Taken from courses taught by Gary Wheeler at the Univeristy of Budapest.

1. Ethics In Organizations
University of Budapest MBA Program
Gary Wheeler, SPHR, GPHR, CCP, CBP

2. On my way to Budapest

3. Joe Pulitzer
• 18th of April, 1847
• Born in Mako, Hungary
• New York City
• Union Army during American Civil War
• St. Louis, MO
• St Louis Post-Dispatch & NY World
• #1 Paper in the U.S.

4. Joe Pulitzer, cont.
• Journalism as a university subject
• Columbia University in New York
• Died October 29, 1911
• First Pulitzer Prize awarded 1917
• Bust of Joe Pulitzer in a square in Mako
• In 1988 Pal Fabry, Hungarian
businessman living in New Orleans, LA
established a Pulitzer memorial prize for
Hungarian journalists

5. Opportunity
• Ask questions
• Clarify any myths
• Gain a better understanding of U.S.
corporations
• Share some of your thoughts and ideas

6. Objectives
• Provide a basic understanding of what
constitutes ethical misconduct in the U.S.
• Insight to two-historical U.S. cases
• Share best practices

7. • Business Consulting Services Franchise
– Coach business owners on how to improve time, team
and money
• Human Resource Business Partner Consultant,
LLC
– HR Consulting Practice

8. Business Background
• Restaurant Manager & Area Manager
 Shoney’s Big Boy Enterprises
 Pizza Hut, Inc.
• United Parcel Service
 Industrial Engineering, Operations and Human
Resources
 District Human Resources Manager:
 Central Tex - San Antonio, Texas
 North Ohio - Cleveland, Ohio
 West Long Island - Brooklyn, Queens, Bronx, Westchester,
NY

9. Education
• University of Maryland University College
– B.S. Human Resources
– Master’s Business Administration (MBA)

10. Agenda
• What is Ethics
• Enron Case Study
• WorldCom Case Study
• What to avoid
• Sarbanes-Oxley
• Lockheed Martin Case Study
• Best Practices
• Questions

12. Opportunity
• Ask Questions
• Participate through interaction
• Learn how business is conducted in the
U.S.
• Clarify any myths
• I will ask you to share

13. Tell Me About You
• First Name
• Your Company
– Local
– Regional
– Global

15. What is Ethics
• What is ethics?
• Review of one definition of ethics
• Why is ethical behavior a problem?

16. Ethics
• “Ethics is a set of values defining right
from wrong.”
• …ethical behavior is not black or white,
right or wrong.

17. Examples of Ethical Issues
• Cloning • Gene therapy
• Abortion • Nuclear energy
• Religious tolerance • Death penalty
• Homosexuality • Politics
• Population growth • Open and honest
• Gifts and persuasion • Democracy
• Drinking • Dictatorships
• Smoking

18. Ethics & the Individual
• Ethics are a personal set of values
• …ethics are relative to our perception of
reality, and are based on our point of
view.
• It begins when children are taught…
• No one viewpoint can seek to define
ethics.

19. Summary of Ethics
• …ethics should not intrude upon the
private lives of other individuals who are
not harming anyone.

20. Case Studies
• Enron and WordCom are not the norm
• 99% of U.S. Companies are ethical
• Two cases that have changed theway
business is conducted in the U.S.

21. Enron
Case Study
• The Company
• Insider Trading
• Fallout
• Pensions
• Accounting firm Arthur Anderson
• Societal & Legal Impact

22. Enron
• Industry – Energy
• Revenue – $111 billion in 2000
• CEO – Ken Lay
• Headquarters – Houston, Texas
• Employees – 21,000
• Recognition – “America’s Most Innovative
Company” six consecutive years
• Filed bankruptcy in 2001

23. Enron Products
• Over 30 products
• Natural gas, pipelines, and oil
• Electricity, power plants, broadband
• Pulp, paper, plastics and steel
• Transportation, shipping, risk
management,
• Water, waste water,
• Media, computer chips, investments

24. Enron Demise
• Handout page four
• Decline
– Bribes
– Irregular accounting procedures
– Controversial dealings
• Insider trading
– Hiding losses through offshore companies

25. Where Are They Now?
• 16 Employees pled guilty
• 5 Others Found guilty at a trial
• At least one suicide
• Ken Lay, Chair/CEO
• Jeffrey Skilling CEO/COO
– Convicted in October 2006
– Lay – six counts of fraud (45-years)
– Lay died on July 5, 2006
– Skilling 19 of 28 counts of fraud
– Skilling serving 24-years and 4 months

