The Scrutinator

Gentle Reader: I expect you to think seriously about questions I ask you. So I endeavor to treat your questions the same way. I want to consider your point-of-view as carefully as I expect you consider mine.

Scott asks, regarding our not finding WMD in Iraq:

How can we, as a people, hold big-wig muckety-mucks from our huge corporations responsible for things like misrepresented financial information or what have you (Enron, MCI, Tyco, etc.) and not hold our own leader of the entire country responsible? If some flunky who works for a CFO at a corporation provides said CFO with a bad income statement and said CFO signs his name on the dotted line, that CFO is liable and going to jail if he's caught. How can you Rep[ublican]s just hand-wave the whole intelligence aspect of the war like we can't blame Bush or Cheney?

Lots of facets to this issue--too many for one post. Part 1--this post--considers what a CEO is and should be legally responsible for. Part 2 will consider the reasons we invaded Iraq. (Any suggestions for more parts?)

I'm not a lawyer, tax expert, business expert, or accountant. I'm just a regular schmoe who thinks he's as qualified as the next person to reason and understand the issues at hand.

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Should we hold CEOs personally responsible for their criminal actions? Absolutely. Laws are on the books. We're prosecuting Enron's Kenneth Lay and Jeffrey Skilling. I'm glad.

Should we hold CEOs personally responsible for what they sign off? Absolutely. Here's what everybody signs on their tax return (every corporation's responsible party, too), along with their tax preparer:

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

Big or small, rich or poor, everybody signs. That's fair. And the bigger the corporation, the more serious the consequences. That's fair, too, since more (employee) livelihoods are at stake. More serious consequences (hopefully) deter more clever rip-offs. Not just perjury, but embezzlement, fraud, conspiracy, insider trading, etc.

But consider this part of Scott's statement:

If some flunky who works for a CFO at a corporation provides said CFO with a bad income statement and said CFO signs his name on the dotted line, that CFO is liable and going to jail if he's caught.

Let's take that to its logical conclusion: If you lie to your tax preparer, should he go to jail because of it, or vice versa? According to Scott's reasoning, he should. I disagree. The second sentence we all sign explicitly protects him from your misrepresentations, but not his own. I think that's fair. And when an employee is caught embezzling, does the CEO automatically stand trial, too? Only if he knows.

When you sign, you're declaring that you have "examined" everything and find them correct "to the best of [your] knowledge and belief." So even if they're not correct, you still may not go to jail: your knowledge, belief, or examination may have failed you. After all, you're only human. We make mistakes. An honest math error shouldn't (and probably won't) send you to jail. That's fair. Everyone deserves that treatment.

But what about the big-wigs? The flagrant offenders? Lets take a look at them.

• Enron's execs' charges: fraud, insider trading, money laundering, tax evasion.
• WorldCom's Bernard Ebbers: conspiracy, securities fraud, filing (knowingly) false statements. "Sullivan was the government's key witness ... He was the only witness to link Ebbers directly to the fraud. Ebbers, who took the stand in his own defense, insisted that he knew nothing of WorldCom's shady accounting and that he left much of the minutiae of running the company to underlings." Further, the Washington Post says that "This is a fatal blow to the 'the CEO is above it all and out of the loop' defense."
• Tyco's execs indicted: "[ex-]CEO Dennis Kozlowski, former CFO Mark Swartz and ex-general counsel Mark Belnick Thursday on charges of orchestrating a web of deals that looted the company of at least $600 million."
• HealthSouth's CEO Richard Scrushy found not guilty on charges of conspiracy, fraud, false statements, money laundering. But the CFO, William Owens, pleads guilty of fraud.
• Arthur Andersen, Enron's accounting firm, convicted of obstruction of jusice (but overturned unanimously by the Supreme Court).

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Further, the Sarbanes-Oxley Act of 2002 raises the bar by requiring CFO's and CEO's to certify financial reports, among other things. That's a good thing, but does it mean that a CEO must personally duplicate every bit of work that his entire accounting department does? If it does, how could any business function? Perhaps (I'm speculating here) it's designed to make sure that CEO's make sure that independent auditors are really doing their job. That's in everyone's best interest, including the CEO's.

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Don't lose this important point: it's reasonable to consider companies' decisions to be completely under their control: their expenditures, their business decisions, what they report to the SEC and their shareholders.

CEOs do get fired for things out of their control, like poor sales, just like coaches get fired for losing games. That's a different discussion, and much more subjective one. Few people claim that every such firing is fair. And they don't get prosecuted for these things.

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How do we apply all this to the Bush administration? To the failure (so far) to find stockpiles of WMD, or advanced WMD programs? Does the analogy hold?

In fact, the analogy becomes immediately strained: trying to assertain what brutal dictator is secretly doing within his own borders is completely different than a company making decisions fully under its control.

But even so, we can adapt the IRS statement: did Bush examine the evidence, and to the best of his knowledge and belief, the case he made was true, correct, and complete?

The bipartisan Senate Select Committee on Intelligence published the Report on the U.S. Intelligence Community's Prewar Intelligence Assessments of Iraq. Nineteen sets of eyes carefully reviewed the raw intelligence and spoke with everyone they saw fit. They had full access to the raw intelligence, as well as the ability to require sworn testimony. Though they had many criticisms of the intelligence community, they ultimately found that Bush had examined the evidence and came to their consensus, and that no inappropriate pressure was applied.

The Chicago Tribune judges the case for war long after the fact: December 28, 2005. "After reassessing the administration's nine arguments for war, we do not see the conspiracy to mislead that many critics allege."

So Bush passes this test.

Apart from the legal aspects, a corporation's shareholders should hold their CEO accountable for bad decisions he makes. I'll ponder that in my next post. Why did we go to war and what did we accomplish? Should we fire him for that?

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One more observation: I haven't found anyone who made this if-Bush-were-a-CEO-we'd-fire-him argument on the public record BEFORE the Iraq war. Or, in other words, "if we don't find WMD in Iraq, we should fire Bush." Because of that, it smells as much like an opportunistic attack as a principled argument. (Prove me wrong by citing someone making this case, on record, before May 1, 2003.)

By The Scrutinator @ 11:36 AM