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Dollars & Sense:
Seven Serious Sins

  Column published in DM Review Magazine
September 2003 Issue
  By Susan Osterfelt

I recently read a scorecard on CEO scandals in corporate America, and it made me realize that criminal charges have replaced wrist slapping as the most likely result of inappropriate corporate behavior. Misplaced ambition now appears to have a price (thank goodness!).

Want to know how to avoid jail time, fines and penalties (which apply, by the way, to managers and executives of private and nonprofit companies in addition to public ones), as well as the negative attention these judgments bring with them? Well, an obvious way to do that is to read and know the regulations and comply with them. However, in case you want examples, let's review seven serious sins (I'm sure there are many more!) that have already resulted in (and will continue to result in) the aforementioned judgments. Each one of these seven serious sins is guaranteed to garner not only increased attention, but greater controls as well.

Sin #1: Don't take your role as director of a company seriously. Don't worry about knowing the business or questioning the CFO on accounting matters -- s/he must know what s/he is doing. This is a big mistake! Where it might have been acceptable in the past to be "removed" from the day-to-day activities of the company on whose board you sit, that no longer is possible. You need to understand your role, understand the business and question anything that doesn't make sense. If it doesn't make sense to you, it probably doesn't make sense to others and deserves an explanation. The courts are littered with cases where directors are trying to evoke the "who ... me?" defense. Fortunately, this defense doesn't cut it anymore.

Sin #2: Make loans to company executives. This sin is almost guaranteed to get attention, whether your company is private or public. The loans may be totally aboveboard, but they just look bad.

Sin #3: Use insider information to make a killing in the stock market. This has been a no-no for a while; but it can take a high-profile case, such as the Martha Stewart/ImClone one, to act as an important reminder. As of this writing, the case has not yet been resolved; however, even the pretense of insider trading is usually enough to make very negative things happen to your company and your own personal reputation.

Sin #4: Be a bully. Insist that your employees cook the books. You want those earnings numbers to be smooth, to be within what you have promised to the street, right? Therefore, you ask your employees to just defer some revenues or expenses so that your financial situation appears to be under control. This sin is a great recipe for surefire attention from various regulatory bodies! The name of the game now is "transparency" -- that is, the ability for investors to see what's really going on within a company and its accounting. Transparency may expose a few warts, but what company today doesn't have a few warts?

Sin #5: Falsify records; delete e-mails. This is guaranteed to draw really negative attention to your company, if not cause its demise (remember Enron/Andersen?). Be careful what you put in an e-mail; but even if it is damning, don't eliminate the record that the e-mail took place. E-mail is now "the" corporate communication method and something that deserves very close governance. The removal of e-mail correspondence is almost guaranteed to result in criminal action.

Sin #6: Pay a big severance to an ousted CEO. Wow! Despite whatever contract the CEO has with the company, a big severance, especially where the CEO did not perform up to expectations or where the company is suffering from financial issues (inadequate liquidity, poor earnings, decreased revenues, etc.), is sure to provide a neon arrow pointing toward the appropriateness of that severance. Investors are going to ask, "Why was this a good idea?" (This relates to Sin #1 where directors should question CEO severance policies.)

Sin #7: Lie to the SEC or other investigative body, or impede an investigation. Lying has never been a good idea, but is doubly bad when under an SEC (or other) investigation. We've always heard that honesty is the best policy, but it's really true.

Corporate reform laws designed to curb a rise in accounting scandals affect all companies - public or private. Investors deserve to know the true activities of a company. Criminal penalties accrue to companies and individuals who attempt to hide or change relevant information or who attempt to pursue financial strategies not in the best interest of the company's shareholders. If you circumvent good accounting policies or try to hide undesirable corporate activities, expect the worst. Honesty is now valued over opportunism.


For more information on related topics visit the following related portals...
Business Intelligence (BI).

Susan Osterfelt is senior vice president at Bank of America, in Charlotte, North Carolina. She can be reached at susan.osterfelt@bankofamerica.com.

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