The Ethical Barometer

New Wells Fargo CEO, Charles Scharf, testifying before the House Financial Services Committee, regarding the findings of a House report on behaviors at Wells since the time of the discovery of the 3.5 million fake accounts, give or take a few thousand here and there.

The e-mails and conduct in the report reveal a bank looking only to have its cap on growth eliminated. Here’s a classic quote from the now former chief risk officer,”If any of the $200MM [for customers injured due to unauthorized accounts] is left over, we promise to give it to charity—only after the CFPB and the OCC let us out of the consent orders. If they do not, no donation. Put the onus back on them.” Yes, that’s where the onus should be, after all.

So, to get out from under the cap and their consent decree, the chief risk officer used charitable donations as a bargaining chip. Remember all those ads Wells was running about its dedication to social causes and the extent of its donations? This is one scary crowd.

Here’s wishing Mr. Scharf well in his efforts at the bank. Between reading the baseball commissioner’s report on the Astros and this latest report on Wells Fargo, the Barometer has her head shaking like a baseball bobble figure on a dashboard.

Mercy! These CEOs. The Barometer is thinking of a new book — The Seven Things CEOs Do That Cost Them and Their Companies Dearly. Lack of candor would be one of them.

Here comes Jes Staley, CEO of Barclays. Do a search of this website and you will find the tales of his fines and troubles surrounding his actions to find out who a company whistleblower was. Now Barclays is grappling with a British investigation into whether Mr. Staley told the truth about his association with the infamous pedophile, Jeffrey Epstein.

While Scotland Yard (actually it is the U.K.’s Conduct Authority and Prudential Regulation Authority doing the work) is busy with its job, Barclays issued a statement that, for the first time, acknowledges that its CEO did indeed visit Epstein’s private Caribbean island, Little St. James, on two occasions. This was an island populated by many young girls, some as young as 11-13. However, Barclays assures that Mr. Staley was accompanied by his wife on both visits.

Barclays also indicated hat it was examining what Mr. Staley told Barclays about this issue when he was hired in 2015. The Conduct and Prudential folks have e-mails from both JPMorgan and Barclays that they are examining. JPMorgan turned its e-mails over, and the Barclays folks turned theirs over and are also perhaps perusing them as well.

Uh-oh. On so many levels.

There’s a headline that inspires confidence in the new leadership of a company that has been struggling with, well, candor with the public, with regulators, and with itself.

Alison Sider and Andrew Tangel, Wall Street Journal, March 9, 2020.

New CEO Dave Calhoun gave a quite remarkable interview with the New York Times. During that interview he said what those of us who are outside observers knew anyway.Just the title of the article reflects what many of us have been struggling to make clear, “Boeing’s Problems Are a Lot Bigger Than He Feared.” He must have gotten an earful from the powers that be, whoever they are. A few tidbits, candid though they may be, from the interview:

“It’s more than I imagine it would be, honestly. And it speaks to weaknesses in our leadership.”
He will be, “Hunting for bad news and acting on it.”

The one time in all of this that someone at Boeing gets something right, they rein him in. Would that they would have been so outraged at the e-mails the employees were writing for years. The Barometer’s hopes were dashed within two days of the surprising, but necessary, candor

Natalie Kitroeff & David Gelles, “Boeing’s Problems Are a Lot Bigger Than He Feared,” New York Times, March 6, 2020, p B1.

Newell Brands (Rubbermaid) has received a subpoena from the SEC following informal information requests. Uh oh!

Newell purchased a competitor (Jarden) in 2016 for $20 billion. That brought $8.3 billion in goodwill to its books and, as a bonus, quadrupled its debt. Then, by 2018, Newell had written down, yes, get this, $9 billion in goodwill. It is one of those, “Okay, we were wrong on the valuation thing.” Oops.

Goodwill is one of those accounting red-flag areas. When you see it, don’t believe it because, sooner or later, and more and more it is sooner, it is going away. When it leaves, the SEC arrives.

Newell is now the stuff of junk-bonds (S&P Global). And the SEC says that it is looking at “sales practices and certain accounting matters.” Raise your hand if you can figure out the components of “accounting matters.”

