Joe Pulitzer• 18th of April, 1847• Born in Mako, Hungary• New York City• Union Army during American Civil War• St. Louis, MO• St Louis Post-Dispatch & NY World• #1 Paper in the U.S.
Joe Pulitzer, cont.• Journalism as a university subject• Columbia University in New York• Died October 29, 1911• First Pulitzer Prize awarded 1917• Bust of Joe Pulitzer in a square in Mako• In 1988 Pal Fabry, Hungarian businessman living in New Orleans, LA established a Pulitzer memorial prize for Hungarian journalists
Opportunity• Ask questions• Clarify any myths• Gain a better understanding of U.S. corporations• Share some of your thoughts and ideas
Objectives• Provide a basic understanding of what constitutes ethical misconduct in the U.S.• Insight to two-historical U.S. cases• Share best practices
• Business Consulting Services Franchise – Coach business owners on how to improve time, team and money• Human Resource Business Partner Consultant, LLC – HR Consulting Practice
Business Background• Restaurant Manager & Area Manager Shoney’s Big Boy Enterprises Pizza Hut, Inc.• United Parcel Service Industrial Engineering, Operations and Human Resources District Human Resources Manager: Central Tex - San Antonio, Texas North Ohio - Cleveland, Ohio West Long Island - Brooklyn, Queens, Bronx, Westchester, NY
Education• University of Maryland University College – B.S. Human Resources – Master’s Business Administration (MBA)
Agenda• What is Ethics• Enron Case Study• WorldCom Case Study• What to avoid• Sarbanes-Oxley• Lockheed Martin Case Study• Best Practices• Questions
Opportunity• Ask Questions• Participate through interaction• Learn how business is conducted in the U.S.• Clarify any myths• I will ask you to share
Tell Me About You• First Name• Your Company – Local – Regional – Global
What is Ethics• What is ethics?• Review of one definition of ethics• Why is ethical behavior a problem?
Ethics• “Ethics is a set of values defining right from wrong.”• …ethical behavior is not black or white, right or wrong.
Examples of Ethical Issues• Cloning • Gene therapy• Abortion • Nuclear energy• Religious tolerance • Death penalty• Homosexuality • Politics• Population growth • Open and honest• Gifts and persuasion • Democracy• Drinking • Dictatorships• Smoking
Ethics & the Individual• Ethics are a personal set of values• …ethics are relative to our perception of reality, and are based on our point of view.• It begins when children are taught…• No one viewpoint can seek to define ethics.
Summary of Ethics• …ethics should not intrude upon the private lives of other individuals who are not harming anyone.
Case Studies• Enron and WordCom are not the norm• 99% of U.S. Companies are ethical• Two cases that have changed theway business is conducted in the U.S.
EnronCase Study• The Company• Insider Trading• Fallout• Pensions• Accounting firm Arthur Anderson• Societal & Legal Impact
Enron• Industry – Energy• Revenue – $111 billion in 2000• CEO – Ken Lay• Headquarters – Houston, Texas• Employees – 21,000• Recognition – “America’s Most Innovative Company” six consecutive years• Filed bankruptcy in 2001
Enron Products• Over 30 products• Natural gas, pipelines, and oil• Electricity, power plants, broadband• Pulp, paper, plastics and steel• Transportation, shipping, risk management,• Water, waste water,• Media, computer chips, investments
Where Are They Now?• 16 Employees pled guilty• 5 Others Found guilty at a trial• At least one suicide• Ken Lay, Chair/CEO• Jeffrey Skilling CEO/COO – Convicted in October 2006 – Lay – six counts of fraud (45-years) – Lay died on July 5, 2006 – Skilling 19 of 28 counts of fraud – Skilling serving 24-years and 4 months
Immediate Impact• Enron employees – Jobs – 401(k) pensions – Enron stock• Enron investors• Arthur Anderson Accounting Firm – Surrender licenses and right to practice – 100 Civil suits – 85,000 employees worldwide
Societal Impact• Primary reason for the creation of Sarbanes-Oxley Act (SOX) of 2002• The most significant change to federal securities laws since Franklin Roosevelt in the 1930’s and the Great Depression
WorldComCase Study• The Company• Multiple Acquisitions• Accounting Scandals• Bankruptcy• How did this happen?
