Ethics: Spinning the Numbers

Nov 1, 2002
HR Magazine, November 2002

Handling an ethical dilemma over accounting practices can be doubly difficult when it's not certain that the practices themselves would breach the bounds of acceptability.

To express your opinion on this ethical dilemma on SHRM Online’s “HR Talk” bulletin board, go to HR Talk: Ethics Case.

It was a Saturday afternoon, and the two men at the window table in the club lounge were relaxing over drinks, talking football and a little politics, and cooling down after an hour of tennis. “You’re getting the hang of it,” Fred Smith joked to Jim Cunningham, who, as he often did, had edged out his longtime friend. “Practice, practice, practice,” Jim replied with a laugh.

Fred and Jim had been playing tennis together for almost as many years as they had worked at Summitt Manufacturing. Fred is vice president for human resources; Jim is one of the company’s accountants.

They try to keep Summitt out of the conversation when they get together, but this particular day they broke

their own rule by getting into some shop talk. That’s when Jim dropped a surprise on Fred.

“I don’t know if I should tell you this,” he said, “but there’s something going on at work and you should know about it.” Jim then told Fred—in strict confidence—that the company’s chief financial officer was planning to have Summitt take an aggressive stance on sales revenue reporting that, in Jim’s view, would stretch the boundaries of acceptable accounting practices.

Jim’s accounting expertise and core responsibilities at Summitt center on the company’s real estate holdings; he doesn’t deal with sales revenue. But he has a pretty good understanding of what’s happening in other areas of the company’s financial activities, and he was clearly concerned with what he had picked up about what the CFO wanted to do.

If the CFO were to prevail, his accounting method would burnish Summitt’s earnings outlook and probably help its stock price. “But it could be risky,” Jim told Fred. “It could raise questions” about the firm’s methods and even its integrity. What’s more, Jim said he wasn’t sure the company’s top executives understood the nuances of the CFO’s approach. “They might get talked into going along with something they’re not up to speed on,” Jim said.

The CFO was hired four years ago by his college buddy, the chief executive officer. The CEO is 48 and has been with the company for five years. He has boosted sales at double-digit rates every year, but his streak may end soon. Sales gains so far this year have been the lowest in more than six years, and there’s no surge on the immediate horizon.

Summitt’s chairman, the son of the founder, is 64 and has been with the company for 35 years. He has spent his career keeping Summitt on a steady growth path, and he considers the company’s reputation and integrity a reflection of his own.

Accounting is outside Fred’s area of responsibility, but now that he has heard Jim’s take on what’s going on, he feels somebody should say something. But is it his responsibility—particularly if it’s not certain that the aggressive accounting would be illegal?

Should Fred just focus on his own job and hope no accounting irregularities materialize? Should he tell Jim that if he’s worried, he should talk to the CFO directly and leave HR out of it?

Or should Fred speak up? And if so, whom should he approach? Should he go to the chairman? The CEO? The CFO?

And if he does speak up, what should he say? What result should he seek and what argument should he use to achieve that result?

Get the Facts, Preserve Integrity

By Brenda Franklin

Fred should ask Jim probing questions about the factual basis of his statements. In particular, he should find out what illegality could exist and who else knows about the situation. In doing so, he would get a better picture of the organization’s possible exposure to liability. He might also check to see if there are auditing procedures that could find these assumed irregularities in reporting sales revenue.

It is important for Fred to get as much information as possible. Since Jim has stated that the company executives “might get talked into going along with something they’re not up to speed on,” Fred could ask how the top executives might get the proper information or how they might ask questions to check this out.

Fred should then ask Jim what he intends to do about it. If Jim says he plans to do nothing and feels that Fred should also stay out of it and that he mentioned it only because it was eating at him, Fred should tell Jim that—without accusing anyone of anything—this needs to be cleared up.

If there are accounting irregularities, the top executives need to know of them so that they can decide for themselves if they want to take the risk. If there are no accounting irregularities, however, it is important to get the facts out to prevent a spread of misinformation and rumors. A perception of irregularities would tarnish the company’s reputation and integrity nearly as much as would any confirmed accounting irregularities.

If Jim is willing to go forward and bring this question of the accounting practices out into the open, then Fred should ensure that Jim suffers no retaliation for asking about the practices. Jim could very well be covered under a state whistle-blower statute.