Analyst say investors do not care about goodwill, debt covenants, etc. Perhaps so. However, what you find in all of these factors that are ignored by analysts are the following:

1. The pressures at the company
2. The ethics of management (keeping your word is some small part of debt covenants)
3. Combine ethics with the squishy numbers in goodwill impairment and the highly subjective becomes highly material

Catherine Pugh made $800,000 selling her self-published children’s health books to those nonprofits and foundations that could benefit from the Mayor’s noblesse oblige in spreading around city grants and funding to those purchasing the books. There were issues with failure to deliver the books and tax evasion. And then there were the campaign finance violations — she used the book money in her campaign.

At her sentencing she said, “I apologize for all that has led me here.” Not sure what that means, but it seems a tad evasive. Creative graft would have been a better term to use with this scheme.

The Ethicist column in the Sunday New York Times generally has questions about racist neighbors, landlords, etc. or roofers who have Confederate flags on their trucks. My favorite was the politically incorrect landlord that the tenant did not want to do anything about because the landlord was giving them a smokin’ deal on rent. The description sounded as if (because there was only one mailbox between landlord and tenant) there were zoning and housing ordinances being disregarded by the politically incorrect landlord to the benefit of the politically correct tenant (who did not want to rock the low-rent boat).

Then there are the family squabbles about who should pay for what. These are questions from lost souls seeking an ethics guru’s imprimatur for not helping some family member who is sick, broke, or both. The helpless they do not want to help are always helpless because of their own actions, decisions, obnoxiousness. The question-asker always details the flaws of the helpless.

Finally, there are the, “Should I tell them?” questions. You have a middle-school girl writing to see if she should disclose that her friends cheated on yet another one of those tests for admission to a highfalutin public school in New York City. This group includes disclosure angst to cheatees about cheaters: affairs of parents, best friends, teachers, and roofers who have Confederate flags on their trucks.

However, last Sunday there was a novel question. The teen daughter of the ethically inquiring mind had gone to a friend’s birthday party. The friend is Asian, and the party-goers followed the custom of removing shoes at the doorway. When the inquiring mind’s daughter was leaving the party she discovered that her boots were missing. Some scoundrel had traded up from the assortment of shoes and gone home in a quasi-new pair of boots. Nancy Sinatra warned us that boots were made for walking.

The Ethicist fan assured us that she would not demand payment for the boots for the hosts, so as to preserve her daughter’s friendship. Those of you with an ounce of graciousness should breathe a sigh of relief here. However, she wondered if it would be right to hold the hosts responsible for the theft. The Ethicist postured that the hosts were negligent for not having some form of check-in system for all the shoes. Wouldn’t that be a fun greeting? But he added, the hosts were negligent with their own stuff. If you invite people to parties in your home without any form of screening you risk things beyond boots in the doorway being pilfered.

Some of us still have faith in mankind (used in the anthropomorphic sense here). We open our homes and shoe deposits at our doors with faith that people will do the right thing and leave in their own shoes. If you want the thrill of wearing shoes that carry someone else’s smells and body oils, try bowling. Sometimes we are wrong about mankind (disclaimer here again). However, the Barometer would not be above posting copies of a photo of the boots around the school with a caption, “Seen these? If so, call this number.” Sometimes disclosure and enforcement improve mankind’s behavior going forward.

The Trump Administration has proposed putting the Public Company Accounting Oversight Board (or as we called it in the early days, “Peek-a-Boo”) under the SEC. Arthur Levitt, a former head of the SEC who was effective in exposing accounting mumbo jumbo in financial statements, believes it is a mistake to shuffle the function over to the SEC. Mr. Levitt says:

1. The SEC is slow
2. Elimination of PCAOB would undermine confidence in the audit profession

The Barometer concedes the first point to Mr. Levitt. The SEC is slow, except when it comes to Musk Tweets. That sounds like a treat for rodents, but it would be the SEC jumping on Elon Musk for his defiance of the agency. Not that a CEO trashing the SEC is a good thing, but it does seem to be a timeliness focus for the agency.

However, elimination of PCAOB would undermine confidence in the audit profession?

