The Ethical Barometer

“These inspection results point to some small signs of movement in the right direction.  Still, overall deficiency rates are unacceptable, and firms must do better.  Now is the time to double down on efforts to improve and deliver the audit quality investors deserve.”  PCAOB Chair Erica Williams

Well, here are the deficiency scores — in other words, the percentage of audits done by the firms that did not meet Public Company Accounting Oversight Board (PCAOB):

23                                 24

Deloitte.            17%                               21%

EY                      46%                               37%

KPMG               30%                               26%

PwC                  9%                                  18%

Not sure there’s a whole lot of improving going on. But it’s all relative.  In the next tier (non-Big 4), we have the following:

BDO                66%                               86%

Grant Th.       31%                                54%\

In the kingdom of the blind, the one-eyed are king. In the kingdom of auditors, reaching the 30% mark is considered a triumph.

The moral of this story may be this simple:   Careful choosing countries in which you do business.  Cuidado!

A secondary moral:  Be even more careful about paying for protection once there.

Chiquita Banana began doing business in Colombia and in 1997 realized that there were dangers everywhere.  So, in 1997, Chiquita began paying the United Self-Defense Forces (AUC), a right-wing paramilitary group to provide protection for drug traffickers and businesspeople against leftist guerrilla groups.

Let’s just recognize this safety tip:  When you are on the same side as the drug traffickers there are bound be some murders.

Talk about ethical dilemmas. How does one keep track of who’s killing whom? And are there any good guys?

In 2001, the United States designated AUC a foreign terrorist organization.  Chiquita was, therefore, violating U.S. laws by paying AUC.  Chiquita  settled up with the Justice Department in 2007 with a guilty plea for dishing out $1.7 mil to the AUCers.  Chiquita then quit paying AUC.

But, many farmers in the area were killed in the exchanges of gunfire amongst the warring groups.  So, the farmers and their families filed suit against Chiquita for the deaths in the crossfire and for funding the violence that drove them off their lands and then scooping up that acreage at cheap prices.

The lawsuits began in 2007. One of Chiquita’s defenses was that it was not clear who shot whom during the Colombian civil war. The war did end in 2016 with a peace agreement between the Colombian government and the leftist guerillas.

Yet another Chiquita defense was that it only paid the money to AUC to protect its employees and farmers.  A jury in South Florida saw it differently and awarded the farmers and their families (16 total) a $38.3-million verdict.

There are more suits pending. And there are leaders in Colombia asking the justice system there to hold businesspeople accountable for their roles in the ongoing war. So far, the suits have been only in the U.S.

So, back to the beginning — be careful where you do business because there are lots of rocks and hard places.  No matter what you do and whose side you are on, there can be 31 years of challenges, including exchanges of gunfire and a multi-million -dollar jury verdict.

The question was sent to the New York Times “The Ethicist” column. Kwame Anthony Appiah went down one of his usual rabbit holes exploring the levels of dementia. And he assures this callous human being, “I’m not saying that you’re required to sacrifice your well-being for his.”

Heavens to Murgatroyd — what a concept!  Caring for someone you love!

Let’s not complicate things.

Sure, you “can” leave your husband if his mind is presently sufficient for signing legal documents, i.e. divorce papers. Not really the issue.

There is a better question, “I think my husband has dementia.  Should I leave him before it worsens?”

Neither the columnist nor the reader who sent in the question grasped the sheer depravity of the inquiry. Sickness and health, better or worse, to have and to hold seem to have new meaning today.  Dementia is a footnote exception, apparently.

How low can we go?  The Barometer is sleeping with the lights on tonight.

Always a thrill to see repeat patterns.  Even better to offer a warning.  Smaller banks are facing stiffer regulations. Dog-gone it! Those regulators are demanding that these banks’ financials look healthy.

So, the banks are selling off bundles of car loans to hedge funds.  And those hedge funds will sell synthetics interests in those loans to investors. Matt Wirz, “Regional Banks Unload Risk Onto Investors,”  Wall Street Journal, June 20, 2024, p. A1.

