"(T)o say that the individual is culturally constituted has become a truism. . . . We assume, almost without question, that a self belongs to a specific cultural world much as it speaks a native language." James Clifford

Friday, November 4, 2011

GlaxoSmithKline: Born Again Ethically?

GlaxoSmithKline, a drug company based in the E.U., agreed in 2011 to pay $3 billion to settle the U.S. Government’s civil and criminal investigations into the company’s Medicaid pricing practices and sales practices, including illegal marketing of Avandia, the diabetes drug linked to coronary problems. The settlement amount surpassed the previous record of $2.3 billion paid by Pfizer in 2009. Even so, it is doubtful that $3 billion proffered enough of a punch to motivate either Glaxo’s board or CEO to do what would be necessary to extirpate a corporate culture perhaps too comfortable with cutting corners.


The full essay is in the Introduction of Cases of Unethical Business: A Malignant Mentality of Mendacity, available in print and as an ebook at Amazon.

Thursday, October 27, 2011

Hedge Fund Lobby: Breaching Ethics

In a rule adopted by the SEC on October 26, 2011, hedge funds over a certain size must report information—the amounts required depending on the fund’s size. The devil, as it were, is in the details. In this case, they reflect the intense lobbying of hedge funds and their advocates. As a result of the lobbying, according to The New York Times, the “changes call for only the largest funds to report the most detailed information, eliminate any penalty of perjury for misleading reports and delay for six months the initial reports for all but the largest funds.”[1] Whereas the matter of the amount (and type) of information required involves or potentially puts at risk the funds’ secret strategic competitive advantages and the matter of a start date involves technical points such as how much effort is needed to cull the required information, the elimination of any penalty for perjury does not correspond to any legitimate business concern. Indeed, it makes on sense to require information if it can be misleading with impunity. It is as if the SEC regulators had told the hedge funds, You will have to submit information to us but it can be misleading. The fund managers would be apt to reply, Oh, ok.


The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  


1. Edward Wyatt, “Rule Allows Regulators a Look at Hedge Funds,” The New York Times, October 27, 2011.

Sunday, October 23, 2011

Deloitte: A Culture of Least Resistance

On October 17, 2011, the Public Company Accounting Oversight Board issued a statement saying audits should protect investors. “The board therefore takes very seriously the importance of firms making sufficient progress on quality control issues identified in an inspection report in the 12 months following the report,” the statement said. Not having seen such progress at Deloitte, the board made its 2008 report on the firm public. The report “cited problems in 27 of the 61 Deloitte audits it reviewed, including three where the issuing company was forced to restate its financial statements.” This was “an unprecedented rebuke to a major accounting firm. In too many instances,” the report stated, inspectors from the board “observed that the engagements team’s support for significant areas of the audit consisted of management’s views or the results of inquiries of management.” In some cases, “Deloitte auditors did not bother to even consider whether accounting decisions made by companies were consistent with accounting rules. Instead, auditors accepted management assertions that the accounting was proper, the board’s report said.”[1] As a very young auditor at that firm, I was told to do just that.  


The full essay is at "Deloitte: A Culture of Least Resistance" in Institutional Conflicts of Interestwhich is available at Amazon.


1. I took the quotes for this paragraph from: Floyd Norris, “Accounting Board Criticizes Deloitte’s AuditingSystem,” The New York Times, October 17, 2011;  and Floyd Norris, “Audit Flaws Revealed, AtLong Last,” The New York Times, October 21, 2011

Saturday, October 22, 2011

Limited Tenure For CPA Firms?

Arthur Levitt, who headed the Securities and Exchange Commission from 1993 to 2001, “sought to root out conflicts of interest at audit firms in 2000, and urged Congress to adopt auditor term limits in 2002 after the Enron and WorldCom scandals.”[1]  Levitt did not buy the argument made by companies that it would cost them a lot of money to change audit firms. To be sure, he acknowledged that some added cost would be entailed in a system of mandatory auditor “term limits,” but a long auditor relationship “raises the perception,” he maintained, “that the auditor is very much beholden to the company and not totally independent. An environment of skepticism should trump the fraternal environment that tends to occur after a relationship has developed over a period of years.”[2] Indeed, Arthur Andersen’s people were well ensconced at Enron by the time the energy giant went bust. In fact, the auditors even approved the questionable “partnership” accounting (used to hide debt).  Nor did the auditors communicate any misgivings to the audit committee of the company’s board of directors. The auditors were “in” with a rancid management. 


