Question

Accounting Fraud

Explain in detail Jennings seven signs of ethical collapse are found in the Lehman Brothers fraud. Select at least 4 signs and give each example.

Jennings – 7 signs of ethical collapse:

1. Pressure to make the numbers

2. Fear and silence

3. Larger than life leader

4. Weak board of directors

5. Conflicts – stock option, loans, business, etc.

6. Innovation like no other (too good to be true)

7. Goodness in some areas atones for evil in other areas

Answer 1

Sign #1: Pressure to make the Numbers

Falsify revenues, earnings per share (EPS), expenses and costs, manipulate stock prices, twist accounting practices including changing numbers in a direction to serve certain stakeholder on the expense of other stakeholders… these practices of cooking the accounting books can be the result of unreasonable and unrealistic obsession with meeting quantitative goals and can lead to ethical collapse of businesses, non profit organizations, educational institutions, and even governmental organizations, particularly during economic downturns or fierce competition when profitability and stock prices are threatened. Even if some practices may be legal, they are not ethical.

Sign#2: Fear and Silence

“He who keeps silent of the truth is a mute devil,” says an Arabic adage. “The culture of ethical collapse is one that does not encourage dissent, or even discussion,” The fear of losing one’s job, paycheck, status, leadership position, financial wellbeing, visa status… can create sycophants in companies and organizations. Shortsightedness in protecting one’s immediate economic interest at the expense of one’s organization’s long term health is a common human trait.

Intimidating subordinates into silence, bullying accountants to falsify numbers, buying the silence of officers and employees about internal fraud are ways for sustaining the culture of fear.   

Sign # 4: Weak Board of Directors

Rather than having a board of true talents counseling about strategies, watching out for red flags and guiding an organization beyond mere compliance, a weak board have characteristics such as conflict of interests if board members also do business with the company, poor participation and attendance, self dealings, favoritism, coziness with management that impinges on board’s duties and a lack of devotion of time, interest and experience.