Montana

The Crisis of Confidence in Business W. Steve Albrecht, Associate Dean Marriott School of Management Brigham Young University Presentation at the University of Montana November, 2004 Let’s start with a story—who committed fraud in this case? • Rich Man--three friends – Lawyer – Accountant – Minister 1/1/02 Rich Friend 50,000 Fifty Thousand and no/100--------------- I M Smarter than U The Accountant’s Check Eternity 50,000 Fifty Thousand Dollars and no/100-------------------------------------My Rich Friend Honor Commitment I. M . Smarter Than U. Crisis of Confidence • In recent years there has been a crisis of confidence in the business world • The market value of international stock exchanges plummeted in early 2000 • Terrorists acts such as ―9/11‖ were a contributing factor • BUT unethical behavior destroyed more wealth than all terrorist acts combined! 5000 5049 4000 3000 391% 78% 2000 9/11 1000 1114 The NASDAQ ―Bubble‖ 1996 1997 1998 1999 2000 2001 2002 2003 2004 Other markets looked very similar Total market loss worldwide… $15 trillion Why the Crash—What Happened? Misstated financial statements: Quest, Enron, Global Crossing, HeathSouth, WorldCom, Xerox, Rite-Aid, Harris Scarfe, HIH, etc. Executive loans and corporate looting: John Rigas (Adelphia), Dennis Kozlowski Bernie Ebbers (WorldCom) Insider trading scandals: Martha Stewart, Sam Waksal, One.Tel, etc. IPO favoritism, incl. spinning and laddering: Bernie Ebbers, etc. Massive fraud by employees Why the Crash—What Happened? Excessive CEO retirement perks: Delta, PepsiCo, AOL Time Warner, Ford, GE, IBM (consulting contracts, use of corporate planes, executive apartments, maids, etc.) Exorbitant stock options for executives Loans for trading fees and other quid pro quo transactions: Citibank, Chase, etc. Bankruptcies and excessive debt Mutual Fund Frauds: Late trading and market timing to benefit insiders and favored customers Consequences of These Problems • • • • • • • • • • • Lost confidence in capital markets Lawsuits—one company has over 3,000 Going out of business/bankruptcies Lost reputation and bad press Longer and more expensive audits, special inquiries Fines & investigations Damaged employees & reputations Lost retirement and pension funds Directors with personal liability, forced resignations Losses from fraud Significant legislative activity Lost Reputation The Cost of Bad Press Largest Bankruptcy Filings Company Assets (Billions) When Filed 1. WorldCom 2. Enron 3. Texaco 4. Financial Corp of America 5. Global Crossing 6. Adelphia 7. United Airlines 8. PG&E 9. MCorp. 10. Kmart $101.9 $63.4 $35.9 $33.9 $25.5 $24.4 July, 2002 Dec., 2001 April, 1987 Sept., 1988 Jan., 2002 June, 2002 $22.7 $21.5 $20.2 $17.0 Dec. 2002 June, 2002 March, 1989 Jan., 2002 How Costly is Financial Statement Fraud? • Financial statement fraud causes a decrease in the market value of a stock of approximately 500 to 1,000 times the amount of the fraud. $2 billion drop in $7 million fraud stock value Example: Martha Stewart • Martha Stewart gained ~$46,000 by using inside information • Martha Stewart Living Omnimedia shareholders lost ~$750,000,000 after Martha’s arrest and ensuing publicity! Fraud Against Organizations A Costly Business Problem • Large Fraud of $2.6 Billion over 9 years – – – – – Year 1 Year 3 Year 5 Year 7 Year 9 $600K $4 million $80 million $600 million $2.6 billion 3,000,000,000 2,500,000,000 2,000,000,000 1,500,000,000 1,000,000,000 500,000,000 0 Year 1 Year 3 Year 5 Year 7 Year 9 • In years 8 and 9, four of the world’s largest banks were involved and lost over $500 million Some of the organizations involved: Merrill Lynch, J.P. Morgan Chase, Union Bank of Switzerland, Credit Lyonnaise, Sumitomo, and others. Why Fraud Against Organizations is a Costly Business Problem • Fraud Losses Reduce Net Income $ for $ • If Profit Margin is 10%, Revenues Must Increase by 10 times Losses to Recover Affect on Net Income – Losses……. $100 Million – Revenue…...$1 Billion Fraud Robs Income Revenues Expenses Net Income Fraud Remaining $100 90 $ 10 1 $ 9 100% 90% 10% To restore the $1 of lost income, need $10 more dollars of revenue. Why Fraud Against Organizations is a Costly Business Problem • General Motors – $436 Million Fraud – Profit Margin = 10% – $4.36 Billion in Revenues Needed – At $20,000 per Car, 218,000 Cars • Bank – $100 Million Fraud – Profit Margin = 10 % – $1 Billion in Revenues Needed – At $100 per year per Checking Account, 10 Million New Accounts Fraud Internationally Transparency International 1. Finland 2. Iceland 3. Denmark 11. Canada 18. United States 21. 