The Millennial Accountant Jack Lachman Assistant Professor of Accounting Accounting Department, School of Business Brooklyn College of the City University of New York E-mail:
[email protected] Miriam Gerstein Assistant Professor of Accounting Accounting Department, School of Business Brooklyn College of the City University of New York E-mail:
[email protected] Hershey H. Friedman Professor of Business Finance and Business Management Department, School of Business Brooklyn College of the City University of New York E-mail:
[email protected]
ABSTRACT After the Enron scandal of 2001 and the financial meltdown of 2008, we have to reconsider how accountants should be taught to be ethical. What is needed is an approach that stresses a new role for accountants and auditors. This new approach should be one that emphasizes and incorporates servant and spiritual leadership qualities. In addition, the accountant has to understand the importance of honest record keeping for all stakeholders, not just executives. Many organizations now understand that a new kind of CEO is needed if an organization is to thrive in the long run. This CEO should not focus only on maximizing short term profits and shareholder value, but rather he or she is concerned with customer satisfaction and the needs of all stakeholders. The same is true of accountants and auditors. They have to be concerned with factors that affect the long-term viability of a company and the needs of all stakeholders and not simply make the financial statements look good in order to maximize the value of the company’s stock.
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INTRODUCTION
We live in a world where integrity and character are no longer a luxury. The Great Recession of 2008 has made us all aware of what happens when leaders lack integrity. The recession also has made many educators realize that business schools were not doing a good job teaching ethics and morals. The financial crisis was without a doubt the worst debacle the United States has experienced in its history since the Great Depression. Millions of jobs were lost many permanently, and millions of Americans lost their homes. Trillions of dollars in market value were lost and income inequality worsened. Americans were not the only ones that suffered, the entire world suffered economic distress. What lessons can be learned from the financial debacle? One major lesson that should have been learned is that greed can have cataclysmic repercussions. Firms that do not behave in an ethically and socially responsible manner can put the entire financial system at risk. Another key lesson is that the accounting profession has a critical role to play in the viability of a company, as well as in the sustainability of the entire financial system. Accountants, who are indifferent to, or actually abet financial irregularities at a company, can place the entire firm at risk.
It is interesting to note that the financial meltdown of 2008 did not suddenly appear out of nowhere. The corporate world headed by some greedy CEOs was leading us down a dangerous path for many years. An early warning signal was the Savings and Loan disaster, in which 1,043 banks failed with a cost to U.S. taxpayers of about $124 billion (Curry and Shibut, 2000). That
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disaster took place between 1986 and 1995. A few years later came several colossal corporate scandals including Enron, Tyco International, Adelphia, Global Crossing WorldCom and many other major companies which filed for bankruptcy. These companies were found to have used dubious accounting practices or engaged in outright accounting fraud to deceive the public and enrich senior executives. In fact, the Sarbanes-Oxley Act of 2002 was enacted in order to prevent future financial disasters in large companies such as Enron.
Suskind (2008) reports that Alan Greenspan, Chairman of the Federal Reserve, was at a meeting on February 22, 2002 after the Enron debacle and was upset with what was happening in the corporate world. Mr. Greenspan noted how easy it was for CEOs to “craft” financial statements in ways that could deceive the public. He slapped the table and exclaimed: “There’s been too much gaming of the system. Capitalism is not working! There’s been a corrupting of the system of capitalism.” This was another warning sign that it was easy for unrestrained greed to harm the entire economy. Greenspan could just as easily have said: “The accounting industry is not doing its job. There’s been a corrupting of the system of accounting.” Without honest accounting, capitalism is doomed to failure.
Post-Enron Despite the Sarbanes-Oxley Act of 2002, Wall Street found new ways to make money for executives who were involved in taking on huge amounts of risk via toxic subprime mortgages and credit default swaps. What is astounding is that the auditors either did not see, or failed to disclose the kind of deceptions that was going on. These included: •
Providing NINJA (no income, no job, and no assets) mortgages.
