The Journal of Values-Based Leadership The Journal of Values-Based Leadership
Volume 14
Issue 2
Summer/Fall 2021
Article 11
July 2021
Corporate Ethical Training: An Answer to White-Collar Crimes Corporate Ethical Training: An Answer to White-Collar Crimes
Richard Pitre
Texas Southern University
Claudius Claiborne
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Recommended Citation Recommended Citation
Pitre, Richard and Claiborne, Claudius (2021) "Corporate Ethical Training: An Answer to White-Collar
Crimes,"
The Journal of Values-Based Leadership
: Vol. 14 : Iss. 2 , Article 11.
DOI: https://doi.org/10.22543/0733.142.1362
Available at: https://scholar.valpo.edu/jvbl/vol14/iss2/11
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References 1. McGrath, Jane (2008) How White-collar Crime Works https://money.howstuffworks.com/
white-collar-crime3.htm 2. SEC (2020) SEC Division of Enforcement Publishes Annual Report
https://www.sec.gov/news/press-release/2020-274 3. Kant's Categorical Imperative. (n.d.) Retrieved from
https://plato.stanford.edu/entries/kant-moral/ 4. McCracken, Grant, (1988), Culture and Consumption,
Indiana University Press, Bloomington, IN. 5. Rousseau, Jean Jacques (1762) The Social Contract
https://www.marxists.org/reference/subject/economics/rousseau/social-contract/ch02.htm 6.
Kirschenbaum, Howard, (1992) A Comprehensive Model for Values Education and Moral Education
https://www.jstor.org/stable/20404767 7. What is White-Collar Crime. (n.d.) Retrieved from
https://www.fbi.gov/about/faqs/what-is-white-collar-crime-and-how-is-the-fbi-combating-it 8. White-Collar
Crime. (n.d.) Retrieved from https://www.fbi.gov/investigate/white-collar-crime 9. Enron. (n.d.) Retrieved
from https://www.fbi.gov/history/famous-cases/enron 10. Carozza, Dick (2017). Why do they Do It?
https://www.fraud-magazine.com/article.aspx?id=4294998521 11. Michelon, Pascale. “Brain Plasticity:
How learning changes your brain,” SharpBrains 26-February-2008. https://sharpbrains. com/blog/2008/
02/26/brain-plasticity-howlearning-changes-your-brain/) 12. Hampton, Debbie. (2016) The 10
Fundamentals of Rewiring Your Brain. https://www.brainhq.com/news/the-10-fundamentals-of-rewiring-
your-brain/ 13. Sanders, Cheryl E. (2006) Lawrence Kohlberg's Stages of Moral Development.
https://www.britannica.com/science/Lawrence-Kohlbergs-stages-of-moral-development 14. Kinser,
Patricia Anne. (2000) Brain Structures and their Functions. https://serendipstudio.org/bb/kinser/
Structure1.html 15. Fogarty, Kevin (2001) Technical Agility https://www.computerworld.com/article/
2582993/technical-agility.html 16. Richards, Lori (2008) Why Does Fraud Occur and What Can Deter or
Prevent it? https://www.sec.gov/news/speech/2008/spch090908lar.htm
This article is available in The Journal of Values-Based Leadership: https://scholar.valpo.edu/jvbl/vol14/iss2/11
1
Corporate Ethical
Training an Answer to
White-Collar Crimes
Abstract
The modern business corporation is a culturally significant component of American Society. It is
facing a cultural invasion of the highest order. The categorical imperative, an unconditional
principle that rational individuals must follow despite natural desires or inclinations to do
otherwise, is today being called into question. This is most likely the result of grounding moral
values upon information that is transient and unstable rather than upon established data. The
social contract, which governs the formation and maintenance of individual morals, is a
requirement in organizations that demands collective agency – employees acting together to set
forth moral rules of behavior and eschew pernicious leanings and tendencies. From that
perspective, ethical training becomes a key leveraging point in the disconnect between cultural
expectations and individual behaviors in corporate America.
Introduction
Ethics is a choice as to how we behave. White-collar crime is a product of those choices. White-
collar crime is not new; it is culturally invasive, representing a major threat to organizational
integrity. One of the earliest cases of white-collar crime dates back to 15
th
century England. It
concerned an act of embezzlement committed by an agent entrusted to transport wool, who
had attempted to keep a portion for personal use without authorization (McGarth, 2008).
Since then, the 21
st
century has witnessed a dramatic increase in fiduciary breaches and
unethical behavior. For example, in fiscal year 2020, the U.S. Securities and Exchange
Commission (SEC) “brought a diverse mix of enforcement actions. These actions addressed a
broad range of significant issues such as accounting violations, foreign bribery, market
manipulation, insider trading, and broker-dealer misconduct. Through these actions, the SEC
obtained judgments and orders totaling over $4.5 billion for the Commission” (SEC, 2020).
