Bottom Line Ethics - Part 2

Lead Story

Elizabeth Holmes and the Perils of Success

Michael K. Shaub, November 12th, 2021

I am following with great interest one of the most significant fraud trials of the past decade, that of Elizabeth Holmes, the CEO of biotech startup Theranos. The company’s central product was a machine known as the Edison, which was supposed to provide a wide range of blood tests on just a few drops of blood taken by pricking a finger. It had the potential to revolutionize the blood testing industry, and the intent was to roll the machines out in pharmacy settings, including at Walgreens. Holmes’s vision and persuasiveness were sufficient to enable her to raise nearly a billion dollars in capital to support the dream, and no one ever asked for audited financial statements. As it turned out, there was a giant disconnect between what Holmes advertised and the actual performance of the machines.

John Carreyrou of The Wall Street Journal broke the story through a series of articles beginning in 2015, eventually resulting in his book, Bad Blood. The whistleblower in the case, Tyler Shultz, is the grandson of former Theranos board member, George Shultz, who was Ronald Reagan’s Secretary of State. The younger Shultz was employed by Theranos after graduating from Stanford, and he quickly became aware of the inconsistency of the company’s testing and of the willingness of upper management to cover it up from outsiders. He captivated my Accounting Ethics students this spring as he told his story.

Elizabeth Holmes is not your everyday felon. As she battles for her freedom in the eighth week of her fraud trial, she portrays the quiet resolve of someone who has always, in the end, won. And this may indeed happen for her again.

There are several reasons why Ms. Holmes may never go to prison for her actions as CEO. Her trial, which began over two months ago, has devolved into a grind for a jury pool that is rapidly shrinking. The sheer number of witnesses going over similar facts about who knew what, and who was responsible, would be a lot for me to bear, and I am fascinated by cases like this one. For the average Californian who has a job and a family, and who is being called aside to do this as a civic duty, the requirements to focus must be unimaginable. One juror has been dismissed for working on Sudokus while the trial was going on. Another juror was allowed to leave after expressing to the judge that she could not send Elizabeth Holmes to prison because her religion believes in forgiveness.

In addition, there is the looming specter of the trial following hers of Sunny Balwani, her former partner and Theranos’s chief operating officer. In some senses, the defense has tried to make the current trial a trial of Balwani, holding him up as insulating Holmes from things that were nefarious, so that she never knowingly signed off on anything fraudulent. Balwani’s reputation as a bully certainly helps Holmes’s case. Without any resolution from a previous trial, the defense has significant opportunities to introduce reasonable doubt into the jury’s mind about what Ms. Holmes knew when.

In the entrepreneurial world, many celebrate the concept of “Fake it till you make it,” and those who perhaps exaggerate their progress early in the startup process are lionized as heroes once the company is a stable success. Holmes went beyond the normal startup founder,

captivating a broad audience with her persona and the back story of a teenage Stanford dropout who was just wasting her time taking classes when she already knew what she wanted to do. In addition, she was able to recruit investments from, and fill board seats with, a cadre of influential investors and politicians, earning her the title at one point of the youngest U.S. female billionaire. It also landed her on magazine covers and on stage at prominent business conferences.

It is easy to become jaded and wish for the worst for those who fall prey to their own hubris. And I would probably be the last person anyone in these cases would want on their jury. But at this point in my life I wonder, what if she had just accepted that they had failed in their attempt at greatness and offered disappointing news to her investors, and then tried again? Today she would likely be CEO of Theranos or of something greater. And when she holds her mother’s hand, it would be to walk her little boy around the block, not to go in and out of the courtroom.

And what exactly do I tell my students? All of them are looking for people to inspire them to do great things; my students want to be like these accomplished people. Should I turn my students into cynics because these people cross lines? My students sometimes have trouble settling for being really good, and they are only okay if they are the very best. The same has been true in amateur and professional sports, where numerous athletes have taken steroids to get an advantage.

Elizabeth Holmes fans in line for day one of her trial

The interesting thing to me is how many of these people are extraordinary without crossing the lines. Multiple Hall of Fame quality baseball players are not in the Hall simply because they took steroids. People like Barry Bonds and Roger Clemens were amazing before they broke the rules. The same is true of Elizabeth Holmes. What makes them willing to risk it all rather than fall short of being transformative?