Think about it — the banks are having trouble collecting car loans or just have too many loans for regulators’ tastes.  When hoity-toity financiers come along, the banks sell bundles of car loans for bundling. Banks have cash, financiers have instruments to sell, and investors step up to invest.

What happens if the loans turn out to have a worse collection rate than the banks represented in bundling those loans off their books?  Well, defaults mean that the investment firm loses money, which means that their investors lose money.

The cheese standing alone would be?  No, not the banks that sold off their bad loans. They escape.  Bank customers have the security of regulatorily-certified capital.  The highfalutin funds have the cash.  A complicated series of transactions to transfer the risk of lending  to cheesy investors.

One does wonder what kind of contract terms exist between the banks and the funds — What happens if the loan risk is not what was represented? What are the consequences for the banks?

Does this tale sound familiar?  Think subprime, and you got it.  We have been down this road before. It did not end well for anyone.

Oprah shilled for Weight Watchers even as she was losing weight thanks to one of the new wonder drugs intended for those with diabetes (Ms. Winfrey did not disclose which one).  Dieters were convinced Oprah was just following Weight Watchers and hiking every morning.  In short, Ms. Winfrey was touting herself as a role model for self-discipline.

Enter “The Ethicist,” who weighed in, as it were, on a reader’s question, “Can I Lie About How I Lost Weight?”  The Ethicist, New York Times Magazine, June 16, 2024, p. 16.  Kwame Anthony Appiah wrote that relating obesity to some deficiency of character is wrong. “Moralizing about weight management in this way is misguided and unhelpful.”  Ah, but morbid obesity is misguided and unhealthy.

Then in a bizarre twist, Kwame runs down another rabbit hole noting that these drugs do not make things “easy.”  He explains that many patients “suffer from side effects such as nausea, vomiting, diarrhea, constipation, abdominal pain, indigestion, and pancreatitis.” It’s not nice to fool Mother Nature — she will make you lose weight with discomfort from the drug itself.  Not disclosing those side effects is also misguided and unhelpful.

For once, could we all just live with the fact that both weight management and weight loss are difficult?  That is not moralizing.  Folks just need help with the difficult part.

Telling the truth about a so-called miracle drug helps others make peace with reality:  It takes discipline unless you want to be a walking gastro-intestinal event.  If you choose not to disclose your use of one of the miracle drugs, then at least tell the truth about the side-effects.  But do not pretend that your weight loss was all self-discipline.  It was self-discipline along with a series of upper and lower digestive track symptoms that would find a goat turning its nose away from a food source.

Orange County held its marathon on May 5, 2024.  The winner?  Esteban Prado, clocking in at 2:24;54.  However, Mr. Prado was disqualified after video camera footage of the race showed that men (including his father) on bicycles raced along beside Mr. Prado to offer him water.  He took it, and he drank it — all for the cameras.

With none of the other competitors enjoying the same advantage, Mr.Prado was disqualified.

Mr. Prado says there were not enough water stops or supplies, including water.  So, Mr. Prado took the water from the men on bicycles and went merrily along to victory.  Mr. Prado said he did not know the rules and neither did his bicycle boys and men.  Did it not occur to Mr. Prado et al. that he was the only runner with an entourage?  And why were the cyclists only in the boonies segment of the race?

“I know nothing” netted him the loss of his win. You have to love those who do something no other competitor is doing and then exclaim, “Who knew?”

Victor Nather, “Marathon Winner Tossed After Illicit Water Breaks,” New York Times, May 12 2024, p. A28.

The FDIC directly supervises and examines more than 5,000 banks and savings associations for operational safety and soundness. And if you were wondering why the FDIC might have missed a few banks going south here and there it is because the FDIC runs a Wild, Wild West operation.

If you are in the mood for a trashy novel, spend no money and look no further.  Just read the  “Report for the Special Review Committee of the Board of Directors of the Federal Deposit Insurance Corporation.  www.fdic.gov/sites/default/files/2024-05/cleary-report-to-fdic-arc.pdf.