If Jim is not willing to do anything with this information, Fred should go to the chairman of the board, since he seems to be the one who could decide how to handle this and is also the individual who has kept the company’s reputation and integrity in mind when making decisions. The CEO and the CFO would not be the best people to go to on this matter because they may be too close to the situation and would probably be the ones producing the numbers.

Fred should give the chairman the information, noting that he’s not an accounting expert and doesn’t know if the information is valid but that, if it is, it could compromise the company’s reputation and integrity. In addition, Fred needs to emphasize that, even if the information is not true, it is important that the matter get cleared up with employees because misinformation could be very damaging. And he should not divulge his source for the information without Jim’s approval.

After telling what he knows to the chairman, Fred should ask if there’s anything else the chairman might want him to do with the information. If the chairman tells him that he will look into it, Fred should just drop it. Fred should not tell Jim that he has talked to the chairman, because that would expose the chairman to further liability.

Fred is in a tough position either way, but it is his ethical dilemma as much as the company’s. If Fred finds that the company is knowingly doing something illegal and chooses to continue doing it, Fred will need to decide if he can continue working for this company.

Brenda Franklin, SPHR, is HR manager for the Moorhead (Minn.) Charter of Bremer Banks, a financial services company based in St. Paul. She has been in HR management since 1984, working not only in banking but also in the public sector, health care, manufacturing and the wholesale and retail grocery industry. She serves as chair of SHRM’s Compensation and Benefits Committee.

Every Manager a Compliance Officer

By David Gebler

It’s always a tough decision to know when to get involved in matters that are not black and white, especially in this era of lack of confidence in financial reporting. However, a vice president for human resources is part of the senior management team, a position that carries certain responsibilities as well as obligations to the company’s stakeholders, including employees and their retirement savings.

One of the greatest fears of ethics and compliance officers is not knowing what they don’t know. In today’s business environment, every manager, if not every employee, needs to be a compliance officer. Everyone should feel empowered to raise issues that trouble them.

The first task is to find out whether this is a real issue at all. Fred needs to be sure that what Jim was talking about is, in fact, something that warrants attention. It’s true that this is outside Fred’s area of professional expertise, but every company should be developing guidelines as to what practices are unacceptable even if they are technically legal.

If Fred feels the issue presents a real question as to acceptable business practice, then he needs to act. He needs to tell Jim that he has an obligation to raise the issue. This is not a situation in which a promise of confidentiality should interfere with the need to get to the heart of the matter.

With whom should Fred raise the issue? As it was at Enron, the logical person to go to—the CFO—is the one who may be causing the problem. Also, as with Enron at the outset, it’s not so clear that the actions would be illegal or even unethical as opposed to just aggressive and very complex.

Fred should go first to the general counsel or the compliance or ethics officer. They are better situated to conduct an investigation even if there is no merit to the allegation. If Fred goes directly to the CFO, it could jeopardize an investigation, evidence and other legal considerations.

The general counsel, compliance officer or ethics officer would be best positioned to take such matters to the CEO, the board and/or audit committee, as necessary. Fred should not have to tackle this alone without going through proper channels.

To preserve the legal posture of the company, attorney-client privilege (through the general counsel) should be invoked as soon as possible. This will protect conversations, written communications, investigations, etc. Plus, the general counsel has a legal obligation imposed by his or her license and state attorney ethics code to take the situation up the ladder to the board in the event the CEO does not cooperate.

However, if the general counsel stonewalls or tells Fred that the matter is not his concern, Fred’s obligations are not over. Fred needs to be certain that the matter is being properly handled.

So if no action is pursued within the proper chains of command, he should go to the CEO. If, after writing a letter to the CEO, Fred does not get satisfaction, his obligation is to inform the chairman and the head of the audit committee of the board of directors.

If Fred is still not satisfied, he should make the matter known to the U.S. Securities and Exchange Commission, which can investigate possible violations of securities laws.

The bottom line is that, while no one wants to be a whistle-blower, Fred has obligations to multiple stakeholders. If the company suffers in the marketplace because of accounting inconsistencies, it’s not only the public investors who may be hurt; it’s likely that Fred’s core constituency, the employees, will be hurt through additional hits on their retirement accounts.

David Gebler is CEO of The Working values Group, a business ethics and corporate responsibility consulting firm in Boston. A lawyer by training, he has spent the past 10 years developing tools and methodologies to help organizations integrate their values into day-to-day work processes.