Why does such deleterious conduct continue to occur and how can it be resolved? Is it
because of our need to be the best versus being the best that we can be? This need to be the
best often leads to compromising or outright violating ethical norms. The desire to be the best
is selfish and lacks compassion. It is generally a result of the failure to internalize a world
beyond one’s sole consideration of self. This presents us with the research question: can a
formal corporate ethical training program be designed that will reduce white-collar crime? The
training should be based on a modified definition of the firm’s objectives by focusing on “the
RICHARD PITRE
HOUSTON, TEXAS, USA
CLAUDIUS CLAIBORNE
HOUSTON, TEXAS, USA
2
process of making ethical choices (doing the right thing) to achieve wealth maximization.”
Ostensibly, the foundation of the training program must be rooted in ethical philosophy and
scientific evidence.
Philosophical History Informs Today’s Struggle with Ethics
Much of philosophy addresses individual beliefs about what is good, right, and true. In many
cases, these beliefs are settled in terms of broader societal mores. Kant (1724–1804) argued
that the supreme principle of morality is a standard of rationality, the
categorical imperative
,
which he characterized as an objective, rationally necessary and unconditional principle that
individuals must always follow despite any natural desires or inclinations to the contrary. The
context of his questioning is remarkably similar to the present day. Are today’s corporations
better positioned, in the current environment, to tie together the societal values denoting
reasoning or knowledge proceeding from theoretical deduction than when Kant so
advocated? If we imagine a social ontology comprised of three levels (see
Figure 1
), the
business or organization is situated between individual behavior and societal values. When a
business articulates and demands certain ethical behaviors based on its translation of
societal values, the resulting individual behaviors reinforce those values, accomplished in a
way that makes the latent societal values stronger. This theory was first articulated by
McCracken (1988) in terms of how meaning is transferred in a marketing system by
advertisers and other promoters. Similarly, this latent knowledge that is acquired
independently of any particular experience trickles down vis-à-vis institutional ethics policies
that set individual behavioral norms. Those behaviors provide feedback and become or
reinforce original societal values. Furthermore, In the
social contract
, Rousseau (1762)
proposes that an individual has a responsibility to give back to the common good vis-à-vis his
(or her) personal will or action. In the ethical corporation, this commitment is well understood.
Figure 1
Grant McCracken Adoption (1988)
The Movement of Meaning and Ethics in
a Society
Ethical training, given this context, becomes a mechanism to operationalize a social
ontological system that goes beyond a mere articulation of normative values. Today, as in the
SOCIAL VALUES, MORES, & LAWS
BUSINESS ETHICS POLICIES
INDIVIDUAL BEHAVIORS
3
1960s and 1970s, traditional values are being questioned. Today, moral reasoning and
values clarification are more important than ever (Kirschenbaum, 1992). As our society
becomes more diverse, multicultural, and pluralistic, a major question arises as to whose
values are the “right” values. In this, the third decade of the 21
st
century, the concern for
values and morality is as prevalent as it was in the 1960s. With the advent of social media
and the massive injection of misinformation, what is true, right, or good is no longer simply a
question of espousing and enforcing a norm. An underlying “me” or “mine” asserts a right to
prosper by any means. Despite societal norms, cognitive schemas allow the perpetrators of
crimes like embezzlement or insider trading to frame their acts as “a small thing,” or “brilliant.”
An understanding of today’s social schemas is relevant in addressing differing social values.
To this end, this paper serves to highlight several major corporate scandals and attempts to
understand the mindset of those who propagated the underlying crimes.
White-Collar Crimes
Reportedly coined in 1939, the term “white-collar crime” is now synonymous with the full
range of frauds committed by business and government professionals (FBI, 2020). These
crimes include acts of deceit, concealment, and violation of trust. They are not dependent on
the use of threats or violence. They are motivated by the desire to obtain or avoid losing
money, property, or services and to secure personal and/or business advantage. Often these
acts are political or business scandals of financial misdeeds committed by trusted executives
of corporations or governments which, in many instances, illustrate the failure of “Leadership
at the Top.” Those misdeeds involve complex methods of gross financial mismanagement at
several levels of the organization. They unequivocally constitute fraud, waste, and abuse and
are usually the catalyst for investigations launched by government oversight agencies such as
the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ).
The Fraud Section of the Department of Justice plays a unique and essential role in the fight
against sophisticated economic crimes in America. Examples of the historical problem are set
forth in
Appendix 1
, while the following case synopses (augmented by others in
Appendix 2)
represent instances of recent criminal activities involving the DOJ’s investigation of white-
collar crime.
1. In September of 2019, one South Florida health care facility owner was sentenced to
20 years in prison for its role in the largest health care fraud scheme ever charged by
the DOJ. The case involved a decades’ long scheme of kickbacks and money
laundering in connection with fraudulent claims presented to Medicare and Medicaid
for services deemed medically unnecessary. Since its inception in March of 2007, this
anti-fraud division has led the Medicare Fraud Strike Force, which is part of a joint
initiative between the DOJ and Health and Human Services (HHS) to focus their efforts
to prevent and deter fraud and enforce current anti-fraud laws throughout the U.S.