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•
Providing ARMs (adjustable rate mortgages) to the public at very attractive rates (even 0%) for the first few years to entice the poor (low Income) to buy homes knowing very well that they would not be able to pay up once the new rates kicked in and skyrocketed.
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Selling collaterized debt obligations consisting of sub-prime mortgages of extremely dubious quality when it was clear the borrowers did not have the income to pay off the loans.
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Shorting (i.e., betting against) securities known to be of inferior quality which was sold to the issuers’ own customers.
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The use by banks of - inaccurate, incomplete and flawed foreclosure documents to unjustifiably evict homeowners.
An example of risk taking and deception is what occurred at this company at A.I.G. Financial Products Division. This company at the time had a 377-person office, based in London that nearly destroyed this trillion dollar mother company, which had over 100,000 employees. This small London office found a way to make money by selling insurance (known as credit default swaps) to financial institutions holding very risky collateralized debt obligations. A.I.G. Financial Products made sure that its employees did very well financially. They earned $3.56 billion during the period 2001-2007 before the firm imploded (Morgenson, 2008). When the financial crisis started, it became quite obvious that there was no way that A.I.G. had enough money to cover the credit default swaps. Without government intervention, A.I.G. would have gone bankrupt and it would have caused a devastating impact upon the global economy.
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Another example of fraud and deception is the group of Chinese banks that are suing Morgan Stanley for selling collaterized debt obligations, consisting of the worst kind of sub-prime mortgages and then betting against them. Internally, people working at Morgan Stanley, referred to the securities as “Subprime Meltdown,” “Hitman,” “Nuclear Holocaust,” or in scatological terms as a “Bag of ----.” Clearly, the investment bankers were well aware that these securities (known as Stack 2006-1) were of dubious quality (Eisinger, 2013).
What and where was the
role of the auditors while all of this was going on?
The scandal involving Bernard Madoff, which has been called the largest Ponzi scheme ever, also serves to show the results of what can happen when a “greed is good” approach is used to run a business and the auditors are lax in doing their jobs or look the other way. Gandel (2008) notes that auditors at KPMG, PricewaterhouseCoopers, BDO Seidman, and McGladrey & Pullen all certified that all was well with the many feeder funds that had invested with Madoff. Clearly, auditors were not acting responsibly and the CEOs running these feeder funds did not take the concept of due diligence seriously. As long as large profits were being earned, senior executives were not concerned as to what was really going on. CEOs in the banking and insurance industries allowed their firms to take huge risks in order to increase their own personal bonuses. New types of mortgages were issued to individuals who were unable to afford the payments and were unable to repay their loans. This practice resulting in increased revenues to the firms as well as an increase in bonuses paid to CEOs and executives. Where were the auditors? Obviously, they were not doing their jobs.
The number of banks and financial institutions that have been sued for dishonest practices that
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contributed to the financial crisis is staggering and inconsistent with an ethical society. Richard M. Bowen III, a former Citigroup executive, attempted to report that his firm was purchasing the riskiest subprime mortgages and then packaging them as “safe” investments in order to sell them to customers. Mr. Bowen whistle blowing resulted in being fired in January 2009 (Cohan, 2013). There are currently eight federal agencies investigating JPMorgan Chase alleged wrongdoing that involves everything from failure to alert authorities about suspicious activities involving Bernard Madoff, and not being honest with regulators about risky deals that ultimately cost the company $6.2 billion (Silver-Greenberg and Protess, 2013).
