What did WorldCom, Lehman Brothers, Bear Stearns, Washington Mutual, Enron, Tyco, HealthSouth, AIG, and many other well known companies have in common?
In the last decade-and-a-half, we have seen some of the biggest accounting scandals in history.
This last week, I had the privilege of speaking to the Texas Association of College and University Auditors, TACUA , the Texas chapter of the national association on “Ethics and Fraud in the Last and Next Financial Crisis.”
I talked about how all the financial institutions that either failed or were bailed out received clean audit opinions in the last financial crisis. And earlier, even companies like Enron’s outside accountants missed what should have been clearly seen.
It’s clear there was a breakdown of auditing controls and ethics, which allowed the financial crisis to happen. As auditors they wanted examples of breakdowns in the auditing process and I cited the ones I’m most familiar with, the several instances when the auditors at Citigroup stumbled over evidence of the fraud which was ongoing but just accepted management’s explanation for what they found without probing more deeply.
If there is one theme for defining the last decade-and-a-half, it would have to be corporate greed and malfeasance. Many of the biggest corporate accounting scandals in history happened during that time.
And this is one area where auditor’s expertise and scrutiny could deter malfeasance and fraud, yet what happened in the above named examples? Were the auditors and accountants asleep, careless or stupid?
The good news is that, to some degree, there may have been fewer accounting scandals at major public corporations since Sarbanes-Oxley took effect. In that regard, there is certainly more emphasis on internal controls, encouraging accountability and deterring fraud; however corporate greed and malfeasance continue.
Part of the underlying issue, as Dr. Dan Ariely, a well known behavioral economist at Duke University and author of The (Honest) Truth About Dishonesty, explains in his work, is that when people see others, who they think are like them, cheat and get away with it, then they themselves are more likely to cheat.
But, if they see others who are similar to them, who don’t cheat, then they are much less likely to cheat. So I told the audience that everyone’s behavior can impact others. What you say and what you do can have a big impact on others.
And we talked about the importance of reminding others as well as ourselves continually of our code of ethics. Yet even if you have employee ethics policies and training, if employees are not truly expected to act ethically, then you won’t get ethical behavior.
Another example I related to the audience was where the internal control reporting of critical issues, which had been submitted by management, including myself, was changed by the management of the internal control function to remove those items which would have alerted auditing to the Citigroup fraud. Thus, the lessons to the auditors was not to rely on the internal control reporting solely without determining any changes that have been made in that reporting to hide items which might alert auditing to ongoing fraud.
And the list went on.
The good news is that the Association of College and University Auditors recognize the issues. Their website says: “We uphold the highest ethical standards to maintain trust and credibility with colleagues, members, and the institutions we serve… the need for internal audit, risk management, and compliance services has never been greater.”
Part of their goal and, of course, the Texas chapter’s is to provide information and resources to help its members improve their organization’s risk mitigation efforts, internal control processes and compliance monitoring systems.
They are well aware of the challenges and complexities of business today and how important the role of the auditor is in assuring companies stay honest.
It was a pleasure and privilege to be with a group who truly recognizes the need for ethical vigilance.
Related Posts
Multiple posts by me on the topic of Ethics
Finally! There’s a Corporate Ethics Revolution Going On – PwC CEO Survey Results
Ethics Rule: Achieving the Gold Standard
Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