26. Immediate Impact
• Enron employees
– Jobs
– 401(k) pensions
– Enron stock
• Enron investors
• Arthur Anderson Accounting Firm
– Surrender licenses and right to practice
– 100 Civil suits
– 85,000 employees worldwide

27. Societal Impact
• Primary reason for the creation of
Sarbanes-Oxley Act (SOX) of 2002
• The most significant change to federal
securities laws since Franklin Roosevelt
in the 1930’s and the Great Depression

28. Enron Questions?

29. WorldCom
Case Study
• The Company
• Multiple Acquisitions
• Accounting Scandals
• Bankruptcy
• How did this happen?

30. MCI WorldCom
• AT & T and the baby Bell’s breakup
• Long Distance Discount Services, Inc.
(LDDS) later became WorldCom
• WorldCom purchased MCI
• MCI WorldCom – WorldCom
• 2nd largest long distance company in U.S.
• Growth thorough acquisitions
• Acquired by Verizon in 2006

31. The CEO
• Bernard Ebbers – CEO LDDS …..
• Ebbers leveraged stock for other
investments
• Declining stock
• Banks made margin calls on Ebbers
stock
• WorldCom board made over $400 million
in personal loans to Ebbers to cover his
margin calls

32. Navigators
• Scott Sullivan – CFO
• David Myers – Controller
• Buford Yates – Director of Accounting
– Misrepresenting and misreporting financial
numbers

33. Accounting Fraud
• Underreporting “line costs”
(interconnection expenses with other
telecommunication companies) by
capitalizing these costs on the balance
sheet rather than properly expensing
them
• Inflating revenues with bogus accounting
entries from “corporate unallocated
revenue accounts”

34. Internal Audit
• WorldCom’s Internal Audit discovery
• $3.8 billion in fraud
• Alerted NEW audit company KPMG
– KPMG replaced Arthur Anderson
• True number was $11 billion in fraud
• Filed bankruptcy in 2002
• Changed name to MCI
• Purchased by Verizon in 2005

35. Bernie Ebbers
• Found guilty of fraud, conspiracy, and
filing false documents
• Sentenced to 25-years in prison (age 63)
• Five other people pleaded guilty to
charges

36. WorldCom Questions?

37. Ethics Issues
• Marietta Police Department
• Your home office
• Tests in College
• Don Imus
• Coca Cola Company
• South America
• Terminations

38. Ethics Issues
• Selection in China
• Intellectual Capital in China
• Child Labor
• Internet porn sites
• Internet at work
• Meal allowance

39. Pressures that Compromise
• Following boss’s directive
• Meeting aggressive financial objectives
• Helping the organization survive
• Meeting scheduled pressures
• Wanting to be a team player
• Saving jobs

40. Pressures continued
• Advancing boss’s career interest
• Rationalizing that others do it
• Feeling peer pressure
• Resisting competitive threats
• Advancing own career interests

41. Types of Misconduct
• Research survey by SHRM
• 24 types of misconduct observed
• Top Five
1. Misreporting hours worked
2. Employees lying to supervisors
3. Management lying to employees,
customers, vendors or the public
4. Misuse of organizational assets
5. Lying on reports / falsifying records

42. Misconduct Survey
Misconduct Observed %
Misreporting hours worked 59
Employees lying to supervisors 53
Management lying to employees 31
Management lying to customers / public 31
Misuse of organizational assets 29
Lying on reports / falsifying records 28

43. Misconduct Survey
Misconduct Observed %
Sexual harassment 25
Stealing / theft 25
Fraud 19
Withholding information from employees 18
Withholding from customers / public 18
Violations of Fair Labor Standards Act 17

44. Misconduct Survey
Misconduct Observed %
Violating privacy of employees 16
Violation of discrimination laws 16
Accepting or giving bribes, kickbacks, gifts 14
Violations of OSHA regulations 8
Violations of Family Medical Leave Act 8
Obtaining competitor’s proprietary 8
information

45. Misconduct Survey
Misconduct Observed %
Misrepresenting company financial assets 5
Misusing insider information 3
Violating environmental laws or 3
regulations
Management lying to shareholders 2
Withholding information from shareholders 2
Mishandling employee 401(k) accounts 1

46. What to Avoid

47. Conflict of Interest
• Conflict of interest:
bribes, kickbacks, sharing inside
information, falsifying records, defrauding
customers, obstructing an investigation

48. Protection of Company Assets
• Protection of company assets: misuse of
company property, cash, information,
ideas, intellectual property