MCI WorldCom• AT & T and the baby Bell’s breakup• Long Distance Discount Services, Inc. (LDDS) later became WorldCom• WorldCom purchased MCI• MCI WorldCom – WorldCom• 2nd largest long distance company in U.S.• Growth thorough acquisitions• Acquired by Verizon in 2006
The CEO• Bernard Ebbers – CEO LDDS …..• Ebbers leveraged stock for other investments• Declining stock• Banks made margin calls on Ebbers stock• WorldCom board made over $400 million in personal loans to Ebbers to cover his margin calls
Navigators• Scott Sullivan – CFO• David Myers – Controller• Buford Yates – Director of Accounting – Misrepresenting and misreporting financial numbers
Accounting Fraud• Underreporting “line costs” (interconnection expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them• Inflating revenues with bogus accounting entries from “corporate unallocated revenue accounts”
Internal Audit• WorldCom’s Internal Audit discovery• $3.8 billion in fraud• Alerted NEW audit company KPMG – KPMG replaced Arthur Anderson• True number was $11 billion in fraud• Filed bankruptcy in 2002• Changed name to MCI• Purchased by Verizon in 2005
Bernie Ebbers• Found guilty of fraud, conspiracy, and filing false documents• Sentenced to 25-years in prison (age 63)• Five other people pleaded guilty to charges
Ethics Issues• Marietta Police Department• Your home office• Tests in College• Don Imus• Coca Cola Company• South America• Terminations
Ethics Issues• Selection in China• Intellectual Capital in China• Child Labor• Internet porn sites• Internet at work• Meal allowance
Pressures that Compromise• Following boss’s directive• Meeting aggressive financial objectives• Helping the organization survive• Meeting scheduled pressures• Wanting to be a team player• Saving jobs
Pressures continued• Advancing boss’s career interest• Rationalizing that others do it• Feeling peer pressure• Resisting competitive threats• Advancing own career interests
Types of Misconduct• Research survey by SHRM• 24 types of misconduct observed• Top Five 1. Misreporting hours worked 2. Employees lying to supervisors 3. Management lying to employees, customers, vendors or the public 4. Misuse of organizational assets 5. Lying on reports / falsifying records
Misconduct Survey Misconduct Observed %Misreporting hours worked 59Employees lying to supervisors 53Management lying to employees 31Management lying to customers / public 31Misuse of organizational assets 29Lying on reports / falsifying records 28
Misconduct Survey Misconduct Observed %Sexual harassment 25Stealing / theft 25Fraud 19Withholding information from employees 18Withholding from customers / public 18Violations of Fair Labor Standards Act 17
Misconduct Survey Misconduct Observed %Violating privacy of employees 16Violation of discrimination laws 16Accepting or giving bribes, kickbacks, gifts 14Violations of OSHA regulations 8Violations of Family Medical Leave Act 8Obtaining competitor’s proprietary 8information
Misconduct Survey Misconduct Observed %Misrepresenting company financial assets 5Misusing insider information 3Violating environmental laws or 3regulationsManagement lying to shareholders 2Withholding information from shareholders 2Mishandling employee 401(k) accounts 1
Conflict of Interest• Conflict of interest: bribes, kickbacks, sharing inside information, falsifying records, defrauding customers, obstructing an investigation
Protection of Company Assets• Protection of company assets: misuse of company property, cash, information, ideas, intellectual property
Employment Practices• Employment work practices: Federal, state laws: sexual harassment, civil rights violations, discrimination, etc., reporting violations
Antitrust• Antitrust: laws, price fixing, bid rigging, allocation of customers, restraint of trade, how to distance yourself from a possible violation
Environmental Protection• Environmental protection: strict legal compliance with corporate, state and federal laws, personal and corporate responsibility
Influences of Ethical Behavior• Personal values• Credible enforcement of ethics violations• Attitude and behavior of supervisors• Attitude and behavior of senior managers• Friends and co-workers• Internal drive to succeed• Ethics related legislation
Corporate and Criminal FraudAccountability Act SOX