When examiners were traveling, they frequented strip clubs.  There were over 500 complaints by employees about sexual harassment, discrimination, and interpersonal conduct that prompted too many employee exits.

Worse, the enforcement strategy used for those who engaged in misconduct was “pay, promote, or move them.”  Despite 92 harassment complaints, between 2015 and 2023, no one was removed and no one had their pay reduced. The most serious punishment was a suspension.

Even worse was the fear of reporting because of retaliation.  The investigating law firm c set up its own hotline for employees to report misconduct. Over 900 employees spoke up to the firm.  However, one employee noted, “[t]he threat of retribution and payback is real, supervisors rule by fear in the FDIC. Nobody trusts those in charge, and even though this is not getting into the hands of senior execs[,] I’m using a VPN and someone else’s cell phone to write this.”  p. 4 of the report

The report found serious culture issues fueled by the leadership. The report recommends pages of changes.  The one change missing was a recommendation for getting rid of the Chairman of the FDIC, Martin Greenberg. His bad behavior was well documented.  Mr. Gruenberg was found to have temper problems.  He was also reported to be aggressive, harsh, and prone to dressing down staff publicly. Mr. Gruenberg testified in Congress  that he was never the subject of a third-party investigation.

Ah, but the law firm found that he actually was investigated in  2008 for his conduct. He had to amend his testimony. Nonetheless, the law firm heaped praise on Mr. Gruenberg, and concluded that he was not a root cause of the problems at the FDIC.  The report’s outing of the “tone at the top” aside, he’s not going anywhere.

That conclusion about the FDIC chairman and the FDIC itself are going nowhere.  The muddy quagmire will continue.  Don’t count on crackerjack bank supervision from this crowd.  They are too busy on the road and in their own building with other activities to really check FDIC deposits.

Flying Southwest is a challenge.  There are no assigned seats – it’s every man, woman, and child for himself or herself in trying to score exit-row seats and avoid the dreaded middle seat.

Southwest has attempted to attract business travelers with a first-boarding priority, but you do pay for that privilege.

However, priority boarding FOLLOWS the pre-boarders. The pre-borders are those who “need extra time going down the jetway,” as the official announcement goes.  Business travelers began to notice that there are often 30 or more pre-boarders on flights.

In its infinite wisdom, the federal government has regulations that require airlines to provide pre-boarding to those with disabilities who “self-identify at the gate.”  Southwest does ask several questions in screening the aforesaid self-identifiers, but will not disclose the questions. Southwest also prohibits pre-boarders from sitting in exit row seats.  Would that be a policy or is it just that one cannot claim a disability and still qualify for the exit row??  If you can’t walk down the jetway you probably cannot hurl an exit door open and get the slide going.

The bottom line?  Passengers are gaming the system to get better seats and overhead space. Business travelers and others who pay extra for priority are starting to take photos.  Reddit is afire with anger over the fake pre-boarders.  As Jeffrey Colvin has written, “Just assume that when there is a reward system involved at some point there will be gaming.”

In the Barometer’s field we call them amoral technicians.  They get ahead by finding loopholes and capitalizing on them. Put a loose-goosey regulation in place and they will maximize opportunities. You find them operating in the complex rules on financial reporting — it’s how we get accounting fraud, eventually. You find them in Fit-Bit wearers.  They get in their steps by putting their Fit-Bit in a sock in the dryer. They cross the gore line to cut ahead when entering the freeway.  They take cuts in line because line-cutting is not often regulated.

Hence, Southwest flights are loaded with gamers — amoral technicians who have found a loophole. They enjoy a fine seat and overhead space on all their Southwest flights — without paying an extra fee.

Mariano Torres, a night janitor (or environmental services employee in modern parlance) in Hamilton Hall at Columbia University, was just doing his job on the third floor.  He heard a ruckus coming from the first floor but continued to do his job because he figured it was encampment nonsense.