23. 54. 56. 66. 86. 132. 133. Japan France Brazil Mexico China Russia Nigeria Bangladesh 3. New Zealand 5.Singapore 5. Sweden 7. Netherlands 8. Australia 8. Norway 8. Switzerland Why Did So Many Financial Statement Frauds Occur? 1. 2. 3. 4. 5. 6. 7. 8. 9. Good economy was masking many problems Moral decay in society Misplaced executive incentives Unachievable Wall Street expectations—rewards for short-term behavior Large amounts of debt and other leverage Nature of accounting rules Behavior of auditing firms Greed by executives, investment banks, commercial banks, and investors Educator failures 1. Good Economy Masked Problems • With increasing stock prices, increasing profits and increasing wealth for everyone, no one worried about potential problems. • People were making nonsensical investment decisions—―irrational exuberance‖ • How to value a dot.com company: – – – – – Take their loss for the year Multiply the result by negative 1 to make it positive Multiply that number by at least 100 If stock price is less than the result…buy If not, buy anyway! 2. Moral Decay • Attendees at the April, 1998 Business Week Forum of Chief Financial Officers: – 67% of CFOs said they had fought off other executives’ requests to ―misrepresent corporate results‖ – 12% of CFOs admitted they had ―yielded to the requests‖ while 55% said they had ―fought off requests‖ to misrepresent corporate results • Honesty studies – People are becoming less honest – Less modeling and labeling of good ethical behavior Has There Really Been “Moral Decay”? Data from the U.S. • Dishonesty Is Increasing – 12% in 1961 – 31% in 1986 • Retail Losses • $400 billion annually • $9 per employee per day (2002 Study) We All Pay for – 30% customers Fraud! – 70% employees • Organizations lose between 1% and 6% of revenues to fraud • Insurance fraud in 2000 was $120 billion • General Motors had $436 million fraud • Large bank in recent year – 6200 customer frauds – 2100 employee frauds – 3600 lawsuits The Transformation of Arthur Andersen • Early days of Andersen – Leonard Spacek—epitome of ethics – DuPont lost to a competitor because Anderson would not agree with accounting method • Recent years – Waste Management case – Anderson turns a blind eye to abuses to keep account 3. Executive Incentives Meeting Wall Street’s Expectations – Stock prices are tied to Wall Street’s earnings forecasts • Focus is on short-term (quarterly) performance only • Price is heavily punished for not meeting forecasts – Compensation is based on earnings & stock price • Bonuses tied to stock price • Stock options—often far in excess of salary Example: Bernie Ebbers, WorldCom Million $ 50 40 30 20 10 0 0.935 Salary Options 46.2 Compensation 2000 4. Wall Street’s Expectations • Investors want decreased risk and growing returns. • Risk is reduced when variability of earnings is decreased. • Rewards are increased when income continuously improves. Firm A Firm B Which firm will have the higher stock price? Actual Complaint in $2.8 Billion Financial Statement Fraud Case “The goal of this scheme was to ensure that (the company) always met Wall Street’s growing earnings expectations for the company. (The company’s) management knew that meeting or exceeding these estimates was a key factor for the stock price of all publicly traded companies and therefore set out to ensure that the company met Wall Street’s targets every quarter regardless of the company’s actual earnings. During the period 1998 to 1999 alone, management improperly inflated the company’s operating income by more than $500 million before taxes, which represents more than one-third of the total operating income reported by (the company.)” Actual Complaint in $2.8 Billion Financial Statement Fraud Case ―The participants in the illegal scheme included virtually the entire senior management of (the company), including but not limited to its former chairman and chief executive officer, its former president, two former chief financial officers and various other senior accounting personnel. In total, there were over 20 individuals involved in the earnings overstatement schemes.