Before this particular investigation, the Strike Force, which maintains 15 teams
operating in 24 districts, had already charged nearly 4,000 defendants who had
collectively billed the
Medicare
program for more than $14 billion (DOJ, 2020).
2. On January 31, 2020,
Airbus SE
(“Airbus” or “the Company”), a global provider of
civilian and military aircraft based in France, agreed to pay combined penalties of more
than $3.9 billion to resolve foreign bribery charges with authorities in the United
4
States, France, and the United Kingdom arising out of the Company’s scheme to use
third-party business partners to bribe government officials, as well as non-
governmental airline executives, around the world and to resolve the Company’s
violation of the
Arms Export Control Act
(AECA) and its implementing regulations, the
International Traffic in Arms Regulations
(ITAR), in the United States. This settlement
is currently the largest global foreign bribery resolution to date (DOJ, 2020).
3. In September, 2020, the DOJ charged 345 people – including doctors, nurses, and
other medical professionals – involved in fraudulent billings across 51 federal districts.
The charges were in connection to cases representing approximately $6 billion in
losses, including more than $4.5 billion connected to
telehealth claims
. According to
court documents, 86 defendant telehealth executives allegedly paid doctors and nurse
practitioners to order unnecessary durable medical equipment, genetic, and other
diagnostic testing, and pain medications, either without any patient interaction or with
only a brief phone conversation with patients they had never met or seen (DOJ, 2020).
4. On October 22, 2020, the
Goldman Sachs Group Inc.
(“Goldman Sachs” or “the
Company”), a global financial institution headquartered in New York, New York, and
Goldman Sachs (Malaysia) Sdn. Bhd. (GS Malaysia), its Malaysian subsidiary, admitted
to conspiring to violate the U.S. Foreign Corrupt Practices Act (FCPA) in connection with
a scheme to pay over $1 billion in bribes to Malaysian and Abu Dhabi officials to obtain
lucrative business for Goldman Sachs, including its role in underwriting approximately
$6.5 billion in three bond deals for 1Malaysia Development Bhd. (1MDB), for which
the bank earned hundreds of millions in fees. Goldman Sachs agreed to pay more than
$2.9 billion as part of a coordinated resolution with criminal and civil authorities in the
U.S., the United Kingdom, Singapore, and elsewhere (DOJ, 2020).
Behavioral Ethical Training Based on Philosophy and Science
The fundamental basis for the development of an efficient and effective training program
requires some basic understanding as to why white-collar criminals behave the way they do.
Harvard business professor Eugene Soltes, in a year’s long quest to discover why topflight
executives become white-collar criminals, interviewed close to fifty convicted defendants
(Carozza, 2017). He says, “he realized that they failed to see the personal and professional
consequences of their choices because they never deeply felt that their decisions were
harmful to themselves or others.”
This paper proposes a cultural change through education. A cultural environment focused on
changing leadership’s thinking from motive to motive and results, such that the breaches
listed above are minimized. This can be done through an applied ethics training program
based on philosophy and science. Prior to attempting to develop such a program, it is
necessary to answer a dominant question: Can We Teach Ethics? According to the research,
the answer is emphatically, yes. Science provides the first proof. The science of neuroplasticity
is the brain’s ability to change over time, with education. According to Pascale (2008), for a
long time it was believed that as we aged, the connections in the brain became fixed and then
simply faded. However, research has shown that, in fact, the brain never stops changing with
continual educational stimulation.
5
Brain plasticity, also known as neuroplasticity, refers to the brain's ability to change and adapt
as a result of experience. It is the ability of neural networks in the brain to change through
growth and reorganization. Recent capability to visually “see” into the brain, allowed by
functional magnetic resonance imaging (fMRI) science, has conclusively confirmed the ability
to change brain processing (Hampton, 2016). The concept of a changing brain has replaced
the formerly-held belief that the adult brain was pretty much a physiologically static organ or
hard-wired after critical developmental periods in childhood. The studies conclude that while
the brain is much more plastic during the early years with its capacity declining with age,
plasticity happens throughout life (Hampton, 2019).
William T. O’Connor, foundation professor of physiology at the University of Limerick Graduate
Entry Medical School and author of the blog “Inside the Brain,” thinks neuroscience has a
particularly useful role in advancing ethics. O’Connor believes that: “The responsible
application of neuroscience should be represented in the teaching and learning of ethics in
the classroom” (Humphreys, 2015). The study of perception, learning, memory, and recall are
converging into what is known as Neuroethics which focuses on ethical issues raised by a
continually improved understanding of the brain, and by consequent improvements in the
ability to monitor and influence brain functions to unite ethical and social thought with
neuroscience (Roskies, 2021).
The second level of support is philosophy which is based on Lawrence Kohlberg’s theory of
moral development. According to Kohlberg, the process occurs in three stages (Sanders,
2006):
1.
