintuitive for a CFO to embrace. But in a small-market company, you are constantly doing things for the first time. That elevates the risk profile, but we can’t let risk alone hold us back from exploring new growth opportunities. I believe what our team does well at Teligent is to plan well whenever possible, but, more importantly, we stay flexible. Our goal is to identify a problem or opportunity quickly, and then to resolve it and move forward. We constantly balance the needs of the organization with an estimate of both the risk and opportunity, and then we develop a reasonable, effective, and efficient solution. In order to be an innovative small-market CFO, you need to possess the vision to see the future, the ability to hire great people, and the insight to know, in order to be a great team captain, you have to be a great teammate.”


Andy Kaplan, Chief Financial Officer,

Brendon Scott, Vice President and Chief Financial Officer, Nat Sherman, Inc.

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