Final Paper

How Ethical and Christian Worldviews affect Financial Decision Making Chuck Elliott ACC - 525 Professor Pam Norris Cornerstone University June 9, 2011

Final Paper Several articles have been written concerning the failure of major corporations in accurately and ethically reporting their financial statuses. Enron, Global Crossing, IBM and

others have failed to provide accurate information to their investors and to provide full disclosure of liabilities that would impact the true value of their stock. While several agencies have had significant discussions about the roles of both internal and external auditing in these cases of financial misrepresentation, little has been said about the role of the corporate communication professional and how it applies to a Christian worldview standpoint. Does a Christian ethical standard exist for the corporate communicator in regard to financial reporting? My goal is to answer this primary question with this paper. The basis of my paper is a search seeking information on what has been written, what studies have been done, and what the Bible says on ethical accounting practices and the corporate communicator. The Enron collapse, the losses incurred in the dot.com industry collapse, Global Crossings bankruptcy and the IBM reporting fiasco have led to a significant questioning of the financial reporting mechanisms currently in place to evaluate a corporations net worth. The ability to properly evaluate a corporation and to rely on its financial disclosures is essential to the free market concept. While certainly the interpretation of the data is subject to individual evaluation, the accuracy of the data should not be. What shall an organization profit if it should gain the world but lose its soul? Starbucks chairman Howard Schultz answered it with, not a lot, when he asked that same question to everyone in his company in a memo he wrote in 2007 (Bodily and Bruner). In the case of Enron, the answer was evidently, nothing at all, as the company eventually lost both its soul and the world it hoped to gain. What Enron and the companies mentioned before lack becomes quite obvious if we compare them to the pharmaceutical giant Merck. Merck states its

Final Paper core purpose as preserving and improving human life, above making a profit. Even though, Merck came under fire with potential health risks from some of its drugs, Merck did give

potentially lifesaving medicine to Third World countries suffering from a river blindness away at no cost. The companys CEO said its commitment to its values made the decision easy (Fielder 2005). As the story of Enron and other similar companies has unraveled, many of the accepted current practices have been called into question.The problem associated with something like the recent failures affecting billions of dollars and thousands of people is that it takes such occurrences before they are called into question. There has been a significant lack of naysayers in business inner circles of late. The idea of questioning the ethics of an action that proposes to increase the valuation of a company is tantamount to corporate suicide. Certainly the accounting profession has come under the most scrutiny for these failures in accurate reporting, but it is most unlikely that the reports have been prepared solely by accountants as much of the preparation and crafting had been performed by the corporate communication professional. The creative ability of the corporate communication professional has been frequently used to express negative information in positive terms and too often this practice has become spin. There is a fine line between failing to disclose information and disclosing it in such a way as to hide its reality. A Gallup Poll recently showed in its annual gauge of the honesty and ethics of different professions that people placed business executives at a 25 percent level while firefighters ranked at 90 percent, nurses at 83 percent, US Military at 81 percent, stock brokers at 19 percent, and advertising agents at 11 percent. These percentages were a measure of those who indicated that these professions were very high or high in ethical practices (Gibson, 2002). Such polls and

Final Paper information can be significantly biased and if individually reviewed may be found wanting; however, in view of the need for trust in the capital markets to ensure a stable environment for business growth and development the position of accountants and business executives is

disturbing. Certainly the accounting profession will be reacting to the unfavorable publicity with new guidelines and there have been many articles written about how certain practices are to be changed to ensure that proper accounting procedures are followed. This, however, will not necessarily change how information is actually reported by company spokespersons in conference calls and press releases, or how investor relations departments will seek to present unfavorable information to the public. There is much to be overcome to improve the image of todays corporate spokespersons. The accounting industry The accounting industry began over 10,000 years ago with stone counters in Jericho. The Bible alone has over 250 verses devoted to accounting. Most notably, from the book of Deuteronomy,verses 14:22-29; 15:1-11; 24:15; 25:13-16; and 26:12-13. In ancient Sumerian cities, in the land that is now Iraq, bookkeepers documented wealth by pressing the ends of sticks into damp clay tablets that hardened into permanent records. The concept of double entry bookkeeping (for every credit in the ledger there just be a corresponding debit) originated in the fifteenth century. The next change came in the eighteenth century during the Industrial Revolution with the innovation of cost accounting: calculating the costs of materials and labor for each step of the manufacturing process, then setting prices to ensure enough profit margin to remain viable. In 1887, thirty-one accountants formed the predecessor of the American Institute of Certified Public Accountants.