Pre-conventional (childhood) stage:
defines right and wrong in terms of what authority
figures say is right or wrong or in terms of what results in rewards and punishment;
2.
Conventional (adolescent) stage:
the individual internalizes the norms of the groups
among whom he or she lives; right and wrong are based on group loyalties; and
3.
Post-conventional level (adult)
stage:
moral principles are defined, right and wrong
determined from a universal point of view. The moral principles of the post-conventional
person are principles that would appeal to any reasonable person because they take
everyone's interest into account.
Many factors can stimulate a person’s growth through the three levels of moral development.
One of the most crucial factors, Kohlberg found, is education. Kohlberg discovered that when
his subjects took courses in ethics and these courses challenged them to examine issues
from a universal point of view, they tended to move upward through the levels.
Lawrence Kohlberg was a developmental theorist of the mid-twentieth century who is best
known for his specific and detailed theory of children’s moral development. His work
continues to be influential and is supported by recognized scholars (including Colby, et al.,
1983; Rest, 1986; Walker, 1989, and Walker & Taylor, 1991b). Kohlberg’s stages of moral
development constitute an adaptation of a psychological theory originally conceived by the
Swiss psychologist Jean Piaget. Piaget placed great importance on the education of children.
Piaget created the International Center for Genetic Epistemology in Geneva while on the
faculty of the University of Geneva. The number of collaborations that its founding made
possible, and their impact, ultimately led to the Center being referred to in the scholarly
literature as “Piaget’s factory” (Burman, 2012).
6
In two studies, Cheryl L. Carmichael et al. demonstrate an engaging classroom activity that
facilitates student learning about Kohlberg’s theory of moral development by using digital
resources to foster active, experiential learning. In addition to hearing a standard lecture
about moral development, students watched a video of a morally provocative incident, then
worked in small groups to classify user comments posted in response to the video according
to Kohlberg’s six stages. Students in both studies found the activity enjoyable and useful.
Moreover, students’ scores on a moral development quiz improved after completing the
activity (Study 1), and students who completed the activity in addition to receiving a lecture
performed better on the quiz than students who received the lecture alone (Study 2)
(Carmichael, et al., 2018).
Kohlberg’s work is further validated by the results of a 20-year longitudinal study of moral
judgement development. The study was an effort to document the basic assumptions of
Kohlberg’s cognitive-developmental theory of moral judgment. Moral judgment was found to
be positively correlated with age, socio-economic status, IQ, and education. The results of this
study were interpreted as being consistent with a cognitive-developmental stage model.
Subjects seemed to use a coherent structural orientation in thinking about a variety of moral
dilemmas. Their thinking developed in a regular sequence of stages, neither skipping a stage
nor reverting to use of a prior stage. The Standard Issue Scoring System used in the study was
found to be reliable, and it was concluded that it provides a valid measure of Kohlberg’s moral
judgment stages (Colby, et al., 1983).
Behavioral Ethical Training: An Applied Approach
The training proposed integrates several approaches that attempt to change individual and
corporate behavior by reprogramming tacit understanding and behavioral outcomes. It is
designed to take place in an organizational setting, which can elucidate concepts and
relationships. The training clarifies what is expected of employees, how the organization will
deliver those expectations, and feedback about performance. The training is accomplished
through four modules.
Module I: Philosophies and Beliefs of Good, Right, and True
Social Ontology
This unit is focused on the impact of social interaction on ethical behavior. It is a process of
analyzing the various entities in the world that emanate from social interaction. In this module,
special emphasis is placed on similarities and differences of employees, specifically in the
design of the rules of the workplace. Additionally, this section examines ethics and societal
norms and traditions including ethnicity, nationality, gender, and wealth as well as their impact
on organizational values.
Emotional Intelligence
Emotional intelligence training focuses on one’s consciousness of the impact of their behavior
on others within the organization. This module focuses on managing emotions of self and
others. Special emphasis is placed on the role of “Leadership at the Top” and its ability to
manage this process. Leadership needs a unique perspective of the natural instinctive state
of mind that results from employees’ circumstances and relationships with their co-workers.
7
Conscious and Sub-Conscious Mind Awareness
This unit is focused on logic and reasoning and how the mind controls intentional actions, as
well as how involuntary actions are controlled. Training will create knowledge of how the
conscious and sub-conscious mind impact organizational behavior.
Shared Agency
This component focuses on what makes us better when we act together. Earlier in this paper,
Eugene Soltes was quoted as saying that those who commit white-collar crimes “failed to see
the personal and professional consequences of their choices because they never deeply felt
the impact of their decisions on others.”
Figure 2
gives a visual of the depth and breadth of
societal interconnections. The visualization of the various groups in society clearly illustrates
how deeply interconnected we are.
