Views on Corporate Scrutiny: Where Things Go Wrong
Judy B. Rosener
Professor of business and government in the Graduate School of Management at the University of California at Irvine
We are experiencing "The Perfect Corporate Storm."
A number of business currents have come together to create a sea change in our attitude toward corporate America.
Let's start with deregulation. For several decades, belief that business could regulate itself and perform more efficiently and effectively without government oversight led to widespread deregulation and privatization.
In many industries, including airlines, telecommunications, oil and gas, and banks, government oversight was greatly reduced.
When then-SEC head Arthur Levitt tried to bring about changes in accounting rules and principles, perhaps anticipating problems with the accounting-consulting relationship, he was rebuffed.
Some would say this was due in large part to corporate campaign contributions that influenced key legislators. New ways to employ stock options, push up stock prices, report earnings based on expectations, and develop complex financial partnerships and alliances all led to enticing opportunities for individual profit making. Evidence also suggests that corporate boards and their audit committees may not have acted as a proper check on management.
And what about chief financial officers? Historically CFOs have been CPAs, or at least had extensive accounting experience. Today, CFOs are increasingly MBAs primarily concerned with developing business strategies, financial instruments, and dealing with investor relationships.
Ironically, as the CFO role has become more important, attention to accounting practices appears to have become less important.
In the 1990s the national debt turned into a surplus, the dot-com world was booming, unemployment was at its lowest level in years, and average citizens became stockholders in large numbers. There was a sense the free market was working as it should, and that former President Ronald Reagan had been correct when he said government is the problem, not the solution to economic problems.
No doubt this led to President Bush's belief that a large tax cut was justified.
These political/economic breezes, by themselves, did not command much attention. Nor did an important social undercurrent working its way to the surface a history of minimal consequences for those whose corporate behavior was considered unethical and illegal.
It is my belief this undercurrent led to hubris on the part of some business leaders who interpreted the cost/benefit analysis as others paying the costs while they received the benefits of the booming stock market. Notice I say "some business leaders," because clearly most in the business community are as outraged at the greed they see around them as their employees who have lost their jobs and life savings.
Like the "perfect storm" of movie fame, this corporate storm too shall pass. The question is what will we learn from seeing the confluence of forces mentioned above?
Professor of enterprise and society, UCI's Graduate School of Management.
We cannot remain sanguine that the current rush by the folks in Washington and state capitals to change public policies will lead to fewer Enrons in the future. After all, they are the same people who regularly cook their own books in grand style and have made interest on corporate debt, but not dividends, tax deductible, encouraging firms to increase their indebtedness, and perhaps increasing the count of bankruptcies.
They also have throttled corporate buyouts and hostile takeovers in response to the leveraged buyout craze of the 1980s, in the process giving executives more freedom to mismanage their firms.
The Enron case, complemented with an array of similar accounting scandals, raises many interesting issues that blend academic and practical concerns, for example:
- How special purpose entities can be used to manage firm risk, for good and bad.
- How stock options can affect executives' incentives to work for the good of the stockholders and to cook the books.
- How wrongdoing in a firm's accounting and financial dealings can be managed and detected.
- How expensing of stock options may or may not improve the accuracy of income statements.
- How (or which) forces afoot in modern business governance structures may be causing executives to lose their moral mooring.
- How certain "expenses" might rightfully or wrongfully be construed as capital expenditures.
- How various financial incentives can corrupt independent auditors and can give rise to boards becoming derelict in their duty to monitor managers and their auditors.
- How politics may be the handmaiden of bad economics and easily abused accounting rules.
- How a largely unfettered market for corporate control may be indispensable for efficient (and honest) corporate governance.
Here in the Graduate School of Management at UC Irvine we have taken the lead among business schools with a course this fall that will make a holistic examination of the Enron failure. It will be taught by nine different lecturers from almost as many disciplines.
The lecture hall will be packed with talented, experienced, and (if I can believe their e-mails) eager students who come from our full-time and executive degree programs and alumni network and who believe that there is much to be learned from an unheralded but old source of business acumen failures.
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