Final Paper

In the early 1930s after the financial scandals of the 1920s and the corporate failures of the Great Depression, the industry sought to formalize consistency, transparency and trust in the profession. The profession got its own governing board and a manual called Generally Accepted Accounting Principles. The profession was also entrusted with responsibility for auditing public companies. Accountants had become moral guardians, an image reinforced in the publics imagination in the 1930s when Price Waterhouse was enlisted by the Academy ofMotion Picture Arts and Sciences to count ballots for the Academy Awards. It was a gentlemans profession; there were no fulltime sales people. Accountants networked at the country club and sat on boards of non-profit organizationsand chambers of commerce. In the late 1960s and 1970s change was already in the air, but the 1980s saw new challenges with globalization and deregulation. To raise huge amounts of money, companies turned from traditional bank loans to more complex, and often riskier, forms of financing. Executive pay became tied to performance, so clients had a personal stake in making sure their auditors squeezed out the best results they could.The reliability of the audited financial statements had begun to decline as well. According to an analysis by New York Universitys Stern School and Financial Executives International 158 companies restated their earnings in 2001 up three times from the mid-1990s and compared to only three in 1981. During this time period other changes were occurring as well. Computers were making auditing services less valuable, so accounting firms began to develop new sources of revenue. They moved rapidly into the consulting business and began to discount their audit fees in return for consulting business.

Final Paper In 1989, consulting accounted for 21.6 percent of the big firms revenues while in2000 it accounted for more than 40 percent. Arthur Andersen served as both consultant and auditor for

Enron, booking $27 million for consulting and $25 million in audit fees. Partners were expected to sell consulting and other services beyond auditing and outsiders were brought in as consulting partners. In the 1990s, in an effort to reduce costs many companies began to outsource their internal auditing to the big accounting firms, typically the same firm they paid as an external auditor. The role of corporate communications has its basis in the advertising and public relations attempts of the corporations in the late nineteenth and early twentieth centuries to provide an image for their companies and their products. Its purpose to a large degree has been to create the soul of the corporation, as noted by Marchand(1998). Marchand (1998) traces the use by many corporations of advertisements that portrayed the corporation as having a high moral value, and often linked small towns and the initial small businesses to their now hugeness in terms of hard work, artisanship, and power. The purpose was to gain the allegiance of people across the country, and gain a presence in their communities. Throughout this time period the large corporations were gaining the position and status of real entities and the messages were designed to support this growth and overcome the fears of the general public that the corporation lacked conscience. The efforts were initially to demonstrate that Victorian values were part of the corporations being paternalistic and linking their business to family and community. During the past several years, much has been written concerning the lack of accuracy in corporate financial reporting, as well as the attempts to hide unhealthy financial situations. There has been a twenty year period of deregulation of corporations accompanied by almost the same

Final Paper period of continual growth in the economy and in corporate profits. It has been a period of great change in business operations and the technology supporting these businesses. The advance of the computer, the Internet, telecommunications and globalization of business has served to accelerate the rate of change. While the accounting firms may have played a significant part in the reporting of financial data, certainly the corporate communication professional has had a large part in the activity as well. Some of the creative ways that losses are downplayed and that wordsmithing has been used to cover detrimental news demonstrates how communication professionals have played their part. As these changes occur and as society adjusts to the changing environment of business, several serious complications have arisen. The employee has become increasingly responsible for his own welfare. Following over three decades of the government being responsible for the welfare of its people through such programs as Social Security, Medicare, welfare supports, pension regulation, and various laws affording the right to work to a multitude of people, there

has been a shift in power back to the corporation. Many corporations have found that layoffs and labor reductions are greeted by a rise in stock price. The adoption of pay for performance for executive compensation seems appropriate at first glance and works well during a rising business cycle. The link to stock price as being an indicator of that performance has led to executives acting at times only in the short-term interest and can create some ethical dilemmas during a business downturn. There has also been a transfer of the previously corporate responsibility for health insurance, pension benefits and long-term employment to the individual. The employee must now select the health care plan that best serves his or her needs, and in most cases participate financially in it on an increasing scale. The employee must maintain a skill level to maintain employment, often obtaining these skills outside of the work environment. The