Let’s recap what the audit profession has been able to do all on its own, and all with the mighty PCAOB in place:

Audit quality has not improved much despite PCAOB’ ratings (its minimal sanctions have not helped the cause)
PwC got the wrong envelope for best picture in 2017 — somehow the firm mixed up the envelope — how are you going to do goodwill valuation and ACRS if you can’t see the difference between “La-La Land” and “Moonlight”?
PwC’s tax strategy at Caterpillar netted that company early-morning IRS raids at its facilities
A KPMG partner entered a guilty plea to feeding a friend insider information on clients so that the client could do some advance trading (but he got a Rolex in exchange)
PCAOB fed information to KPMG’s audit folks, turned state’s evidence, and one partner was convicted of collusion with PCAOB (and despite KPMG being given a heads-up on which companies’ audits PCAOB would be examining, KPMG’s audit quality was not affected — there some crackerjack work)
Ernst & Young is now under criminal investigation for allegedly being fed bid information by management so that the independent audit committee of the company board would pick EY for its auditor
KPMG was the auditor for collapsed New Century
PriceWaterhouseCoopers (PwC — and this acronym at least matches the letters in the words) settled for $41.9 million for overbilling federal agencies for its work
PwC, EY, and KPMG settled with the federal government for overbilling travel expenses to the government

The list could go on — and that it just the most recent stuff. What could possibly go wrong with this group handling audits of publicly traded companies?

The semi-private PCAOB has not proven itself to be a fierce watchdog. Perhaps its resources would be better used in an existing regulatory framework such as the SEC. The again the SEC missed both the Madoff and Stanford Securities Ponzi schemes. You can’t relate ethics. Fundamentally, the strength of audit firms is dependent on the ethics and backbones of auditors. From watching out for conflicts to refusing to back down when clients pressure them on issues, the critical juncture lies in auditors’ ability to call ’em as they see ’em, not as the client would like to have it. PCAOB was never ever to move the needle on that metric.

Car dealers seem to be giving some bad credit advice to customers who bought a car above their pay-grades. The advice? Buy another car, then turn the first car over to the repo guy. The dealer makes two sales instead of one. The buyer has a more affordable car. And the lender is stuck with the repo.

Dealers deny the practice. But the Wall Street Journal offered data: Transunion says that there were 24 million auto loans in the US in 2018. About 300,000 of those cars were repossessed — up 17% since 2018 despite a booming economy. Just think of the ethical issues in this practice.

The credit experts tell consumers not to do it because it is bad for their credit score. And destructive to their souls.

Like the Astros, Mr. Milken has never gotten it. During his time since prison (he served only two years of a ten-year sentence because of prostate cancer), he has twice been involved deal-making despite a lifetime ban against, well, deal-making. While he made no admissions, he did settle with the SEC. Let’s be frank: No one ponies up a fine of $47 million to the SEC because of innocence. That was in 1998, and he has walked the straight-and-narrow since then. But somehow the hubris is still there. We have not heard the last of Michael Milken.

It was painful to read. The reports on the apology fest of the Astros leave you with one thought, “C’mon guys!”The report of the Commissioner, which you can find here (https://img.mlbstatic.com/mlb-images/image/upload/mlb/cglrhmlrwwbkacty27l7.pdf.) reads a tad differently. The union got the players immunity for their roles, and it showed.

The Astros had developed a system for decoding their opposing teams’ sign sequences using live game feed. Over time, they then evolved their means for getting that information to the dugout. They went from runners being sent to the dugout, to text messages from the review room to a smart watch or cell phone in the dugout, to phone calls to the review room from the dugout. Then there was the hurdle of getting the info to the batters. They went from clapping, whistling, yelling, and eventually to banging on the garbage can with a bat, which proved to be the perfect low-tech finish to high-tech espionage.

The report concludes that most of the players received signals from the banging and added:

“Several players told my investigators that there was a sense of “panic” in the Astros’ dugout after White Sox pitcher Danny Farquhar appeared to notice the trash can bangs. Before the game ended, a group of Astros players removed the monitor from the wall in the tunnel and hid it in an office. For the Postseason, a portable monitor was set up on a table to replace the monitor that had been affixed to the wall near the dugout.”

The report does not offer conclusions on whether the decoding and banging helped the Astros. However, here is some insight from the Barometer — ignorant in all matters related to sports — in post-season play, the Astros were 2-6 in their road games and 8-1 at home. Ah, the power of those Home-town cheers.

The stark reality of the report does not match the apologies, coupled with a large dose of, “Who knew?” and “It didn’t make a difference.” Okay, on that last one, with one question, “Then why did you do it?”

There was a lot of hedging, hemming, hawing, hesitation, and hubris in the apology campfire meeting. What was missing was full admission and sincere regret. Worse, the folks who worked in the video room are still there — that’s not immunity, that’s organizational culture. The overall message was not what the Commish hoped for in requiring the apologies. Here’s the meeting in a nutshell. “It was bad. We are done with this. We still won.”

