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(Marianne Jennings, Financial
Engineering News, Jan/Feb 2006)
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A researcher who was surveying high school students about “cheating” was
confronted by a student, “Before I can tell you if I have ever cheated,
you must define cheating.” The researcher explained to the young student
that, for example, sitting next to another student and copying answers
from that student’s paper onto your own paper would be cheating. The
student seemed perplexed and responded, “No, that would be research.”
Another student caught with a good part of the American Revolutionary
war penned on her hand for assistance on a history exam called her palm
data, “Memory pegs.” Funny, there was a time when information written on
body parts for exams was called “answers,” and the process was referred
to as “cheating.”
But, these are different times. Ours is an era of technicalities,
literalism and labels. That last category of labels is a phenomenon of
these times that serves as salve for the conscience. If we attach a
lovely enough label to what we are doing, we can convince ourselves that
something we propose or have done could not possibly be an ethical
breach. That which takes on literary quality in its name precludes any
possible ethical lapse. For example, an accurate description of the
downloading of music from the Internet without paying the appropriate
fees is a form of “copyright infringement.” However, talk to a college
student who downloads music at will and for free and his label for his
activity will be “peer-to-peer file-sharing.” How lovely! How
neighborly! How egalitarian! How could such magnanimous exchanges
possibly constitute an ethical issue?
Labels have become so pervasive and commonplace that we may no longer
even realize the ethical breaches that lie beneath the superficial
beauty of a better name. There may be serious ethical breaches beneath
our glib dismissals via language choices. A cab driver in Cincinnati
taught me an important lesson about these labels and my grip on reality.
The cab driver, one Big Jack, was a true entrepreneur who shared his
story with me. He had driven his cab for decades and had saved and
invested his money for his retirement. However, this cab ride with this
colorful personal portfolio manager came on the heels of the collapses
of Enron, WorldCom and Adelphia. Big Jack was not terribly pleased with
Wall Street or the lack of ethics demonstrated in these collapses. His
mood did not improve when I told him that I taught business ethics. He
then asked me if I was familiar with a practice known as “earnings
management.” Armed with my undergraduate degree in finance, I offered
Big Jack my best support for the shareholder value that comes from
smoothing out those earnings. Following my theoretical discussions, Big
Jack thought for a moment and then commented, “I don’t really call it
earnings management. I call it lying.”
His thought was a punch to the gut. I had fallen into the trap and
comfort of “labelese.” The sophisticated label we in finance had
attached to smoothing out earnings had become the extent of our ethical
analysis on that process. “Earnings management” sounds suave,
sophisticated, grounded in theory, perfectly appropriate and certainly
not unethical. When the label sounds intelligent and/or comfortable
enough, we need no longer think about the ethical implications of our
choices or how far the label may have allowed us to move the line on the
components of earnings management. We lump dilemmas and decisions under
the protective umbrella of the lovely label. We get so comfortable that
nothing undertaken in the name of earnings management is an ethical
issue. There is no such thing as “cooking the books;” there is
“aggressive accounting.” Lawyers offer the same comfort when they issue
an “aggressive opinion.” Does that mean the conduct could be illegal?
Engineers and accountants are often given the directive to “sharpen
their pencils.” Does that mean make sure the numbers are accurate? Or
could it be code for “make the numbers work”? And who has not made a
financial reporting decision on the grounds that the numbers were
“immaterial”?
The label phenomenon is one of many human avoidance techniques that have
evolved as a means of ignoring or bypassing ethical issues or as a way
for easing the pain of crossing an ethical line. Confronting those
ethical issues head-on can be awkward! Analysis of ethical issues
requires effort that includes fact gathering, a look at consequences and
consideration of possible risk and eventual outcomes. Labels make no
such demands on us and serve to postpone any deep ethical analysis.
Walking through a few examples from the Kozlowski CEO days at Tyco is an
exercise in labels. When the Tyco board commissioned its report on the
company accounting and financial practices during Kozlowski’s reign, it
found that many employees were fully aware of the just-plain-wrong
accounting decisions that had been pervasive at the company during its
period of feverish acquisitions. From 1998-2001, Tyco spent $30 billion
on acquisitions and attributed all $30 billion to goodwill on its
balance sheet (Berenson 2002). That label meant that Tyco had a
non-depreciating asset that was pure gold. Further, if Tyco sold any of
the assets of the acquired company, there was pure profit because the
assets had no cost according to this accounting process. When Tyco
acquired a security company, its books showed that it had paid $1,000
for the acquisition of each individual alarm security contract. But,
Tyco charged the dealer a $200 “connection fee” as part of the process,
so Tyco paid the dealer only $800 cash. The full $1,000 was booked as
the cost of acquisition, but the $200 was recorded as a reduction in
expenses, which boosts both cash flow and earnings (Greenberg 2002).
Tyco also used “spring-loading.” It instructed those in the company
being acquired to book as many expenses as possible because the goal was
to make the company look as bad as possible. Post-acquisition could only
bring improved performance with Tyco getting all the credit.
The report of lawyer David Boies, who was hired by the Tyco board in its
post-Kozlowski era to try to determine what exactly happened, concludes,
“Tyco pursued a pattern of aggressive accounting that was intended,
within the range of accounting permitted by GAAP, to increase current
earnings above what they would have been if a more conservative approach
had been followed” (Eichenwald 2002). There it is – aggressive
accounting. Not illegal accounting, but accounting that crossed ethical
lines in terms of deceiving shareholders, analysts, investors, and
others who could not know the nuances of “aggressive accounting.”
When Boies and his staff asked Tyco employees to explain either their
conduct or silence in light of these ethical missteps, employees
explained that they did not see their conduct as “cooking the books.”
Rather, they preferred to think of their steps as “financial
engineering.” They were using a label of comfort to justify conduct that
proved to be deceptive about the true financial condition of the
company. Deception is not a means of financial engineering.
Labels lull us into a false sense of security. They provide a quick
resolution to those pangs of conscience. Thinking up lovely labels for
what we are doing does not solve the problem. Rather, when we find
ourselves slipping into labels, it is time for an introspective look at
our conduct. Slipping into the world of memory pegs, immateriality, and
aggressive opinions happens quite easily. However, the comfort is
deceptive and temporary. Deception by any other name . . .
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References
Berenson, Alex. June 3, 2002. Investigation Is Said to Focus on Tyco
Chief Over Sales Tax. New York Times: C1.
Eichenwald, Kurt. December 31, 2002. Pushing Accounting Rules To the
Edge of the Envelope. New York Times: C1.
Greenberg, Herb. April 1, 2002. Does Tyco Play Accounting Games?
Fortune: 83. |
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