I assume that ego is part of the answer. But I also have to recognize that many of us, including me, love to believe the unbelievable. And we invest ourselves in those who can make things seem possible. Sometimes it is just hero worship, and sometimes it is our money, but when those heroes fail, we are ready to burn the whole thing down. Perhaps we should recognize that we feed the flame as well.

In the meantime, in the next month or two, Elizabeth Holmes will learn her fate. Twelve good people will set the direction for her life. And this piece that I have written will fade into the dust of memory.

But if I could say one thing to my students, regardless of the trial’s outcome, it would be this: You are enough as you are. Dream big but tell the truth—to yourself and to others.

And if you are going to invest your money in your heroes—ask for audited financial statements.

 

On this beautiful, sunny day I write from the prison that my home office has become because of COVID-19. In another life, I would have climbed on a plane last night, flown to New York City, and walked my beautiful daughter down the aisle to the waiting arms of her beloved. Instead, I am fielding emails and conducting Zoom calls that are necessary to my roles as administrator and professor. I have the privilege of teaching 103 students online for the rest of the semester. Meanwhile, I cheer myself listening to the music of a band whose concert I will not be attending next month after all.

This is the new normal for so many of us in Aggieland and beyond. We have had our organic culture turned upside down by perhaps the greatest worldwide threat to health in a century. We are second-besting our ways through days and waking up multiple times at night. We are trying to create the kinds of structures that allow us to function, and few of us are thinking of being normal, or even more outrageously, actually prospering in the circumstances.

But we should. In all the disappointments and injustices that face me today are the seedlings of new opportunities that I never knew existed. I am communicating with students in new ways and delegating responsibility in ways I never have before. Zoom connecting is not the same as face-to-face, but particularly in smaller groups that are the equivalent to staying after class to ask questions, I am finding that students stay around for quite a while and listen to each other’s questions. That doesn’t happen in the regular classroom. The hunger that at least half of them have for connection makes them more willing to find value in the classroom, even though it is hard staring at a screen, and I can’t walk up to them if they are having trouble staying awake.

Our students are dealing with what they have lost and, for many of them, they have lost a lot. They are separated from their friends, and even those living in the protective world of their families are mostly there reluctantly. Many feel overwhelmed by the workload demanded by courses that were changed on the fly, and many have no idea when they will be able to take the CPA exam that they have been diligently studying for all semester. They will not physically attend their final Muster on campus and commencement is, at a minimum, postponed.

Some say that the coronavirus will propel us into the brave new world of teaching because of what is possible online. They say that the burden of mounting college debt and the near-universal availability of technology in the U.S. marks the end of universities as we have known them. But I disagree. I can’t imagine any students who are going through this not valuing what it is to plop down in a trusted professor’s office to bare their souls, or to gather with friends at the Chicken, or Breakaway, or Harry’s, or just to sit in the MSC flag room and listen to the piano while you pretend to study. Perhaps we can do online education at a high level; that doesn’t mean it is what we were meant to do. At the very least, it will compel us to think seriously about what we value, and what is worth paying for.

My daughter is happily married, the ceremony safely performed by her pastor in a city that has become known as the epicenter of the pandemic. The pictures are beautiful. She painted her fingernails green for the 100% Irish grandmother she is named for, and she wore the small pearl bracelet I bought for her in Beijing’s Pearl Market. And hopefully, soon, we will have a full ceremony that involves all the family, and we will dance together.

I face the fact that there are many things beyond my control, things that I can’t make right. But the important things are in place; I prayed, after all, for a man who would truly love her, and not for a ceremony. And I asked for the chance to spend my life investing in people, one of the greatest gifts I have been given in my life. Both of those prayers have been answered.

Realizing how finite I am makes me more willing to walk away from the computer and be okay with saying, “I can’t solve that problem, at least not today.” I have a different empathy for my wife, and for what she goes through as she cares for our parents that we are banned from seeing for the indefinite future because of the threat to their health.

None of us asked for this. Tears will flow as a result of our disappointments. May they water the soil of our lives and bear fruit in a new level of compassion for one another, and especially for those with whom we disagree. May Aggies everywhere reach into my students’ lives and let them know that everything is going to be okay. And may those of us entrusted with investing our lives in students, if we were not already aware, embrace what a gift we have been given.

