Floyd Norris: Punish, sure, but deterring fraud is hard
By Floyd Norris International Herald Tribune
FRIDAY, SEPTEMBER 23, 2005

LINK

L. Dennis Kozlowski, whose excesses damaged the reputations of everything from shower curtains to ice sculptures, is on his way to a New York State prison for at least seven years. He may be lucky that his sentence was not determined by a jury of his peers.

The reality now is that even as some lawyers moan that it is unfair to send business executives away for years or even decades, there is a stunning lack of sympathy for them from the people who used to be their peers: those who are or were at the top of large corporations.

"I think 25 years would be fair, similar to Bernie's sentence, so they are basically spending the rest of their lives in prison," said Colleen Cunningham, president of Financial Executives International, the trade group of chief financial officers.

Bernie, of course, is Bernard Ebbers, 64, the man who built WorldCom from a tiny long-distance company into a giant, and who then watched as it collapsed in fraud. He was sentenced to 25 years.

Cunningham, a former chief financial officer of Havas, the French advertising agency, is not alone in her hostility to convicted bosses.

Her group, along with Baruch College's Zicklin School of Business in New York, polled 318 chief financial officers on what they thought of Ebbers's sentence. About three-quarters of them thought 25 years was either about right or too lenient. One who thought the sentence fair added that if Ebbers had been younger, he "would have opted for a longer sentence."

As for Scott Sullivan, the former chief financial officer of WorldCom who was sentenced to five years after being the star witness against his former boss, almost 60 percent thought that sentence too light.

Why the hostility? The simple answer is that many of these people think executives like Ebbers and Kozlowski have stolen something of value from them: a part of their reputations. They fear that others will think many executives are crooks, that what sets a Koslowski apart from them is that he was caught. And they resent it deeply.

The costs of these frauds are obvious and are often thought of in terms of shareholders' losses and the fate of employees laid off after companies like WorldCom or Enron collapse.

But there are other victims. Cunningham recalls weekend meetings when she was chief accounting officer at AT&T where she and her colleagues would pore over WorldCom's financial reports, trying to figure out how its rival did it and looking for ways to cut costs to stay competitive.

"We made decisions based on those false numbers," she said. AT&T laid off thousands of customer service people.

In fact, WorldCom's costs were much higher. But the costs were being hidden, something that never occurred to the people at AT&T.

Lawyers for Kozlowski, who is 58, emphasized that Tyco International, the company he bilked, did not collapse, and that may have helped to persuade the judge to be lenient. The sentence of 8 to 25 years could be cut to just over seven years if he behaves himself in prison. He could be out before he is 66.

One important question about long sentences for corporate criminals is whether they have a deterrent effect. That answer may not be reassuring.CFOs hold similar views about recent verdicts in trials of corporate executives, believing as a group that the punishment for corporate wrongdoers should be severe. Three-quarters of respondents feel that the 25-year sentence of Bernie Ebbers, former CEO of WorldCom convicted of security fraud, was just about right or even too short. Scott Sullivans sentence of five years in prison was deemed by 60% as too short. Mr. Sullivan, WorldCom CFO, who pleaded guilty to fraud and conspiracy, was the governments star witness in the Bernie Ebbers trial. Regarding Richard Scrushy, former CEO of Health South, only 4% of the surveyed CFOs believe that his jury was correct in acquitting him on charges of financial fraud.

These are strong opinions from our members, reflecting their anger at how these executives misused their power. CFOs recognize the costs to shareholders, the economy and corporate reputation caused by these high-profile scandals, said Colleen Cunningham, FEI President and CEO.

"It would not stop economic predators like me," said Sam E. Antar, who knows something about fraud. He was the chief financial officer of Crazy Eddie, a New York home electronics chain that cooked its books. (Antar chose to cooperate with investigators and managed to stay out of prison after he pleaded guilty.)

What will stop them? "You need to build barriers like good internal controls," Antar said, "and you need sharp auditors."

Auditors may or may not be getting sharper, but the pressures for good internal controls are weakening. The Securities and Exchange Commission voted this week to delay for another year requiring small companies to test and certify their controls. They say such testing is just too expensive.

Perhaps the delay will result in finding cheaper ways to protect investors. But in the meantime, investors in small companies campaigning against the rules might want to ask just what those companies have to fear.

Tyco, we now know, had no good internal controls, and top management very much liked it that way.

Floyd Norris can be reached at fnorris@iht.com.

Exerpt from the CFO Report, The Robert Zicklin Center For Corporate Integrity:

Corporate Wrongdoers Should be Punished
CFOs hold similar views about recent verdicts in trials of corporate executives, believing as a group that the punishment for corporate wrongdoers should be severe. Three-quarters of respondents feel that the 25-year sentence of Bernie Ebbers, former CEO of WorldCom convicted of security fraud, was just about right or even too short. Scott Sullivans sentence of five years in prison was deemed by 60% as too short. Mr. Sullivan, WorldCom CFO, who pleaded guilty to fraud and conspiracy, was the governments star witness in the Bernie Ebbers trial. Regarding Richard Scrushy, former CEO of Health South, only 4% of the surveyed CFOs believe that his jury was correct in acquitting him on charges of financial fraud.

These are strong opinions from our members, reflecting their anger at how these executives misused their power. CFOs recognize the costs to shareholders, the economy and corporate reputation caused by these high-profile scandals, said Colleen Cunningham, FEI President and CEO.

Financial Executives International

The Corporate Library

TYCO Executives Dennis Kozlowski and Mark Swartz Go Back On Trial, Say They "Didn't Steal Anything" and They Are "Not Greedy"

The Corporate Culture Takeover of America's Departments of Education Mandates the Termination of Personnel Without Cause

Computer Associates International Former Chairman and CEO is Indicted for Securities Fraud and Obstruction of Justice

Indicted Republican Lobbyist Jack Abramoff Attests to "Good Relationships With Members of Congress"

The New York Stock Exchange is Cleaned Up, as AIG Chairman's Improprieties are Exposed and 15 Traders are Indicted

Roslyn, Long Island, NY: The Enron of Education Fraud and Corruption

Scandals, Inc