Jennings

Ethical Lapses: A Look at How and Why Tax Professionals Make Headlines

Prof. Marianne Jennings W.P.Carey School of Business

Arizona State University

The Scary Slides

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Ethical Lapses Adelphia ADM (twice) AIG (three times) Allergan American Apparel American Express Apple (twice) Apollo Group Arthur Andersen AstraZeneca AT & T Autonomy Avon Bally Total Fitness Bank of America Barclays Bayer BCBS BCCI BDO Seidman Bear Stearns

Berkshire Hathaway Biovail BNY Body Shop Boeing BP (three times) Bristol-Myers

Squibb Calpers Cardinal Health Cendant Chase Chesapeake Energy Chiquita Chrysler Cintas Citigroup Columbia HCA Computer

Associates Countrywide

Financial CSFB CVS

Davis-Besse

(FENOC) Deloitte Touche Delphi Deutsche Bank Diamond Nuts Downey Savings &

Loan Duke Energy DuPont Edward Jones Eli Lilly Ernst & Young Facebook Fannie Mae (twice) Fidelity Investments

Galleon Hedge Fund

General Electric

GlaxoSmithKline (2)

Global Crossing

Global Research

GM

Goldman Sachs (2X)

Google (3 times)

GroupOn

Hallmark Westland

HealthSouth

Helig-Myers

Herbalife

HP

HSCB

ImClone

IndyMac

Johnson & Johnson

Kmart

KPMG (twice)

Krispy Kreme

Lehman Brothers

Lennar Corp.

Lucent

Madoff Investment Securities

Marsh & McLennan

McNeil (Tylenol)

Ethical Lapses Medtronic Mellon Bank Mercer Merck Merrill Lynch MF Global Microstrategy Milberg Weiss Moody’s Morgan Stanley Navistar International New Century Financial New Orleans Saints Nortel Novartis Options scandals (200

companies) Oracle Olympus Parmalat Penn State Pfizer Prudential PriceWaterhouseCooper Putnam (twice)

Tyco International UBS UnitedHealth Group Universities and

sports UPS Wachovia WaMu Wells Fargo World Bank WorldCom Xerox Zynga

Qwest Razorfish RBS Reebok Refco Royal Ahold Royal Shell SAC Capital Saks Fifth Avenue Sallie Mae Samsung Satyam (India) Shaw Group Siemens Société General Standard & Poor’s Stanford Investments Student loan lenders Taco Bell Taylor Beane Tenet Titan Toyota

Some Tax Professional Headlines

“Another Reason Los Angeles is Broker: Appraisal Fraud Inside the County Assessor’s Office,” January 2013

“L.A. County Assessor John Noguez Faces More Charges, Los Angeles Daily News, October 28, 2013

“Tax Consultant and Chief Appraiser Indicted,” Los Angeles Daily News, October 28, 2013 − “$185,000 paid; Property values reduced by $10,000,000

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Some Tax Professional Headlines “18 City Tax Assessors Indicted in

Decades-Long Bribe Scheme,” New York Times, February 26, 2002.

●500 buildings had values reduced over 35 years – city lost $160 million in revenues

●Tax consultant offered dinners and millions for reduced values

●Assessor took $4.1 million in bribes (lost it all gambling)

“Cook County Assessor’s Worker Indicted in Kickback Schemes,” Daily Herald, March 24, 2014

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Tax Professional Headlines

“We have to take care of our donors. We have to take care of our buddy Ramin.”

Former L.A. County Assessor, John Noguez to an office appraiser

“Quitman County Tax Assessor Charged with Embezzlement, Fraud,” Washington Times, January 28, 2014. ($56,000 on office credit card and $4,840 in office checks for her bills)

“Putnam County Tax Assessor Indicted on Theft, Misconduct Charges,” News Channel 5, March 25, 2014, Nashville

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Tax Professional Headlines History of Putnam County −1998 Bryan Looper, assessor, accused of

murdering state senator in order to inherit his seat

−1999 Looper’s replacement (Rhonda Chaffin) undervalued 200 properties of prominent citizens (denied wrongdoing, but voted out of office in 2012)

−Travis Roberts – replaced Chaffin and charged with selling county land for cash that was used to buy marijuana, DUI, speeding, and not wearing a seatbelt

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What can we learn?

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a. These were not close calls.

Embezzlement Bribery Falsified paperwork Conflicts Manipulating reports and data Withholding or covering up information Taking advantage of tax payers

b. Those involved were aware of their ethical lapses.

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Gregg Williams – New Orleans Saints

"It was a terrible mistake, and

we knew it was wrong while we were doing it.”