‖ Meeting WS Projections Firm Morgan Stanley Smith Barney Robertson Stephens Cowen & Co. Alex Brown Paine Webber Goldman Sachs Furman Selz Hambrecht & Quist Actual Earnings Fraud Reported EPS Fraud (Millions) 1st Qtr $ 0.17 0.17 0.17 0.18 0.18 0.21 0.17 0.17 0.17 $0.08 0.09 0.17 $62 M 2nd Qtr $0.21 0.25 0.21 0.25 3rd Qtr $0.23 0.23 0.24 0.28 0.21 0.21 $0.13 0.09 0.22 $61M 0.23 0.23 $0.16 0.07 0.23 $71M Wall Street expectations were especially high for certain industries such as the telecom industry (e.g. Global Crossing, ATT, WorldCom, Quest) How People Got Involved • The CFO instructed the chief accountant to increase earnings by $105 million. The chief accountant was skeptical about the purpose of these instructions but he did not challenge them. The mechanics were left to the chief accountant to carry out. The chief accountant created a spreadsheet containing seven pages of improper journal entries, 105 in total, that he determined were necessary to carry out the CFO’s instructions. Over 20 people were involved in making or instructing to make similar entries. 5. High Amounts of Debt & Other Leverage • During 2000, Enron’s derivates-related liabilities increased from $1.8 B to $10.5 B • By 2001 Enron hid $25 B in off-balance sheet (SPE) debt while on-balance sheet debt was $13 B • WorldCom had nearly $100 B in debt – Not only did Bernie Ebbers borrow $100 billion for WorldCom but he also racked up over $1.3 billion in personal debt while CEO of WorldCom • Every company that committed financial statement fraud had huge amounts of debt In U.S. 186 public companies with $368 billion in debt filed for bankruptcy in 2002—includes WorldCom, Conseco, Global Crossing, United Airlines 6. Nature of Accounting Rules • In the U.S., accounting standards are ―rulesbased‖ instead of ―principles based.‖ – Allows companies and auditors to be extremely creative when not specifically prohibited by standards. – Examples are SPEs and other types of off-balance sheet financing, revenue recognition approaches, merger reserves, pension accounting, and other accounting schemes. – When the client pushes, without specific rules in every situation, there is no room for the auditors to say, ―You can’t do this…because it isn’t GAAP…‖ – It is impossible to makes rules for every situation 7. Behavior of Auditing Firms • Failed to accept responsibility for fraud detection (SEC, Supreme Court, public expects them to detect fraud) If auditors aren’t the watchdogs, then who is? • Became greedy--$500,000 per year per partner compensation wasn’t enough; saw everyone else getting rich (Andersen’s partners were jealous of Accenture partner’s income) • Audit became a loss leader – Easier to sell lucrative consulting services from the inside – Became largest consulting firms in the U.S. very quickly (Andersen Consulting grew to compete with Accenture) • A few auditors got too close to their clients • Entire industry, especially Arthur Andersen, was punished for actions of a few 8. Greed by All Parties • Jeff Skilling, onetime CEO of Enron: ―All that matters is money.‖ • One large investment bank issued $2 billion of Enron debt it internally considered ―legal but sleazy.‖ It received huge fees for this issue. • Example: Jack Grubman, CitiBank, and the million dollar preschool 9. Educator Failures • Haven’t taught ―ethics‖ enough in the classroom • Need to teach students about fraud—―Most students wouldn’t recognize a fraud if it hit them between the eyes!‖ • Need to teach students how to think—more analytical skills; less memorization • Need to teach ethical courage and ethical leadership How did we teach? Professors Lecture Professionals find similar examples and copy (last year’s work papers Assign Problems at end of chapters Students can’t work problems What did we teach? We taught our students how to copy! Students graduate and get assignments (e.g. perform audit) Never really learn or think analytically Find similar examples in the chapters and copy The Fraud Triangle 1. Good economy masked problems 2. Lack of controls from board, auditors 3. Nature of accounting rules 4. Educator failures 5. Behavior of CPA firms 1. Executive incentives 2. Wall Street expectations— rewards for shortterm behavior 3. Large amounts of debt and leverage 4. Greed by investment banks, commercial banks, investors and executives Fraud Triangle Rationalization Moral Decay in Society Example of a Company Gone Wrong Enron: A Case of Complexity • WorldCom was a $9 billion fraud but a simple one – Capitalized expenses