Liz cCurtain/The Hoya Former CEO of Arthur Andersen Joe Berardino discussed the accounting discrepencies and corporate ethics scandals that rocked the business world over the past year last night in ICC.
Joe Berardino, former CEO of the accounting firm Arthur Andersen, spoke before students in the ICC Auditorium Monday night as part of a panel of experts gathered to discuss business ethics and the recent financial scandals in corporate America. McDonough School of Business professors Lisa Gaynor and Ed Soule sat on the panel that was moderated by the MSB Dean John Mayo
Berardino was elected CEO of Arthur Andersen in 2001. The accounting group was one of the largest firms in the business. Its clients included many companies in the Fortune 500. After one of Andersen’s biggest clients, Enron, declared bankruptcy in 2001, the government charged the firm with fraudulent accounting.Berardino resigned in March of 2002, several weeks after Andersen was indicted for obstructing justice because it shred documents containing information on Enron’s financial statements.
In a brief introduction given before Berardino spoke, Mayo noted, “Business ethics has been part and parcel of this institution for over 200 years.”
He then said that it is important for people to learn from the mistakes that were made by companies like Enron and WorldCom. “We are fortunate that Mr. Berardino is here to help us learn these lessons,” Mayo said.
Berardino spent a majority of his 30-minute speech discussing the factors that led to the collapse of Enron and his firm Arthur Andersen. He also talked about the measures that have been and should be taken to prevent future corporate failures.
The former CEO pointed to five key problems that caused companies like Enron and WorldCom to go bankrupt. First he spoke about the democratization of the stock market. “More and more Americans are directly investing in the stock market,” Berardino said, “but these investors are not always sophisticated and do not always do their homework.” As a result, he said that too many people invested their money without knowing much about the market.
Additionally, Berardino said that the practice of paying executives with stock options has encouraged greed and given people the motive to present false profits. “We have now seen how some analysts were publicly touting stocks while privately selling their own,” he said.
He also felt that the media’s powerful influence on people has forced many companies to take drastic steps to look good in a public forum.
Berardino also noted that the recent rise in Hedge Funds has caused the market to be highly reactive to small changes. Rumors, regardless of their accuracy, have become increasingly influential to a stock’s rating. The slightest sign of weakness in a company can devastate stock prices.
Finally, he commented that several conflicts of interest existed in the system that caused major problems in the accounting field. He specifically noted that is was difficult for an analyst working for an investment bank to reveal a client’s actual records. If a client, for whom the bank was selling stocks for, was going bankrupt, millions of dollars could be lost. Berardino asked, “Could an analyst be objective with so much money riding on their decisions?” Thus he felt that the conflicts of interest encouraged accountants to “cook the books.”
Berardino had several suggestions on how to prevent another Enron from happening. He stated, “We need to set the bar higher by rewarding companies that show transparency with their records.” Though he said that government regulation can be an effective method to improve corporate corruption, “The leadership must come from the private sector . Leaders must recommit to living up to the expectation of our founding fathers.”
Toward the end of the speech, Berardino emphasized the importance of discussing the failure of companies like Enron and WorldCom. In conclusion he stated, “I think that the future is full of promise for those who heed the lessons and mistakes of the past.”
After Berardino’s speech Graynor talked about the value of learning from companies like Arthur Andersen. “You will all be investors in the market,” she said. Graynor went on to further state the importance of people educating themselves on issues like Enron in order to improve the business world.
Soule, who said he was shocked by the breakup of Arthur Andersen, added that he thought it was vital for people like Berardino to take a stand to prevent future scandals. “In the midst of this we have somebody coming back and trying to fix it,” Soule said. “Joe is a forthright, honest and dignified individual.”
Since resigning, Berardino has spent time speaking about the events that lead to the breakup of his firm, and giving suggestions for reform. In addition to Georgetown University, Berardino has spoken before students at other academic institutions such as Boston College and the University of Virginia.
The Georgetown Lecture Fund sponsored the dialogue.
