Honest Work: Chapter 4 (2 days)

MON$Y ETHICS

Chapter 4 128-152

Carl J. Loomis: Lies, Damned Lies, and Managed Earnings.

Arthur Levitt (SEC Chairman: 1993-2001


1) Unethical money management is inefficient: ultimately costing more money than it saves/makes.

2) Successful businesses have efficient money management.

3) Thus, Unethical money management is not part of a successful business model.


Premise 1: Unethical money management is inefficient: ultimately costing more money than it saves/makes.

• Rite-Aid 7 bil. Loss• Donnkenny CEO sentenced to years in jail• Sunbeam CEO, Dunlap, fired


The methods of unethical money management are diverse:• Big Bath

– After Restructuring, a company appears to have significantly more money than it actually does.

• Acquisitions– When a company purchases goods and warehouses them rather than using them.

• Cookie-Jar Reserves– Money is tucked away until it is strategically displayed for investors to show a

profit.• Materiality

– Accountants claim “materiality” when they have done their ‘due diligence’ to discover money uses, when they actually have not.

• Revenue Recognition– False recording of sales, such as recording sales that happen after a quarter.

http://whitecollarfraud.blogspot.com/2011/05/is-green-mountain-coffee-roasters.html


Big Picture: If money/stocks is dependent on trust, then accounting practices that detail the money/stocks of a company need to be transparent and true. Otherwise, investment in the company will suffer and its value decrease.

Ed Cohen: Arthur Anderson Refugees Reflect on What Went Wrong


In 2001, Enron was found by SEC to have 100bil. of its revenue to be based on falsely reported documents: fraud. The accounting firm Arthur Andersen's performance and alleged complicity as an auditor came under intense scrutiny. The Powers Committee (appointed by Enron's board to look into the firm's accounting in October 2001) came to the following assessment: "The evidence available to us suggests that Andersen did not fulfill its professional responsibilities in connection with its audits of Enron's financial statements, or its obligation to bring to the attention of Enron's Board (or the Audit and Compliance Committee) concerns about Enron's internal contracts over the related-party transactions"

On June 15, 2002, Andersen was convicted of obstruction of justice for shredding many of these falsely reported documents.


Question: How is it that an accounting agency that was built by trust, could negate that trust so readily by a company (Enron) whose success it had little stake in?


Answer 1: By failing to do its job!

‘In the 1980s and 90s accurate accounting became more complex and the investment community demanded information faster.’

“[A]t best, you were always trying to come up with approximately the right answer instead

of the right answer.” (140)


Answer 2: Culture of personalization and risk.

In the 1970s the culture of accounting was professional and risk-adverse. However,

this culture devolved into personal stakes and the risk involved in such stakes.


Answer 3: Complexity AND Culture Complex business practices ALLOW for a corrupt accounting culture to flourish. In addition, as companies seek risky ventures, they need accountants to mitigate risk.

This combo led to the accounting corruption of the 80s and 90s.

Frederick & Hoffman: Individual Investor in Securities Markets


Problem: Securities Markets (stocks, bonds, options) are volatile investments. Citizens believe they must ‘beat inflation’ and get a better rate than bank savings provides. So, Citizens risk “betting” on Securities Markets


Resolution: Forbid at-risk Citizens from investing in Securities Markets

Supporting Reasons and Problems

a) Other areas have government oversight by regulating citizen involvement: age limits on drugs, driving and guns. (Analogy)

-But, there is no way to regulate who is at risk.

b) Paternalism regulation is a common means of protecting citizens from self-harm/bad investments: seatbelts, food ingredients etc.

-But, bad investment is not fatal, making it less important.

c) If a citizens KNEW the full risk and would consent to intervention, paternalism is just.

Again, there is no way to regulate who is at risk.

Regulating Risk without Paternalism

• SEC regulates operations of publically traded stocks and ensures transparency of investments so that the investor does not share all of the ‘regulation’ burden.

• “Rider” clauses highlight risk to investors.


Problem: at Risk investors continue to ‘gamble’ their money in penny stocks, etc. and lose

their money. The regulated and transparent information remains too complex!

Solution???

Regulating investment amounts via IRA contributions

Boatright: Finance Ethics


• In order to strengthen trust in the market system, ‘unbiased’ financial services are put into service. But, the practitioners of financial mediation (fiduciaries) MUST uphold ethical practices to do their work as ‘trust protectors.’

What are the ethical norms of fiduciaries?


A fiduciary engages in asset allocation without having a stake in the asset, acting in the interest of another person only.


The central ethical dilemma of any fiduciary is ‘conflict of interest,’ whether professional or personal:• If an asset allocation might personally benefit a

fiduciary (even incidentally), they are unethical in that allocation.

• If an investment opportunity is also used by a fiduciary’s own portfolio, , they are unethical in that investment.

• If personal conflict upends asset allocation, they are unethical in that allocation.


The central goal of a fiduciary is to maximize the wealth of the shareholder. Hence, the ethical context of the fiduciary is unique in its loyalty over personal ethical conscience.

E.g. A fiduciary may engage in a hostile takeover if it maximizes shareholder

wealth, even if it is broadly or personally unethical or unethical to the employees of the company they are taking over.


• Do fiduciaries get an ethical ‘pass’? • Given the justification for potential unethical behavior,

is being a fiduciary unethical?• Do fiduciaries REALLY general a more ethical financial

system? More trustworthy system?

Bonus ‘fact’ question: is a fiduciary a shareholder or stakeholder in a company?

Moore: What is Really Unethical About Insider Trading?


1) The business system protects a “level playing field.” (Texas Hold ‘em e.g. everyone hides their cards and everyone see the public cards).

2) Insider trading entails an unfair ‘information’ advantage. (Texas Hold ‘em e.g. peeking).

3) Thus, Insider Trading is Unethical.


Premise (2) is weak for the business system.

Unfair information advantage is the basis of the competitive structure of the business system.


• Insider trading entails a theft of property ‘information.’

– In business, information is a kind of property and must be purchased by a legal means. Just as it is illegal to steal someone’s property, so too is it illegal to deal in their secrets.

Response: if information is property, then it is okay to ‘trade’ it. Hence, information should be sharable if both parties agree to it. (E.g. Texas Hold ‘em: is it legal to ‘tip your hand’ as long as both the tipper and observer are in the know?)

Farrell/Partnoy/McDonald/Ferguson

1) A derivative is a contract that allows another body to gain or lose given fluctuating values and/or rates.

2) There is roughly 60-80 trillion dollars in the world.

3) There is roughly 600 trillion dollars in derivatives. 4) So, roughly 90% of the dollars that are

determined by fluctuating values and/or rates do not actually exist.

Derivatives and the Housing Bubble

Beyond Capitalism????

https://www.youtube.com/watch?v=qOP2V_np2c0

Honest Work: Chapter 4 (2 days)

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