Nothing feels normal now. But a day will come when it does. And on that day, as on this day, there is nowhere that I would rather be than right here in Aggieland.

Interesting read? Here’s another:

Philanthropy & Pandemic

Learn more:

James Benjamin Department of Accounting
5-year Professional Program in Accounting

Categories: Bottom Line Ethics

I have been following with great interest the baseball cheating scandal for the last several weeks. Growing up playing baseball, deceit was an integral part of the game, and much of it was within the rules. As a shortstop, one of the most satisfying plays to execute was to catch a runner flatfooted and pick him off second base. All it took was a simple signal and appropriate timing (and a gullible baserunner). Catchers framing pitches for umpires, infielders making tags look like they were in time with a sweeping motion, and first basemen coming off the bag slightly to receive a throw just in time to get the runner were, and are, commonplace to the game.

Of course, the trash can banging of the Houston Astros to tip-off batters about pitches coming, based on cameras following pitchers’ tendencies and catchers’ signs, goes far beyond the functional deceit common to most games. The situation came to light when Oakland A’s pitcher Mike Fiers, who had won the 2017 World Series with the Astros, said publicly that he had warned his new team about the Astros stealing signs. So, while Fiers was technically a whistleblower and has received some of the blowback all whistleblowers get, he primarily used the information only for his own team’s benefit.

While the Astros have been fined and lost draft picks, and manager A.J. Hinch and general manager Jeff Luhnow were suspended for a year by Major League Baseball and subsequently fired by the Astros, nothing has happened to the players involved. Hinch allegedly actually interfered with the cheating by breaking monitors used in the scam on more than one occasion, which were then replaced. MLB Commissioner Rob Manfred’s statement on the issue did not indicate that Luhnow had personal knowledge of the cheating, but held him responsible for oversight of the baseball portion of the organization, as opposed to the financial part overseen by Astros owner Jim Crane. So the hammer came down on the person who tried to stop it and a person who may not have known about it—but nothing has happened to the players.

A.J. Hinch and Jeff Luhnow
Source: click2houston.com

Hinch and Luhnow are familiar characters to anyone who studies fraud. Many people like Hinch have tried to stop frauds but not had the moral courage to reveal them outside the organization, something even more difficult in a culture like professional baseball. Two WorldCom employees involved in that gargantuan financial fraud signed letters of resignation but never turned them in. Both went to prison. Some people in positions of authority, like Luhnow, plead ignorance and indicate that it was lower-level employees who carried out the fraud unbeknownst to them. In financial fraud investigations, enough information is released or comes out at trial to provide insight as to whether those claims are true. The secretive nature of professional sports leagues means that we will likely never know whether it is true for Luhnow, but because of the sanction by the Commissioner, he is being treated like it is. And that may be totally unfair.

Punishing teams is like punishing corporations—it has almost no effect on those engaged in the behavior being punished. (That is an exaggeration—I don’t expect any trash can banging this year.) It is arguable that the cheating had an effect on the Astros’ success in their championship season. We simply will never know for sure. But what would deter players from doing it again if they believed they would not be detected?

Some have said that the league actually was heavy-handed, and did all that it could to punish the Astros. However, it could have instituted additional sanctions. For example, it could have required the Astros to forfeit any compensatory draft picks that would otherwise have been received for free agents who signed with other teams. A sanction like this for, say, ten years could actually alter a team’s ability to keep its free agents.

When cheating can be assigned to an individual, it is easy to punish. Sammy Sosa, that most creative of baseball cheats, not only allegedly tested positive for steroids, but was suspended in 2003 for corking his bat. I assume that the reason the Astros players were not sanctioned is because of the players’ union’s influence, the terms of the collective bargaining agreement, and the universal participation in the scandal by team members. You either punish them all, or you punish none of them. In this case, there really is safety in numbers. A real penalty would have been for the players to lose a year of major league service time toward their salary arbitration and their pension. That would change future behavior. But it would never happen in the current labor environment.

The other option that I think would have been impactful would have been to ban the team from the postseason for a year. To spend an entire season knowing that your performance was meaningless is something no player would ever want to go through again. In other words, no one wants to play for the Orioles or Tigers. It would also have a much more significant impact on the franchise financially than the maximum fine of $5 million.