Figure 2: Shared Agency Personified
Module II: Ethical Values
One needs to know one’s unique perspective from which one chooses. This can be
accomplished by knowing one’s values. The training here will focus on the impact of a value
system as a deterrent to wrongdoing. It is difficult to embrace these values and be unethical.
Training Values
a) Honesty
b) Responsibility
c) Respect
d) Cooperation
e) Due Process
f) Justice
g) Competence
h) Professional Judgment
i) Greed (lack of)
j) Perseverance
k) Courage
l) Compassion
Reconfigured by Richard Pitre (2021).
The above figure is an example of our
shared humanity.
8
The ethical values presented here reside in the frontal lobe of the cerebral cortex (see
Figure
3
). Sensitivity to these values is the foundation of an ethical way of life. Leaders are often
consumed with the maximation of shareholder wealth exclusive of the ethical consequences.
Figure 3
is an illustration of the relationship between the values and the brain as supported
by the concept of neuroplasticity.
Figure 3
This connection is part of the default action stimulated by the brain. This default process has
its genesis of ethical brain stimulation long before one becomes a leader. Your thinking,
controlled by your brain, ultimately impacts how you lead, and the benefits of ethical training
are a great reinforcement of brain thoughts and behavior. Effective ethical training is achieved
through the actual application or use of ethical ideas, beliefs, and realistic expectations as
opposed to theories and philosophical discussions lacking in sincerity and practical content.
Ultimately, choices have consequences and proper training enhances the positive and
minimizes the negative. It is very difficult to adhere to these values and be unethical.
Kinser, Patricia Anne. Brain Structures and their Functions
(Insertion of ethical values are of the author)
9
The phenomenon of plasticity is of significance to this research because it is widely accepted
that it provides the underlying processes for learning and memory. “The Brain,” with David
Eagleman, which aired on Public Broadcasting Service (PBS.org) on March 2021, explored the
foundational principles of the phenomenon of neuroplasticity. The major focus was on how
the brain can change throughout an individual’s lifespan. With the latest scientific research
and illuminating stories about neuroplasticity, “The Brain Revolution” shows how the brain
works. Of significance to this research is
structural
plasticity: the brain’s ability to actually
change its physical structure as a result of learning (Ethical Training). The frontal lobe in
conjunction with the other lobes of the brain plays a vital role in controlling inhibitions (Lieff,
2014). The frontal lobe is important for voluntary movement, expressive language, and
managing higher level executive functions. Executive functions refer to a collection of
cognitive skills including the capacity to plan, organize, initiate, self-monitor, and control one's
responses in order to achieve a goal (Brain Map Frontal Lobes, 2021).
Module III: Modern Technology
Modern technology has revolutionized the way the world operates, especially in the ethics
space. It is a powerful tool that supports the dynamics of modern business operations.
However, it is not without unethical consequences. The focus in this module is on the ethical
implications of constantly emerging technology and the consequences of knowledge
insufficiency in this area. Employees need technological agility (Fogarty, 2001) – the ability to
adapt to and integrate current technologies quickly and smoothly with newer, different,
disruptive, expansive, or convergent technologies. This module involves data analytics as
accountants analyze raw data in order to guide decision-making.
Module IV: Ethical Leadership
The success of any ethics training program starts with the Board of Directors or the otherwise
highest level of organizational leadership. This level, “Leadership at the Top,” must embrace
ethics training by committing to be the first to engage directly in the training themselves.
Leadership defines the culture of the organization. It is essential that leadership is cognizant
of the impact of culture on the integration of values as it impacts operations. Leadership is
the filter that is essential to an effective and efficient environment conducive for success.
In a speech titled
Why Does Fraud Occur and What Can Deter or Prevent it?
, Lori Richards of
the SEC stated:
“For us as regulators, our three-fold efforts should be seen as a common attack on fraud.
1. We seek to educate investors to protect themselves against fraud;
2. We conduct regulatory examinations to ensure that firms have robust compliance
systems to prevent and detect fraud and other violations; and
3. We aggressively prosecute securities fraud, collaborating with criminal prosecutors.”
The training program proposed by this research has the potential to be transformative,
assuming active involvement of “Leadership at the Top.”
Summary and Conclusion
We study ethics because we are constantly striving for perfection. This requires an earnest
attempt to alter the mental obsession with absolute perfection; being the absolute best versus
being the best that one can be. Altering the need for absolute perfection will redirect
10
leadership thinking from motive to motive and results. This will give the organization the ability
to deal with the challenges and issues encountered in leading the modern corporation. Based
on the findings related to the science of neuroplasticity and Kohlberg’s theory of education, it
can be concluded that ethical training is an effective means of contributing to the reduction
of white-collar crimes. The concept of neuroplasticity, the brain’s ability to reorganize itself
throughout life by forming new neural connections, reinforces the importance of training.
Training promotes development of an ethical awareness that the organizational focus should
be on creating a culture that is based on being the best that one can be instead of being “the
absolute best.” The need to be the absolute best is a threat to an ethical culture and a
significant contributor to white-collar crimes.