-on the bounty program he coordinated

Lehman’s Former Chief Risk Officer

“In the course of performing my duties for the Firm, I have reason to believe that certain conduct on the part of senior management of the Firm may be in violation of the Code. The following is a summary of the conduct I believe may violate the Code and which I feel compelled, by the terms of the Code, to bring to your attention.”

Letter of Matthew Lee, dated May 18, 2008, as included and discussed in the Report of the examiner for the bankruptcy trustee in the Lehman bankruptcy

“Can you find another clueless auditor?” From a 2008 e-mail from Joel Sanders, the former CFO of Dewey & LeBoeuf, to Frank Canellas, the director of finance, about their plan to come up with $50 million in income to meet loan covenants. Mr. Canella responded to Mr. Sanders:

"That's the plan. Worked perfect this year.”

Dewey LeBoeuf and the Effort to Stay Afloat

“We're going to have to create a story. Get ready to do some dancing." Response: "What the heck. We'll all be retired when this comes up on audit.”

E-mail exchange between PricewaterhouseCoopers partner, Thomas E. Quinn, and PwC managing director, Steven R. Williams, on the tax strategy they had helped Caterpillar create.

Caterpillar and the Swiss Tax Strategy

What is different about agencies, companies, and people that stay out of ethical difficulty?

1. They were careful about conflicts and relationships.

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You have to manage conflicts 1. Disclose There is a resulting duty of recusal See description on the following slide

2. Don’t do it!

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Examples Those campaign contributions Those close relationships Those friendships Borrowing money Seeking employment for family and

friends in exchange for . . .

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Watch perceptions of conflicts! Relationships Socializing Close-connection doctrine The social media aspects of socializing

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2. They know how to think clearly and simply about ethical issues.

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What if the cameras were running? Would you be proud of the discussion? Would you worry about what you are doing being made public?

Front-Page-of-the-Newspaper Test

Jamie Dimon, CEO of Chase

His post- federal regulatory issues advice to employees:

“Make every decision as if the head of the SEC and the Pope are in the room with you.”

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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

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.

Simple Tests for Resolving Ethical Dilemmas

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. Plato: May I do to others as I would that they should do unto me. Judaism: What you hate, do not do to anyone. Buddhism: Hurt not others with that which pains thyself.

TREAT PEOPLE THE WAY YOU WANT THEM TO TREAT YOU.

Resolving Ethical Dilemmas

Truth and Its Percolating Quality The laws of probability do not apply when it

comes to the surfacing of unethical or illegal conduct

Three people can keep a secret if two are dead.

- Hell’s Angels’ motto (courtesy B. Franklin) Lying is good. It’s the only way we ever get at

the truth. - Dostoevsky Circumstances beyond your control will cause

bad acts to be discovered. - Anonymous Don’t underestimate probability of truth

coming out. Don’t overestimate your ability to manage

the truth.

Truth and Its Power

It’s all coming out anyway – it is simply a matter of time. And circumstances beyond your

control will cause it to come out −The Chinese gymnasts −The Gulf Coast fishers −Student excuses

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Be careful not to rationalize!

“Everybody else does it.” “I looked up the word ‘cheat’ in the dictionary

and decided it didn’t apply, given that it meant ‘to gain an advantage on a rival or foe.’ I didn’t view doping that way. I viewed it as a level playing field.”

●Lance Armstrong, January 2013

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Rationalizing brings great comfort

“Everybody else does it.” “I looked up the word ‘cheat’ in the dictionary

and decided it didn’t apply, given that it meant ‘to gain an advantage on a rival or foe.’ I didn’t view doping that way. I viewed it as a level playing field.”

●Lance Armstrong, January 2013

So, we make it all gray!

Why is it important that it be gray to you? Is it legally gray? Is it ethically gray? Is it a good-faith disagreement? What if it’s not a gray area? Does everyone believe it’s a gray area? Interpretation vs. loophole vs. nondisclosure

of relevant information “There will always be a gray area.”

M.M. Jennings

Racing and Gray Areas

Dan: If you could take a performance-enhancing drug and not get caught, would you do it if it allowed you to win Indy? Danica: Well then it’s not cheating, is it? If nobody finds out? Dan: So you would do it? Danica: Yeah, it would be like finding a grey area. In motorsports we work in the grey areas a lot. You’re trying to find where the holes are in the rule book

●Danpatrick.com. www.sportillustrated.cnn.com. June 2, 2009

Some issues to think about and apply the simple tests.

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3. They recognized the importance of enforcement to the culture of the organization.

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Enforcement: Absolute, Unequivocal, and Egalitarian

“If the janitor had taken the liquor, he would have been fired.”

