business ethics & financial reportingusers.metropolia.fi/~minnak/ipw/monika...
Post on 18-Jan-2019
216 Views
Preview:
TRANSCRIPT
University of Applied Sciences St. Pölten
Business Ethics &
Financial Reporting
Monika Kovarova-Simecek
Corporate Communication
Deepwater Horizon Disaster 2012
Corporate Communication
”(…) is a set of activities involved in managing and orchestrating all internal and external communications aimed at creating
favorable point-of-view among stakeholders on which the company
depends. It is the messages issued by a corporate organization, body,
or institute to its audiences, such as employees, media, channel
partners and the general public. Organizations aim to communicate
(…) to transmit coherence, credibility and ethic.”
Riel, Cees B.M van/Fombrun, Charles J. (2007). Essentials Of Corporate Communication
What is business ethics?
Business Ethics = Corporate Responsibility
Definition along the legal debate over two questions:
Does a corporation hold a corporate responsibility for
activities of individual persons within the company?
1909 the US Supreme Court: YES
Is corporate responsibility defined by law or by what is
socially accepted in practise?
Strong resistence of business persons based upon Milton Friedman (1970): ‚ There is one and only social responsibility of business…to
use its resources and engage in acitivities desinged to increase its profits so long
as it stays within the rules of the game, which is to say, engaged in open and free
competition without deception or fraud.‘
Criminal responsibility for individuals
Fraud committed by members of the boards
Abuse of power
Demage of the company and third parties
Common case of Top Management fraud is accounting
fraud
The aftermath of legal vacuum
Case of Hooker Chemicals (1953): used Love Canal in Niagara Falls
as a dumping ground for trichlorophenal and dioxin without informing
government construsting a school at the area at the same time; years
later, chemical burns, miscarriagies, liver ailments and different types of
cancer were reported.
Case of Pinto Vehicle by Ford (1972): production despite of the
knowledge of a technical defect by which the fuel tank burst into flames
by collision.
Case of Lockheed (1972-73): payment of bribes to Japanes
government officicials to facilitate the purchase of jets Foreign Corrupt
Practises Act
Several other cases in the 1980s
Corporate risks
Risk is fundamental to all business activity:
Risks at operating level: sales, costs, customers, suppliers,
liquidity, etc.
Risks at strategic level: political and legal risks, new technologies,
innovation, competitors, know-how etc.
Risk at human and behavioral level: the risk of
unethical behavior
Corporate risks of unethical behavior
reputa-tion
trust
cost Investors and customers lose
their trust in the corporation and
stop investing capital or bying products
The market value of the corporation
shrinks and it might become difficult
to raise capital which causes higher
capital costs
Employees might be leave and thus
the potential of know-how. It will
become difficult to attract new
employees.
Communication as a risk of unethical
behaviour
Corporate Communication is a matter of behavior of the
company and thus of the individuals within the company.
This behavior is driven by the following factors:
Why? Reason? Motivation!
To whom? Stakeholder? Motivation!
What? Content? Motivation!
When? Time? Motivation!
Corporate Governance
Company‘s view Inverstors‘ view
Price
General Assembly once a year
Supervisory Board represents inversotrs‘ interests
Management
Σ S
ha
res x
Ma
rket
Va
lue
pe
r S
ha
re =
> E
qu
ity
selects
supervises
Assets Capital
Equity
Share
Share Supply
Demand
Share
Earnings
Ownership
Speculation
Investment
Influence the development
of the company
Profit
Accounting Fraud 1:
Incorrect financial statement presentation
Unjustified classification
Merge items of a balance sheet which should be displayed
separately
False naming of balance sheet and income statement items
Unjustified balancing
Even though false balancing doesn‘t change the net profit, it
displays the items in an incorrect way
Accounting Fraud 2:
Falsification of profits
Valuation fraud
overvaluation (defaulted extraordinary depreciation)
undervaluation (of provisions)
Defaulted booking of an asset or a liability
Booking of a not existing asset or a liability
Accounting Fraud 3.1:
Creativ accounting or „Window dressing“
Managers try to present the company in a better shape than it
is by:
Progressive balancing in bad times
Booking of good wills, deferred taxes and disagio
No booking of long-term provisions
Valuation of inventory with fixed and variable costs
Linear depreciation
Accounting Fraud 3.2:
Creativ accounting as „Window dressing“
Managers try to present the company in a worse shape than it
is by:
Conservative balancing in good times
Booking of provisions for expenses
Valuation of inventory with variable costs only
Declining depreciation
ENRON
The biggest case of bankruptcy based upon unethical
business
The result of abuse of power of individuals within the
company and legal vacuum
The story of ENRON
1985: after federal deregulation of natural gas pipelines, Enron was born
from the merger of Houston Natural Gas and InterNorth
In the process of the merger, Enron incurred massive debt
In order to survive, the company had to come up with a new and
innovative business strategy to generate profits and cash flow
Revolutionary solution to Enron's credit, cash and profit woes: a "gas
bank" in which Enron
would buy gas from a network of suppliers and sell it to a network of
consumers,
contractually guaranteeing both the supply and the price,
charging fees for the transactions and assuming the associated risk.
The raise of ENRON
Enron created both a new product and a new paradigm for
the industry the energy derivative
Enron Finance Corp.
dominated the market for natural gas contracts
could predict future prices with great accuracy
thereby guaranteeing superior profits
The raise of ENRON
Enron applied the „gas bank-concept“ to
the market for electric energy (1996)
other tradeable „commodities“ like coal, paper, steel, water,
weather (1997)
1999: Enron created EOL – an electronic commodities
trading Web site, handling 335bn $ in online commodity
trades in 2000
The fall of ENRON
Enron started to face various difficulties:
No appropriate accounting rules for such innovative products or
concepts
Increasing requirements on debt ratio by rating agencies such as S&Ps
Moody‘s
Increasing profit expectations of shareholders
Outstanding derivative contracts on balance sheets at the end of a
particular quarter adjustment to fair market value, booking unrealized
gains or losses to the income statement of the period.
No quoted prices upon which to base valuations for long-term futures
contracts in commodities such as gas.
Credit ratings
To satisfy credit rating agencies, Enron had to make sure,
its ROA and equity ratio is within an acceptabel range
reducing hard assets
earning increasing paper profits
using special purpose entities (SPEs)
The structure of SPEs
Enron SPEs
Bank
contributes hard assets and debt
in exchange for debt guarantees
sells hard assets
books profits
gives credit to SPEs
borrows the bank credits without
showing it up on the balance sheet
The case of Enron Corp.
100 bn US-$
50 bn US-$
85 US-$
26 Cent
1996 2001
6 weeks
Sales 2001: 101
bn US-$
SHV increased from
50 bn US-$ to 80 bn
US-$
Annual increase
of sales by 52%
Stock price dropped
from 85 US-$ to 26
Cent
618 mio US-$
Profits had to be adjusted;
2001 Enron published a loss
of 618 mio US-$
The subject of fraud in case of ENRON
1. Market manipulation
2. Sales and profit manipulation
3. „Asset light“-strategy and minimizing of capital
4. SPEs – Off-Balance-Sheet-Treatment of risks and liabilities
5. Lack of an internal control system
6. Lack of trancparency of Enron‘s disclosures
7. Misbehaviour of auditors, banks and rating agencies
Typical fraud behaviour
following the SAS No. 82
Aggressive earnings targets and management bonus compensation
based on those targets.
Excessive interest by management in maintaining stock price or
earnings trend through the use of unusually aggressive accounting
practices.
Management setting aggressive financial targets and expectations for
operating personnel.
Inability to generate cash flow from operations while reporting earnings
and earnings growth.
Assets, liabilities, revenues or expenses based on estimates involving
unusually subjective judgments
Significant related party transactions
Aftermath of the Enron case
Critisism on the accounting profession
Adequacy of the U.S. discloser practices
Integrity of the independent audit process
Loss of confidence in financial markets
To restore the investor‘s confidence in financial reporting,
SEC called for a new financial reporting system
26
SEC: financial reporting system
Current disclosures on a real-time basis
Disclosure of significant "trend" and "evaluative" data in addition
to historical information
More timely and responsive accounting
Cooperation between the SEC, Plc and auditors to seek advice
on disclosure issues in advance
An effective and transparent system of self-regulation for the
accounting profession
More proactive oversight by audit committees
Accounting frauds in the USA
Enron (Energy, 2001)
Reliant Resources/CMS Energy/Dynegy (Energy, 2002)
Worldcom (Telecommunications, 2002)
Xerox (Office Technology, 2002)
Tyco International (Conglomerate, 2002)
Global Crossing (Fiber Glass Supplier, 2002)
Merck (Pharmaceutical Industry, 2002)
Adelphia Communications (Cabel Network, 2002)
AOL Time Warner (Media, 2002)
Computer Associates (Software, 2004)
Accounting frauds in Europe
SAir Group (Airline, CH, 2001)
Lernout & Hauspie (Speech Products, B, 2001)
Ahold (Retailer, NE, 2003)
Yline (Software & Internet Services, AUT, 2003)
Parmalat (Food Industry, Italy, 2003)
Adecco (Leasing personell, CH, 2004)
ABB (Electro Technics, CH, 2004)
Accounting fraud is NO misdemeanor
Year Company Delict
1999 Tyco 600m $ accounting fraud
2001 Enron 1,2bn $ unrealized profits, 2,6bn $ off-balance liabilities
2002 Adelphia 3,1bn $ off-balance liabilities by owners + 50m $ cash
2002 Worldcom 11bn $ accounting fraud
2003 Parmalat 14bn $ off-balance lilabilities
2003 Ahold 11bn $ unrealized profits
2004 AIG 3,9bn$ profit adjustments for 2000-2004
2004 BAWAG 1,5bn € accounting fraud
2006 Fannie Mae 6,3bn $ profit adjustments
How to handle the risk of unethical business?
Law and regulatory frameworks are a necessary element
to reduce unethical behavior such as corruption, misleading
intransparency, fraud etc.
Corporations must apply the law and set up proper risk
management, internal control and transparency
systems to
avoid proactively the occurrence of unethical behavior
find out early enough if unethical actions is being set
prosecute criminal activities
Regulatory frameworks
Federal Corporate Sentencing Guidelines (FCSG),1991 –
establish requirements for corporate ethics programm
Environmental Protection Act, 1995
Sarbenes-Oxley-Act (SOX), 2002
increased the transparency and the accuracy of financial information
increased the independence of the outside auditors who review the
accuracy of corporate financial statements and
increased the oversight role of boards of directors
Corporate Governance Codex, Finland 2010
Being ethical is expensive…
Critisism of the current way to manage the risk of unethical
business such as
high level of bureauracy and thus deceleration of processes
high costs of transparency and documentation (compliance is reckoned
to cost 3%-5% of total sales)
But if you think, being
ethical is expensive,
try unethical.
Punishment of unethical behavior 1
At individual level - imprisonment:
Enron:
Ben Glison (Accountant) – 5 years
Adrew Fastow (CFO) – 6 years + 2 years social work
Jeff Skilling (CEO) – 24 years and 4 months
Worldcom:
Bernie Ebbers (CEO): 25 years, max. reduction of 3 years
Tyco:
Dennis Kozlowski (CEO): 8 years
Punishment of unethical behavior 2
At corporate level – fines and voluntary payments:
AIG: 1,64bn $
Worldcom: 750m $
Fannie Mae: 400m $
PLUS:
Loss of reputation
Loss of trust
Loss of market value
Corporate death – Arthur Anderson (with Enron)
top related