Slide 1. title slide Slide 2 Introduction Wave upon wave of corporate scandal has swept over the United States in recent years, completely drowning public and consumer trust in big business. High profile instances of corporate fraud such as Enron and Tyco shook the financial and political establishments in the United States and elsewhere around the world. Corporate financial reporting scandals brought into question the laws governing big business. Legislators have since responded by imposing a series of new obligations, restrictions, and punishments. The purpose? To regain consumer confidence in the corporate sector, by implementing a higher standard of accountability. Slide 3. Brief History Though corporate scandals seem to be a problem of modern society, history reveals that corporate scandals have existed from the earliest stages of big business. Industrialists of the early to mid 19th century were involved in the first corporate scandals of the United States. Jay Gould was one of the most notorious "robber barons" of the 1800’s. Along with Daniel Drew and James Fisk, he formulated a scandal involving the Erie Railroad. By issuing illegal stock and bribing state legislators, Gould accumulated a great fortune and became president of the Erie. In 1869, Gould and Fisk almost cornered the gold market until the U.S. Treasury released some of its own gold stocks, measures that lead to the Black Friday panic of 1869. The ensuing public indignation forced Gould to resign as director of the Erie in 1872 (Jenson, nd). Slide 4. Recent Scandals Recent Scandals: Two types of Fraud Between 2002 and 2003, twenty-eight publicly traded companies indicted on major corporate fraud and fraud related charges in the United States. There are many different types of corporate fraud; however, for the most part they can be divided into two categories, business law violations and accounting fraud. Here are a few examples of the most common. The following cases represent two different types of corporate fraud. Slide 5. Tyco and Enron Enron Named as one of Fortune's "100 Best Companies to Work for in America." In 2000, Enron was hailed by many, as an overall great company. It was even praised for its large long-term pensions, benefits for its workers and extremely effective management until its exposure in corporate fraud. As was later discovered, many of Enron's recorded assets and profits were inflated, or even wholly fraudulent and nonexistent. Enron filled bankruptcy in 2001. The fallout was enormous. Thousands lost jobs and retirement funds that were based wholly on the value of Enron stock, which after bankruptcy were worth next to nothing. Investigations into the matter began followed by federal indictments of more that 15 Enron executives. In 2005, former Enron CEO Jeffrey Skilling was found guilty of 19 counts of fraud, insider trading and conspiracy earlier this year he was sentenced to 24 years in prison. Enron founder Kenneth Lay. Lay was convicted of 10 counts of fraud and conspiracy. Lay passed away in July of heart problem (Jenson, nd) There are still billions of dollars in civil suits pending, though since Lays death, according to the doctrine of abatement, voids his conviction, those outcomes are questionable (Johnson, 2006). Tyco Former Tyco CEO Dennis Kozlowski and ex-CFO Mark Swartz were found guilty of stealing hundreds of millions of dollars from the manufacturing conglomerate. Kozlowski and Swartz, were accused of taking bonuses worth more than $120 million without the approval of Tyco's directors, abusing an employee loan program, and misrepresenting the company's financial condition to investors to boost the stock price while selling $575 million in stock. Earlier this year, they were both found guilty on 22 of 23 counts of grand larceny and conspiracy, falsifying business records and violating general business law. They face 15 to 30 years in prison. Because their crimes were considered both white and blue collar in nature, these two face the likelihood of spending the better of the next three decades in a state penitentiary. State facilities are quite different from the federal facilities that are typically reserved for corporate criminals (Funaro, 2005). Slide 6. The Many Costs of Corporate Scandals Real costs In 2002, the entire cost of corporate scandals in the United States was estimated at more than $5 trillion. That figure losses in the value of stocks, investment savings, jobs, retirement funds and tax revenue (“Top 10,” 2002). According to Carol Graham and Robert Litan of The Brookings Institution (2002), The United States lost as much as $42 billion dollars in GDP because of corporate scandals. More than 4,000 Enron employees lost their jobs - and many their life savings - when the company declared bankruptcy in December 2001. Investors lost billions (Johnson, 2006). Theoretical Costs Trust The public perceptions of corporations are that they cannot be trusted, this from a recent Lichtman/Zogby Interactive poll (2006). In which only 7% of persons polled said that they trust corporate leadership. Reputation Companies that survive a corporate scandal, such as Tyco, find that they have lost more than just money. They have damaged their reputation to the extent that business partnerships are drastically affected. Tyco, which has over 40 divisions, ranging from farm equipment to toys, has experienced a setback in all of their businesses (Kramer, 2006). Slide 7. Corporate Law and Ethics Corporate Law and Ethics The First Laws Do you recall the “Robber Barron’s” mentioned earlier? In the late 1800’s the system of “checks and balances” began to rise up against widespread corporate fraud. Not unlike today, the most significant of these “checks and balances” was the press. The reporting of scandals by newspaper reporters was taken to heart by the American public. A new political party was formed, on the platform of reforming business. The Populist movement led to the passing of laws to regulate corporations and the robber barons who owned them. However, the courts interpretation of “the sacredness of contracts,” struck down repeated attempts to protect society from labor and monopoly abuses (Jenson, nd). New Laws Sarbanes Oxley Legislation In simple terms, the Sarbanes-Oxley Act requires company executives to certify the accuracy and authenticity of corporate economic statements or face the prospect of civil or criminal action (Jenson, nd). SOX Law Provisions * Creation of a Public Company Accounting Oversight Board * New Roles for Audit Committees and Auditors * Criminal Penalties * Protection for Whistleblowers * Financial Reporting and Auditing Process changes * Certification by CEO and CFO (Accountability ) Corporate Governance Addresses how a Board of Directors oversees management, making sure the company is run well and that shareholders are treated fairly. It requires the board maintain independence from company management. COSO The Committee of Sponsoring Organizations of the Treadway Commission.” A framework of internal control. This written internal control framework supported by the organization, COSO. This framework is referenced within the SOX Act as a methodology to comply with this law.(Jenson, nd) Slide 8. Executives have top billing but 43 % of people admit to having engaged in at least one unethical act in the workplace in the last year, according to a 2005 survey conducted by PricewaterhouseCoopers. The same survey found that 75 % observed such an act and did absolutely nothing about it (“Combating,” 2006). Awareness The public is more aware of the issues Keep topics fresh regularly in-service and educate Transparency The word transparency implies openness, communication, and accountability. Quantity and quality of information a company provides its various constituents including shareholders and other capital providers, suppliers, customers, employees, etc. Ethical Code of Conduct Written code of conduct that reflects the company’s ethics and values Applicable to everyone from CEO to cleaning staff Slide 9. Recommendations Recommendations for DWI Ethics Hotline “Confidential, anonymous reporting mechanisms serve as an early warning system that enables organizations to react quickly to investigate issues and often resolve problems prior to increased malfeasance, costly stealing, litigation, or negative publicity. Spending a few dollars early on can save untold dollars and valuable time. It also creates a culture of ethical behavior that over time will diminish the prospects of these actions. When installed properly, confidential, anonymous reporting mechanisms can uncover a variety of information that can improve processes, resolve issues, and prevent catastrophic financial losses. Like a computer network and a website, an employee hotline was once just a good idea that top companies had adopted. Now it's a mandatory part of doing business.” (“Combating”, 2006). Mandatory Ethics Training “Ethics training empowers employees. It is based on the recognition that they are important actors in the work place - whose ethical thought and decisions matter to the well being of the company. Employees who feel respected in this way are more likely to take the types of steps, such as calling a concerns line, that - from a compliance and ethics program perspective - can be of critical importance to a company.” (Kaplan, 2005). This concludes the presentation on Corporate Scandals
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