49. Employment Practices
• Employment work practices: Federal,
state laws: sexual harassment, civil rights
violations, discrimination, etc., reporting
violations

50. Antitrust
• Antitrust: laws, price fixing, bid rigging,
allocation of customers, restraint of trade,
how to distance yourself from a possible
violation

51. Environmental Protection
• Environmental protection: strict legal
compliance with corporate, state and
federal laws, personal and corporate
responsibility

52. Influences of Ethical Behavior
• Personal values
• Credible enforcement of ethics violations
• Attitude and behavior of supervisors
• Attitude and behavior of senior managers
• Friends and co-workers
• Internal drive to succeed
• Ethics related legislation

53. Corporate and Criminal Fraud
Accountability Act
SOX

54. The Sarbanes-Oxley Act
• Sarbanes-Oxley Act of 2002
• Required by law
• Major changes to the regulation of
financial practice and corporate
governance
• Named after Senator Paul Sarbanes and
Representative Michael Oxley

55. Reporting Responsibility
• Corporate officers have reviewed the final
report
• No untrue statements or omissions
• Financial statements and related information
fairly present the financial condition
• The signing officers are responsible for internal
controls and have evaluated these internal
controls within the previous ninety days and
have reported on their findings

56. Reporting Responsibility cont.
• List of all deficiencies in the internal controls
and information on any fraud that involves
employees who are involved with internal
activities
• Any significant changes in internal controls or
related factors that could have a negative
impact on the internal controls

57. Disclosure of Periodic Reports
• Financial statements are published by issuers are
required to be accurate and presented in a manner that
does not contain incorrect statements or admit to state
material information.
• These financial statements shall also include all
material off-balance sheet liabilities, obligations or
transactions.

58. Management Assessment
• Issuers are required to publish information in
their annual reports concerning the scope and
adequacy of the internal control structure and
procedures for financial reporting.
• This statement shall also assess the
effectiveness of such internal controls and
procedures.

59. Management Assessment cont.
• The registered accounting firm shall, in the
same report, attest to and report on the
assessment on the effectiveness of the internal
control structure and procedures for financial
reporting.

60. Real Time Issuer Disclosures
• Issuers are required to disclose to the
public, on an urgent basis, information on
material changes in their financial
condition or operations. These
disclosures are to be presented in terms
that are easy to understand supported by
trend and qualitative information of
graphic presentations as appropriate.

61. Criminal Penalties
• Up to 20 years imprisonment for altering,
destroying, mutilating, concealing,
falsifying records, documents or tangible
objects with the intent to obstruct, impede
or influence a legal investigation.
• Up to 10 years for any accountant who
knowingly and willfully violates the
requirements of maintenance of all audit
or review papers for a period of 5 years

62. Corporate Sentencing
Guidelines
• Company fines
• Individual fines
• Jail time
• Loss in share value
• Company reputation
• Impact to employee morale
• Recruiting and attracting talent

63. Best Practices

64. Ethics
The Fabric of Business
• 20-minute Video
• A case study of Lockheed Martin, Inc.
• Narration by Wayne Cascio, Ph.D.
• Produced by The Society for Human
Resource Management (SHRM)
Foundation
• Positive approach to managing ethics

65. Corporate Charter
• Vision
• Mission
• Core Values

66. Accountability
• Corporate Compliance Officer
• Internal Audit Team
• Board of Director Responsible
• Board Audit Sub-Committee
• Training
• Tracking and monitoring tools

67. Business Code of Conduct
• An outline of responsibilities of or best
practice for an individual or the
organization
• Set of principles of good corporate
behavior adopted by the company

68. Training and Communication
• Ethics and Integrity
1. New employee orientation
2. Policy and/or employee handbook
3. Periodic discussions in meetings
4. Formal annual communication
5. Performance reviews
6. Employee hotline

69. Whistle-blower Act
• A whistleblower is an employee, former
employee, or member of an organization,
especially a business or government agency,
who reports misconduct to people or entities
that have the power and presumed willingness
to take corrective action.
• Generally the misconduct is a violation of law,
rule, regulation and/or a direct threat to public
interest -- fraud, health, safety violations, and
corruption are just a few examples

70. Voluntary Reporting
• Immediately report appropriately
– Board of Directors
– Government
– Shareowners
• Correct and put controls in place

71. Discipline
• The punishment should fit the crime
• Unintentional
– Write-up
– Impact on performance review
• Deliberate
– Termination

72. Social Responsibility
• Report appropriate information
– Suppliers and Vendors
– Employees
– General public

73. Questions?

74. Thank You