What is ironic is that a significant number of CEOs, who led their firms to insolvency, or close to it, did quite well financially for themselves. One example is Richard Fuld, CEO of Lehman Brothers, who earned approximately half-a-billion dollars from 1993 to 2007, the year before Lehman Brothers sued for bankruptcy. Another example, is that of E. Stanley O’Neal, was CEO of Merrill Lynch, from 2003 to 2007, who presided over the firm’s catastrophically deteriorating capital position that led to its sale to Bank of America the year after his ouster O’Neil walked away from the shambles he had help to create with a severance package worth over $161 million, in addition to the $100 million he received in compensation in 2006 (Kristof, 2008). The outrageous salaries of the CEOs who helped destroy their own mega firms and undermined the very fabric of the national economy has served to reinforce the view that CEOs sole interest is their own enrichment with little concern for their firms, their employees and society at large. The biggest losers in the global financial crisis of 2008 were not the CEOs; but rather the employees, shareholders of the firms destroyed by ruthless and corrupt chief executives, as well as the taxpayers, whose money paid for the government bailouts that followed. Granted the
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CEOs are chiefly to blame for the most recent economic meltdown, the fact remains that the accountants and auditors allowed it to happen and their failure to blow the whistle on the chief perpetrators must be noted and analyzed if future financial debacles are to be prevented.
New Scandals
Financial scandals are unfortunately not a thing of the past. The Libor (London Interbank Offered Rate) scandal involving the rigging of one of the most important interest rates of finance has made it quite apparent that corruption is now the norm in the corporate world. This scandal shook the belief in the integrity of the banking system and begs the question of the role of bank auditors and their whereabouts as the scandal was transpiring. This has placed the accounting profession under further scrutiny. In the aftermath, banking executives now reportedly spend about fifty percent of their time dealing with legal matters and regulatory issues rather than focusing on business growth (“The Libor scandal”).
Hewlett-Packard shocked Wall Street by claiming it discovered “serious accounting improprieties” and “a willful effort by Autonomy [a computer software company] to mislead shareholders.” HP apparently paid a ridiculously inflated price – $11 billion– for Autonomy. HP is alleging that Autonomy inflated revenue and gross margins and “was booking licensing revenue upfront before deals closed” (Gupta and Leske, 2012).
The number of major financial scandals we have seen during the last three decades is truly astonishing and they have made laughing stocks of concepts such as accounting ethics,
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government ethics, and corporate ethics. One can find a long list of accounting scandals at the Wikipedia website (http://en.wikipedia.org/wiki/Accounting_scandals). The ten largest bankruptcies in American history were: Lehman Brothers, Washington Mutual, Worldcom, General Motors, CIT, Enron, Conseco, Chrysler, Thornburgh Mortgage, and Pacific Gas and Electric (CNNMoney.com, 2009). Accounting malfeasance played a significant role in at least three of these bankruptcies. Cantoria (2010) provides a list of 10 major accounting scandals that caused significant damage to the corporate world and states that “In the midst of all these accounting anomalies, the accountancy profession and the role it plays came into focus. Accountants helped in misleading the public by certifying that the financial reports of fraudulent companies were true and correct.”
It is as though we are seeing a race to the bottom by accounting firms, banks, Wall Street firms, and corporations all apparently trying to prove that they can bend the rules and get away with it. Given all of the enumerated scandals and the damage they caused, it should be obvious that maintaining high ethical standards and doing the right thing is the best long-term strategy for any company. Companies that do not have a moral compass are destined to find themselves out of business. Indeed, doing what is morally correct is the optimum strategic move in virtually all cases (Lennick and Kiel, 2011).
Importance of Integrity Values and integrity are extremely important in running an organization. Lennick and Kiel (2011: xxxii) state: The integrity crises of the first decade of the 21st century have been devastating. But they have not yet convinced enough leaders
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of the importance of morally intelligent leadership. How many wake-up calls do leaders need to get the message that their ultimate success depends on moral leadership? Will leaders get another chance to do the right thing? Given the precarious nature of today’s global economy, we fear that this wake-up call to choose integrity over greed might very well be our last … how can any leader afford to ignore the call to put moral values at the center of what they do?