Final Paper employee in many situations has to be given the responsibility to manage his or her own

retirement funding either through 401(k) programs offering some degree of selectivity and IRAs from their own salaries. Gone is the paternalistic approach to employees that was so much a part of the business environment of 30 to 50 years ago. But often these very plans offered by the company are subject to investment in the companys own stock. This is part of the tragedy of Enron, that 90 percent of the asset value of its 401(k) was in company stock. Similarly, LucentTechnologies stock, which also lost 90 percent of its value due in large part to financial misrepresentation, comprised 70 percent of its employees plan assets. During this time of rapid change there has been a continued acceptance that corporations will do their reporting properly and fully. Such actions are most important to a capital marketplace. Financial reports form the basis of corporate valuation and as such become the basis for investment and stock prices. It is important to remember that, as the responsibility for retirement was transferred from the corporations to the employee, the number of individual stock investors has risen to an alltime high. The need for confidence in the capital markets is essential to both employees, and ultimately to the corporations and the governments that depend upon investment (and taxes). Taking all of the above into consideration demonstrates the importance that financial reporting be beyond refute. Both those within the corporations and their auditors must treat it as an awesome responsibility. However, with deregulation, increased competition and increasing pressure for better performance each quarter this has not always been the case. We have only to witness Enron, Global Crossing and the fall of the various dot.com enterprises to observe that this is not the case. How many other companies are in the same situation or very close to it is an unknown.

Final Paper I began with a brief history and update on the accounting industry because I believe it is important to note that the public trust developed over time and that much of todays free marketplace is dependent upon that trust and reliability. The ability to invest with any degree of certainty is dependent upon factual financial information, delivered in a clear and comprehensible format that is uniform and replicable across industries. This is the basis for the stock market and the development of valuation. There now exists an investor class of 100 million Americans. Over half of the adult population of the USA invests in securities through direct investment in companies, through mutual funds or through their 401(k)s. Certainly with the recent events at Enron and Arthur Andersen much criticism has been directed toward the accounting industry, but much must be directed toward the corporate communicators as well. The annual reports, the quarterly reports, the press releases, and

speeches delivered all failed to reveal the problems and in fact may prove to have been presented to cover up the problems. Not that these two actions are alone in taking any bad news and making it good news or failing to bring any attention to it. Thus the crux of my concern: ethics and the corporate communication professional and the reporting of financial data, and whether anything can be done about it. To see what was being done in the educational process concerning ethics courses, I selected a number of universities offering advanced degrees in both accounting and communications (Masters programs). I found that out of thirteen universities offering advanced accounting degrees only one required an ethics course while of the twelve universities offering advanced communications degrees none made ethics a required course, but two did offer a course as an elective. When I reviewed the requirements for these same institutions for their MBA programs, I found that approximately 50 percent had a course in business ethics as a

Final Paper 10 requirement. Selection of schools was not scientific but based on the US News Annual Guide for Graduate Schools (Best business schools, 2011). Does offering an ethics course or making it a requirement have any effect on the actions of the participants at a later point in their lives? That is an unknown. But certainly the concept of making it a part of the curriculum for any advanced degree in business would at least expose students to some thought processes that could prove beneficial to them in the future. A recent survey by Morris (2001) and published in Business Ethics Quarterly,Business Ethics Assessment Criteria discussed several issues concerning differences when the courses were taught by the philosophy professors or by the business professors. This study defined and established assessment criteria and ranked various courses based upon these criteria. What seems clear from this survey is that there is no overwhelming sentiment among those teaching business ethics that what they are doing is attempting to educate people to be more ethical. The primary exception to this relates to those who believe that if students can be educated to be more rational or logical then they will act more ethically (Morris 2001). Nearly every corporation has corporate creeds, statements from CEOs as to their own convictions, ethics hot lines, codes of conduct, and other programs in place to establish the ethical standards for the organization. There are many scholarly papers written supporting ethics in business and suggesting how to implement programs to encourage ethical practices. The reality is, however, somewhat different. The very basis for a corporations existence, corporate law, could be construed as to inhibit executives from being socially responsible or ethical. The law covering the corporation states, the directors and officers of a corporation shall exercise their powers and discharge their duties with a view to the interests of the corporation and of the shareholders. The very law that