Ethical training can help to remove ambiguity and clarify what is acceptable based on
organizational culture. The values presented in this research help individuals to know wisdom
and heed instruction, perceive the words of justice, judgment, and equity, and give prudence
to the simple. They allow the young to gain knowledge and learn discernment and the wise to
increase learning and understanding. Ethical training reinforces the need for “Leadership at
the Top” to be the linchpin that solves the disconnect between collective cultural expectations
and individual behaviors in the organization. Ethics is a choice as to how we behave. Choices
have consequences and our thinking, controlled by our brain, ultimately impacts those
choices. Efficient and effective ethical training creates an environment of leaders who are
visionaries and live the values, managers who operationalize the vision, and employees who
are productive. When these three are so coordinated, the organization is capable of realizing
the objective of the firm, that is, “the process of making ethical choices (doing the right thing)
to achieve wealth maximization.” This is how we become “The Best We Can Be.”
Appendix 1
Infamous Accounting Scandals
Waste Management
In 2002, Waste Management was found to have been involved in the largest financial
statement restatement in history. The company had admitted that its profits had been
overstated by $1.7 billion ($1,700,000,000). This defendant’s scheme was simple: it
improperly eliminated or deferred current period expenses in order to inflate earnings. For
example, it avoided depreciation expenses by extending the estimated useful lives of the
company’s garbage trucks while simultaneously making unsupported increases to the trucks’
salvage values. In other words, the more the trucks were used and the older they became, the
more the defendants said they were worth. Defendant also:
• made other unsupported changes in depreciation estimates;
• failed to record expenses for decreases in the value of landfills as they were filled with
waste;
• failed to record expenses necessary to write off the costs of impaired and abandoned
landfill development projects;
11
• established inflated environmental reserves (liabilities) in connection with acquisitions
so that the excess reserves could be used to avoid recording unrelated environmental
and other expenses;
• improperly capitalized a variety of expenses and failed to establish sufficient reserves
(liabilities) to pay for income taxes and other expenses (
Complaint
: SEC v. Dean L.
Buntrock, Phillip B. Rooney, James E. Koenig, Thomas C. Hau, Herbert A. Getz, and
Bruce D. Tobecksen, retrieved from https://www.sec.gov/litigation/complaints/compl
r17435.htm).
Tyco
From 1996 through 2002, Tyco International Ltd. (Tyco) violated federal securities laws by
overstating its reported financial results, recalibrating those reported earnings, and hiding
vast amounts of senior executive compensation and a large number of related party
transactions from investors. To achieve those ends, the company utilized a number of
improper practices conceived, guided, or encouraged by the individuals who managed the
company at that time. As a result, the company overstated its operating income by an
aggregate amount of at least one billion dollars. During this period of time, Tyco acquired
hundreds of companies. At least $500 million of Tyco’s inflated operating income resulted
from improper accounting practices related to some of its acquisitions. In addition, apart from
its acquisition activities, Tyco used a variety of reserve accounts to enhance and smooth its
reported financial results and to meet earnings projections from its fiscal year ending June
30, 1997, through its fiscal quarter ending June 30, 2002.
Another area of Tyco’s misconduct involved a scheme designed to overstate operating income
in connection with transactions between Tyco’s ADT Security Services, Inc. (ADT) subsidiary
and the security alarm dealers from whom it purchased residential and commercial security
alarm monitoring contracts. As a result, from its fiscal year ending September 30, 1998,
through its fiscal quarter ending December 31,2002, Tyco inflated its operating income by
approximately $567 million and inflated its cash flow from operations by approximately $719
million (
SEC Complaint
: Tyco International Ltd., retrieved from https://www.sec.gov/liti
gation/complaints/2006/comp19657.pdf).
Health South
HealthSouth Corporation (HRC), the nation’s largest provider of outpatient surgery, diagnostic,
and rehabilitative healthcare services, as well as its Chief Executive Officer and Chairman
Richard M. Scrushy, systematically overstated its earnings by at least $1.4 billion in order to
meet or exceed Wall Street earnings expectations (
SEC Complaint:
HealthSouth Corporation
and Richard M. Scrushy: Lit. Rel. No. 18044 / March 20, 2003, retrieved from: https://www.
sec.gov/litigation/litreleases/lr18044.htm).
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac entered into a Non-Prosecution Agreement with the Commission
in which each company agreed to accept responsibility for its conduct and not dispute,
contest, or contradict the contents of an agreed-upon Statement of Facts without admitting
nor denying liability. Each also agreed to cooperate with the Commission’s litigation against
the former executives.
