Consulting and ethics

Who's Watching the Big 5? On Consulting and Ethics...

By Jennifer Beever, Marketing Consultant
© New Incite Marketing Analysis and Design, January 2002.

This article was prompted by Andersen Consulting's role in the Enron bankruptcy story. I couldn't resist summarizing the tangled web of happenings before providing a brief commentary. Most of the facts are from my readings of Los Angeles Times articles from January 10th through the 21st, 2002.

The Chairman of Enron, Kenneth Lay, tells his employees to buy more stock just weeks before taking a billion dollar write-down on the books. After the write-down, employees were unable to sell their shares because of a "lockdown," in which time the shares lost two-thirds of their value. It turns out that Lay, although known to be a net-purchaser of Enron stock over the past two years, was all the time purchasing at a significant discount through stock options, which limited his risk and which he did not disclose along with his otherwise optimistic statements.

Enron had hidden a great deal of debt through innumerable partnerships, one of which was managed by Enron's CFO, Andrew Fastow. Enron's auditors, the consulting firm Andersen, knew about the accounting "irregularities" almost a year ago, but in light of the fact that they were billing Enron hundreds of millions each year (some say at one point Andersen billed Enron $1 million each week) for audit and consulting work, they took no action.

Now Congress is investigating Enron, but 49 of 70 members of the House Financial Services Committee have received contributions from Enron and Andersen. 51 of the 56 members of the House Energy and Commerce Committee have received contributions. Texas Republican Senator Phil Gramm is the largest recipient of Enron and Andersen contributions; his wife serves on the Enron Board of Directors and fortunately made an early sale of her stock. As investigations go further, keep in mind that Andersen has a large consulting contract with the Justice Department that is investigating Enron.

Lawrence Lindsay, the President's Chief Economic Advisor, investigated the Enron bankruptcy filing and said that it would be a non-event in the energy industry. Lindsay previously was a paid consultant to Enron. Enron's bankruptcy caused investor hesitancy and an increase in the cost of capital for energy investments. As much as $12 billion of investment money in new energy ventures is being held up because of this.

The Head of the House Energy and Commerce Committee, Representative W.J. Tauzin, is calling for a review of national accounting standards and is questioning an accounting firm's ability to perform both an audit and consulting function for a client. Currently accounting firms' behavior is self-monitored, and audited by a review of their peers. Andersen's last audit was in 1998, in which Deloitte and Touche found reasonable compliance with accounting standards.

Is peer review enough for accounting firms? KPMG was just censured by the SEC for auditing funds in which it also invested. There are many more examples of auditors being fined for failure to represent their clients' financials in a realistic light. While the penalties number in the millions of dollars, it doesn't seem to stop big accounting/consulting firms. With investors' life savings on the line, it would appear that more scrutiny and punishment if non-compliance is found is required.

Is this activity a sign of the times? We saw the bottom drop out of the tech boom, but then Enron appeared to be the darling of Wall Street. A faltering economy and a need to prop a public company up isn't justification for failing to adhere to professional standards. What is needed is not only adherence to professional standards for accounting firms but personal business ethics.

According to Michael Josephson, founder and President of the Josephson Institute of Ethics, oftentimes "whether the company wants to live up to its commitments is a business decision, not an ethical decision…. Under this theory, whatever works is right. It makes the pursuit of self-interest the proper standard for business judgments." (Pacific Coast Business Times, January 25-31, 2002)

Ethics courses only recently became an important component of business school curriculum, yet the problems have existed for many years. My alma mater, Pepperdine's Graziadio School of Business, has taught ethics in its curriculum for many years, more recently even taking students on field trips to a prison where they hear directly from white-collar criminals and witnessed the consequences of white-collar crime.

Some believe that recessions by their nature tend to uncover auditing abnormalities. In the words of Barry H. Evans of John Hancock, "The rug under which much was hiding during the expansion has now shrunk to reveal problems."

As a member of the Institute of Management Consultants, I'm required to adhere to a code of ethics (for more information, see my web site at www.newincite.com). I don't have a large firm to answer to or to fall back on - however I am accountable to my peers and ultimately to my own conscience. My peers refer me to their clients and to other consultants, referrals that my business depends on. The code of ethics that I follow ensures that I operate with integrity, which provides reassurance to both clients and other professionals. According to the Institute:

"In the global world where change comes so suddenly, and the impact of only one unethical decision or event can be overwhelmingly disastrous for so many, all advisors to management-management consultants and other professionals-must practice complete independence of thought and action. For consultants to management to represent themselves as objective outside experts or facilitators of change, they must exercise the professional and financial freedom to reject or withdraw from assignments where they are not able to effect solutions in the interest of their client, or where they find a client deliberately practicing unethical, immoral or illegitimate behavior. Independence is the foundation of consulting to management. It requires freedom from management pressures to represent, refer, or recommend services or products of their parent or affiliate organizations. Independence means standing apart from self-serving motives and telling the truth-facing clients with hard facts about the right things to do-and knowing when to withdraw from a conflict of interest. To practice otherwise is a disservice to the client and its stakeholders." From the Institute of Management Consultants, www.imcusa.org.

As I hear and read more every day about the Enron debacle, I recognize even more value in my membership in and certification from the IMC, which promotes ethical behavior in its consultants.

This article may be reprinted with permission of the author. Please contact Jennifer Beever at 818-347-4248 or by email, jenb@newincite.com, for permission. Proper acknowledgement of the author, including name, company, and contact information, must be made with use.

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