The Sarbanes-Oxley Act• Sarbanes-Oxley Act of 2002• Required by law• Major changes to the regulation of financial practice and corporate governance• Named after Senator Paul Sarbanes and Representative Michael Oxley
Reporting Responsibility• Corporate officers have reviewed the final report• No untrue statements or omissions• Financial statements and related information fairly present the financial condition• The signing officers are responsible for internal controls and have evaluated these internal controls within the previous ninety days and have reported on their findings
Reporting Responsibility cont.• List of all deficiencies in the internal controls and information on any fraud that involves employees who are involved with internal activities• Any significant changes in internal controls or related factors that could have a negative impact on the internal controls
Disclosure of Periodic Reports• Financial statements are published by issuers are required to be accurate and presented in a manner that does not contain incorrect statements or admit to state material information.• These financial statements shall also include all material off-balance sheet liabilities, obligations or transactions.
Management Assessment• Issuers are required to publish information in their annual reports concerning the scope and adequacy of the internal control structure and procedures for financial reporting.• This statement shall also assess the effectiveness of such internal controls and procedures.
Management Assessment cont.• The registered accounting firm shall, in the same report, attest to and report on the assessment on the effectiveness of the internal control structure and procedures for financial reporting.
Real Time Issuer Disclosures• Issuers are required to disclose to the public, on an urgent basis, information on material changes in their financial condition or operations. These disclosures are to be presented in terms that are easy to understand supported by trend and qualitative information of graphic presentations as appropriate.
Criminal Penalties• Up to 20 years imprisonment for altering, destroying, mutilating, concealing, falsifying records, documents or tangible objects with the intent to obstruct, impede or influence a legal investigation.• Up to 10 years for any accountant who knowingly and willfully violates the requirements of maintenance of all audit or review papers for a period of 5 years
Corporate SentencingGuidelines• Company fines• Individual fines• Jail time• Loss in share value• Company reputation• Impact to employee morale• Recruiting and attracting talent
EthicsThe Fabric of Business• 20-minute Video• A case study of Lockheed Martin, Inc.• Narration by Wayne Cascio, Ph.D.• Produced by The Society for Human Resource Management (SHRM) Foundation• Positive approach to managing ethics
Accountability• Corporate Compliance Officer• Internal Audit Team• Board of Director Responsible• Board Audit Sub-Committee• Training• Tracking and monitoring tools
Business Code of Conduct• An outline of responsibilities of or best practice for an individual or the organization• Set of principles of good corporate behavior adopted by the company
Training and Communication• Ethics and Integrity 1. New employee orientation 2. Policy and/or employee handbook 3. Periodic discussions in meetings 4. Formal annual communication 5. Performance reviews 6. Employee hotline
Whistle-blower Act• A whistleblower is an employee, former employee, or member of an organization, especially a business or government agency, who reports misconduct to people or entities that have the power and presumed willingness to take corrective action.• Generally the misconduct is a violation of law, rule, regulation and/or a direct threat to public interest -- fraud, health, safety violations, and corruption are just a few examples
Voluntary Reporting• Immediately report appropriately – Board of Directors – Government – Shareowners• Correct and put controls in place
Discipline• The punishment should fit the crime• Unintentional – Write-up – Impact on performance review• Deliberate – Termination
Social Responsibility• Report appropriate information – Suppliers and Vendors – Employees – General public