QuikTrip’s remarkably low shrinkage rate

“Enforcement of the rules is to an organization what integrity is to individuals.”

M. M. Jennings

4. They watched what pressure can do.

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Monitor Personal and Professional Pressure

Deadlines Revenue Budgets Personal goals Sunk costs Rankings/ratings Loss of _________.

Pressure: Probability from the Financial Analysts Institute

P = f(x) x = amount of money

involved

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Pressure’s Influence: Irrational Responses and Behaviors

Claremont McKenna and inflating SAT scores to maintain #9 rank 46 of the 71 runners at the New

York City Marathon

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P = f(X) “. . . desperately at least need to turn the Raw Peanuts on our floor into money . . . We have other peanuts on the floor that we would like to do the same with.”

Email from Stewart Parnell, CEO of

Peanut Corporation of America

“We could ship peanut meal from Plainview…, [b]ut they need to air hose the top off though because they are covered in dust and rat crap.”

Employee e-mail to Stewart Parnell

“Clean ‘em all up and ship them…” Parnell’s response

“PLEASE, PLEASE make sure someone air hoses off the totes before they are loaded on the truck. They are filthy on top.”

Plainview manager’s e-mail in following Parnell’s instructions

The Story Behind the Rules

Pressure can be curbed if we understand consequences and recall them

The stories that make us realize the wisdom behind seemingly bureaucratic rules

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Curbing Pressure: Keep focused on long-term survival If individuals are reminded of the impact

their decisions have on those who will follow, they do make different decisions

Discussions of 5- and 10-year plans have an impact

The psychological strategies: How and where we sign

Curbing Pressure: Define the Goal Very Carefully The Lessons of the Atlanta Public

School System (APS) Board and Superintendent: −Test scores had to go up each year − “No exceptions. No excuses.” −178 teachers changed answer sheets −38 principals supervised weekend

“changing parties” on answer sheets −35 indicted

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Defining the goal carefully and staying focused

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EDUCATED YOUNG PEOPLE vs.

TEST SCORES

FINDING WHAT WORKS/HOW THEY LEARN

vs. TEACHING TO THE TESTS

TEACHING

MEASURE KNOWLEDGE AND SKILLS vs.

GIVING ANSWERS/ALTERING ANSWER SHEETS TESTING

Losing the Goal in the Pressure

“APS became such a ‘data-driven’ system, with unreasonable and excessive pressure to meet targets, that Beverly Hall and her senior cabinet lost sight of conducting tests with integrity.”

●Governor’s Task Force on APS Testing

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Keeping Pressure From Consuming Actions and Decisions: Avoid Irrational Choices

“Atlanta school administrators emphasized test results to the exclusion of integrity and ethics.”

●Georgia Governor Nathan Deal

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Relieving Pressure by a Laboratory Exercise

The Organizational Credo

The Personal Credo

Deciding issues in advance so that resolution when pressure hits is more clear

“These are the lines we do not cross to get results.”

Analysis of the Former Illinois Governor’s Pay-to-Play

“This is not like a guy taking $500 for a zoning change. This is selling a U.S. Senate seat.”

Chicago Alderman Brian Doherty Judy Keen, “Blagojevich case is a blot

on Chicagoans’ pride,” USA Today, December 11, 2008, p. 5A

Avoid The Either/Or Conundrum

Do the ends justify the means?

CONFLICTING VALUE

DISHONESTY

5. They understood that everyone has the right and the responsibility to speak up!

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Organizational Fear and Silence

There is never a problem with employees missing the ethical issues

Palpable Fear in Atlanta

“In sum, a culture of fear, intimidation and retaliation permeated the APS system from the highest ranks down.”

●Governor’s Task Force Report

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On speaking up

How to raise issues How to respond to issues Systems for raising issues Tracking raised issues Finger on pulse of movements:

Terminations, turnover, and those issues that do not seem to be ethics issues

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What you can’t change

Ultimately, you are dependent upon individuals.

Individual Action

Organization Regulations

Government and Systems Regulations

How do you find out what you need to know?

Promoting a flat organization “The video just astounded us. Our jaws

dropped . . . We thought this place was sparkling perfect.”

Anthony Magidow, General Manager, Hallmark-Westland Meat Packing Co.

David Kesmodel and Jane Zhang, “Meatpacker in Cow-Abuse Scandal May Shut as Congress Turns Up Heat,” Wall Street Journal, Feb 25, 2008, pp. A1 and A10.

Whatever happened to MBWA?