There is a criminal investigation into the process that Sealed Air followed in selecting Ernst & Young (EY) as its external auditor. Senior executives at Sealed Air allegedly favored EY by leaking details of competitor KPMG’s bid.The same two executives worked together at Carlisle Cos ten years earlier when EY got that audit contract. Sealed Air has fired one of the senior executives as well as EY.

The bidding process issues arose as the SEC has been looking into Sealed Air’s accounting practices. The agency’s questions focus on write-offs related to asbestos claims. In investigating the accounting issue, the SEC ran across the e-mails that piqued interest in the bidding process.

Years ago, post-Enron, the audit selection process was placed in the hands of the board’s independent audit committee. Management “collusion” (air quotes here in a tip of the hat to the word of our times) was headed off at the pass, we thought.

The Barometer thought that bid-rigging was a thing of the past. A number of professional organizations have codes of ethics that prohibit even the slightest communication between purchasers and vendors during the bid process. Purchasing professionals frown upon saying to vendors something as generic as, “You are going to have to get your price down.” In fact, the foundation for these rules is no ex parte contact. If there are questions, distribute the question and answer to everyone. If there is confusion, clarify for everyone. What a stunning series of events! What a sad commentary on yet another of the Big 4 accounting firms.

BlackRock, the fund manager, fired two of its senior executives last year. The executives had romantic relationships with subordinates. What else is new, you sniff. However, BlackRock did not send out the usual “leaving to spend more time with their families” explanation. Whoever believed such an explanation? They would be lucky to still have families. Nay, nay! BlackRock sent out a memo to its 16,000 employees that said the two executives had broken company rules.

CEO Laurence Fink, who was close to at least one of the executives, said that one of the goals is to make clear that it is important for staff to speak up when they see problems. The egg-shell walking approach of most companies is the signal employees get. They already know what happened. Privacy exists only in the minds of HR and attorneys. The corporate grapevine tops Napa for quality. The hush-hush is a signal of “embarrassing and we were forced to do this to one of our own.’ The public discussion is the signal of, “Enough.”

Full disclosure: Some fund held by the Barometer for some sort of savings, SEP, IRA, etc. is managed by BlackRock. The Barometer saves for a flood, not a rainy day. ‘Tis best not to know exactly how much you have saved — keeps the spending in check.

Bernie Ebbers, the former CEO of WorldCom, a company that was once the largest company in the U.S. (capitalization). Of course, that ranking assumed that the accounting was accurate. It was not — the company had $3 billion in accounting overstatements on its revenues. When WorldCom declared bankruptcy, it was the largest bankruptcy in U.S. history with $107 billion in assets.

Mr. Ebbers was convicted of fraud and sentenced to 25 years in prison. He was scheduled to be released in 2028. However, he was released in December 2019 because he was in the advance stages of dementia. Mr. Ebbers died at home this past week at the age of 78.

Bernie Madoff, he of the largest Ponzi scheme in American history, has requested early release from his 150-year prison sentence because he has “chronic kidney failure” and a life expectancy of 18 months. He is in the comfort-care unit of the prison and initially refused dialysis, but is now undergoing treatment.

Tragic endings for two men who had everything from cattle ranches to Miami and East Hampton estates to Bentleys. It was never enough. The desire for wealth consumed them, yet mere mortals they were and are, subject to the ravages of time and the debilitation of disease.

“The wretch, concentered all in self,
Living, shall forfeit fair renown,
And, doubly dying, shall go down
To the vile dust, from whence he sprung,
Unwept, unhonored, and unsung.”
Sir Walter Scott
1805
The Lay of the Last Minstrel

Wall Street Journal headline February 3, 2020, p. A3

Michael Sanchez, the brother of Lauren Sanchez, Mr. Bezos’s girlfriend, has filed a defamation suit against Jeff Bezos for allegedly claiming that he (Michael) leaked the suggestive photos of Mr. Bezos to the National Enquirer. The Barometer is confused. Mr. Bezos and his experts allegedly believe that the Saudis leaked the photos.

It’s just like junior high, except we never employed the courts and defamation suits to resolve the boy-girl-brother-romance complexities. We just shot spitballs through straws. Disclaimer: They were paper straws.

Economists say that one of the ways we achieve economic stability is to get married and stay married. It seems to be a formula for avoiding lawsuits and entanglement with the Saudis as well.