Rationalization Is Not An Excuse

Is rationalization an excuse for committing fraud? In a video interview, "Health South- A Cautionary Tale," with Kirk O. Hanson, Executive Director of the Markkula Center for Applied Ethics at Santa Clara University, presented on the blog for the Josephson Institute center for Business Ethics, Aaron Beam, former CFO and co-founder of HealthSouth discusses his rationalizations for the accounting fraud he committed which came to light in the 2002 HealthSouth accounting scandal. He also gave another interview along the same lines with Edward Teach, entitled "I Should Have Said No" that appeared in the June 2009 issue of CFO Magazine and on their website. In this article he expresses how he should have stood up to pressures from the CEO of HealthSouth at the time to "cook the books," and how he hopes that business students learn from his mistakes.

After watching Aaron Beam's interview with Kirk O. Hanson and reading his responses to Edward Teach, I was angered by the excuses he gave for committing accounting fraud. While it is nice to see Mr. Beam finally being accountable for his actions, his words in these interviews resonated with me as him still trying to cover up what he did only this time with the excuse of rationalization and him trying to profit from his unethical behavior by lecturing to students.

What Happened


Starting at the source of the ethical dilemma gives a clear idea of what went wrong. According to Mr. Beam it began with some aggressive accounting techniques that lowered bad debt expense, something that was "pretty common knowledge and practice with people on Wall Street." He rationalized that he would do a better job collecting debt and even informed his auditors that he was doing it. Accounting techniques that Mr. Beam calls aggressive accounting techniques are accounting methods that normally have not yet broken any laws or principles, but do not necessarily provide a true and transparent view of the company.

In 1995, Beam claimed he was pressured by the HealthSouth CEO and co-founder, Richard Scrushy, as they were facing an earnings reporting deadline to make their numbers look better than they were to meet investor expectations. This practice is also commonly referred to as "cooking the books." In his interview Mr. Beam stated that Mr. Scrushy was not the type of guy to let you go home and sleep on it and sometimes carried a gun in his brief case, hinting that he was almost afraid for his life if he did not comply with Mr. Scrushy's request. Aaron Beam later resigned from HealthSouth and had several CFO successors who admitted to the $2.7 billion fraud l that occurred between 1996 and 2002. It wasn't until Weston Smith finally blew the whistle that Health South began to be investigated for fraud, resulting in Mr. Beam serving 3 months in prison, Mr. Smith serving 27 months, and several other CFOs serving jail time. One of the worst parts of the whole scandal was that MR. Scrushy, the bully directing the fraud, was acquitted on all counts.

Ethical Opinions

Throughout both interviews, Mr. Beam drew the picture that Richard Scrushy practically held a gun to his head pressuring him to falsify earnings. He justified his rationalization that he “wasn’t putting money in his pocket, just fudging company numbers to meet Wall Street expectations” was a valid excuse. Now he wants college students to realize that there are people like Scrushy that will push you to commit fraud and to be prepared.

First, at any time Mr. Beam could have walked away and alerted authorities. While I understand that having someone threaten your job security in a company you helped build can be detrimental, it ultimately was Beam’s choice. He compared Mr. Scrushy’s request to peer pressure. I faced a lot of peer pressure in high school, but was able to “Just say NO”. Second, he claims that he wasn’t putting money in his pocket. I don’t doubt for a second that he wasn’t rewarded with stock earnings that were inflated because of his fraudulent actions. Third, he is still making money on the scandal by getting paid to lecture to college students. While it is important for students to learn ethics, should he really be allowed to profit from what hurt so many investors? The most important conclusion to draw from this though is a company can be rebuilt, you can always make more money, but damage to integrity and reputation can last a lifetime. Do what Mr. Beam should have done and say no! There is no excuse including rationalizations for committing accounting fraud.

Works Cited

Josephson Institute. "Rationalizations in Accounting Fraud." Josephson on Business Ethics and Leadership. Joseph Institute Center for Business Ethics. 19 January. 2011 Web. 10 October. 2011

http://josephsoninstitute.org/business/blog/tag/accounting-practices/

Teach, Edward. "I Should Have Said No." CFO Magazine (2009). Web. 10 October. 2011

http://www.cfo.com/article.cfm/13687644

Blurring The Ethical Line

Focus on ethics in accounting seems to be a growing trend in America. The blog article, "The Lying Culture," written by the Grumpy Old Accountants, two associate accounting professors, talks about the reason they believe these ethical violations are still so prevalent despite new regulations that attempt to discourage these practices. Their theory is that it is our lying culture in society and the self-serving nature of our business leaders that is blocking progress. They may be grumpy, but these two accountants have a point and the business leaders are not alone when it comes to dishonest leadership. To see how deeply ingrained it is in our society, we merely have to look at our government, legislature, education system, and even some of the most respected accounting agencies to see that self-preservation and keeping up appearances seems to blur the ethical line.

Banks are one of the biggest violators lately. After going into detail about the banks excuses for holding on to toxic assets and how they report them, the Grumpy Old Accountants conclude, "banks are lying about asset values and really are not well capitalized." A great example of this is Bank of America and the Country Wide loan fiasco they are currently facing. Not only did they approve loan applications where applicants had lied about their income, indicating they failed to use due diligence in the approval process, they also face fraud charges from HUD, a government housing program. The government has their own ethical accounting issues though.

Government leaders are also liars according to these accountants. Ethical questions arise by the government accepting banks accounting standards because of its own incentives to hide the truth, citing the January 6th changes to the Federal Reserve accounting policy. This change eliminates the Fed ever having a negative capital situation and insolvency similar to what many banks are facing now by reporting what should be reductions to capital as negative liabilities instead. This move by the Fed boils down to politically motivated policy change that hides the truth and enables them to risk even more money. In addition to the Fed reporting change, state and local governments also fall into the category of liars who, according to the Grumpy old Accountants, are not required to report their pension funds on their balance sheet like other businesses because those obligations constitute liabilities. This makes me wonder, is it really alright to change reporting standards to fit your situation, regardless of truth, as long as you are the government and it is "in the best interest of the economy?" Would these ethical issues get better if we increased ethics education requirements? Not necessarily.

The education system, with its ethics courses and professional certification requirements, although providing a partial solution, is also lying to itself. The article reads, "Perhaps well intentioned, most are simply revenue generating ploys by organizations to make a "fast buck" by offering new courses that have little or no impact on behavior." I agree with this statement not because of the part about the fast buck, but because of the observation that they have little or no impact on behavior. While not all ethics courses are pointless, the curricula must foster introspective changes within the student not just passing the test or memorizing the material. The second reason I support their statement is because when we send students out into the workforce, they see unethical behavior by leaders and professionals in their field and many assume that kind of behavior is simply the norm and is acceptable.

It has become quite evident that ethical problems are everywhere, even in some of the organizations we are supposed to trust the most. While we thought new reforms would help, clearly they haven't. The one thing that we can conclude from all of this is that if we expect change it has to come from the top. Our leaders must abandon appearances for once and try complete truth and disclosure, otherwise even our attempts at educating our future leaders will fail.

Works Cited
Catanach, Anthony H. Jr, and Ketz, J. Edward. "The Lying Culture." Grumpy Old Accountants. Smeal College of Business, Pennsylvania State University. 27 April. 2007 Web. 9 October. 2011
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/13