Suddenly five or six protesters were bringing chairs into the stairway.  He asked them to stop and even tried to block them.  Behind his scarf-covered face one protester told Mr. Torres to get out of the way because “This is bigger than you.”

One of the masked protesters tried to hand him a fistful of cash, but Mr. Torres responded, “I don’t want your money, dude.  Just get out of the building.” Despite his calls and those of his two co-workers, police would not arrive for 20 hours.  There had been only one Columbia security officer at the building and he just “let it happen.”  Sharon Ottoman, “3 Columbia Workers Recount Fearful Time Trapped in Hall,” New York Times, May 9, 2024, p. A1.

In this incident we witness the arrogance of the protesters — what they were doing was more important than a janitor just trying to do his job.  And they tried to pay Mr. Torres off, but he was having none of it.  A “better than thou attitude” coupled with corruption techniques.  What a charming and dangerous combination.

Bless Mr. Torres and his colleagues for  moral clarity and steadfastness.

By contrast, the police were out in full force and the protesters not so when celebrities dressed as Star Wars characters showed up for the Met Gala. Their event sallied forth, hassle-free. They strutted, they hobbled due to clothing and footwear choices, and they preened for the cameras. No protesters raining on their animal-vegetable-mineral parade.  “Let the janitors eat nothing,” was their arrogant mantra.  Funny how class warfare really works — the elite students and professional protesters with cash pick on the  janitors.  But media icons are immune untouchables — because the Met Gala crowd and protesters  are on  the same level — classless.

A New York Times reporter went to the University of Chicago to talk with students and faculty about the “encampment” anti-Israel protestors had created.  One, a young lady who is a senior, said, “I came here to hear views that are different than mine.”  Let’s hope there are  some writing courses with a sprinkling of grammar somewhere I the curriculum.  She meant views “different from” hers.  “Than” is used in comparisons — “Jane is taller than Youssef.”  Jeremy W. Peters, “Encampment Is Testing College’s Commitment to Ideals of Free Speech,” New York Times, March 7, 2024, p. A18.

And then there is this sentence, “The university continuously batters this point about free speech.”  He sees Chicago’s speech principles as “a fig leaf.”  Mixed metaphors aside, how does one batter a point?  Perhaps use a battering ram to dismantle an argument???One pictures Chicago faculty and administrators walking through encampments with their fig leafs on, although it is not quite clear what or how the fig leaf shields the university.

Nothing like the musings of a pseudo intellectual.  If he means Northwestern’s free-speech policies are all hat and no cattle, then he should say so.  He can use the Barometer’s metaphor.  Put away the battering ram and small-plant covering.

The protests and encampments have been dangerous, disruptive, and juvenile.  Reading these Ivy League students’ quotes one understands that their educations have been woefully inadequate.  Community college students are better spoken than (notice the correct usage) the hoity-toity students.  Those students  are busy working and going to classes — protests do not fit  into their schedules.   Also, they avoid battering, whatever that means and however it is done.

There’s some news for McKinsey clients.  A grand jury was empaneled in Virginia.  The investigation focuses on McKinsey’s consulting advice to opioid drugmakers.  McKinsey had no comment.  The Barometer does.  “Yikes!”

McKinsey has already paid $642 million to resolve opioid civil litigation. That settlement covered  suits in all 50 states, D.C.,  and five U.S. territories. One of McKinsey’s clients has already complied with a Justice Department subpoena requesting its McKinsey documents,  Two of McKinsey’s opioid clients, Enzo and Purdue, have been successfully prosecuted or entered guilty pleas related to their opioid sales. McKinsey’s consulting role with the companies was related to boosting opioid sales.  “Gadzooks!”

Alexander Gladstone, “McKinsey Hit With Criminal Inquiry,” Wall Street Journal, April 25, 2024, p. A1.

However, the top-heavy problem is not physical, as in the angle of attack on the 737 MAX or door panels falling form the skies.  Its top-heavy problem is with its executives.  They have ethical tin ears.

The most recent issue is the company recording executives’ personal company jet travel as business expenses. That personal travel is income to the executives and not a travel expense for Boeing.

