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SECTION 4D – THE STRUCTURAL FACTORS: GOVERNANCE,
EXAMPLE, AND LEADERSHIP
READING 4.14 – RE: A PRIMER ON SARBANES-OXLEY AND DODD-FRANK
Use PowerPoint Slides 147 - 161.
Key Discussion Items
The following issues could or should have been addressed and were obvious in Readings/Cases 4.3
through 4.10: conflicts of interest among auditors; conflicts of interest by executives and directors;
conflicts of interest among analysts; less-than-candid analysis by financial analysts; independent audit
committee; financial reporting expert on audit committee; independent compensation committee; ethics
codes and training; certification of financial statements by CEO and CFO; disclosure of non-GAAP
reporting; reporting mechanisms and means for policing internal controls; rewards for employees who
report issues; protection against retaliation for employees who report issues.
The most obvious additional costs for companies is that of certification of internal controls, an average of
$1.1 million for such certification. The other additional costs are those for developing the new financial
codes of ethics and implementing reporting systems and codes of ethics and ethics training.
Changes include board structure (independence) and committees (audit and compensation). There
would also be new contract requirements with two external auditors – one for the audit and one for
certification of internal controls. The company would also need a financial code of ethics and training.
CASE 4.15 – WORLDCOM: THE LITTLE COMPANY THAT COULDN’T AFTER ALL
Use PowerPoint Slides 162 - 169.
Answers and Key Discussion Items
1. The market was so caught up in growth and “the sky’s the limit” that the hard questions weren’t
2. Students should learn that history repeats itself and “if it sounds too good to be true, it is too good to
3. Fraud is a result of feeling pressure, but not all companies succumbed to the pressure. There are
natural market corrections, but not all companies required corrections that made them defunct.
4. Investors did not ask hard questions such as how WorldCom met numbers so precisely –
manipulation had to have been involved. The classic adage of “if it sounds too good to be true, then it
5. Sometimes religion is the compensation for bad deeds in business. Others who were devoted church
attendees were Ken Lay, former Enron chairman, and those running the bankrupt Baptist Foundation.
6. Use PowerPoint Slides 164 - 167 to cover the discussions on this issue.
Mr. Sullivan used the ends to justify his means. He was focused on short-term results. He thought
he could conceal the truth with his abilities. Questions he could have asked: Is this really a gray
7. All of Houston mourned when the truth about Enron emerged because it had been so generous of a
company in terms of supporting the community and the arts. The same is true here. WorldCom was
Compare & Contrast
1. Use PowerPoint Slide 167 for this discussion. The quotes offer some insights for the students on
their credos. Tell the truth. Do not succumb to pressure when you are asked to do something that
you know is wrong. Do not let the ends (saving the company) justify the means (accounting fraud).
Remember manipulating numbers is but a temporary fix, a nonsustainable competitive model. Note
that he refers to himself as a coward for not facing up to WorldCom’s financial downturn.
2. Sprint and AT&T are in much better financial condition and now understand that WorldCom’s numbers
were an illusion. Their observations at the time WorldCom was at the top of the market are proof of
the “if it sounds too good to be true, it is too good to be true.” WorldCom was defying basic market,
economic, and accounting principles, but yet, once again, those with expertise failed to raise those
questions or were too willing to accept facile explanations. Perhaps the students can learn from this
and other cases that there is no magic solution in business; that success comes down to the basic
business principles of keeping costs low, production up, customer service good, and paying attention
to the need for strategic changes and direction. There is no magic or one company that is this much
better than another, 132% better, is tough to explain in terms of what WorldCom was doing differently
from the other telecoms. Michael Keith does have new credibility because he was asking the right,
very logical questions.
3. The common threads so far in the cases studied (and these will carry through into other cases):
Pressure to maintain numbers
Fear among employees
Unwillingness to raise questions both internally and externally
Weak boards (for different reasons, but they were all weak)
Conflicts of interest abounded among officers and company and relatives, etc.
Perception that they were better and above the competitive fray in the marketplace
Good corporate citizens with many of the executives also being good community citizens
Use PowerPoint Slides 168 and 169 and have the students add any of their common
observations
An important credo element here is the need to stay grounded – not succumbing to the belief that you are
above the others in business and also above the basic rules of law and accounting. Have the students
consider Betty Vinson – she was not looking at the risk in just entering the numbers because she thought
she was saving her job, a position she needed as the breadwinner. A simple credo – I would never
submit false information for company reports, data processing, or financial disclosures.
CASE 4.16 – BANK OF AMERICA: THE MERRILL TAKEOVER, THE
DISCLOSURES, AND THE BOARD
Use PowerPoint Slide 170.
Answers and Key Discussion Items
1. Legal Issues – the lawyer-client privilege is one that provides for silence on the part of the lawyer with
respect to information that the client discloses to the lawyer. For example, if a client confesses to a
crime to the lawyer, then the lawyer must keep that confession in confidence. An exception would be
Yes, the privilege applies to corporate general counsel and their corporation clients. The lawyer
SOX applies in this case because of the obligations of lawyers under that law. Lawyers are required
to take financial fraud issues to the board and report them, but SOX does not require the lawyer to
2. Mr. Mayopoulos stood firm probably because of his oath as a lawyer, a form of a credo. No matter
3. The impact on the culture of the company would be that no one would want to come forward with
candid information about what is happening at the bank. Once employees see how an employee who
READING 4.17 – GETTING INFORMATION FROM EMPLOYEES WHO KNOW TO
THOSE WHO CAN AND WILL RESPOND
Use PowerPoint Slides 171.
Answers and Key Discussion Items
1. Sensing mechanisms are tools managers use to determine what issues are developing in the
2. The humble firm has the characteristics of seeking feedback, being willing to listen as others raise
questions or issues about their organizations, being willing to investigate, being willing to dig deeper,
3. They were defensive; they wanted to be rid of issues and people who raised them; there was little or
4. There is a certain fear that employees have about reporting issues at the company – they are not
convinced that the processes are anonymous. Also, they are grappling with the fact that they feel
disloyal in reporting something that others may not know about and/or know about their disclosure.
CASE 4.18 – WESTLAND/HALLMARK MEAT PACKING COMPANY AND THE
CATTLE STANDERS
Use PowerPoint Slides 172 and 173.
Answers and Key Discussion Items
1. Yes, the approach that the workers use to fit the definition of a stander was a classic “legal”
compliance issue. The intent of the law was to be sure that cattle with diseases do not make their
way into the meat supply. Their processes circumvented the purpose of the law, although technically
2. Whether through options or bonuses tied to stock price or through per-head slaughtered formula at a
cattle processing plant, the result is the same – employees respond to incentives and will reach
3. Yes, managers need to adopt behaviors akin to the parents of teenagers who learn to come home
surface. Use PowerPoint Slide 173.
