By William K. Black
Quito: April Fools’ Day 2015
The odious New York Times “brand” (DealBook) managed in its lead sentence to show that how complete its pro-CEO banker bias is and how that bias prevents it from getting even the most basic aspects of our recurrent crises correct. The April Fools’ Day article is entitled “S.E.C. Fires Warning Shot About Confidentiality Agreements.”
“A sound that delights regulators and strikes fear in corporations — employees’ blowing the whistle on wrongdoing — is poised to become louder.”
First, corporations are not people and they never feel “fear.” Second, if corporations were capable of emotion, they would be delighted by whistleblowers. Third, the fact that the abject Ben Protess thinks that “blowing the whistle on wrongdoing” “strikes fear” in “corporations” reveals what he thinks of the honesty of corporate CEOs.
Honest CEOs would do everything possible to encourage their employees “to become louder” in “blowing the whistle on wrongdoing” at the corporation. They would be delighted when employees blew the whistle and promptly follow-up and end the wrongdoing.
This obvious fact never passes Protess’ mind – because he expects the CEOs to “fear” the revelations of corporate “wrongdoing” due to the fact that they are leading the wrongdoing. So Protess never asks what we can infer from the fact that many CEOs are rushing to deter and suppress whistleblowers. This also explains the massive industry effort led by CEOs to bar employees under the SEC whistleblowing program from reporting wrongdoing to the SEC. Dishonest CEOs are desperate to ensure that any whistles be blown internally. This allows the CEO to know that his frauds have been discovered and permits him and his defense to destroy incriminating evidence and attempt to deter and discredit the whistleblowers through retaliation and smear campaigns.
Securities frauds are led overwhelmingly by the CEO and CFO, as COSO reported. COSO (aka “Treadway”) is dominated by professionals who are pro-corporate and pro-top tier audit firm. This makes it findings in its 2010 report particularly damning.
“COSO sponsored this study, Fraudulent Financial Reporting: 1998-2007, to provide a comprehensive analysis of fraudulent financial reporting occurrences investigated by the U.S. Securities and Exchange Commission (SEC) between January 1998 and December 2007. This study updates our understanding of fraud since COSO’s 1999 issuance of Fraudulent Financial Reporting: 1987-1997. Some of the more critical findings of the present study are:
There were 347 alleged cases of public company fraudulent financial reporting from 1998 to 2007, versus 294 cases from 1987 to 1997. Consistent with the high-profile frauds at Enron, WorldCom, etc., the dollar magnitude of fraudulent financial reporting soared in the last decade, with total cumulative misstatement or misappropriation of nearly $120 billion across 300 fraud cases with available information (mean of nearly $400 million per case). This compares to a mean of $25 million per sample fraud in COSO’s 1999 study. While the largest frauds of the early 2000s skewed the 1998-2007 total and mean cumulative misstatement or misappropriation upward, the median fraud of $12.05 million in the present study also was nearly three times larger than the median fraud of $4.1 million in the 1999 COSO study.
The SEC named the CEO and/or CFO for some level of involvement in 89 percent of the fraud cases, up from 83 percent of cases in 1987-1997. Within two years of the completion of the SEC’s investigation, about 20 percent of CEOs/CFOs had been indicted and over 60 percent of those indicted were convicted.”
We, of course, did not learn the lessons of the Enron-era epidemics of accounting control fraud. While there was a brief flurry of regulation (SOX) and prosecutions, by 2003, the global financial regulatory “race to the bottom” super-charged the three “de’s” – deregulation, desupervision, and de facto decriminalization. This, along with perverse executive and professional compensation and the death of true financial partnerships created the criminogenic environments that produced the three most destructive financial fraud epidemics that drove the financial crisis.
If corporations could feel “fear” their principal fear would be “looting” by their two senior officers because they would know that they had no meaningful protections against being looted by their controlling officers. Only regulators and whistleblowers can protect the corporation from fraudulent controlling officers. So DealBook got its article on whistleblowing 180 degrees wrong.
Great point and posting, Prof. Black.
Might we humbly suggest that the second “de” be “dereliction” — as in dereliction of duty to supervise, etc …?