So we should not be surprised if the players cry crocodile tears about the situation and offer thin apologies this spring. What we have seen clearly is that there are behaviors that Major League Baseball is powerless to stop. And the players do not have the sense of duty to honor the game when success, and the money that flows from it, is all that matters.

Categories: Bottom Line Ethics

Updated 12/4/2019 11:24 AM with scholarship information at end.

There are times along the road of life that we are given to cynicism. In my world, that cynicism can come from following closely the stories of people in the business world, and in the accounting profession, who live on the edge ethically. They deflect criticism and offer a litany of excuses when they wrong others or take their money. They largely avoid punishments they deserve, and they move on to hurt others in similar ways. There are days when I wonder if there is any hope of changing the environment my students will go into in the business world.

And then you meet someone like Maegan Sanders. Raised in a family deeply rooted in its faith, in a close-knit community, the kind of small town that sends its best to Texas A&M. A gentle, effervescent soul who could dominate you intellectually, but refuses to make you feel small. Maegan is the kind of person you design exams around; the goal is not to challenge her, but to see if you can create an exam on which she will not make 100.

She has been a presence in these halls even before she was in these halls, the precious daughter of a colleague who shapes some of the very best of our Accounting students with the information technology skills that put them in high demand on the market. Her mom is one of the most influential members of our faculty, and I have spent the entirety of my 13+ years here officed in the same hallway, watching her children go in and out of her door as they became formative Aggies.

Maegan hit the ground running here, accelerating through Business Honors into our Professional Program in Accounting (PPA), and she was headed out the door next May to work for Ernst & Young in San Antonio, and to begin her new life with her beloved fiancé. Last Sunday her life was cut short in a moment on a too busy holiday highway.

The tragic accident that took Maegan and her brother, Wesley, from us is the type of event that could make us cynical as well. The unexplainable is often the root of doubt and despair. A decade ago we lost one of our very best in the Professional Program in a similar sudden and unexplainable way, and I am affected by that seeming injustice to this day.

But I also see in these tragedies the hope that springs from faith and from community, and from a life well-lived, whether for 22 or 92 years. I received word of the accident barely 48 hours ago, and yet I have seen an outpouring of love and commitment from the Aggie family and from the students in our program that humbles me. Within hours a 24/7 prayer vigil for the family was launched by PPA students that is continuing at this moment. Money for an urgent need was raised through a Venmo outreach—in 20 minutes. A scholarship is being established to remember Maegan and Wesley, and Aggies from all over are asking how they can be a part.

I try with everything in me to teach and to model a life worth living in the business world. And then someone like Maegan Sanders enters my classroom, already living the joint life of technical excellence, even brilliance, and unquestioned integrity. I wonder exactly how God puts together a person like that.

I can give you a clue. In my Accounting Ethics class, my students are required to develop principles to guide their professional lives. Maegan’s first and last principles came from the same source—her mom. “Always listen to your little voice.” That little voice was “built and sculpted by the way I was raised,” Maegan wrote. And the second principle that was her guiding force in the voice of her mother was this: “Just be nice. It’s as simple as that.”

Tonight I will attend the visitation, and tomorrow the funeral, for two precious lives taken too soon. I will wear something green for Wesley, and yellow for Maegan, as the family has requested. And as I sit there, I will listen to my little voice. It is the same little voice that told me to write this.

And then tomorrow, in the challenges that go with directing a program and caring for aging parents, I will try to remember to just be nice. Because, in the end, it’s as simple as that.

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The Accounting department has created a scholarship endowment in memory of Maegan and Wesley Sanders. Income from the endowment will be used to provide an annual scholarship for an outstanding accounting major and to help create a lasting legacy for Maegan and Wesley. If you would like to contribute to this fund, please visit the Texas A&M Foundation page and choose The General Memorial Fund.  Under gift details, check the box in honor of someone special, select “In Memory” of “Maegan and Wesley Sanders” for the “Memorial Scholarship” and notify “The Sanders Family”. For information on where to send checks, please email ppa@tamu.edu. Thank you.

