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Wheel, Deal, and Steal: Deceptive Accounting, Deceitful CEOs, and Ineffective Reforms

by D. Quinn Mills

April 2003

Intermediate to advanced

320 pages

9h 28m

English

Pearson

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Dedication
Investors Aren’t Primarily to Blame for Their LossesPower Is at the Root of the Corporate Financial ScandalsThe Internet Bubble and The Big Company ScandalsThe Decay of American CapitalismReturning to a More Honest AmericaTalking Points
The Scandals in a NutshellSunbeamEnronWorldComGlobal CrossingTycoAdelphiaImCloneQwestWarnacoGeneral ElectricIBMXeroxMicrosoftWhy We Didn’t See This ComingTalking Points
What Was Going On?Corrupt AccountingRestatementsCEOs Ask for MisrepresentationHiding Relative ImportanceJust Like the OthersThe Common Accounting DodgesManaging Earnings: Cookie Jar Accounting Using Reserve AccountsNot expensing options.Using one-time write-offs that occur year after year.Issuing pro-forma financial reports.Calling Something What It Isn’tMisclassifying or Fabricating RevenuesRecognizing Revenue Too SoonCreating the Appearance of Sales via Small AcquisitionsCreating Profits by Assumption from the Pension FundRecognizing Expenses Too LateDisguising Loans to the CompanyFudging Cash FlowManipulating the Classification of ExpensesOther ExamplesDisguising loans as sales.Vendor financing of high-risk customers.Disguising compensation as loans.SEC OversightThe Criminal MindTalking Points
A Lot of Dirty Little PiggiesBad Actors but No ScandalsFew Prosecutions Doesn’t Mean Few ViolationsInvestors Made Too Little, and CEOs Too MuchChanges in CEOs’ Attitudes Led to a Decline in Investors’ TrustBusiness Isn’t Only to BlameNot a Great Depression—YetThe American Economic System Is Not BrokenThe Business System as a Whole Is Not BrokenThe Financial System as a Whole Is Not BrokenThe Securities Industry Is BrokenConflicts of Interest: The Core of the Problem in the Securities IndustryThe CEOs: Benefiting Not with but without the ShareholderMembers of Boards of Directors: Scratching the CEO’s BackAccountants: Doing Audits and Consulting for ClientsInvestment BanksMutual Funds: Dealing on Their Own AccountManaging Hedge Funds and Mutual FundsBrokerage HousesPublic OfficialsAwards for “the Best” in Corporate AmericaCFO Magazine’s “Excellence Awards”Scott Sullivan of WorldCom.Andrew Fastow of Enron.Mark Swartz of Tyco.Chief Executive Magazine’s AwardsEnron.Chief Executive of the Year Sandy Weill.Fortune Magazine’s AwardsEnron.Citigroup.Talking Points

