Deck 2: Ethics Governance Scandals

Question 1

In each case discussed at some length in this chapter-Enron, Arthur Andersen, World- Com, and Bernie Madoff-the problems were known to whistle-blowers. Should those whistle-blowers each have made more effort to be heard? How?

Answer 1

In each case discussed in the chapter - Madoff, WorldCom, Enron and Arthur Andersen - whistleblowers failed to use all available avenues to have made their concerns heard.
The steps available include:
• Bring evidence of potential problem to immediate supervisor or appropriate company official : If one's immediate supervisor is not responsive, bring concerns to another official and/or the firm's inside counsel.
• Notify the audit committee of the Board of Directors
• Notify the firm's independent auditors
• File a complaint with the Securities and Exchange Commission
• Consider going public - after seeking advice and retaining personal legal counsel.

Question 2

Does it matter that Madoff's auditor, Friehling, was his brother-in-law?

Answer 2

There was a conflict of interest with Madoff's brother-in-law acting as his auditor. Clearly the brother-in-law benefited from auditing such a significant account; however, much more troubling was the brother-in-law's lack of audit experience outside of the Madoff account.
Investors in companies (public or private) should always be somewhat wary when a company (or investment) has independent auditors who are not on par with those of its peers. As companies grow, they often need to upgrade their professional services. Failure to do so does a disservice to investors - as well as the Board and executive management. Larger companies require more resources and local and small regional accountants may not be able to provide those services.

Question 3

Should investors who make a lot of money (1 percent per month while markets are falling) say "Thank you very much," or should they query the unusually large rate of return they are receiving?

Answer 3

Investment returns (particularly those that are not hedged) are unlikely to be consistently good quarter after quarter, year after year. Probability dictates that there should be some variance in periodic investment returns (unless the securities are purely interest paying). Therefore, a reasonable investor might want to make certain that they understand their investments and their investment professional's strategy, at least so that they can make reasonably informed comparisons to the results that other investment managers are experiencing from quarter to quarter.

Question 4

The lack of corporate accountability, and an increased awareness of inequities and other questionable practices by corporations, led to the Occupy Movement. Identify and comment upon additional recent instances that have led to concerns over the legitimacy of corporate activities.

Question 5

Both Barclays and UBS reduced the bonuses of current employees to help pay part of the fines that occurred because of the actions of former employees. Is this fair?

Question 6

Should investors who made money from "investing" with Madoff be forced to give up their gains to compensate those who lost monies?

Question 7

It seems likely that the top executives of the major banks involved in the manipulation of the LIBOR rate were aware of the manipulations, and of the massive profits and losses caused by those manipulations. Why did they think that such manipulations could continue to be undetected, and/or unpunished?

Question 8

Bernie Ebbers was not an accountant, so he needed the cooperation of accountants to make his manipulations work. Why did WorldCom's accountants go along?

Question 9

Is this simply a case of "buyer beware"?

Question 10

The new anti-bribery prosecution regime involves serious charges and penalties for bribery in foreign countries during past times when many people were bribing in the normal course of international business, and penalties were not levied. Is it unreasonable to levy extremely high fines at the beginning of the new regime, and/or not to limit the period over which bribery can trigger those fines? Why and why not?

Question 11

Wal-Mart Mexico seemed to have a culture of the goal justifying the means. How can the board of directors ensure that the operational activities of the company do not subvert proper governance objectives?

Question 12

Is Madoff's sentence too long?

Question 13

Does it matter that Friehling did no audit work?

Question 14

Which groups were most at fault for the LIBOR manipulations: brokers, traders, bank executives, bank boards of directors, or regulators? Why?

Question 15

The rate manipulations seemed to be systemic to the industry because so many banks were involved. What can be done to curtail such widespread unethical practices within an industry?

Question 16

Describe the mechanisms that World- Com's management used to transfer profit from other time periods to inflate the current period.

Question 17

Why would a board of directors approve giving its Chair and CEO loans of over $408 million?

Question 18

Where were Wal-Mart's questionable payments made, and where did this result in serious damage to the company and its executives? Why?

Question 19

Comment on the efficacy of self regulation in the form of FINRA, and in respect of the audit profession. What are the possible solutions to this?

Question 20

Some SEC personnel were derelict in their duty. What should happen to them?

Question 21

Why weren't the directors of the banks, that had caused the scandal, fined or jailed? Should they have been?

Question 22

What should the regulatory bodies do with the fines paid by these banks? Reduce tax rates for the general public? Use the funds to re-educate investment bankers?

Question 23

How can a board ensure that whistleblowers will come forward to tell them about questionable activities?

Question 24

Do you think that the events recorded in this chapter are isolated instances of business malfeasance, or are they systemic throughout the business world?

Question 25

Why did Arthur Andersen go along with each of these mechanisms?

Question 26

Answer Markopolos' questions: "How can we go forward without assurance that others will not shirk their civic duty? We can ask ourselves would the result have been different if those others had raised their voices and what does that say about self-regulated markets?"

Question 27

The events recorded in this chapter have given rise to legislative reforms concerning how business executives, directors, and accountants are to behave. There is a recurring pattern of questionable actions followed by more stringent legislation, regulation, and enforcement. Is this a case of too little legislation being enacted too late to prevent additional business fiascos?

Question 28

The 'gestores' payments were made to third parties, who then bribed local officials. How would a company ensure that its third party vendors are operating within the law?

Question 29

Why should members of the public trust the banks that were involved in manipulating the LIBOR rate?

Question 30

Is there anything else that can be done to curtail this sort of egregious business behavior other than legislation?

Question 31

Are the reforms undertaken by the SEC (see http://www.sec.gov/spotlight/sec -postmadoffreforms.htm) tough enough, and sufficiently encompassing?

Question 32

How could Markopolos and the other whistle-blowers have gotten action on their concerns earlier than they did?

Question 33

Many cases of financial malfeasance involve misrepresentation to mislead boards of directors and/or investors. Identify the instances of misrepresentation in the Enron, Arthur Andersen, and WorldCom cases discussed in this chapter. Who was to benefit, and who was being misled?

Question 34

Robert Diamond continues to receive his £2 million pension annually. Should he suffer financially by having to forfeit this pension because the LIBOR scandal occurred while he was CEO of Barclays?

Question 35

Did Markopolos act ethically at all times?

Question 36

Use the Jennings "Seven Sign" framework to analyze the Enron and WorldCom cases in this chapter.

Question 37

How should WorldCom's board of directors have prevented the manipulations that management used?

Question 38

What were the most surprising aspects of Markopolos' verbal testimony on YouTube at http://www.youtube.com /watch?v=uw_Tgu0txS0?

Question 39

Rank the worst three villains in the film Wall Street: Money Never Sleeps (2010). Explain your ranking.

Question 40

Some of Wal-Mart's senior executives knew about the bribes, but did not take any effective actions to curtail this activity. What steps should the board of directors take to ensure that systems and internal controls are in place so that they are informed about questionable managerial activities and actions?

Question 41

Did those who invested with Madoff have a responsibility to ensure that he was a legitimate and registered investment advisor? If not, what did they base their investment decision on?