Categories: Blogs, Bottom Line Ethics, Business, Family, Friends, Religion, Texas A&M

On this August day, the University of Nebraska at Omaha flags fly at half-mast for a man whose heart was as beautiful as his mind. David Swanson could have done any number of things with that extraordinary intellect. What he chose to do was to quietly make life better for thousands of Nebraskans by investing himself in a critical role that impacted its university system. It is not the kind of thing that engenders a hero’s respect in most people’s eyes. But then Dave is not most people.

David SwansonI met David when I was a young professor at Nebraska, about the time he married Ronda. He was a bike-riding graduate student who thought on a different plane. As they grew into their marriage and encountered parenthood, our friendship blossomed. Linda and I were hopelessly overwhelmed with three, and then four, children, so we welcomed their curiosity and their practical help.

He loved the Twins. The first two times I typed that, it came out “loves” as if my fingers couldn’t type the past tense. He loved them stupidly, like a child, against all evidence, the way I love the Orioles. I still remember a camping trip our families took together, our boys tossing the baseball back and forth as proxies for us. My last memory of Lincoln before leaving for good is a whiffle ball game at his son’s first birthday party.

He loved the Huskers, too, even through a long period of gradual decline after three national championships. But even in frustrating times, he could always laugh at the irony of decisions that were being made. He had a lightness to his heart that did not, with rare exception, allow the blows of life to drive him to despair.

And so he served as a sort of flotation device for many, including me, a combination of humor and relentless rationality that kept us from sinking too deep. He was not just rational about science and math, but he understood the rational implications of the faith in Christ he so boldly proclaimed for all the years I knew him.

Right now I am emotional and dazed at this tragic and seemingly pointless loss. And then I start thinking of him talking to me in that uniquely nasal tone I could immediately identify if I heard it in a crowded room. He is finishing every other sentence with a rat-a-tat laugh that says, “What did you expect?” It is not a cynical question.

So much of our lives as believers is ironic. What would make Dave and me friends? How would we both marry above ourselves to women who, though born a decade apart, cannot seem to get enough of being together? Dave and I would have been stuck with each other even if we had not found so much to like in each other. But I cannot remember spending five minutes in David Swanson’s presence without laughing, even in the bad times.

You don’t lower a flag to half-mast for Ph.D. types who are computer gurus, but on the day I write this, they are lowering it for Dave. He would be laughing and saying, “Are you kidding me?” No, dear friend, we’re not. You have lived a life worthy of that. You have made a meaningful impact on so many, one life at a time, not just one professional accomplishment at a time. What you could do with your mind gave you access to our hearts. And your unselfish devotion to each of us, to your family, and to your Lord is the reason we feel not just regret, but pain, in losing you.

I know you are hearing even better commendations now. But I wanted you to hear it from me, too. Well done, beloved friend.

Related: Two funds set up to support Swanson family

Categories: Blogs, Bottom Line Ethics, Business, Family, Friends, Religion, Society, Texas A&M

My wife and I were walking up from the beach together, past a house that had a pickup truck whose bass speakers were sufficient to physically rattle the windows of our house across the street. I looked over at the truck, and an older man (and, by that, I mean younger than me) shouted at his daughter to turn the music down out of consideration for us. Her immediate reply to him before complying was, “They were young once!”

Indeed they were. Once they held hands and talked of a future together. He whispered in her ear and she giggled and pulled away, only to have him gently grab her arm and pull her back to him. He looked in those clear blue eyes and felt his heart fly away to places he never knew existed. He wooed her as a college student and married her right after. They spent restless nights sleeping in an unairconditioned house with a box fan whirring in a window and a baby in the next room. They spent a dozen years living in more than that many homes, stopping and starting a career in fits and spurts until a Ph.D. program spat out a professor equipped with an inquisitive mind, two more kids and that same blue-eyed girl. Those three kids grew to five, and the seasons flew by, hardly noticed. Life for them was a continuum, pulsing from one stage to another until all those kids were gone and the grandkids had long since begun arriving.

Only then did it begin to occur to them that they might be growing old. That they—that he—might be on the backside of his usefulness. He noticed that more of his questions were “why” and fewer of them were “how.” It was not that he just didn’t remember as much; he didn’t understand as much. Because as you get older, while still in the continuing desperate pursuit of those things you never comprehended, you realize that you are quickly being caught from behind by those things that you never knew to ask about, as well as those things you no longer understand. Those deep consternations reflect themselves not just in your specific discipline or expertise, but in music and art and culture and religion. They are accelerated by changes in technology, but they are not a result of it. All generations have faced this inevitable passage in their own ways.