Courage and Creativity

By Barry Mason

The critical process for responding to such an ethical dilemma must include at least four steps: clarification of roles, definition of critical issues, validation of pertinent information and a challenge to risk-inducing facts and realities.

First, Fred and Jim each need a well-defined frame of reference to guide their interactions with each other, as well as with anyone else affected. HR’s role is best fulfilled when it demonstrates:

  • Strong working knowledge of all business areas.

  • Strategic savvy that aligns and engages the workforce for maximum business value.

  • Courage of conviction to identify, fully explore and deftly challenge all risks, particularly those with ethical implications.

Although neither Jim nor Fred works within the organizational function in question, both are legal agents of Summitt and thereby are obligated to protect its interests and integrity.

Second, they must define the critical issues before them with uncompromising objectivity and honesty. Jim appropriately expresses concern about the chief financial officer’s approach—one that could burnish Summitt’s earnings picture and stock price—and its potential to damage Summitt’s integrity and reputation. This scenario vividly illustrates the classic tension faced by publicly traded companies. Pressure to satisfy shareholders competes with moral and legal obligations and risks. Perhaps one of HR’s most daunting yet crucial tasks is to broker a truce between Wall Street and the companies it evaluates.

Third, Fred needs to validate the information Jim offers and ask him to explore further. Integrity requires that all decision-makers fully understand the facts and risks before making changes. If they acquire any evidence that the CFO is obstructing this process and information flow, Fred and Jim are also culpable and must act on behalf of Summitt’s interests.

Fourth, organizing the data in the context of Summitt’s priorities equips Fred to discuss apparent risks and incongruities with appropriate parties. While the chairman’s concern for Summitt’s reputation and integrity is a key priority, it must be balanced against his long-term focus on growth.

To maintain credibility, Fred must follow the chain of command. Starting with the CFO, discussions must ensure that all top executives clearly understand the sales revenue reporting changes and their implications. Fred’s primary objective and argument need to focus on Summitt’s integrity and welfare, both short-term and long-term. Clear, complete communication facilitates the confidence and trust required to achieve that end.

Until leaders fully understand how confidence and trust drive business success (stock prices, sales, revenue, return on investment, etc.), they will limit the success of the businesses they lead. It takes plenty of courage and creativity to earn the confidence and trust required for best results in today’s increasingly complex business environment.

Barry Mason, SPHR, is an organizational performance consultant with InnerActive Solutions LLC in Indianapolis. He has 15 years of business management experience—including 12 years in HR management—in manufacturing, distribution, health care and banking. He also spent five years in youth ministry/social work.

‘Our Primary Responsibility’

By Jeff Ewing

As vice president of human resources, Fred has a fiduciary responsibility to employees, shareholders and customers. If he is aware of potentially illegal conduct, he has an obligation to take the matter to company officials and, if necessary, to the board. He should start by informing his accountant friend Jim that they share a responsibility and that he will make every effort to avoid bringing his name up but that the matter needs to be addressed.

The next step is for Fred to speak with the chief financial officer to gain a better understanding of what the CFO intends to do. If Fred is not satisfied, he should then speak with the chief executive officer, all the time documenting every conversation. If Fred remains concerned, he then should write a letter to the chairman of the board along with the chairman of the board’s audit committee outlining his concerns and questions.

Fred also should consider retaining his own legal counsel prior to initiating discussions. Many states have whistle-blower protection laws. Depending on the CEO and board’s integrity, being summarily fired for raising difficult issues is not out of the question.

It takes courage to raise ethics issues, especially when these issues potentially involve senior company officers. However, it is important to remember that as leaders of human resources, our primary responsibility is to employees, customers and shareholders. At the end of the day, our personal integrity is more important than even our jobs.

To express your opinion on this ethical dilemma on SHRM Online’s “HR Talk” bulletin board, go to HR Talk: Ethics Case.

Jeff Ewing, SPHR, is vice president of human resources at Centennial Ventures, a venture capital firm in Denver. His professional experience includes serving as director of executive development with Whirlpool Corp. and as vice president of corporate human resources with Neodata Inc.

To express your opinion on this ethical dilemma on SHRM Online’s “HR Talk” bulletin board, log on to HR Talk. For guidance in ethical dilemmas faced by HR, the Society for Human Resource Management recently developed a new “Code of Ethical and Professional Standards in Human Resource Management.”


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