12
While Freddie Mac disclosed during the relevant period that the exposure of its Single Family
Guarantee business to subprime loans was between $2 billion and $6 billion, or between 0.1
percent and 0.2 percent, of Freddie Mac’s Single Family Guarantee portfolio - its exposure to
subprime was materially greater. As of December 31, 2006, Freddie Mac’s Single Family
Guarantee business was exposed to approximately $141 billion (or 10 percent of the portfolio)
in loans the company internally referred to as “subprime,” “otherwise subprime,” or
“subprime-like” and its exposure grew to approximately $244 billion (or 14 percent of the
portfolio) by June 30, 2008, as the company sought to win back lost market share by
increasing its acquisition of such loans (“SEC Charges Former Fannie Mae and Freddie Mac
Executives with Securities Fraud”; Release No. 2011-267; December 16, 2011; retrieved
from https://www.sec.gov/news/press/2011/2011-267.htm).
Bernie Madoff (April 29, 1938 – April 14, 2021)
The SEC charged Bernie Madoff with violations of the anti-fraud provisions of the
Securities
Act of 1933
, the
Securities Exchange Act of 1934,
and the
Investment Advisers Act of 1940
.
He was charged committing securities fraud through a multi-billion-dollar Ponzi scheme
perpetrated on advisory and brokerage customers of his firm. The size of the Madoff fraud
was estimated to be $64.8 billion. On March 12, 2009, Madoff pleaded guilty to 11 federal
crimes and admitted to operating the largest private Ponzi scheme in history. On June 29,
2009, he was sentenced to 150 years in prison with restitution of $170 billion. He died in
federal prison on April 14, 2021 (retrieved from Press Release: SEC Charges Bernard L.
Madoff for Multi-Billion Dollar Ponzi Scheme; 2008-293; Dec. 11, 2008).
Enron
Kenneth L. Lay, Jeffrey K. Skilling, and Richard A. Causey, all former senior executives of
Enron, engaged in a multi-faceted scheme to defraud in violation of the federal securities
laws. From at least 1999 through late 2001, Lay, Skilling, Causey, and others manipulated
Enron’s publicly reported financial results and made false and misleading public statements
about Enron’s financial condition and its actual performance. As an objective and result of
their scheme to defraud, Lay, Skilling, Causey, and others made millions of dollars in the form
of salary, bonuses, and the sale of Enron stock at prices they had inflated by fraudulent
means. Skilling and Causey made at least $103 million and $23 million, respectively, in illicit
gains (retrieved from comp18776.pdf (sec.gov).
WorldCom
From as early as 1999 through the first quarter of 2002, defendant WorldCom Inc.
(WorldCom) misled investors. This corporate defendant acknowledged that during this period,
and as a result of undisclosed and improper accounting, it materially overstated the income
it reported in its financial statements by approximately $9 billion. In general, WorldCom
manipulated its financial results in two ways. First, the company reduced its operating
expenses by improperly releasing certain reserves held against operating expenses. Second,
it improperly reduced its operating expenses by re-characterizing certain expenses as capital
assets. Neither practice was in conformity with generally accepted accounting principles
(GAAP) (
Complaint
: SEC v. WorldCom, Inc., retrieved from https://www.sec.gov/litigation/
complaints/comp17829.htm).
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Appendix 2
The SEC Continues to Investigate
The following examples of continuing cases of white-collar crimes reinforce the need for ethics
training. The SEC continues to investigate and recommend actions addressing conduct that
spanned the securities markets, including conduct involving financial fraud, insider trading,
offering fraud,
Foreign Corrupt Practices Act
violations, misconduct by broker-dealers,
investment advisers, and more. Based on this work, the Commission brought hundreds of
enforcement actions and secured meaningful remedies to protect investors and U.S. markets
against wrongdoing.
A cornerstone of the SEC’s enforcement program is ensuring that entities are held
accountable for their misconduct.
In Fiscal Year 2020, the Commission brought actions against financial institutions,
automobile and engine manufacturers, and technology, telecommunications, and
pharmaceutical companies, among others. The following subset of cases is illustrative:
Wells Fargo & Co.:
In a settled action, the Commission found that Wells Fargo misled investors
about the success of its core business strategy at a time when it was opening unauthorized
or fraudulent accounts for unknowing customers and selling unnecessary products that went
unused. Wells Fargo was ordered to pay the SEC a $500 million civil penalty as part of a
combined $3 billion settlement with the SEC and the Department of Justice.
Telegram Group Inc.
: The Commission filed an emergency action and obtained a temporary
restraining order against Telegram and its wholly-owned subsidiary TON Issuer Inc. for
allegedly operating an unregistered offering of digital tokens called “Grams” in violation of
federal securities laws. On the Commission’s motion, the court issued a preliminary injunction
barring the delivery of Grams and finding that the Commission had shown a substantial
likelihood of proving that Telegram’s sales were part of a larger scheme to unlawfully
distribute the Grams to the secondary public market. Following this decision, the defendants
agreed to settle the action and were ordered to return more than $1.2 billion to investors and
to pay an $18.5 million civil penalty.
BMW AG.