I sit on the cusp of freedom and despair. My life today is the opportunity to finish strong, to fulfill many of my hopes and to see so many good things happen in the lives of those I love. It is the chance to pass the baton on to the next generation, which has already begun accelerating in the exchange lane. In fact, they are quite quickly matching my speed, which is necessary for a successful handoff.

But it is also a recognition that my contribution, my leg of the race, is reaching its end. I am still running hard, and I have to in order to keep up with them. But not for long.

There is a reason I am not running the anchor leg, and that is because I am not the fastest runner. But I have done my best on my leg. I am free to enjoy, in the not too distant future, the rest of the race from the infield. The despair comes in knowing that soon, all that will be left for me to do is cheer.

My Dad turns 99 this month. In his room hangs the picture of a confident 26-year-old, with his civilian arms wrapped around my Mom’s waist after having survived both the worst of the Pacific War and two years apart from her. The whole world lies before them—like us, a return to school, five kids, and a career of the mind. They were young once. Today, he wonders where she has gone.

The pickup truck just pulled back into the neighbor’s driveway, the speakers booming life, the future, possibilities. The guy on the porch across the street from that pickup truck watches, reflecting on what it is to have meaning and confidence without youth. He knows deep in his heart that he is one of the lucky ones, still stimulated by a meaningful job that includes the opportunity to teach, and to be influenced by, a remarkable group of college students who continue to make him feel young. And to still be carried away by those gorgeous blue eyes not just to unseen places, but to memories built together, full of whimsy and wonder.

They were young once. And, to be honest, perhaps more often than you think, they still are. The immeasurable gift of a lifetime together is hard to top, even by the highest highs of youth.

But I’d be lying if I said I didn’t want to go back and try.

Categories: Blogs, Bottom Line Ethics, Business, Family, Friends, Society, Texas A&M

“To be ethical in a profession, a person needs to be both competent and honest. It is unethical to act dishonestly, and that is particularly evident when it is for personal gain. But it is also unethical to project competence, or to pretend to know something professionally, when in fact you do not.”

** From the Editor: “How to Lose a Profession” is a sobering essay on the value of integrity and having moral courage when integrity is lacking. In the interest of integrity and morality, read the full article before you react. **


In recent days, the Securities and Exchange Commission announced that they were fining Big 4 accounting firm KPMG $50 million for systematically stealing the PCAOB inspection lists for the years 2015-2017 to know in advance which of their audits would be inspected. All but one of the partners or managing directors involved have entered guilty pleas or been convicted, so the announcement was no surprise. In fact, the $50 million penalty seems relatively modest in light of the charges.

…Read more

Categories: Bottom Line Ethics

When I was growing up, I idolized ballplayers who scrapped and worked hard to do what the team needed. They were always “whatever it takes” guys; lay down a bunt, hit behind the runner, hit the ball in the air with a runner on third and less than two outs. They were not looking for the glory, but they were the glue that held a baseball team together.

But “whatever it takes” has taken on a new meaning in adulthood, most recently demonstrated by the recent college admissions scandal. Parents focused on maximizing opportunities for their children were willing to pay to game the admissions system in two ways—direct payments to coaches for their children to be classified as athletic admits when they were not competitive athletic recruits, and paying to cheat on standardized tests. The lack of controls at well-regarded schools, even Ivy League schools, meant that the “whatever” in “whatever it takes” was simply money funneled through Rick Singer. And the lack of control over testing centers by the College Board and the ACT, when their only product is an exam that is supposed to be a reliable measure, meant that the willingness to travel to take the exam at those testing centers was part of “whatever it takes.”

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Categories: Bottom Line Ethics

As the ball floated helplessly through the air and nestled in the arms of LSU safety Grant Delpit, I watched with dismay as another chance for an Aggie football breakthrough disappeared like a puff of breath on a cold night. Delpit slid to a stop, and I turned to the aisle, unwilling to watch the inevitable kneel down that followed the Gatorade bath enjoyed by LSU coach Ed Orgeron. I’m sure the young defensive back was already rehearsing in his mind the answers he would give to a swarm of reporters about how it felt to seal a game that sent his team to a New Year’s Six Bowl.