Boeing has corrected the “accounting error” in an SEC filing.  That disclosure came after the Wall Street Journal raised questions about the executives’ use of Boeing’s private jet fleet. Andrew Rangel and Mark Maremont, “Boeing Eases Office Return for Senior Executives,” Wall Street Journal, September 12, 2023, p. A1. Andrew Rangel and Mark Maremont, “Boeing Didn’t Disclose All Executive Jet Perks,”  Wall Street Journal,  April 12, 2024, p. A4.

In fairness to Boeing, one can understand the confusion.  The executives live all over the country and then commute when they have to come into the office. In one case, Boeing actually set up an office near CFO  Brian West’s home in Connecticut so that he did not have to commute to an office so far away. Arlington, Virginia is not that far — is even in the same time zone!

Boeing has office in Arlington, Virginia (that resulted when the company HQs were changed from Chicago to the DC area).  Meanwhile, outgoing CEO Calhoun has homes in New Hampshire and South Carolina. But he zigzagged from Arlington, VA to Hilton Head, SC to Monterey, CA and then back to New Hampshire.  Mr. Calhoun noted in 2023 that Boeing headquarters is wherever he and Brian West are.

Is it any wonder the accounting on personal vs. business flights got jumbled?  The Barometer’s question is, “When do these guys actually work?” And all of this was going on as Boeing was ordering employees back to the office.  And it is a little difficult for those assembling airplanes to work from home. Perhaps the missing bolts from the ejected door panel can be found while at a machinist’s home who tried the work-from-home approach.

The executives at Boeing have tin ears on ethics and perception.  Jetting around the country and living away from plants and headquarters means an absence of leadership. You can’t build a culture via Zoom.

And a culture of integrity cannot exist when the executives are abusing the company’s private jet use. Boeing needs to start at the top for its clean-up. For replacements consider someone who will leave near the factories so that there is hands-on leadership shaping a culture of safety, quality, and ethics.  Oddly enough, you can’t do that from an airplane.

The accounting firm of KPMG has already paid a fine in the United States for facilitating cheating by its auditors on the required PCAOB exams on audit standards and ethics.  PCAOB (often referred to as Peek-a-boo) is the Public Company Accounting Oversight Board.

The $50 million fine in the United States was for lowering the score required for passing the PCAOB exams.  By changing a number in a hyperlink, KPMG had lowered the passing score to 25%.  That’s a crackerjack group of auditors who could get 25% of the answer correct on an exam. Thatscore that would be tough to get by just randomly selecting answers.

The  Netherlands just assessed a $25 million fine against KPMG for providing employees with answers and/or questions on the PCAOB exams in that country.  The sharing of exam information involved hundreds of KPMG employees.  The “sharing program” ran from 2017-2022.  In addition, the Netherlands officials found that KPMG leaders misrepresented their  knowledge of the cheating during the investigation.

KPMG issued a statement about the findings of the Dutch Authority for Financial Markets:

“The conclusions are damning, and the penalty is a reflection of that.  I deeply regret that this misconduct happened in our firm”. Mark Maurer, “KPMG Will Pay Record Fine Over Cheating,” Wall Street Journal, April 11, 2024, p. B1.

The Barometer notes that the fine for the cheating in the U.S. was issued in 2019.  One does wonder why KPMG did not review the exam practices in all of its offices worldwide.  Cheating knows no international boundaries.

The declaration, issued by the Vatican, begins by stating clearly the inherent dignity of all human beings.

The declaration then concludes that assaults against human dignity are abortion, surrogate childbearing, euthanasia, capital punishment, poverty, war, the travails of migrants, human suffering, sexual abuse, marginalization of the disabled, and digital violence.

The declaration added, “. . . all attempts to obscure reference to the ineliminable sexual difference between man and woman are to be rejected.”

The Pope noted that its clarity was designed to put an end to two sets of ethics among Catholics: life ethics and social ethics.  The People then added that such was a “misuse of reason.”