: In a settled action, the Commission found that BMW and two of its U.S. subsidiaries
disclosed inaccurate and misleading information about BMW’s retail sales volume in the U.S.
while raising approximately $18 billion from investors in several corporate bond offerings. The
three companies were ordered to pay a joint penalty of $18 million.
Telefonaktiebolaget LM Ericsson
: In a settled action, the Commission alleged that Ericson
engaged in a large-scale bribery scheme involving the use of sham consultants to secretly
funnel money to government officials in multiple countries. In resolving this matter, Ericsson
was ordered to pay more than $1 billion to the SEC and the Department of Justice and to
install an independent compliance monitor.
FinCEN files further show massive money-laundering cases, including the following:
In September 2020, leaked documents provided to
BuzzFeed News
, and passed along to the
International Consortium of Investigative Journalists (ICIJ), implicated major international
14
banks — including Deutsche Bank, JPMorgan Chase, HSBC, Standard Chartered, and Bank of
New York Mellon — in the laundering of more than $2 trillion linked to oligarchs, criminals,
and terrorists from 1999 to 2017 (see Leopold, Jason (20 September 2020). Dirty money
pours into the world’s most powerful banks: The FinCEN files,
BuzzFeed
. Retrieved from
https://www.buzzfeednews.com/article/jasonleopold/fincen-files-financial-scandal-criminal-
networks).
For the complete SEC report,
see
https://www.sec.gov/files/enforcement-annual-report-
2020.pdf.
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About the Authors
Richard Pitre, Ph.D., CPA
Richard Pitre is a Professor of Accounting in the Jesse H. Jones School of Business at Texas
Southern University with 49 years of teaching experience, and 45 years of experience as a
Small Business CPA Practitioner. Richard Pitre served as a University Administrator at Texas
Southern University, serving as Associate Provost for Academic Affairs, Dean of The Graduate
School, and Chair of the Department of Accounting. Pitre served as one of the authorized
providers of the required Ethics Course for Texas Certified Public Accountants for over twelve
years. In that role, he was highly regarded by practicing CPAs as being among the first in Texas
to champion the teaching of ethical reasoning and ethical decision-making in the world of
business.
Pitre is the author of a Financial Accounting Textbook. His research is multi-disciplined
covering such topics as Ethical Leadership, Ethics of Privacy, Ethics and Information Systems
Controls, Fraud, Curriculum Development, Environmental Cost Liability, Managed Care,
Deferred Taxes, Hospital Effectiveness and MIS, Small CPA Practitioner and Information
System Liability, and Organizational Behavior and Citizenship. He has served in leadership
positions for several professional accounting organizations. He is also the recipient of several
awards from Accounting and community organizations.
Dr. Richard Pitre can be contacted at [email protected].
Claudius Claiborne, Ph.D.
Claudius “CB” Claiborne is an experienced marketing educator with a strong foundation in
undergraduate and graduate education in both face-to-face and online environments. He has
an acknowledged capacity for providing effective leadership and management for academic
programs, which includes student mentoring, and academic staff and faculty development.
He repeated demonstrated success building dynamic teams that work together to ensure
programs, policies, and practices align to overarching mission and vision. He has a keen
aptitude for coordinating systematic and ongoing evaluation of strategies and identifying ways
to enhance the student experience and boost academic performance.
Dr. Claiborne’s teaching competencies include: New Product Development, Marketing
Innovation, Marketing Management, Consumer Culture, Qualitative Methods, Marketing,
Communications, Marketing and Art, and Digital Marketing. He has published in the
Journal
of the Academy of Marketing Science
,
Journal of Business and Psychology
, Social Indicators
Research, Applied Research in Quality-of-Life Studies and the International Journal of
Business Research. He has chaired regional conferences (the Southwestern Business
Administration Teaching Conference) and edited special editions of journals (the International
Journal of Business Research (IJBR)). He led a team that worked with the business community
17
to completely revamp the junior year business school experience. The four foundation
courses; finance, marketing, management and information systems were combined into one
twelve-hour, case-based cross disciplinary course, co-taught by executives from the business
community. The course followed the life cycle of the business from start-up to going
international. He received multiple teaching innovation awards for this and other efforts. He
oversaw development and delivery of engaging curriculum regarding marketing innovation,
culture and innovation, and qualitative methods as a Fulbright Scholar in Japan.
Dr. Claiborne is an Apple Distinguished Educator, Fulbright Scholar, Sasakawa Fellow, Coors
Eminent Scholar, and Presidential Scholar. With respect to his educational background, Dr.
Claiborne received a Doctor of Philosophy in Marketing from Virginia Polytechnic Institute, a
Master of Business Administration in Marketing & Management from Washington University,
a Master of Engineering in Biomedical Engineering from Dartmouth College, and a Bachelor
of Science in Mechanical Engineering from Duke University. His professional experience
includes working within the Product Development Group at Ford Motor Company, the Design
and Development Group at Booze Allen Hamilton, and the Systems Design Group at Duke
Energy Corporation.
Dr. Claiborne can be contacted at [email protected].