Fixing That Fear of Speaking Up Challenge Question/Challenge Meeting Alan Mulally strategies at Ford Ethics discussions: Time disparity How do we respond to employees who

raise issues? How do we respond to employees who

miss targets?

6. They watched for ethical slippage.

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Your Future Work Force

30%

20%

38%

76%

74%

55%

52%

81%

93%

0% 20% 40% 60% 80% 100%

Believe ethics and character better than most

Satisfied with their character and ethics

Lied on this survey

Stole from a store in past year

Lied to save money

Lied to parents in past year

Copied homework

Lied to teacher in past year

Cheated on a test

High School Students Surveyed

Josephson Institute 2012

“No. 176: Do not steal more than $3 worth of office supplies per quarter.”

—Kelly Williams Brown, from her book Adulting: How to Become a Grown-up in 468 Easy (ish)

Steps

“Or, you could not steal at all.” —M. Jennings

Society’s Shifting Norms: Honesty in Social Networking

How honest?

Totally honestFib a littleTotal fabricationFlat-out lie

31% 22%

21% 26%

Cheating in college: 11% reported cheating in 1963

49% reported cheating in 1993

85% reported cheating in 2013

50% graduate students reported

cheating in 2006

Your Future Work Force

Don McCabe, Rutgers, and Eric Alderman, Ohio State

It’s Fixable: Teach Them

It’s all new to them. Fifty to sixty years of moral relativism have brought different attitudes. One-third have strong values, and they can point to a singular event with a mentor who influenced them.

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A recent résumé study

50% had false information

The false information was material: degree; job title; previous employment

Recent examples: − West Virginia University and the governor’s

daughter

− Former Yahoo CEO Scott Thompson and his 1979 degree in computer science

20002005

2008

49% 50% 50%

76% 74% 74%

observed misconductthat would cause theirfirms a "significant lossof public trust."observed a high level ofillegal or unethicalconduct in last 12months.

In KPMG’s Business Ethics Survey, respondents consistently

Ethics at Work

2000 2005 2007 2008 2011 2013

55%

45% 41%

76% 74% 74%

ERC Survey

KPMG Survey

Survey respondents who have observed unethical conduct at work:

Ethics at Work

ERC: 60% of ethical lapses observed were committed by managers

We all think we are ethical.

None thought their ethical standards were lower than those of their peers in their organization (1%)

Society of Human Resource Managers

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“Have you ever run into anyone who said, ‘You probably shouldn’t do business with me. I am not to be trusted.’”

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Why do we all think we’re the most ethical person in the room?

1. We are not talking about it with others.

2. We have rationalized, labeled, and defended ourselves into believing we are ethical.

3. We’re doing so well that we equate performance with ethics.

4. We’re doing so well that we are offended when ethical issues are raised.

5. The failure to internalize and reflect.

What I Did in the Past Year

“Was charged the wrong amount at a restaurant (less than I was supposed to be charged) and I let it slide.”

“I accepted cable I had not paid for.” “While opening a car door I bumped the

car next to me and did not let the driver know.”

“Had to complete an essay for my child for homework.”

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What I Did in the Past Year

“I told relatives who called that we would not be at home so that they wouldn’t come visit.”

“I lied in a personal reference by giving a glowing review.”

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More . . . Family issues

“I told my wife this seminar started earlier than it really did.” “I went to an entertainment venue

without my wife knowing.” “I didn’t tell my wife about a

bonus payment I received.”

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What I Did in the Past Year

“I lied to get reimbursement for items not really damaged in a lightning strike.”

“We did some remodeling without a permit and needed to have one for that work.”

“Overstated my charitable deductions for tax purposes.”

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Some quiz questions

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Guess who said it!

"How many times do I have to say it? … Well, it can't be any clearer than 'I've never taken drugs.'"

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Lance Armstrong 2005

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A Few Quiz Questions

What CEO said, “We are the good guys. We are on the side of angels.” and “We are doing God’s work here.”?

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Jeffrey Skilling – while CEO of Enron Lloyd Blankfein – CEO of Goldman Sachs

Guess who said it!

“In today’s regulatory environment, it’s virtually impossible to violate the rules. It’s impossible for a violation to go undetected, certainly not for a considerable period of time.”

Bernie Madoff: 150 years for a $50 billion/18-year Ponzi scheme

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Guess Who Said It?

“I have done absolutely nothing wrong.”

Rod R. Blagojevich, former governor of Illinois

Guess Who Said It!

“I have not done anything wrong.”

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Lois Lerner – head of IRS Exempt Organizations Unit – retired

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Watch out for the fog!

Watch your analysis! Look for the simple answer. Don’t let fear or fear of loss get in the

way of the simple answer.

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