Up front I must be honest with you. While the rest of this article is mine, the title of this post belongs to my friend and colleague at my office. While we were discussing about corporate scandals, he said that he cannot state with any level of certainty that God exists. But he knew for sure that evil starts with complacency. 

Reflecting on what he said about corporate scandals I tend to agree with him. Today we have reached a situation where we treat the venerable financial statements as myths and start to wonder how much of them are true.

At any of the following stages in the evolution of a corporate scandal, person or persons involved could have blown the whistle and let the investing public and authorities concerned know that something is amiss and needs some review/investigation.
But they prefer to remain complacent and do nothing.

Stages of corporate downfall:

1. Idea being conceived in the brain storming sessions of corporate ‘smarts’ (Example: Morgan Chase thought of offloading the risk from their balance sheet to banks as assets or Enron conceived the idea of selling Energy as a commodity)
2. Plan executed with finesse in total secrecy and promoted as the next big thing.
3. Investors being led to believe that it is a now or never opportunity. ( Example: banks/insurance companies/pension funds vie with each other to carry the risk offloaded by investment banks as assets on their balance sheets)
4. Top executives show spectacular results from quarter to quarter and award themselves impressive cash bonuses or stock options in so far the going is good.
5. Employees tend to believe and go with whatever good news management doles out to them. They show their enthusiasm by enhancing their contribution to the 401(K) plans
6. Auditors (both internal and external) certify that to the ‘best of their knowledge’ the statements presented to them are true and accurate. (Arthur Andersen did an excellent job in certifying Enron’s financial statements. I wonder who the auditors of Nortel Networks were. Thanks to them restating of financial statements became fashionable.)
7. News media/ investment analysts gobble up stories presented by the management of such ‘excellent’ companies and award ranks for ‘performance’. (One notable exception being the story ‘how exactly Enron gets its revenue? in Fortune Magazine.
8. A year or two goes by and then word slowly gets around that things are not as rosy as they are painted out to be. