Ethics Newsline®

Imagine this: The football game is in full flush. The referee is charging down the field. He clicks on his microphone and barks a command — but not to make a public announcement to the fans. He’s talking privately to the head coach of one of the teams. Why? Because he’s not only a referee. He’s also that team’s defensive line coach.

Well, why not? If you’re that team, it makes good sense to hire him. After all, he’s in the thick of the action. Who better to judge what’s going on? Sure, it looks like a conflict of interest. But he has promised the fans he’s an honorable man, fully able to separate his careful neutrality as referee from his fervent dedication as coach. Besides, refs don’t make a fortune. Doesn’t he have the right to maximize his earnings by offering his expertise to a willing buyer?

Only one problem: It’s an extremely bad idea for the integrity of football.

But this parable isn’t about football. It’s about Enron, Arthur Andersen, and the suspect but highly lucrative practice of allowing a single firm to fill the roles of both referee (or auditor) and coach (or consultant). That’s what Andersen was doing for Enron. And as recent events make clear, that’s an extremely bad idea for the integrity of business executives, public corporations, and the entire financial marketplace.

Finance, like football, depends on referees who are independent and ethical. Without them, neither fans nor investors can be sure what they’re watching. That’s when the fans go home. And that’s when investors sell off — as, apparently, they did in droves last week. In both cases, the unspoken four-word message is the same: “We don’t trust you.”

Those are chilling words. Trust, after all, is the offspring of integrity. And when integrity ebbs, so does the basis for fair play in markets or sports. Chilling, too, is the recognition that, in business at least, this ebbing of integrity may not be so new. Consider some of the cases that have recently touched Arthur Andersen:

• 1999: Andersen agrees to pay $90 million to settle an investor suit charging that it triggered losses of about $300 million at Colonial Realty, a Chicago real estate company that went bankrupt in 1990.
• 2000: Former Pier 1 chief financial officer Robert Herndon — who was once an auditing partner at Andersen — agrees to pay $75,000 to settle allegations that he hid $20 million in losses from shareholders and management.
• 2001 (May): The Securities and Exchange Commission charges that former Sunbeam Corporation CEO Al Dunlap, aided by Andersen auditors, “orchestrated a fraudulent scheme to create the illusion of a successful restructuring of Sunbeam” that cost shareholders billions of dollars.
• 2001 (June): Andersen agrees to pay a $7 million civil penalty for allegedly issuing what the SEC called “materially false and misleading audit reports” on behalf of Waste Management, the nation’s largest trash hauler.

To be sure, some of these are settlements with no admission of guilt. And one, involving Pier 1, may be guilt by association. But when one of the most highly regarded of the “big five” audit firms sinks this deep into a reputational taint, those fine points may be lost on the public. No wonder investors are concerned. They’re worried that the entire structure of corporate accounting — and of accountability itself — may be flawed. That means they don’t know — and perhaps can never know — what they’re buying.

Not all those flaws would be corrected simply by separating the consulting from the audit function. Other adjustments may also be needed, such as requiring firms to change audit firms every few years. That way, auditors may be more willing to tell the client the unvarnished truth and so risk dismissal. If you’re going to be dismissed anyway, candor comes more easily.

What’s clear is that greed needs to drained from the auditing system, and that moral courage needs to be poured in. The auditor’s lust for more consulting business deserves to be rebuked. And the auditor’s courage in standing up to management — even at the risk of dismissal — needs to be enhanced. Structural changes can help.

In the end, however, the real issue is the ethics of those within the structure. Only when that’s in place will the fans — both of teams and companies — again have reason to return to their respective stadiums.

(c)2002 by the Institute for Global Ethics

“I’m like a mouse looking up at an elephant asking the elephant to surrender, quite frankly.”

WASHINGTON
President Bush last week sent to Congress a plan to grant more control of investment decisions to employees, following revelations that Enron workers were forced to hold on to company stock for many years and were prevented from selling the plummeting stock because of a trading freeze imposed when the company changed administrators of the tanking 401(k) plan.

The Bush plan would allow workers to sell shares in their plans after three years, require companies to give 30-day notices before implementing “administrative lockdowns,” or trading freezes, and will hold company executives responsible for investment losses incurred during the lockdown.

“It will level the playing field,” Secretary of Labor Elaine Chao said, according to a CNN report. “It will give American workers choice, confidence, and also control.”

Enron employees lost more than $1 billion in company stock in their 401(k) plans when the company collapsed last December, bringing the company stock price plummeting to less than $1 per share. They were prevented by administrative rules from selling their stock even as they saw its value plummet.

The Bush proposal came after a three-member task force appointed by Bush launched a review of pension laws. The task force included Chao, Treasury Secretary Paul O’Neill, and Commerce Secretary Donald Evans.

Congressional Democrats agreed on the need for 401(k) overhaul, but claimed that Bush’s proposal didn’t go far enough. Sen. Majority Leader Tom Daschle (D-South Dakota) said that they would soon offer a “much tougher and more comprehensive” alternative, according to a report in the Los Angeles Times.

WASHINGTON
The Senate Commerce Committee last week unanimously voted to subpoena former Enron chairman Kenneth Lay to testify in the panel’s ongoing investigation into the financial meltdown of one of the nation’s energy giants.

Lay has refused to answer questions regarding the allegedly suspect accounting and reporting practices that led to the company’s collapse.

“We have no choice,” said Sen. Byron Dorgan, (D-North Dakota). The vote came as another Senate committee heard testimony from former employees whose retirement savings were obliterated by the company’s collapse because of a controversial requirement that workers hold company stock in their 401(k) plans for years.

Lay had been scheduled to testify before the committee Monday morning, but backed out at the last minute, claiming the hearings had taken on a “prosecutorial tone,” according to the Washington Post.

The last-minute decision infuriated lawmakers. Lay “should not have expected it would ever be a walk in the park” to testify at a congressional hearing, said Dorgan.

Lay was also ordered to appear before a House panel on Feb. 14, according the Associated Press.

Most aides and observers don’t expect Lay’s testimony to unearth much information about the company’s collapse. “I’ll bet you a dollar to a doughnut that he doesn’t testify and invokes his right under the Fifth Amendment,” said Sen. John Breaux, (D-Louisiana).

Proving Sen. Breaux correct, Lay this week said he would refuse to appear before Congress, invoking his right to refuse providing testimony that could incriminate him, reported the New York Times.

“Under the instruction of counsel, Mr. Lay will exercise his Fifth Amendment rights at the Tuesday hearing,” spokewoman Kelly Kimberly confirmed.

Special to Newsline from Canadian correspondent Errol P. Mendes

TORONTO
The Globe & Mail is reporting that the Canadian Imperial Bank of Commerce (CIBC) was a major creditor in at least two of the dubious limited partnerships that are alleged to be at the center of a cover-up of Enron’s financial situation.

CIBC’s involvement was revealed by a report of an internal investigation committee of the Enron board of directors concerning the limited partnerships that allowed Enron to overstate its profitability by over $1 billion, the Globe & Mail reported.

CIBC has acknowledged that it has a $215 million loan exposure to Enron, but has not revealed the extent of its involvement in the suspect limited partnerships.

The Globe & Mail is reporting that one of the limited partnerships that involved CIBC was the disastrous “Project Braveheart.” This project involved a joint venture between Enron and Blockbuster Entertainment to sell movies to customers at home by phone lines. CIBC agreed to lend $115.2 million in return for a major part of Enron’s share of the cash flow for the first ten years of the 20-year agreement.

CIBC syndicated most of the loan to about 15 other banks.

The CIBC is defending its loan as a normal loan to what it thought was a stable investment grade company.

Other reports have alleged that such loans by major financial institutions in the United States and Canada to finance similar Enron limited partnerships, ended up being put into the profit side of the Enron balance sheet through “creative accounting” practices.

LONDON
The Enron scandal found its way across the Atlantic Ocean last week, as prominent Conservative politician Lord John Wakeham resigned from his position as head of the Press Complaints Commission, a prestigious position on a quasipublic board that oversees issues in media accuracy.

Wakeham considered his decision “a matter of honor,” according to the Washington Post, as his involvement with Enron Corp. as a nonexecutive board member has put his name in newspaper headlines.

“As chairman of the Press Complaints Commission for the past seven years, I am only too aware of the damage that can be done to individuals and institutions that are thrust into the public spotlight,” he said in a statement.

The scandal brought Wakeham to the United States last week to meet with attorneys working with him and other non-executive board members at Enron. Though he has not been summoned in any of the ongoing investigations, Wakeham says he is actively cooperating with investigators, according to the BBC.

Wakeham’s resignation was seen as a blow to Conservative Party plans to use the Enron scandal against Prime Minister Tony Blair and his Labor Party. Earlier last week, a Conservative spokesperson had accused Blair of “another bout of sleaze,” on the news that the Labor Party had accepted $54,000 of in-kind contributions from Enron over the past three years, according to The Times of London.

Some observers expect Wakeham’s involvement to be of particular significance, given his role as chairman of audit and corporate governance committees, according to press reports.

PIPER, Kansas
A high school teacher in Piper, Kansas, has resigned in the wake of her school board’s decision to ease the district’s strict plagiarism policy.

After discovering that 28 of her biology students had plagiarized their semester project from the Internet, teacher Christine Pelton, with support from her principal and superintendent, gave all the students failing grades, per the district’s established plagiarism policy.

But following complaints from some of the students’ parents, the school board ordered her to go easy on the students, prompting Pelton to resign in protest, the Associated Press reported.

“The students no longer listened to what I had to say,” she told the Dallas Morning News. “They knew if they didn’t like anything in my classroom from here on out, they can just go to the school board and complain.”

Pelton, 26, resigned days after the board ordered her to give the students partial credit and to decrease the project’s value from 50 percent of the final course grade to 30 percent.

Many educators and ethicists are condemning the school board’s decision, calling it a blow to integrity.

Several other teachers from the Piper School District have said that they’ll resign at the end of the school year because of the episode, according to CNN.

BUENOS AIRES
Argentina’s Supreme Court has declared a national banking freeze unconstitutional, asserting that banking restrictions, decreed by President Eduardo Duhalde, limiting withdrawals to $800 a month amounted to unconstitutional constraints on the right to private property.

In a unanimous 5-0 ruling, the court dealt a surprise blow to President Duhalde’s emergency effort to stabilize a national financial system on the brink of collapse. The decree was issued late last year on a day when anxious depositors suddenly withdrew over $2 billion from the nation’s banks.

Following the decision, an angry Duhalde announced the suspension of his economic recovery plan and the closure of banks for two days to prevent a run on savings that he says could hasten the nation’s economic collapse.

“Regrettably the decision that they’ve taken is extremely serious,” Duhalde said of the high court’s ruling. This “strikes a very strong blow to any chance of an orderly exit from the financial crisis.”

YOUNGSTOWN, Ohio
The corruption and bribery trial of Ohio congressman James Traficant (D) began last week with Traficant, who is not an attorney, defending himself and challenging the judge on trial arrangements.

Traficant is accused of accepting gifts and favors from constituents in exchange for influence-peddling in Washington. He has also been accused of forcing his staff to make cash kickbacks to him or do favors for him at his horse farm.

Traficant is known around Washington for his brash and outspoken style. Though a declared Democrat, both major parties steer clear of being associated with the controversial figure from the Cleveland area, according to the Washington Post.

As Tuesday’s jury-selection process begun, Traficant objected to a closed circuit television that allows the public and media to watch from another room while the courtroom was filled with prospective jurors. He also objected to the dismissal, for health reasons, of a black woman from the pool of potential jurors.

His objections were repeatedly overruled by U.S. District Judge Lesley Wells.

During pretrial media interviews, Traficant did not predict victory. “I’m like a mouse looking up at an elephant asking the elephant to surrender, quite frankly,” he said to ABC’s “Good Morning America.”

In 1983, Traficant was acquitted of bribery and tax evasion charges.

TOKYO
Japan-based Snow Brand Food Company has admitted cheating the Japanese government out of millions of dollars by repackaging foreign beef and calling it domestic to qualify for government subsidies.

Japan’s agriculture ministry has filed a criminal complaint against the company.

After initially denying the allegations, published early last week in the Japanese newspaper Asahi Shimbun, the company’s president, Shozo Yoshida, has admitted the scam took place, agreeing to return the funds to the government, CNN reported.

In an effort to prop up the faltering beef industry after the outbreak of “Mad Cow disease” in Japan last fall, the Japanese government had agreed to buy domestic beef back from producers and incinerate it. To qualify for the buyback program, Snow Brand falsely labeled nearly 15 tons of Australian beef as domestic product.

“We would like to deeply apologize for damaging trust in food administration and inviting the mistrust of consumers,” the company said in a statement, according to CNN.

Later in the week, Snow Brands was also accused of using a similar deception to mislabel foreign pork as a domestic product. As the scandal grew, Snow Brand president Yoshida resigned from the company, which may be fractured into four separate firms, according to press reports.

The latest problems follow on the heels of a milk poisoning scandal in June 2000, during which it was revealed that the company had recycled and reused old milk returned from stores, causing more than 10,000 people to become ill.

The latest scandal prompted several supermarkets to remove all Snow Brand products from their shelves.

The Japanese government’s criminal complaint is still pending.

WORCESTER, Massachusetts
Hoping to allay ethical concerns about stem cell research, scientists in Massachusetts have developed a source of embryonic stem cells from an unfertilized monkey embryo.

Medical research firm Advanced Cell Technology (ACT) hopes the new process, performed on the macaque monkey, a close genetic relative to humans, will allow stem cells to be teased into developing into replacement organs for people with diseases such as Parkinson’s and diabetes, the Reuters news agency reported.

The new process, involving an early egg developmental stage called parthenogenesis, makes lead ACT researcher Jose Cibelli “100 percent sure this will work,” according to a USA Today report.

Because parthenogenetic embryos do not go to term if placed in the womb, many scientists see the process as a way to quell many of the ethical controversies surrounding stem cell research.

“If someone can establish this is not a human being, the moral problem is much reduced,” said Dr. Richard Doerflinger, a frequent spokesman for the National Conference of Catholic Bishops, about the potential for the new research to allay many ethical concerns.

No stranger to controversy, ACT came under fire last fall after announcing it had induced parthenogenetic development in human cells. Last week the company announced itself “confident of repeating the process in humans,” according to the New York Times.

WASHINGTON
Clinical studies of an experimental Alzheimer’s vaccine came to a halt last week, as researchers discovered that the trial doses were harming some of the study’s human subjects.

According to a statement released by the vaccine’s manufacturers, Elan Corporation and Wyeth-Ayerst Laboratories, four patients involved with the trials developed inflammation in the central nervous system.

“This sort of occurrence is not uncommon in the process of testing new medications,” Dr. Jenny Ward Robinson, medical and scientific director of the Alzheimer’s Association, told CNN. “The nature of science is to move through this process towards discovery of what works, how it works, and under which conditions successful outcomes are attainable.”

The drug, known as AN-1792, was hailed as a potential breakthrough in treating and possibly curing Alzheimer’s after studies in mice last year showed it could clear the brain-clogging plaques that are a hallmark of the disease. Though the dosing trials were suspended, the study itself will continue while an independent monitoring group tries to pinpoint the cause of the side effect.

“The origin of the problem is still unknown,” said Ward Robinson. “We are not sure if the problem is due to the vaccine or another yet-to-be-determined source.”

It is not yet known when the dosing trials might recommence.

WASHINGTON
The Washington Post has obtained an official court document filed by U.S. attorneys admitting that the government has collected no evidence linking West African detainee Tony Oulai to the Sept. 11 terrorist attacks, though Oulai has been held under arrest since the week of the attacks as a material witness.

The document, filed two days before U.S. Attorney Paul J. McNulty convinced a federal judge to keep Oulai under arrest, claimed that “although the government investigation is ongoing, the government so far has not turned up a connection between Mr. Oulai and the terrorist attacks on September 11 or other potential terrorist activity.”

The West African pilot was arrested on Sept. 14 after flight manuals and a stun gun were found in his luggage at a Florida airport. He has been held since then without being charged with a crime through a series of legal maneuvers that represent part of the Bush Administration’s rigorous investigation into the attacks, the Post reported.

Because Bush has called the terrorist attacks a national emergency, the government can detain immigrants for an indefinite time without charging them. The government has been subjected to some criticism for the way it has handled the investigation, including many claims that detainments and seizures have been racially motivated. Bush has also been criticized for his refusal to consider al Qaeda members and Taliban fighters being held in Cuba prisoners of war.

Meanwhile, Oulai and his attorney have been fighting for his freedom since his arrest, arguing that the government has no grounds to hold him. “They’ve got no basis for doing what they’re doing,” said Robert Kolken, one of Oulai’s attorneys.

The federal judge is scheduled to reconsider the question of Oulai’s release in two weeks.

BARSTOW, California
A California jury ruled against Ford Motor Corporation last week, holding the company liable for damages in a civil suit because the company’s Explorer vehicle was “defective by design.”

In a 10-2 ruling, the jury sided with plaintiffs Agop and Catherine Gozukara, whose four-door 1994 Ford Explorer rolled over on a California highway three months after they bought it in 1997. The accident left Gozukara, who was not wearing a seat belt, paralyzed for life. Her husband sustained severe leg injuries.

“This is the first time in history that a jury has found this vehicle to be defective in design, in that it has a propensity to roll over,” said Garo Mardirossian, attorney for the plaintiffs, according to a Reuters report.

Although the jury found the Explorer to be “defective by design,” it also ruled that the defect was not the cause of the vehicle’s malfunction. Instead, the jury said, the accident was caused by shoddy repair work done by a California dealer, reported the Reuters news agency.

Four days after the ruling, the plaintiff’s agreed to settle their case for $14.9 million, including a $9.4 payment from the dealer, noted Reuters.

The ruling is widely seen as the first case wherein Ford has been found liable for manufacturing and shipping a faulty Explorer model. The company has come under intense scrutiny over the past two years as a rash of accidents linked to Explorers and Firestone tires left both companies reeling and pointing fingers at each other.

MIAMI
National drugstore chain Eckerd Corp. has been sued in a Florida state court for allegedly overcharging customers on prescription drug orders.

The suit, filed last week by customer Shirley Minsky, seeks unspecified damages and asks the judge to declare the case a class-action suit covering all the drugstore chain’s customers.

Minsky alleges that for the past two years Eckerd has charged customers full price for prescription orders that were not completely filled, a process referred to as “rounding up” in the lawsuit. The suit also alleges that Eckerd employees mislabeled the orders, overstating the amount of medication actually contained in them, according to USA Today.

Eckerd denied the charges, claiming that because of limitations in its computer systems, the firm has to round up quantities of certain medications, as they have no control over the quantities shipped to them by manufacturers. Processing systems at the chain’s stores have recently been upgraded, Eckerd officials told USA Today.

“I am confident that we have charged our customers the correct price for their prescriptions,” said Wayne Harris, Eckerd chairman and chief executive, according to the Associated Press.

This is the third suit in the past three years involving Eckerd. In 1999, Eckerd settled a lawsuit over the practice of “short filling,” a process by which pharmacies give customers partial prescriptions when inventories run low, asking them to return for the remainder. Despite the settlement, Eckerd denied any wrongdoing.

In December of last year, Eckerd was fined $1.7 million for overbilling the government on Medicaid prescriptions, the AP reported.

From the Gallup News Service:

“The vast majority of Americans, 72 percent, believe the U.S. treatment of al Qaeda and Taliban fighters at the U.S. naval base in Guantánamo Bay, Cuba, has been acceptable. Only a handful, 4 percent, considers it unacceptable, while one-quarter are uncertain….

“Critics of the U.S. treatment of the detainees at Guantánamo Bay — ranging from Amnesty International to the European press and government leaders — claim that the Taliban and al Qaeda captives should have ‘prisoner of war’ status under the Geneva Conventions, which would give them certain humanitarian and legal protections. The Bush administration continues to review the question of prisoner of war status, but in the meantime argues it is following the spirit of the Geneva Conventions in its treatment of the captives.

“The high level of public support for the Bush administration’s policies toward the 158 captives in Guantánamo is sustained even after some of the controversial conditions are detailed. When asked whether holding a Taliban soldier ‘outdoors in an 8 foot by 8 foot cell,’ and keeping him blindfolded with his hands tied during transport is acceptable treatment, 76 percent of Americans say it is. Just 20 percent say it is unacceptable.

“When asked hypothetically about those same conditions if they were applied to an American soldier captured during war, Americans are much more closely divided: 49 percent say it would be acceptable, 46 percent disagree.

“Americans are fairly uniform in their support for the current treatment of the detainees in Cuba. A solid majority of Americans of all ages, educational backgrounds, and political orientations say that the treatment is acceptable. This sentiment is especially high among Bush’s natural political allies: Republicans (85 percent support the current U.S. policy), conservatives (80 percent), men (80 percent), and upper income Americans (81 percent)….”

Dear Rush,

Your article on plagiarism could not have been more timely for me. It is one of our key focuses in the … management education course in which I teach, but it is an even greater challenge in the Ethics for a Global Economy course I teach … to Lebanese students in our International Programs unit. The academic culture and lack of copyright laws are so different in Lebanon that understanding the concept of plagiarism is as foreign as we professors who “profess” the concept of academic integrity. Thanks to your article, in one blatant case of a plagiarized assignment, I instructed the student to visit the Institute’s Web site and read your article and then advise me if she would like to resubmit her assignment.

Richard Pilarski
Saratoga Springs, New York, U.S.A.

“Progress is nothing but the victory of laughter over dogma.”

– Benjamin DeCasseres (U.S. writer, 1893-1961)