The full essay has been incorporated into "A Proposal: Limited Tenures for CPA Firms"  at Institutional Conflicts of Interestavailable in print and as an ebook at Amazon.  


1. Emily Chasan, “Keeping Auditors on Their Toes,” The Wall Street Journal, October 19, 2011.
2. Ibid.

Friday, October 21, 2011

Conflicts of Interest at the Federal Reserve

In 2011, “(m)ore than a dozen members of the regional Federal Reserve boards have had ties to banks or companies that received emergency funds during the [2008 financial] crisis, according to [a GAO report]. The report highlights a close relationship between the Fed's regional banks and many of the institutions they were lending to, adding credence to concerns that the financial sector enjoyed a largely consequence-free rescue in the wake of the crisis, thanks to its connections with the federal government.”[1] Meanwhile, mortgage borrowers with houses “under water” got hammered. From the crisis to the release of the GAO report in October 2011, there were millions foreclosures in the United States, with very little in the way of mortgage modifications or refinancing for those homeowners who needed relief. In other words, the bankers had connections in the banking regulatory agency while Congress left the troubled homeowners—constituents—at the mercy of the bankers. Their agency having their backs, the bankers could afford to take a hard line on the mortgages. The playing field, in other words, is not at all level. 


Material from this essay has been incorporated into "The Federal Reserve" in  Institutional Conflicts of Interest, which is available in print and as an ebook at Amazon.  


1. Alexander Eichler, “Conflicts of Interest Abound at the Federal Reserve, Report Finds,” The Huffington Post, October 19, 2011.

Monday, September 5, 2011

AOL Ignores TechCrunch’s Conflict of Interest

According to The New York Times, “When Michael Arrington, the editor of the popular Web site TechCrunch, told his bosses at AOL that he was forming a venture capital company to finance some of the technology start-ups that his site wrote about, they did not fire him or ask for his resignation. Instead, . . .  they invested about $10 million in his fund.”[1] Tim Armstrong, AOL’s chief executive, issued the following statement when CrunchFund was announced: “TechCrunch is a different property and they have different standards. We have a traditional understanding of journalism with the exception of TechCrunch, which is different but is transparent about it.”[2] As for Michael Arrington, Arianna Huffington claimed that he would have no influence on coverage—that there would be, in effect, a Chinese wall between TechCrunch’s news site and venture-capital firm. However earlier on the same day, Arrington stated, “I am TechCrunch and TechCrunch is me.”[3] 


The full essay is at Institutional Conflicts of Interestavailable in print and as an ebook at Amazon.

1. David Carr, “Tech Blogger Who Leaps Over the Line,” The New York Times, September 5, 2011, p. B1.

Monday, August 29, 2011

In the Eye of the 24/7 News-Cycle: Profits & Attention-Seeking

For about a week toward the end of August 2011, the news networks in the U.S. seemed utterly captivated, or obsessed, with Hurricane “Irene,” which was running up the east coast from North Carolina to New England. The prognosis had been given as a fait accompli when the storm was just pulling out of the Bahamas. A rough convergence of the models was taken for certainty. If this obsessiveness sounds familiar, it may be because on virtually any major story, the 24-hour news networks have tended to crowd out other stories even when the marginal utility of the added coverage on the major story is very low. Editors go with filler on the major story rather than risk losing viewers by breaking away to cover the other news to a meaningful extent. Viewers who are not obsessed with the main story may view the networks as obsessed while the networks may view themselves as merely satisfying a growing obsession by viewers. In any case, the narrowness of coverage, as if a major story should crowd out other news, is problematic, for it ultimately leaves the American people less well informed than they would otherwise be of what is happening around them.
 
