News

Dishonesty does not pay

As I review my past 20 years of professional experience, and reflect on the irregularities and corporate governance issues I have encountered in light of the ongoing financial crisis, I noted an article in the Huffington Post. It relates to Tom Flanagan, the Vice Chairman of Deloitte & Touche, being found guilty of fraud and insider trading. http://www.huffingtonpost.com/ryan-blitstein/deloitte-sues-its-own-vic_b_141034.html . He was extensively trading shares in companies that he was an audit advisory partner for. He lied repeatedly to his fellow partners, to deny he was doing so. Tom is well known to me, and was responsible for my departure as a Regional Partner from Deloitte & Touche CEE in a most shocking fashion, including threats to my life and family.

I had been reporting irregularities to him that I had noted on my arrival in an Eastern European office. I found an office culture well versed in cutting corners professionally, including corruption. It was apparent that the performance of the offices in question was a key contributor to the regional Eastern European performance, as well as the achievement of bonus targets for top management. My warnings to management, including Tom, went unheeded and my tenure was short lived as a result of me ringing the alarm bells.

It is interesting to note that Tom identified being CEO of Eastern Europe for Deloitte & Touche as one of his most challenging assignments. http://articles.chicagotribune.com/2008-04-13/business/0804111210_1_deloitte-touche-stock-market-tom-flanagan/2. In the article he notes "When Deloitte originally opened its offices, in good times, for every $10 in revenue, we lost $1. Success was measured by how big your office or car was. With 10 slides, I put together a simple program to teach people how to make money. If they wanted to take $1 home, the client needed to pay us a certain amount of money and our costs needed to be within the budget. It only took a few months for many people to catch on."

It has been ten years since those fateful days. For me it was a critical turning point in my career which saw me become one of the youngest Big 4 partners at 33 years of age and leave the Big 4 at 34 years old. On reflection, no experience is ever bad. Nevertheless, the emotional pain and anguish has not completely gone as the years have passed. In some ways, the feelings have been revived every time I have noted another person or firm in a position of responsibility not honouring the public's expectations, their professional codes of ethics or their personal honour. Especially since those individual and collective decisions have ultimately led to a financial crisis that is now hurting numerous individuals worldwide.

Lately I have been reading similar stories about executives of major financial institutions.. http://articles.moneycentral.msn.com/Investing/CompanyFocus/5-lies-the-big-banks-keep-telling-us.aspx . In that context I have noted how senior executives of banks profess ignorance or apparently lie over very basic matters such as accounting, internal controls and corporate governance. As an example, I read a transcript from the FCIC hearings where they were told by a senior accounting executive at Goldman Sachs that the firm has no accounting systems in place to track derivative contracts. Really?

All of the above indicate a huge moral vacuum at the top of our corporations, especially those that are entrusted with independently reviewing the financial performance of those corporations, and those entrusted with our finances. But as the articles have noted, including references to those who chose to stand up and paid the price for their courage, all this was pretty obvious for the experienced observer.

On a related note, recent months have shown a number of revisions to GDP figures in major economies, notably the USA, UK and last week PRC. It is interesting that the latest revision of month on month GDP growth figures for PRC were reported by the BBC in the week of 28 June, purporting to have been revised by a think tank, and adjusting growth from 1.7% for the previous month to 0.3%. I recall this adjustment from watching the news, but cannot find any further articles on the internet, and just wonder what happened to the analysis that came up with this anomaly. I wonder what the real GDP figures are, and whether we will have another surprise down the road similar to the financial melt down?

As I often tell my children, a lie (or misstatement) can run as fast as it wants, but the truth will always catch up. In my twenty years of experience this has been confirmed again and again. Gone are all those who wished to twist the truth and bend the rules for short term gain. For those for whom this moment of truth hasn't yet arrived the bells are tolling. I am unable to locate all of those who have found their reckoning, so I am glad I can add yet one other case study to my list. I fondly recall studying the Merchant of Venice in 1981, and memorized the following for my exams that year;

LAUNCELOT:
Nay, indeed, if you had your eyes, you might fail of the knowing me: it is a wise father that knows his own child. Well, old man, I will tell you news of your son: give me your blessing: truth will come to light; murder cannot be hid long; a man's son may, but at the length truth will out. (Shakespeare, The Merchant of Venice, 1596)

In Tom's case, thirty years of professional career to an exalted level now lies in ruins, many professionals besides me are negatively affected, and all ill gotten gains may be recovered. It may leave nothing but a paltry allowance for old age for this former Vice Chairman, publicly humiliated at a time when he should be enjoying the fruits of his labour.

Parents, tell your children. Corruption, fraud and lies will not lead to happiness. They are a short term strategy, in the mistaken believe that time will forget. But time does not forget, and retribution will be exacted. If you are faced with any decision to lie or to tell the truth, remember that one lie leads to another until you become entangled in a web of deceit. It is better to be morally clean and honourable. You might not become rich from it, but you will be happy to see your reflection in the mirror each morning to start a new day.