Final Paper 11 creates the corporate purpose, distilled to its essence, says that the people who run corporations have a legal duty to shareholders, and that duty is to make money. Failing this can leave directors and officers open to being sued by shareholders. While MBA programs often require ethics courses and corporations tend to have codes of conduct, the view from the trenches is very different. It offers little comfort for senior executives who are trying to implement corporate ethics programs, for academics developing philosophy based approaches to business ethics, or for those who hope that communitarian values will soon take root in corporate soil. This study, which is based principally upon in depth interviews with thirty recent graduates of the Harvard MBA program, reveals several disturbing patterns. First, in many cases, young managers received explicit instructions to do things they believed were sleazy, unethical, or sometimes illegal. Second, corporate ethics programs, codes of conduct, mission statements, hot lines, and the like provided little help. Third, many of the young managers believed that their companys executives were out-of-touch with ethical issues, either because they were too busy or because they sought to avoid responsibility. Fourth, the young managers resolved the dilemmas they faced largely on the basis of personal reflection and individual values, not through reliance on corporate credos, company loyalty, the exhortations of senior executives, philosophical principles, or religious reflection (Morris 2001). The National Investor Relations Institute (NIRI) has taken an active role in suggesting methods of improving how financial information should be communicated. It has taken the courageous position of making the following recommendations: y Companies should help investors understand how a company makes money and it should be communicated in plain English.

Final Paper 12 y Investors should know what the companys GAAP (generally accepted accounting principles) earnings are before being told that the adjusted earnings are on a pro forma basis. GAAP may not provide investors with a completely accurate picture of a companys performance, but it is the best thing we have until a better system is created. The SEC has recently called for an expansion of the MD&A (Management Disclosures and Announcements). NIRI agrees with this. Companies should explain in plain English what are the key factors that drive the companys business, what significant trends exist that could impact on the companys performance going forward, and other key factors that affect the companys business both on a historical and prospective basis. When companies notice a significant change in one or more of these factors, they should consider, on a current basis, disclosing that information broadly to investors. The SEC should examine whether the Management Responsibility for Financial Reporting section of the annual report (Form 10-K) should cover all written disclosures; whether it should be required instead of optional as it currently is; and whether to require management to formally affirm quarterly, instead of annually, that its disclosure is complete and current. It recommends that companies that have off-balance sheet businesses disclose that information to investors in an aggregated form. Companies should consider broadly disseminating that information, preferably in a company news release and posted on the companys Web site. The disclosure should include the business purpose of the investment, what current or special charges were recorded to set up the entity, contingent liabilities, if any, and what the impact would be on the earnings if they were consolidated. As recently proposed by the SEC, companies should report insider transactions on a current basis and there should also be

Final Paper 13 current reporting of material compensation actions, such as annual option grants, instead of waiting for the annual proxy to be published. Companies should have formal window periods that govern when insiders may buy and sell securities and the dates of those windows should be published so investors know when they are. Companies should be more aggressive in educating employees regarding the benefits and risks of owning the companys stock. This action by NIRI is most welcome and during the past several years it has as an organization recognized the importance in ethical reporting of financial data. Based upon the material available and the pressures being applied by regulatory processes and the understanding that trust in the capital markets is essential to continued investment and growth, I believe some steps will be taken to improve the quality of financial reporting. This offers a unique opportunity to corporate communicators to utilize their talents, informing their stockholders as to what their companies do and how they make money, as well as the opportunities open to those who invest in those companies. Perhaps too it is time to support the change in the law that creates corporations. A possible addition to the phrase the directors and officers of a corporation shall exercise their powers and discharge their duties with a view to the interests of the corporation and of the shareholders to include but not to the expense of the environment, human rights, the public safety, the communities in which the corporation operates or the dignity of its employees (Hinkley, 2002). While such a step is doubtful, certainly the need to ensure that corporate reporting does not undermine the very foundation of corporate investment upon which the marketplace relies is essential. The attempts to control the accounting industry by making it responsible for its actions have led to an increasing number of lawsuits over the past several years and to a significant increase in political donations from major accounting firms. The links between government