But I was stopped in my tracks by the wholly unanticipated announcement: “The previous play is under further review.” An inadvertent touch of knee to ground nullified the interception, and an improbable 4th-and-18 conversion, followed by a sideline catch and a “just in time” spike, left the Aggies hanging by the slenderest of threads, with one play, and one second, to go. No one could have imagined the bedlam that was to follow over the next hour and a half.

 This is our 13th year as Aggie season ticket holders, and nothing could have prepared us for what we were about to experience. It reminded me of watching the end of the first Rocky movie, when both fighters were punching with everything they had and yet barely standing up. The overtimes that followed Quartney Davis’s touchdown on the last play of regulation consisted largely of a series of momentum swings, devolving into two offenses running roughshod over defenses depleted by the weight of nearly 200 plays. For the first time in 100 years, it looked like the 12th Man might actually be needed on the field.

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Categories: Bottom Line Ethics

My favorite team, the Baltimore Orioles, just introduced their new executive vice president and general manager, Mike Elias, a Yale grad who is known as an analytics expert who has been helpful in rebuilding the Houston Astros. There is general agreement that he is a timely hire, and Baltimore fans on social media seem very supportive. A team once known for the “Oriole Way,” a commitment to excellence and professionalism characterized by unselfishness even among its star players, is joining the modern world of excellence through explicit calculation.

One of the most interesting articles I have read in recent years was an interview by Sports Illustrated writer and author of Astroball, Ben Reiter, of a former St. Louis Cardinals scouting director and analytics expert, Chris Correa. Correa went to federal prison for a widely reported breach of the Astros’ database that gave the Cardinals a clear competitive advantage in understanding the Astros’ evaluation of players. In that article Correa stated that while he initially saw his hacking as no different than stealing signs in baseball, he, in his words, eventually “. . . recognized how essentially disrespectful my behavior was of the people whose privacy I violated.”

The term “analytics” possesses a sense of cold objectivity that makes ethics unnecessary. Truth is truth, science is science, facts are facts. Of course, there is some subjectivity in how analytics are interpreted or generalized to others. But there is a heartlessness, a Darwinian ruthlessness that suggests that analytics are synonymous with value. This is much the same tone expressed by investment banks and Wall Street analysts in valuing companies and their management teams. When I teach executive education sessions, I realize that the financial leaders of public companies are driven by this unrelenting pressure to meet performance standards evaluated by quarterly measurements. It is entirely predictable what the analytics (and the analysts) will say, so C-suite executives have incentives to characterize things a certain way. Today, the machine is the market, and its judgment is pitiless.

Analytics is also the basis for most of baseball strategy in major league organizations now, from scouting young players to determining defensive shifts during the game for particular hitters. The Orioles are certainly late adopters when it comes to analytics, and many have blamed the collapse of the team’s performance on a series of poor, ill-informed management decisions that relied too much on instincts, and occasionally on emotion. What is ironic is that the Orioles did this while simultaneously maintaining what is thought to be the most aggressive medical evaluations of players they considered trading for or signing as free agents.

Data analytics is quickly becoming central to the accounting profession, and to the careers of the young CPAs I prepare. We are revamping courses and offering new courses that target the analytic and coding skill sets necessary to succeed in financial roles in organizations. We are leveraging powerful technologies that can potentially improve the quality and efficiency of audits, reduce errors in reporting and decision making, and improve the quality of consulting advice. It is no longer a question of whether we should prepare students for a data analytics world; it is how to stay ahead of the learning curve without just teaching specific software that may be irrelevant within three years.

My fear for my profession is that we will become simply practitioners of the head, and not of the heart. One of the core characteristics of the accounting profession is a hardheaded dedication to the truth, which seems entirely aligned with analytics. Analytics provide us more insight into what is truly going on economically within an organization. I embrace their ability to make us better practitioners.

But what a data-driven new reality can never give us is a heart commitment to the importance of seeking truth as an ethical value, or a moral duty to uphold truth in order to protect the public. This has always been the core of the accounting profession, but it is being commoditized away in a number of ways. CPAs will get richer using their analytical skills to increase clients’ wealth than they will making sure clients tell the truth. And what we should expect to see in an analytics world is consulting fees dominating audit and tax services in public accounting firms.

