Ethical Lessons for Accountants

Article excerpt

According to the Dictionary of Criminal Justice Data Terminology, white-collar crime is "nonviolent crime for financial gain committed by means of deception by persons whose occupational status is entrepreneurial, professional, or semi-professional and utilizing their special occupational skills and opportunities." For decades, the legal system has been relatively easy on whitecollar criminals.

When compared to traditional street criminals, white-collar criminals have been the least likely to be incarcerated; only 20% receive prison time. They also receive the shortest sentences, an average of 1.8 months (2007 Fraud Examiners Manual, Association of Certified Fraud Examiners, page 4.312). Recently, however, the tide has turned against white-collar criminals. This is due in part to the well-publicized stream of corporate frauds that cost investors billions of dollars.

Consider the following Department of Justice statistics in corporate fraud cases brought by prosecutors from July 2002 through July 2007 (www.usdoj.gov/ opa/pry2007/July/07_odag_507.html):

CEOs and presidents: 214

Vice presidents: 129

CFOs: 53

Corporate counsels or attorneys: 23

Other corporate officers: 817

Total corporate fraud convictions 1236

The following prison sentences were awarded to recently convicted white-collar criminals:

* Bernard Ebbers, WorldCom CEO- 25 years

* John Rigas, Adelphia Communications CEO-15 years

* Dennis Kozlowski, Tyco International CEO-« 1/3 to 25 years

* Martin Grass, Rite Aid Corp. CEOeight years

* James Olis, Dynegy Inc. vice president of finance - 24 years

* Martha Stewart, Marma Stewart Living Omnimedia CEO - five months in prison and five months of home confinement

* Andrew Fastow, Enron Corp. CPO-six years

* Jeffrey Skilling, Enron Corp. COO-24 years.

The accounting profession can learn some constructive lessons from this recent proliferation of corporate malfeasance.

Four Lessons for the Accounting Professions

Honesty is the best policy. Most people know, even from early childhood, that lying often creates worse problems than the acts they are trying to hide. Consider the following examples that illustrate this point.

Martha Stewart, contrary to what many believe, was not convicted of insider trading, which would have been difficult for the prosecutors to prove. When questioned by investigators about a personal sale of ImClone Systems stock, Stewart chose to lie about it The prosecutors convicted her of making false statements to investigators and of obstruction of justice. Had she told the truth and cooperated, she may have escaped a prison term.

Kenneth Lay, Enron Corp. CEO, was managing a business in a precarious financial position. His crime was telling employees, stock analysts, and the public that Enron was "one of the strongest companies ... in the country" when he knew for a fact that it was not Had Lay told the truth from the beginning and not participated in the "puffing up" of Enron's earnings, he probably would not have been a convicted felon whose death before sentencing resulted in his conviction being abated.

Corporate executives and managers need to create a workplace where principles drive decisions and people are not afraid to express themselves openly and honestly. With a greater emphasis on corporate transparency inspired by the Sarbanes-Oxley Act (SOX) and other regulations, customers, regulators, and shareholders are demanding full visibility into U.S. companies. Managers must prepare their workforce for a time when dishonesty is met with zero tolerance.

The costs of dishonesty must exceed the benefits derived from dishonest behavior. A classical theory of criminology known as "rational thought" maintains that deterrence is best achieved when penalties for criminal behavior exceed the benefits derived from it For years, white-collar criminals have derived substantial benefits from their wrongful actions and incurred little in the way of penalties. …