World Class Faculty & Research / April 1, 2006

Smith Hosts Final Lecture in Business Ethics Series

The Business Ethics Lecture Series, sponsored by the Smith School, hosted its final speaker, Mark H. Taylor, on April 19. Taylor, who holds the John P. Begley Endowed Chair in Accounting at Creighton University, has a PhD and a CPA and is an Academic Fellow in the Office of the Chief Accountant at the United States Securities and Exchange Commission (SEC). In his hour-long talk, Taylor focused on the state of the accounting profession, occupational fraud, financial statement fraud, the psychology of fraud, and finally the role of the SEC.

Taylor began proceedings by providing a historic context for the role of the accounting profession. He particularly highlighted the pioneering role played by Arthur Andersen in the early part of the 20th century. Taylor observed that it was ironic that in his time Arthur Andersen, the founder of Andersen & Co, played a pioneering role in ensuring that the accounting profession remained a virtuous one where values and ethics were strongly valued, has become synonymous with accounting fraud. He gave the example of how Arthur Andersen once lost a lucrative DuPont engagement because he was unwilling to accept DuPont managements liberal definition of operating income.

However by the 1970s, the foundation of accounting ethics and values came under tremendous pressure. As the audit market became saturated accounting firms entered the consulting business. At first, this did not seem like such a detrimental trend because auditors by virtue of their access to a company's internal condition were often able to identify and solve company-related problems better than anyone else. However, as audits became loss leaders and accounting firms started getting increasingly dependent on their consulting business, the quality of their audits started deteriorating.

Taylor admitted that we will never know what exactly happened at Andersen & Co., but that it was likely the culture of the firm had changed considerably since the days of Arthur Andersen himself. Taylor pointed out that Andersen & Co, was not the only firm to have problems, but that the other large firms too had experienced problems with litigation associated with performing audits. It was at this time that the accounting profession lost sight of its main goal, its raison detre which was to secure the public interest. Instead of being score-keepers, accountants became players in the game, Taylor said.

Whereas once accountants were synonymous with probity; in recent times public opinion polls suggest that the accounting profession became viewed with some distrust in the early part of the current decade. There was a recent crisis in the accounting profession. And the central piece of the puzzle is ethics, Taylor said.

Taylor then illustrated with several interesting and interactive case examples, instances of occupational and financial statement fraud. He also cited studies that revealed the number of companies which had experienced fraud rose between 1998 and 2003. Furthermore, it was the small companies which were most vulnerable. By some estimates fraud is costing the U.S. economy up to $600 billion annually.

The next section of Taylors talk focused on the psychological profile of people committing fraud. He surprised the large audience by pointing out that the psychological profiling of fraud perpetrators shows that they appear to be upstanding citizens and team players. Studies also show that they rarely stop after committing a single fraud. Also, if they believe that they may get caught then they are unlikely to do it, thus further underscoring the need for visibly tight vigilance.

Taylor then described the fraud triangle pressure, rationalizing and opportunity. Employees who were under extreme financial or other kinds of pressure were more likely to commit fraud. Furthermore, rationalization is very common among fraud perpetrators; because if they are unable to rationalize then they feel tremendous guilt. He told the audience that, Under the right set of circumstances, anyone could become a fraud perpetrator. Thus, the last wall of defense is your personal moral code.

Taylor concluded his talk by discussing the crucial role that the SEC plays in combating fraud. He said that although the accounting profession has suffered a major crisis of confidence in recent times, today it is on the path to recovery.

▓ Smith Media Group, Sachin Agarwal, MBA Candidate 2007

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About the University of Maryland's Robert H. Smith School of Business

The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and flex MBA, executive MBA, online MBA, business master’s, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

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