that should have been expensed • Enron involved many complex transactions and accounting issues • “What we are looking at here is an example of superbly complex financial reports. They didn’t have to lie. All they had to do was to obfuscate it with sheer complexity—although they probably lied too.” Senator John Dingell • Born from merger of two pipeline companies in 1985. • Incurred massive debt and no longer had exclusive rights to its pipelines. • Needed new and innovative business strategy • Kenneth Lay, CEO, hired McKinsey & Company to assist in developing business strategy—consultant Jeffrey Skilling. – Background in banking and asset and liability management. – Recommendation: create a ―Gas Bank‖—buy and sell natural gas Enron’s History • Feb. 2001-- Fortune magazine names Enron ―The Most Innovative Company in America‖--company worth $60B • Dec. 2001 – Enron files the biggest bankruptcy in U.S. history (now exceeded by WorldCom) Enron Kenneth Lay – Founding and last CEO Andersen David Duncan – Audit Partner Jeff Skilling – CEO from 2/2001 to 8/2001 Michael Odom – Risk Mgt Partner Andrew Fastow – CFO Nancy Temple – Michael Kopper – Assistant to Fastow Firm Attorney Enron’s Changing Business Producer 2Wholesale Utility 3Retail Industrial User 4”Extras” 1Transportation and Distribution Total Revenues Transportation and Distribution 1998 1999 2000 $1,849B $2,032B $2,955B Wholesale Services $27,725B $36,287B $94,906B Retail Energy Services $1,072B $1,807B $4,615B Aggressive Nature of Enron • Enron believed it was leading a revolution – Pushed the rules – Employees attempted to crush not just outsiders but each other. ―Enron was built to maximize value by maximizing the individual parts. – Enron traders were afraid to go to the bathroom because the guy sitting next to them might use information off their screen to trade against them.” Enron took more risk than others— ”it swung for the fences.” The Motivation • Enron delivered smoothly growing earnings (but not cash flows) • Wall Street took Enron on its word but didn’t understand its financial statements • It was all about the price of the stock. Enron was a trading company and Wall Street normally doesn’t reward volatile earnings of trading companies. – Goldman Sachs, a trading company, had P/E of 20 – Enron’s P/E was 70 times earnings • In its last 5 years, Enron reported 20 straight quarters of increasing income Enron’s Arrogance ―Those whom the Gods would destroy they first make proud.‖ Enron’s banner in lobby: Changed from ―The World’s Leading Energy Company‖ to ―THE WORLD’S LEADING COMPANY‖ ―Older, stodgier companies will topple over from their own weight…‖ Skilling Conference of Utility Executives in 2000: ―We’re going to eat your lunch‖….Jeff Skilling Special Purpose Entities (SPEs) Enron’s principal method of financial statement fraud • Originally had a good business purpose • The SPE is really a joint venture between sponsoring company and a group of outside investors • To help finance large international projects (e.g. a gas pipeline in Central Asia) • Investors want risk and reward exposure limited to the pipeline, not the overall risks and rewards of the associated company • Pipeline is to be a self-supported, independent entity with no fear that the company will take over • Outsiders must own >3% to qualify for off balance sheet Manipulating numbers between entities Hide Everything Bad Enron Bring in Everything Good OffBalance Sheet SPE Going back and forth: Debt, cash flows, earnings, Related party-transactions, investments, etc. Enron’s Use of Special Purpose Entities (SPEs) • To hide bad investments and poor-performing assets (Rhythms NetConnections). Declines in value of assets would not be recognized by Enron (Mark to Market.) • Earnings management—Blockbuster Video deal--$111 million gain (Bravehart, LJM1 and Chewco) • Quick execution of related-party transactions at desired prices. (LJM1 and LJM2) • To report over $1 billion of false income • To hide debt (Borrowed money and not put on financial statements of Enron) • To manipulate cash flows, especially in 4th quarters • Many SPE transactions were timed (or illegally backdated) just near end of quarters so that income could be booked just in time and in amounts needed, to meet investor expectations LJM1 SPE One Enron Example (the “Rhythms” transaction): • Enron held Internet stock in company called Rhythms NetConnections • Stock was restricted (couldn’t be sold for a certain period of time) • Enron didn’t want exposure to risk of a price drop • The solution was simple! Find someone else who believes the Rhythms stock price would rise and was willing to sell a contract (a put option) to buy the stock in the future at a set price (a hedge!) • The problem was that Enron couldn’t find anyone willing to ―do the deal‖ • Another simple solution! Start a company (a Special Purpose Entity or SPE) to take the other side of the transaction (Enron called it LJM1) • Where did the financing come from? – 97% from bank loan  Guaranteed with Enron stock – 3% from entity other than Enron Andrew Fastow and others! • • • • Enron gave $168 million in Enron shares to LJM1 (LJM1’s primary asset) LJM1 gave Enron a note for $64 million and a put option valued at $104 million When everything ―settled out,‖ Fastow received $15 million for his $1 million investment Enron got to ―hedge‖ (i.e., not report) a $103 million market loss on its stock investment Clue #1: Warnings about Enron • In early 2001, Jim Chanos, who runs Kynikos Associates, a highly regarded firm specializing in short selling said publicly that ―no one could explain how Enron actually made money.‖ He noted that Enron had completed transactions with related parties that ―were run by a senior officer of Enron‖ and assumed it was a conflict of interest. (Enron wouldn’t answer questions about LJM and other partnerships.) Clue #2: Fortune Article…March 5, 2001 • ―To skeptics, the lack of clarity raises a red flag about Enron’s pricey stock…the inability to get behind the numbers combined with ever higher expectations for the company may increase the chance of a nasty surprise. Enron is an earnings-at-risk story…‖ • ―At the least, these sorts of hard-to-predict earnings are usually assigned a lower multiple...In 1999 its cash flow from operations fell from $1.6 billion the previous year to $1.2 billion. In the first nine months of 2000, the company generated just $100 million in cash. (In fact, cash flow would have been negative if not for the $410 million in tax breaks it received from employees’ exercising their options.‖ Clue # 3: Executives Abandon Enron • Rebecca Mark-Jusbasche, formerly CEO of Azurix, Enron’s troubled water-services company left in August, 2000 • Joseph Sutton, Vice Chairman of Enron, left in November, 2000. • Jay Clifford Baxter, Vice Chairman of Enron committed suicide in May, 2001 • Thomas White, Jr., Vice Chairman, left in May, 2001. • Lou Pai, Chairman of Enron Accelerator, departed in May 2001. • Kenneth Rice, CEO of Enron’s Broadband services, departed in August 2001. • Jeffrey Skilling, Enron CEO, left on August 14, 2001 Enron’s Cash Flows • Enron’s cash flows bore little relationship to earnings (a lot due to mark-to-market). On balance sheet debt climbed from $3.5 billion in 1996 to $13 billion in 2001. • Key Ratio Net Income (from Operations*) – Cash Flow (from Operations**) Net Income (from Operations*) • Would expect to be about zero or slightly negative over time *From the Income Statement **From the Statement of Cash Flows Enron’s Cash Flow Ratio 4 3 2 1 0 -1 -2 3 6 9 months months months Year 1998 1999 2000 2001 Negative Cash Flows: 1st three quarters in 1999, 1st three quarters in 2000, 1st two quarters in 2001. Role of Investment & Commercial Banks • Companies like CitiBank & JP Morgan Chase made millions in loan interest and fees but hundreds of millions in investment banking business • Enron paid several hundred million in fees, including fees for derivatives transactions. • None of these firms’ analysts alerted investors about derivatives problems at Enron. • In October, 2001, 16 of 17 security analysts covering Enron still rated it a ―strong buy‖ or ―buy.‖ • Example: One capital management firm purchased 7,583,900 shares of Enron for a state retirement fund, much of it in September and October, 2001 Role of Law Firms • Enron’s outside law firm was paid substantial fees and had previously employed Enron’s general counsel • Failed to correct or disclose problems related to derivatives and special purpose entities • Helped draft the legal documentation for the special purpose entities Role of Credit Rating Agencies • The three major credit rating agencies—Moody’s, Standard & Poor’s and Fitch/IBCA—received substantial fees from Enron • Weeks prior to Enron’s bankruptcy filing—stock traded at $3 per share—all three agencies gave investment grade ratings to Enron’s debt • These firms enjoy protection from outside competition and liability under U.S. securities laws • Being rated as ―investment grade‖ was necessary to make SPEs work Part II What Was Done? Fraud Triangle Rationalization What Was Done? I. Passed New Laws and Listing Requirements Fraud Triangle Rationalization What the Laws/Guidelines Attempt to Accomplish Restore Public Confidence Align Directors More Towards Shareholders Improve Quality of Financial Information Encourage Ethical & Legal Behavior in Management and Boards Legislation in U.S.