CEOs Made Fortunes without Building CompaniesAligning CEO and Investor InterestsShifting to OptionsThe Failure of the TheoreticiansStock Options Begin to Dominate CEOs’ Pay PackagesPreferential Accounting TreatmentConsultants, CEO Compensation, and CEO EgosThe Company as the CEO’s Piggy BankBehind the Executive Pay ExplosionWhy Options Pay Off When Companies Don’tStock Options and the Link to PerformanceIndexingFollow-Up Option GrantsReissuingRepricingRescindingHedgingRiggingReloadingShareholder–CEO Alignment in TattersIs Alignment of CEO and Shareholder Interests Possible?Talking Points
Peer ReviewDeceiving Investors LegallyAn Insidious Dynamic DevelopsOther Commercial VenturesThe “Integrated Audit”Widespread but Not UbiquitousA ScapegoatBecoming an ArthurTalking Points
Rubber Stamps—Boards of DirectorsProtection for Deception: The Role of the AttorneysThe Failure of the RegulatorsWhat the Prosecutors, Courts, and the SEC Didn’t DoWhat the Fed Didn’t DoTalking Points
Conniving with Corporations to Deceive InvestorsGreasing the CEO’s Palm via IPO AllocationsTalking Points
Use It or Lose ItMay DayMaybe 20 Percent Are HonestWhat’s Said Isn’t What’s DoneActual and Potential ClientsThe Language of RecommendationsEfforts at ReformIndependent AnalystsDaniel ScottoMike MayoKenneth BossPraise (or Rebuke) for PayStealth MarketingTalking Points
The New Very Rich: CEOsHow CEOs Get RichCashing in EarlyTaking Golden Parachutes or Walkaway MoneyGetting Paid for FailureThe Ignorant CEOSo Strong a TemptationThe Crucial Importance of LeadershipThe Courage to Speak OutTalking Points
Do What’s Right: Why Ethics Are Very ImportantWhat Are Ethics?The Failure of Ethics Programs in CompaniesThe Decline of American Ethics and How it HappenedThe “Push the Limits” EnvironmentHamstringing Ethics in AmericaThe Role of the Business SchoolsTalking Points
What To Do about CEO CompensationStandard OptionsIndexing OptionsSummary of the Major Elements of Optimal Option PackagesA Critical Change Needed in Federal Tax LawBoards of Directors versus the CEO in Setting Pay PackagesExpensing OptionsThe CEOnistas—A ParodyTalking Points
A System Full of HolesImperiling Investors by Keeping the SEC WeakStrengthening Investor Protection via a Consolidated AgencyLetting Investors Leave the MarketKeeping Investors in the MarketOveruse and Abuse—the Gnomes of NorwalkTalking Points
American CEOs Have Too Much Power for the Safety of American InvestorsProposals to Strengthen Corporate BoardsIncreased Shareholder ActivismAmerica’s Imperial CEOsHow Imperial CEOs Control their BoardsThe CEO chairs the board.The CEO is the source of information and initiatives.Exploiting the dual and conflicting roles of the board.The Danger of Ineffective ReformsPower Struggle: What Will Happen with Governance Reforms if the Imperial CEO Retains His or Her PowerAlternatives to the Imperial CEOAmerica’s Leadership Paradigm Is Upside DownWe Don’t Have to Have Imperial CEOsReining in the CEOTalking Points
Limitations of the MarketFreeing the Market from Ideological ConstraintsTrusting the Imperial CEO AgainFinding a Market Solution in the Not-for-Profit WorldRelying on the Market to Reform the Securities IndustryComments of Fed Chairman Alan Greenspan on the Corporate Financial ScandalsTalking Points
Corporate Leadership’s RoleBusiness Schools’ New Role in Teaching EthicsShould Ethics Be a Separate Subject or Part of Other Courses?Better Selection of Business School ApplicantsImproved Course ContentThe Importance of Continuing Education about EthicsWill Society Reinforce Courses in Ethics?Talking Points
Three Routes to the MoneyGetting the Company to Sue for YouAppropriate LimitationsFiling a Claim against Your BrokerGoing Directly to the CourtsCan Investors Get the Law Enforced?What Happened to Chainsaw AlProving that CEOs Were at FaultIndividual SuitsClass ActionsGetting Money if You Win the SuitTalking Points
Taking Money from Perpetrators and Giving It to VictimsA Restitution FundVoluntary Assumption of RiskPaying for a FundIdle Redress—Excessive LegalismTalking Points
A Tough Time for InvestorsHow to InvestThe Fundamentals of the Market: The Economic EnvironmentLearn How the Game is PlayedSet Your Expectations ReasonablyDeciding Whether the Market as a Whole Is Becoming Less Dangerous for InvestorsThree Steps to Making an InvestmentKey Things to Watch forHow to Pick Individual StocksWhich Way Will the Market Go?The Case for Another Bull MarketThe Case for a Bear MarketSpecial Considerations for Investing Pension MoneyPicking Individual Companies in Which to InvestTalking Points
The Next Big Thing—The Fund of FundsHedge FundsRegulating Hedge FundsThe Impact of Hedge Funds on the MarketTalking Points
A Bear Market, Yes, But Not Only a Bear MarketDiagrammatic Summaries of CEO and Investor Conflict in the Securities MarketsThe Temptation RemainsIt’s Still Going OnReform, Justice, and RestitutionThe Irony of the Investor as a Victim of American CapitalismThe Trembling Foundations of Wall StreetSources of Investor RiskAmerican Investment Markets without InvestorsKey Ideas of This BookTalking Points

Content preview from Wheel, Deal, and Steal: Deceptive Accounting, Deceitful CEOs, and Ineffective Reforms

Chapter 6. Osama Bin Andersen: The Role of the Accountants

MODERN FINANCIAL DEFINITIONS

EBIT—. Earnings before irregularities and tampering
CEO—. Chief embezzlement officer
CFO—. corporate fraud officer
NAV—. normal Anderson valuation
P/E—. parole entitlement
EPS—. eventual prison sentence

One of the most unexpected results of the current turmoil in the financial services sector is the sudden public prominence of a profession long regarded as staid and uninteresting by most Americans. According to a widely told story, Osama bin Laden sadly told his confidants, “If I’m to do real damage to America, I’ve got to give up terrorism and become an accountant.”

Why has this happened? In brief, it’s because during the past decade America’s top accounting firms ...

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