What can be learned from the above crises, and in particular, the financial meltdown of 2008? First, we should recognize that what we have experienced is not the breakdown of an economic system but rather primarily a meltdown in values of those who are in a position of leadership. As Weinstein (2009) notes: But there is one kind of problem the Obama Administration has yet to tackle, even though it may be the most pervasive one of all. It is a distressing issue about which everyone complains but no one has been able to address effectively: The widespread failure of our leaders—and the rest of us—to take ethics seriously. Porter (2012) cites a study by the economists Paul Romer and George Akerlof that indicates that “the most lucrative strategy for executives at too-big-to-fail banks would be to loot them to pay themselves vast rewards — knowing full well that the government would save them from bankruptcy.” This is why we need someone other than a CEO to ensure that a company is being run with integrity. Corporate executives are more concerned with maximizing corporate and personal profits than behaving morally and ethically. A study by Zingales, Morse, and Dyck estimated than in any given year - 11% to 13% of large American companies were committing fraud (Porter, 2012).
Teaching Ethics
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What needs to be done to ensure that organizations are truly concerned about integrity? Friedman, Friedman, and Kass-Shraibman (2008) assert that CEOs have to see their role in a new light. It can no longer merely be about maximizing shareholder wealth or maximizing the profits of the firm. CEOs today have the responsibility to ensure that firms behave in an ethical manner and do what is right for all stakeholders – customers, suppliers, employees, local communities, and the environment. They feel that CEOs have an obligation “to help humankind achieve its ultimate goal of creating a just and caring society.” The new model of the CEO, according to Sydney Finkelstein, an expert on failed leadership, is to search for a man or woman who has the “highest ethical standards, who can lead by example, and who can build a strong effective team around him or her… rather than the cowboy riding in to provide the magic answer for the company” (Tischler, 2007).
The same can be said of the accounting profession. Accountants and auditors have to see their role in a new light. Ethics courses taught in institutions of higher learning are not accomplishing what they should. Many of the individuals responsible for the financial crisis had MBAs and took the required ethics courses. It is not surprising that one study found that 56% of MBA students cheated on a regular basis in college, a percentage that is higher than those of students who cheated in any other areas of study (Holland, 2009). In fact, there is evidence that students who complete MBA programs are less ethical at the end of the educational program than when they started (Etzioni, 2002). On one hand, there is a growing body of evidence that suggests that we cannot teach students to be ethical using the current methods of instruction (Bowden & Smythe, 2008). On the other hand, there is an emerging consensus, that courses in business ethics can help students know themselves and their own moral values, improve their ethical
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sensitivity and awareness, and attain confidence and courage in making ethical decisions that can provide them with the ability to question decisions that have ethical implications (Bowden & Smythe, 2008).
One reason that courses in ethics may have little impact is that their lessons are negated by other courses. The most powerful idea taught in a finance class is one that probably played a key role in causing the Great Recession of 2008, and that is the goal of the firm is to “maximize shareholder value.” Jack Welch, former CEO of GE, referred to this goal as the “dumbest idea in the world” (Denning, 2011). Mangan (2006) also feels that business schools inadvertently teach students that “greed is good” when they focus on shareholder profits rather than improving society. Whereas Mangan’s recommendation is utopian in any society and particularly so in capitalist society, recent history indicates that the key to long-term business prosperity is to focus on the goal of satisfying the needs of all stakeholders including society, and the maximizing of customer satisfaction.
But what are we actually teaching accounting students? Accounting students generally take courses in microeconomics and macroeconomics and are also being exposed to economic theories in many other courses. One pillar of mainstream economics is based on the famous statement of Adam Smith in his classic work, TheWealth of Nations: that “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest.” Smith demonstrated how self-interest and the “invisible hand” of the marketplace allocate scarce resources efficiently. Students are taught that “economic man” or homo economicus act with perfect rationality and is interested in maximizing his/her self-
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interest. In other words, rational people are concerned only about their own needs (Friedman and Friedman, 2008). Despite the Great Recession of 2008, many accounting students believe that self interest, free markets and deregulation result in great prosperity for everyone. Howard (1997) uses the expression “tragedy of maximization” to describe the devastation that the philosophy of maximizing self-interest has wrought. Pitelis (2002) shows that “in the absence of restraint, efficiency and productivity can be the biggest foes of efficiency and productivity!” Unrestrained capitalism that is obsessed with self-interest and is unconcerned about the long-run, can lead to monopoly, inequitable distribution of income, unemployment, and environmental disaster (Pitelis, 2002). Considering how close the economy came to the abyss in 2008 we can add that unrestrained capitalism can also lead to the destruction of companies and demise of the entire economic system. Special Role of Accounting
What the corporate world desperately needs is a new kind of accountant “the millennial accountant”. One who is not motivated by greed and ambition to build a company where all stakeholders benefit. Accountants and auditors have to redefine their roles in an organization along the lines of the concept of servant leadership. This concept was first introduced by Robert K. Greenleaf in 1970 in an essay entitled “The Servant as Leader” (Spears, 2004). Much of Greenleaf ‘s notions of leadership may be found at The Greenleaf Center for Servant-Leadership website at: http://www.greenleaf.org. In addition, management, as well as the religious literature contains numerous books and articles on the concept of servant-leadership (Autry 2001; Blanchard 2003; Greenleaf 1983). Servant leaders care for their employees and want them to succeed and to reach their potential. They empower others and are facilitators. They are not concerned with personal aggrandizement. The servant-leader is the antithesis of the autocratic,
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authoritarian, leader who is primarily concerned with power and wealth. He cares about people and wants them all to be successful. Spears (2004) finds ten characteristics in the servant-leader: 1. Listening intently and receptively to what others say. This, of course, means that one has to be accessible. 2. Having empathy for others and trying to understand them. 3. Possessing the ability of healing the emotional hurts of others. 4. Possessing awareness and self-awareness. 5. Having the power of persuasion, influencing others by convincing them, not coercing them. 6. Possessing the knack of being able to conceptualize and to communicate ideas. 7. Having foresight; which also includes the ability to learn from the past and to have a vision of the future. 8. Seeing themselves as stewards, i.e., as individuals whose main job is to serve others. 9. Being firmly dedicated to the growth of every single employee. 10. A commitment to building community in the institutions where people work.
Accountants and auditors must to be taught that they have a key role to play in making the system work. Their job is to prevent CEOs from distorting the true picture of the financial health of a company. The job of the auditor is to ensure transparency. Whereas auditors may be paid by the companies they audit, they must understand that their work impacts the many stakeholders, as well as investors. Company employees have a huge stake in what the accountants and auditors do. By the company taking huge unjustifiable risks in order to enrich a few executives, it is jeopardizing the very existence of the company and hence the jobs of all its rank and file employees who will not be walking away with past profits and severance pay. As we know, many employees have lost their pensions as well, as their jobs, when companies went bankrupt.
Spiritual Leadership
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Lynch and Friedman (2013) discuss some of the problems with the construct of servant leadership. They state: One of the shortcomings of the concept of servant leadership is that servant leaders might easily focus too much on the needs of followers rather than the needs of the organization. A servant leader might also be more concerned with the needs of followers without considering the needs of society. In fact, a servant leader might do what is best for his followers without necessarily considering the higher values of truth, justice, peace, compassion, and human dignity. A servant leader who is obsessed with the needs of followers might not see any reason to be concerned about world poverty. One might even be able to rationalize dumping hazardous wastes into rivers and oceans in places where there is no regulation if it would allow a firm to provide bonuses for all employees and survive. One can easily argue that compassion has no place in a firm headed by a servant leader. Why should a firm go out of its way to hire, say, people with special needs or other handicaps if it will make other employees uncomfortable and not help the bottom line? What happens when a firm has the opportunity to add to everyone’s bonuses but in order to do so must engage in legal, but immoral business practices? Google decided not to do business in China because of the way it treated its citizens. Of course, this kind of attitude can result in reduced bonuses for employees. Servant leadership is not enough to ensure a successful organization. Another construct that is relevant to accounting is that of spiritual leadership. Workplace spirituality is not the same as religion and certainly does not have to be linked to any organized religion. Workplace spirituality has been defined as: A framework of organizational values evidenced in the culture that promotes employees’ experience of transcendence through the work process, facilitating their sense of being connected in a way that provides feelings of compassion and joy (Giacalone and Jurkiewicz, 2003: 13). Many of today’s students and professors are interested in spirituality. They are searching for meaning and purpose in life. Spirituality has become so important that Astin (2004) argues that
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it deserves a central place in all liberal arts education. People want to feel that their job is meaningful and has a larger purpose than simply making a living. The idea that your work can help others and improve the world is part of being in a spiritual workplace. Their attitude to work changes when there is a feeling that the job is significant and valuable to others. There is a feeling of joy when people work with others in a way that benefits all. Rhodes (2006) avers: Today’s spiritual organization is deliberate in implementing a vision that is built around contributions to the betterment of mankind. It promotes work outside of the organization that contributes to and “gives back” to society through community and volunteer service. Spiritually aware managers and businesses consider themselves servants of employees, customers, and the community.