—Sarbanes Oxley On July 30, 2002 President Bush signed into law the Sarbanes-Oxley Act of 2002. • Bolster public confidence • Impose new duties and significant penalties for non-compliance on public companies • • • • • Management Boards of directors Auditors Attorneys Securities industry Summary of Sarbanes-Oxley Act Title I: Public Company Accounting Oversight Board Title II: Auditor Independence Title III: Corporate Responsibility Title IV: Enhanced Financial Disclosures Title V: Analyst Conflicts of Interest Title VI: Commission Resources and Authority Title VII: Studies and Reports Title VIII: Corporate and Criminal Fraud Accountability Title IX: White Collar Crime Penalty Enhancements Title X: Corporate Tax Returns Title XI: Corporate Fraud Accountability What Can Be Done? II. Reducing the Pressure Fraud Triangle Rationalization Pressure Comes from… • Focus almost exclusively on – Stock price – Earnings • High levels of debt and other leverage – Corporate – Personal • ―Tone at the top‖ • Peer pressure Example: Enron’s Compensation Model • Skilling— ―Stock price is the only measure the company should be concerned with.‖ • Main reward: stock options – Accelerated vesting if earnings growth >15% • Cash bonus if stock price > index of tech stocks • Employees rewarded for present value of sales— regardless of cost of providing service What Organizations Should Do • Reduce compensation from stock options • Reduce leverage from financial and operating sources • Focus on long-term measures: growth, customer service, core business retention, etc., rather than on single, myopic measures like earnings alone Set the “Tone at the Top” • Talk often about long-term goals and measures of performance • Include long-term measures in compensation system • Stress ethics over performance • Build a culture of ethics within the company Example: Warren Buffett  No quarterly statements  Wants only long-term investors  Invests in people  Once said to his CEO’s: ―We can afford to lose money, even a lot of money.‖ ―We can’t afford to lose reputation—not even a shred of it.‖ Management Education Must Help • Finance courses often claim stock price is only valid measure – Corollary—that earnings is most meaningful accounting number • Must develop other more comprehensive measures meaningful performance for employees and firms What Can Be Done? III. Improving our Ethical Strength Fraud Triangle Rationalization Questionable State of Ethics Did You Cheat to Get Into Graduate School? ―Yes‖ – – – – 43% Liberal Arts 52% Education 63% Law and Medicine 75% Business Source: Rutgers University survey of students Questionable State of Ethics MBAs • 76% were willing to understate expenses that cut into their companies’ profits • Nearly all believe shareholder value is more important than customer service • Convicts in 11 minimum security prisons had higher scores on an ethical dilemma exam than MBAs Questionable Ethics at Work • 76% of employees observed a high level of illegal or unethical conduct at work in the past 12 months • 49% of employees observed misconduct that, if revealed, would cause their firms to ―significantly lose public trust‖ KPMG 2000 Organizational Integrity Survey Deterioration in Ethical Values Year Year College students who cheated in H.S. Self-reported cheating Believe cheating is common Used cheat sheets Let others copy work Willing to lie to get job Students who had stolen 1940 (20%) 1983 (11%) 1940 (20%) 1969 (34%) 1969 (58%) 2000 (28%) 2000 (35%) 2002 (75-98%) 1993 (49%) 1997 (88%) 1989 (68%) 1989 (98%) 2002 (39%) 2002 (38%) (Based on several different ethics studies) Survey of Employees • Most (65%) don’t report ethical problems they observe • 96% feared being accused of not being a team player • 81% feared corrective action would not be taken