It is not surprising that regulators in the UK today, and in the U.S. 16 years ago, have wrestled with what to do about this reality. It is not an intractable problem, and I am not suggesting the sky is falling. But while I am giving my students the analytics necessary to make them competitive in the marketplace, I hope I can provide them with context.

It is not just calculated value that matters; truth and duty are important, too. A failure of the head when it comes to analytics may cause you to lose a client, or a job. But, as Chris Correa can attest, a failure of the heart may cause you to lose your soul.

And, in the end, the accounting profession will become irrelevant not because it is insufficiently analytical, but because it is insufficiently committed to revealing – and holding people accountable to – the truth.

Categories: Uncategorized

As I began writing this on a Friday afternoon, Tesla’s stock was down almost 14 percent as a result of the Securities and Exchange Commission filing suit against Elon Musk for securities fraud, and seeking his removal as the company’s CEO. This follows Musk’s decision on August 7 to tweet, “Am considering taking Tesla private at $420. Funding secured.” At the time, that represented roughly a 20-percent premium to the stock price. The SEC (and many others) believe that he rounded the price to $420 as a marijuana reference to impress his girlfriend. But the market’s immediate reaction during the rest of the day was a 6 percent increase in the share price. And, unfortunately for the Tesla CEO, he had arranged no such funding.

On a number of occasions recently people have asked about Elon Musk, “What was he thinking?” and sometimes even, “What was he smoking?” It is not just his recent appearance on Joe Rogan’s podcast apparently smoking a blunt, but his initial willingness to put his company at risk through refusing a relatively gentle SEC settlement offer. Instead, the SEC sought to ban him from serving as an officer or director of a public company, leading him to agree on Saturday to a $40 million penalty (half of it to be paid by him), removal as chairman for at least three years, and the addition of two independent directors to Tesla’s board.

Most agree that Elon Musk is an innovative genius. But smart people do stupid things for a variety of reasons. Psychologist Robert Sternberg identifies five fallacies of thinking that are often drivers of this decision-making: egocentrism, a false sense of omniscience, a false belief about one’s omnipotence, perceived invulnerability, and unrealistic optimism. Others have arguably checked all five boxes, like Martin Shkreli of Turing Pharmaceuticals, who mocked those opposing his choice to dramatically raise the prices of certain critical drugs. This included referring to members of Congress as “imbeciles” on Twitter after citing his Fifth Amendment rights against self-incrimination when he was called to testify before them. He was sentenced to seven years on fraud charges related to a hedge fund and forfeited over $7 million dollars.

Despite Elon Musk’s many successes, an argument can be made that he is characterized by all five of the fallacies as well. It is not uncommon that a CEO would have a streak of egocentrism, but a visit to his Twitter feed, especially as he engages with those who are shorting his stock, will give you a sense of self-preoccupation. He is extremely knowledgeable, but he could use some help from a veteran CEO or a more involved board to check his tendency to project himself as omniscient. At the very least, he could use someone who understands federal securities laws. His oblivious $420 tweet reflects a false sense of being powerful enough to do whatever he wants. Toking on YouTube is just one example of his sense of invulnerability. He has also been sued for making potentially libelous accusations, without apparent support, about a British diver who questioned the usefulness of Musk’s mini-sub to rescue Thai boys trapped in a cave. And while unrealistic optimism alone is hard to criticize, his consistently aggressive assumptions about both car production and operating cash flow have earned him broad criticism.

What is ironic is that Tesla is likely finishing a record quarter in production, if not cash flow. They seem to potentially be turning the corner on some measures, even while they still have real challenges ahead. And eliminating the uncertainty with the SEC resulted in a predictable Monday morning bounce back in Tesla’s share price.

Of the five fallacies of thinking, all but egocentrism are really just bad calculations of reality, and sometimes it takes a cold bucket of water to make a person come to grips with reality. If you want to run a public company, an SEC suit to ban you from serving as an officer or director officially qualifies as a cold bucket of water.

For now, it seems to have been enough to bring Elon Musk to his senses. Only time will tell if it is enough to keep him there.

 

Credit: theverge.com, September 7, 2018

Categories: Blogs, Bottom Line Ethics

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