Published February 2004

Recent ethics scandals
are hot topic in classroom

By Bryan Corliss
Herald Business Writer

Recent ethics scandals at the Boeing Co., Enron and other corporations are providing up-to-date case studies for college business schools, professors said.

University of Washington finance professor Jonathon Karpoff said in January that he planned to start discussing the issues that led to the resignation of Boeing chief executive Phil Condit with his students who are pursuing their doctorates.

And at Edmonds Community College, accounting instructor Andy Williams said he hands out copies of newspaper stories about finance officers going to jail.

Ethics discussions have “filled up my accounting classes,” said Williams, who also teaches part-time at Seattle University. “It gets students interested. It illustrates some of the key points.”

For Williams, the accounting scandals at WorldCom and Enron have been particularly useful. WorldCom’s accountants misstated billions of dollars worth of expenses to make the company look more profitable, while Enron’s chief financial officer admitted in January that he and other top managers had manipulated public financial statements to mislead investors and boost the company’s stock prices and credit ratings.

The lesson for accounting students to learn, Williams said, is that “standards are more important to them than any one job.” Whistleblowers sometimes pay a high personal cost, but “the costs of not taking a stand are greater.”

The Boeing ethics issues came to light so recently that Williams said he hasn’t had time to incorporate them into his curriculum. In late November, Chief Financial Officer Mike Sears was fired amid allegations that he had offered a job to the Pentagon weapons buyer who was negotiating the 767 tanker deal. Boeing also fired the former Pentagon official, Darlene Druyan.

“I could see doing something about that when we get to a lesson on conflicts of interest,” Williams said. “Even if there were no objective conflict of interest, the appearance was there.”

For Karpoff’s graduate students, the lessons are more subtle.

In general, corporate scandals are costly, he said. “Firms pay pretty heavily through their lost reputations.”

But that’s not always true when it comes to defense scandals, he continued.

Large defense contractors caught breaking the rules have “symbolic and short-lived penalties imposed on them,” Karpoff said.

There are a couple of potential reasons, he said.

For starters, big defense contractors such as Boeing are “just too important,” Karpoff said. The Defense Department couldn’t do its job without them, so officials feel it’s not in the national interest to punish contractors too severely.

“They have too much specialized knowledge,” he said.

In addition, the ties between officials in the Defense Department and contractors are very close, Karpoff said. Many defense contractors used to work with the government officials they’re doing business with. That can create a reluctance on the part of regulators, who feel awkward punishing their former colleagues.

In one case in the past, the Pentagon punished Boeing by barring its Washington, D.C., office from submitting bids on government contracts — but allowed Boeing to send in bids from other locations, he said.

More recently, the Air Force barred Boeing from bidding on satellite launch contracts after it was revealed that executives had taken documents from competitor Lockheed Martin.

That ended up costing Boeing close to $1 billion. That could be a sign that the government “wants to see some real discipline in this case,” Karpoff said.

But if past patterns hold, “Boeing’s losses on the defense side are going to be more symbolic than real,” he said. “Boeing’s going to ride this storm out fairly well, at least on the defense side.”

Real-world topics such as these lead to interesting classroom discussions, both professors said.

“For the younger ones it’s an eye-opener, and for the older ones it’s sometimes a relief to talk about these things,” Williams said.

Karpoff’s students include a high percentage of foreign students who bring different perspectives on U.S. business. “I’m looking forward to seeing what they have to say about this,” he said.

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