Ethics and Governance Scandals

Ethics & Governance Scandals This chapter provide a timeline and summary of some of the most notorious corporate ethics and governance scandals and failures, as well as an analysis of the governance changes and trends these scandals produced. Throughout the period covered, the pattern of change has remained the same.  Each scandals has outraged the public and made people aware that the specific behaviour of corporate personnel or profesionals needs to be improved.  With each additional scandal, the awareness and sensitivity of the public to sub-standard behaviour has grown, and the publics’s tolerance level has diminished.  The credibility of corporate promises and financial statements has been eroded.  Lawmakers, regulators directors, and professional bodies have responded to restore confidence in the corporate governance system. The failure of boards of directors, management, and accountants to ensure that business and the accounting profession are acting in the best interest of shareholders, and society is traced through the following scandals and reactions: 1) Enron corporation; the board of directors failed to provide the oversight needed to prevent the largest bankruptcy in American history, at the time. 2) Arthur Anderson; as a result of shifting its focus from providing audit services to selling high-profit margin consulting services, Arthur Anderson lost its perceived independence when conducting the Enron audit. 3) WorldCom; at $11 billion it beclipsed the $2.6 billion Enron fraud. There was no one in the organization to challenge and question the authority of Bernard Ebbers, CEO of WorldCom. 4) Sarbanes-Oxley Act (SOX); as result of business, audit , and corporate governance failures, the U.S. government passed SOX in 2002 to enhance corporate accountability and responsibility. 5) Tax shelters; Ernst & Young and KPMG were no longer protecting the public interest when the began to sell highly lucrative tax shelters to the super-rich. The government was so incensed with their egregious behaviour that the firms were fined and Circular 230 was issued. 6) Circular 230; in 2007n the internal revenue service imposed new professional standard on tax preparers and tax advisors. 7) Subprime Mortgage Meltdown; there was a lot of money to be made vin speculating on mortgage-backed securities. but the risks had not been carefully assessed and so, when the U.S. housing market collapsed in 2008, the value of the associated securities fell, and governments around the world had to provide bailouts to avert a global financial crisis. 8) Dodd-Frank Wall Street Reform and Consumer Protection Act-in July 2010, as a result of the subprime mortgage crisis, the U.S. Congress enacted new regulations over the financial services marketplace in order to provide enhanced consumer protection. 9) Benard Madoff; in 2009 he was sent to prison for cheating investors out of billions of dollars. Investors should remember that if they are offered returns that are too good to be true, they probably are. Ethics & Governance: 1970 - 1990 As the 1950s and 1960s wore on, the awareness that our environment was a finite resource clearer, as did the realization that corporation could make changes to protect the environment. An activist group known as environmentalists began to do what they could to raise the general awareness of the public to environmental issues and sensitize the public to bad practices. Their objective was to put pressure on boards of directors, executives, and managers to realize that bad environmental practices would not only harm our environment, but in turn would harm the reputation of the individuals and the companies involved, and ultimately their profitability. Ethics & Governance: The Modern Era-1990 to The Present In November 1991, just before the introduction of the U.S. Federal Sentencing Guidelines, a judge commented that if a company could prove that all reasonable effort had been made to avoid environmental harm, then the proposed penalties of up tom $2 million per day and jail time for responsible executives could be reduced to $50,000 per day. Immediately, many major companies began to develop environmental problems and the desire of those corporations to avoid environmental damage as well some assurance of compliance. Essentially, corporations, under the direction of their boards of directors, develop governance programs that shaped their behaviour and benefitted society. In response to pressure from other activist stakeholders, corporations have instituted governance programs devoted to:  Encourage and protect whistle-blowers.  Improve health and safety.  Ensure fair dealing.  Reduce conflicts of interest.  Ensure reasonable employment practices. Despite these favourable developments, greed and conflicts of interest did not vanish. They accounted for money of the scandals that have triggeted further governance reform in the form of the Sarbanes –Oxley Act of 2002 and internationality generated 2010 bank reform regulations.