Final Paper 14 enforcing regulations and the amount of monies being spent on the political scene is disturbing. The tendency to move toward influencing legislation to limit exposure from suits brought due to the failure to provide accurate accounting by the very companies being paid to provide this accounting is cause for concern in itself. From what I have found to date there has not been much study performed in this area. It is most complex and almost confessional in nature. It may be that additional emphasis needs to be placed on this topic during courses. But in reality the corporation needs to reaffirm the importance of honesty and propriety in its dealings with its employees and the public at the highest executive levels to truly make a change in current practice. The role of the corporate communicator will certainly remain challenging. There will continue to be a requirement to soften or control the effect of bad news whether financial or otherwise. There will continue to be pressure to create the perception that all is fine even when it is not. There is a strong probability that the accounting profession will have some degree of regulation that, if enforced, will require more appropriate disclosure of the facts. But I would be most surprised to see any such regulation providing any direction for the corporate communication professional. The Christian Worldview What does the Bible say about all of this? Where and what is the Christian worldview when it comes to accounting practices for the business and for the corporate communicator? The Bible itself contains over 250 verses on money and business, plus over half of the Parables told by Jesus use money and/or business as a teaching source. For the accounting executives at Arthur Anderson, Enron, and the other companies, it seems one verse truly rings out, Whoever loves money never has money enough; whoever loves wealth is never satisfied with his income.

Final Paper 15 This too is meaningless. (Ecc 5:10) From this, we can now clearly see that the unethical accounting principles put into place by Enron and others were doomed from the start. Several times, we are taught from the Bible that God owns everything (Job 41:11, Psalms 24:1, Psalms 50:10, Psalms 50:12, Isaiah 66:2). The Scriptures have much to say about how Christians are to operate businesses. Christian business persons are an essential part of Gods plan for reconciling people to Christ. For instance, we have a major advantage that nonChristians do not have. God tells us in Deuteronomy 8:18, But remember the LORD your God, for it is he who gives you the ability to produce wealth, and so confirms his covenant... From the Christian businesspersons standpoint, here are some guidelines we must follow to remain true to our teachings, in order to succeed in making financial decisions in our business: First, God demands our total honesty. Ephesians 4:25 calls upon us to speak the truth in all things we do. Jerry White reminds us that, "Although we will frequently fail, our intent must be total honesty with our employer, our co-worker, our employees, and our customers" (White, 1978). This can be a difficult principle to adhere to. James 3:2 says this is where we often fail, but if we can control our tongue we will be able to control the rest of our body as well. The Bible best sums it up in Romans 12:17 which says, "Do things in such a way that everyone can see you are honest clear through." We must ask ourselves, are we totally honest in reporting our use of time, money, and accomplishments? The second guideline is personal responsibility. We must take full responsibility for our own actions and decisions. We should not try to excuse our actions based on pressure within our business or organization to do what we know is not right. We all fail at times to do what we know we should do. We must then accept the responsibility for what we have said or done and not try to pass that responsibility on to someone else or try to blame it on some set of

Final Paper 16 circumstances. Romans 12:2 warns us about the danger of allowing the world to shape us into its mold (White, 1978). Finally, there is the issue of reasonable profits. This principle is quite a bit harder to get a handle on, but it is still vital to have guidelines to follow. What is a reasonable profit? This is something each person has to deal with on his own. Luke 6:31 is a great help on this. It says that we should treat others the same way we would want to be treated. Put yourself in the other person's shoes and ask yourself how you would want to be treated in a particular situation. To the business person this is the price of our service or product above our cost. To the employee it is the amount of our wages for our service to the organization. Luke 3:14 says to be content with our wages, but the Bible also reminds the employer in 1 Timothy 5:18 that the laborer is worthy of his wages(White, 1978). It is all too easy to rationalize our way around many of these principles, but God will hold us accountable in the end. Ultimately, it is God whom we serve and to whom we must give account to. If corporate communicators were to maintain their trust and faith in God in all things they should do, the trust and faith of the public possibly would not have been lost in them or in their corporations.

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References Best business schools. (2011). US News, Retrieved from http://gradschools.usnews.rankingsandreviews.com/best-graduate-schools/top-businessschools/executive-rankings Bodily, S. and Bruner, S. (2002).Transformation of enron 1986 2000.Multimedia Case, Darden School.University of Virginia. Fielder, J. (2005).The vioxx debacle.Engineering in Medicine and Biology Magazine.24 (2).106109. Gibson, D. (2002), ``Object of devotion, Star Ledger, 17 February. Hinkley, R. (2002), ``How corporate law inhibits ethics, Business Ethics, January/February. Marchand, R. (1998), Creating the corporate soul, University of California Press, Berkeley, CA. Morris, D. (2001), ``Business ethics assessment criteria, Business Ethics Quarterly, Vol. 11 No. 4, pp. 623-50. White, J. (1978). Honesty, morality, and conscience. Colorado Springs, CO: NavPress