anyway • 68% feared retribution from their supervisors Source: Society of Human Resource Management Will Our Ethics Improve? • 74% (71%) cheated on an exam in the last year; 45% (45%) said they did it at least twice in the last year • 93% (92%) lied to their parents in the past year; 79% (79%) say they lied twice • 78% (78%) have lied to their teachers • 37% (27%) said they would lie to get a job • 38% (35%) took something from a store in the last year Josephson (2002)(2001) Survey of High School Students 2002 2001 Why is Dishonesty Increasing? Modeling Labeling Honesty Why Is Dishonesty Increasing? • Bad Modeling/Lack of Good Modeling – Makes up our news— more explicit than ever – Focus of TV/movies – Dishonest ―leaders‖ – Sports, business, entertainment ―heroes‖ – Good models are rare • Lack of Positive Labeling – Home….average family spends 10 hours less time together a week than 20 years ago – Vocabulary of kindergarten children – Schools – Churches Who Commits Fraud? Normal Citizens Sample Fraud Perpetrators Sample Bank Robbers Sample No Significant Differences Major Differences While people who commit rape, murder, bank robbery and other property offenses have distinguishing characteristics, fraud perpetrators look more like more citizens than criminals! Who Commits Fraud? Demographics • • • • • • • Married Active church members Children Good education First-time offenders Good employees Don’t abuse alcohol Who Commits Fraud? Psychological Characteristics • • • • • • • • Optimistic High self-esteem Achieving Family harmony Socially conforming Self control Kind Sympathetic Conclusion: Fraud Perpetrators Look Exactly Like Us! Who Commits Fraud? Length of Time With Company • • • • • Less Than 3 Years…………………....26 Percent 3-5 Years……………………………..14 Percent 5-10 Years……………………………30 Percent 10-20 Years…………………………..20 Percent Over 20 Years………………………...10 Percent Moral: Just because someone has been honest in the past doesn’t mean they will be honest in the future. Who Commits Fraud? Perpetrators’ Ages • • • • • Under 26 Years Old……………...…14 Percent 26-35 Years Old…………………….28 Percent 36-45 Years Old…………………….36 Percent 46-55 Years Old………………….…12 Percent Over 55 Years Old………………….10 Percent Can Ethical Values be Taught? Level 1: The Foundation Personal Ethical Understanding Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others Level 2: Application to Business Application of Ethics to Business Situations Fraudulent Practices, Misleading Advertising, Unfairness Personal Ethical Understanding Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others Can Ethical Values be Taught? Ethical Courage Willingness to Pay the Price for Ethics Application of Ethics to Business Situations Fraudulent Practices, Misleading Advertising, Unfairness Personal Ethical Understanding Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others Can Ethical Values be Taught? Ethical Leadership Helping Others to be Ethical Ethical Courage Willingness to Pay the Price for Ethics Application of Ethics to Business Situations Fraudulent Practices, Misleading Advertising, Unfairness Personal Ethical Understanding Right/wrong, Fairness, Honesty, Personal Integrity, Respect for Others WalMart’s View Honest Employees Will be Honest Always Swing Group Could Go Either Way Dishonest Employees Policies Won’t Help Much Ethical Leadership will significantly impact an organization since the vast majority, in this view, can be influenced to behave ethically. Is There a Universal Ethical Standard? Yes—In Principle Categorical Imperative: How would you want to be treated? Are you comfortable with a world with your standards? Christian principle: The Golden Rule Do unto others as you would have them do unto you. Luke 6:29-38 Thou shalt love thy neighbor as thyself. Luke 10:27 Taught in All Cultures Confucius: What you do not want done to yourself, do not do to others. Aristotle: We should behave to our friends as we wish our friends to behave to us. Judaism: What you hate, do not do to anyone. Islam: No one of you is a believer until he loves for his brother what he loves for himself. Hinduism: Do nothing to thy neighbor which thou wouldst not have him do to thee. Sikhism: Treat others as you would be treated yourself. Buddhism: Hurt not others with that which pains thyself. Plato: May I do to others as I would that they should do unto me. TREAT PEOPLE THE WAY YOU WANT THEM TO TREAT YOU Questions?