Potential Consequences of Inaccurate Reporting
They say drastic times call for drastic measures. But organizations are expected to operate with integrity even in the lean years. In the past few years, there have been several high-profile instances of financial reporting manipulation, including Wells Fargo, Toshiba, and GSK. When does “managerial discretion” cross the line into misrepresentation?
Big Boss calls you into his office and gives you the quarterly revenue number he wants you to report. He tells you “this is the number, now go make it happen.” What options do you have here and what consequences are you willing to accept in this situation? -e-Factor!® scenario
Have you ever been told, “here’s the number, now go make it happen?” This is a real-life scenario that anyone in business could face. I’ve faced it myself. In the heat of the moment, do we know how to respond?
Let’s analyze this situation to see what choices – and potential consequences – we have available to us. First, let’s identify the ethics issues here. The scenario does not offer much detail, but the implication is clear: Big Boss has a number in mind. Under what circumstances would this be an acceptable request? If we received direction for sales goals, production targets or the purchase price for a particular item, this would be fantastic communication, right? If the number the boss wants to report is close to the actual financial result achieved, the request might even be reasonable. Perhaps the boss has information we did not have access to and wants us to make corrections. Still, no ethics issue here. However, if Big Boss’ number is nowhere close to the actual result, we have a conflict.
The ethical dilemma is not just an issue of financial reporting accuracy. This is also an issue of trust, accountability and integrity on both a personal and organizational level. A lot depends on the overall condition of the company in addition to the reasons for changing the results. If times are good, there’s less pressure than when times are bad. If numbers are being changed to make bonus or meet certain contractual requirements, for example, this is an ethical dilemma that could destroy trust, disengage employees and possibly be viewed as undue influence.
We’ve seen the impact and consequences of this type of financial reporting manipulation. Within the last two years, Wells Fargo, Toshiba, GlaxoSmithKline and Credit Suisse all received huge fines and penalties for misrepresenting results, both financial and nonfinancial. It is true that senior executives have the responsibility to report results they see as appropriate. It’s called “managerial discretion.” But where should we draw the line between “managerial discretion” and “misrepresentation?” And how do we overcome fear of retaliation or punishment for reporting what we determine to be inappropriate behavior?
The decisions we make in this situation affect a variety of stakeholders besides us and Big Boss. In part, our decisions depend on the level of authority we perceive we have, as well as the potential consequences we might face for our choices.
For example, other employees watch what happens and make their decisions based on what they see. From an executive’s point of view, the request might be considered justified because there is confidential information other than strategic initiatives involved here. Employees, however, might view this as manipulating financial results in order to protect executive bonuses or the stock price, and if employees don’t receive a fair reward for their own efforts, it can get ugly. I’ve the seen destruction of an entire parking lot full of cars because senior executives were awarded luxury cars at year end while the general workforce received frozen turkeys as their bonus!
But here’s the point: regardless of how people at various positions view this request, if tone at the top makes it OK to falsify information without punishment, a cultural standard is established that encourages misconduct. And misconduct has a price.
Other stakeholders who could be impacted in this situation include prospective shareholders or investors as they determine whether or not to buy or sell stock. Falsifying financial results sets an inappropriate expectation of return on investment that could lead to possible SEC or Department of Justice investigations, sanctions or other punishments. And finally, other senior executives are affected by our choices, because they rely on the accuracy and integrity of financial information to make business decisions.
Assuming that the number Big Boss wants to report is very different from actual performance, there are a number of options on what to do if we are the ones being pressured to change results. We can outright refuse to report Big Boss’ number and risk angering the Big Boss who approves our paychecks, bonuses, promotion and task assignment. Fear replaces objectivity, and even if we know we are right, we also acknowledge we might face heavy criticism or retaliation.
Another option is to just accept that Big Boss knows what he’s doing and report the requested number, even though we know it doesn’t match actual results. This could lead to a loss of self-confidence and engagement as we begin to question the ethics of the leader and the company we work for. We acknowledge in this choice that we need the job to pay for health care, the kids’ education, the rent or whatever necessities we face.
We could talk to other executives about this request or report this to a hotline or board of directors, and risk being labeled as a “whistleblower.” Or we could talk with our colleagues and try to convince someone else to take care of it. And finally, we could choose to leave the company and find another place of employment.
If we are the executive with financial responsibility and we’re the ones asking our staff to make changes, we have a few options as well, including clearer communication on the reason for the change or information we have that makes the change necessary.
These are just a few of the options we have available, along with potential consequences. Our ultimate decision depends on our corporate culture and our own perception of what is “right” based on information and experience we have. The real question is: what consequence are we willing to take? What risk are we willing to accept? I invite you to discuss this with your teams and come up with your own options, consequences and decisions.Corporate Compliance Insights is a wholly owned subsidiary of Conselium Executive Search, the global leader in compliance search.