A spiritual leader ensures that there will be spirituality in the workplace (Stone, Russell, and Patterson, 2004; Fry, Matherly, Whittington, and Winston, 2007). Fry (2003) believes that a spiritual leader “must primarily motivate workers intrinsically through vision, hope/faith, and altruistic love, task involvement, and goal identification. He feels that workplace spirituality involves: 1. Creating a vision wherein organization members experience a sense of calling in that their life has meaning and makes a difference; 2. Establishing a social/organizational culture based on altruistic love whereby leaders and followers have genuine care, concern, and appreciation for both self and others, thereby producing a sense of membership and being understood and appreciated. These twin concepts of servant leadership and spiritual leadership must be stressed in all advanced accounting courses. The accountant/auditor of the future has to see his/her role as someone whose job is to ensure the long-term viability of a firm while understanding the importance of improving the world. It is not simply about following the accounting principles
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and rules. After all, it is quite easy for good accountants to find clever ways to manipulate the rules for the benefit of the CEO. Ethics courses are not enough. The role of the accountant has to be redefined if capitalism is to thrive. The new kind of accountant/auditor is a person who understands that his/her role is to be an honest protector of the rights of all stakeholders. Accountants and auditors have a responsibility to all the stakeholders. They should not allow their companies to become another Enron. The auditor can work for the CEO to the detriment of the long-term viability of the company or work for all stakeholders. Numerous papers have been written about the problem of auditor independence and conflicts of interest (e.g., Moore, Tetlock, Tanlu, and Bazerman, 2006; Hilton, 2012). Auditors who feel that they are servant/spiritual leaders will be able to see quite clearly the immorality of serving only the interests of the CEO.
Conclusion
There are very convincing reasons for educators to take accounting irregularities seriously. A COSO study based on 350 cases of financial fraud found a strong correlation between fraudulent financial reporting and subsequent bankruptcy and/or delisting from a stock exchange. This COSO study also found that in 90% of the cases, the CEO and/or CFO was implicated in the fraud (Accounting Today, 2010). Conflicts of interest of this type played a major role in the Great Recession of 2008 (Friedman and Friedman, 2008). A Pew Center survey shows that sixty-one major cities in the United States have a gap of approximately $217 billion in unfunded pension and retiree healthcare liabilities (Pew, 2013). Recently, Detroit went bankrupt and the same could happen to many other cities over the next several years.
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Trust in corporate America is declining rapidly. Indeed, 62% of Americans feel that corruption and dishonesty are widespread over corporate America. About 75% of Americans believe that corporate dishonesty has increased during the last three years. It is well known that capitalism cannot function without trust. As Nobel laureate Kenneth Arrow remarked: “Virtually every commercial transaction has within itself an element of trust” (Porter, 2012). If the accounting profession does not do its job, capitalism will find itself in deep trouble. It has become imperative for accountants to take a leadership role in ensuring that companies are run for the benefit of all stakeholders. REFERENCES
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