Claiming they were unaware of financial scams occurring under their watch is unlikely to let CEOs off the hook in corporate fraud cases – not any more at least.
As one Canadian ethics expert pointed out, it didn’t work for Bernie Ebbers, the disgraced ex-CEO of WorldCom, who was convicted Tuesday on all charges related to the US$11 billion fraud that led to the company’s bankruptcy in 2002.
“Up to now, [ignorance] has been a reasonably successful [defence],” said Leonard Brooks, executive director of the Clarkson Centre for business ethics of board effectiveness in Toronto.
But no longer.
Brooks noted that though Ebbers believed pleading ignorance was his best defence, jury members were not buying. “I think [they] were of the opinion that this guy can’t be such a successful CEO and not know something was being done with the numbers.”
Brooks said Ebbers’ conviction has set a precedent of sorts that may spell trouble for Enron CEO Kenneth Lay during his upcoming trial. “[We] watched Ebbers go down and we watch again for Ken Lay.”
According to Brooks, recently introduced legislation such as Sarbanes-Oxley is one big reason why the “I didn’t know what was happening” argument won’t wash anymore.
Under current legislation, CEOs and CFOs are held criminally liable if a company’s financial statements are false. As well, an increasing number of companies have placed internal controls to ensure nothing is missing or inaccurate in their financial statements.
Attempting to deflect blame to subordinates also won’t work, as Sarbanes-Oxley places accountability for a company’s financial statements squarely on the CEO, Brooks noted.
Ebbers had sought to pin WorldCom’s financial woes on CFO Scott Sullivan.
“There is a level of competence a CEO should have [to know] accounts are being prepared properly,” Brooks said. He said CEOs today are less likely to tolerate fraudulent activities as they know they are also on the hook. “If you are looking at personal liability, why would you tolerate people around you unwilling to toe the line in terms of ethical standards?”
Brooks said prior to WorldCom, Enron and Sarbanes-Oxley, many companies were rather cavalier about how they created and reported financial results, and about the protection of shareholder interests.
Inaccurate reporting, he said, may “mislead people into thinking companies are viable when they may not be.” He said this is unacceptable especially for publicly traded companies as they raise money from the public and “ought to be watching carefully how they are using other people’s resources.”
Brooks pointed out that global firms at the centre of financial scams – such as Enron and WorldCom – have at least one thing in common – a very powerful and dynamic CEO who runs the show.
He said it’s fascinating how the charismatic CEO has been so successful in the U.S. and able to get away with many actions done purely out of self-interest. “Certainly Ebbers was a dominant CEO [who] bulldozed his way.”
Brooks said it is up to a company’s board of directors to manage the CEO and ensure things such as company policies are being followed and approve its financial statements.