The constant coverage and hyperbole that typically accompany a major news story can whip some viewers into a frenzy of binge-watching, which doesn't hurt ratings. To be sure, some stories, such as the 2020 U.S. presidential election, contain their own built-in excitement. 

When the hurricane named Irene failed to strengthen after the Bahamas, little was made of it; reporters did not point out that the storm’s eyewall, which had collapsed, did not re-form out of a contracting outer wall. Instead, the media obsessed on where the storm would make landfall. According to James Franklin of the National Hurricane Center, “There were a lot of rain bands competing for the same energy. So when the eyewall collapsed, there were winds over a large area.”[1] Spread over a larger area, the winds were less intense. So what was predicted to be a Category 2 or possibly Category 3 storm at landfall in North Carolina was in fact a Category 1 storm. After North Carolina, the storm weakened even more rather than strengthening over the water east of Maryland and Delaware. The water was slightly cooler and the winds and drier area of another weather system kept the storm from strengthening. 

Even so, the media was reporting that the hurricane would reach New York City as a hurricane. No mention was made of the fact that the storm was downgraded to a tropical storm prior to reaching New York City. Instead, the media kept up the storyline of lower Manhattan being set to go underwater. Eventualities based on an assumed worst-case-scenario were played out ad nausea even after the storm had been downgraded from hurricane status! Not surprisingly, New Yorkers were underwhelmed and most of the rest of us might have wondered whether the five or six day marathon had been worthwhile.

To be sure, damage was in the billions of dollars (especially from flooding far from the coast). The storm was a Category 1 hurricane when it arrived in North Carolina and a large and very wet tropical storm when it headed from New Jersey to New York and into interior New England. Also, the hurricane had the potential early-on to be devastating to the major cities on the eastern seaboard. So getting the warning out, particularly to folks on North Carolina’s outer banks, was important. However, the overkill had its own costs, including the opportunity cost of foregone, neglected news. Other things were happening during that week in August 2011. At the very least, the American broadcast media suffered from tunnel vision, was slow in reacting to the diminished destructiveness of the storm and was partial in reporting the updated storm information as it came in.  The partiality was in line with perpetuating the rather dramatic worst-case-scenario. I contend that this did not happen by accident.

As if to vindicate all the attention devoted to the story and the catastrophic portant, at least one network showed water going over a reporter’s feet when the tropical storm was at New York City. After the storm, as the nonstop coverage astonishingly continued, one reporter was interviewed because at one point on a boardwalk she could see foam below the boards. So much for catastrophic. Along with the omission of data indicating the storm was weakening, the refusal to budge from the storyline of utter destructiveness points to something being up (i.e., even beyond acting on behalf of public officials in sounding the alarm).

It is as though the media were bound and determined to run through the storyline come hell or high water—even if there was neither. Better to keep on message than change course because the latter would imply that the original storyline had been wrong. In obsessing on the projected path of the storm, the media ignored data on the diminished strength. “(I)t was not surprising that the strength forecasts were off,” The New York Times observed. “The accuracy of such forecasts has hardly improved over the past several decades.”[2] In the wake of hurricane Irene, readers might have been thinking, now you tell us. However, it is not just overreliance on predictions; the media had an interest in ignoring the inherent inaccuracy.

The staff at the news networks might have wanted to take the limits of human knowledge to heart the next time a storm pops up in the Caribbean, and the rest of us might want to remember that it is in the self-interest of the media companies and their personalities to exaggerate the dramatic scenario and then pretend that they have done no such thing when things turn out differently. In other words, there is not apt to be a learning curve on this circulation of profits and attention around an eye of ego—this is one spin that can be predicted. The game is up, journalists, but whether anything can be done about your little scam is another story—one that no doubt will also be preempted by some pressing disaster that demands a monopoly of attention across the continent of North America and beyond.


1. Henry Fountain, “Hurricane Lost Steam as Experts Misjudged Structure and Next Move,” The New York Times, August 28, 2011. 
2. Ibid.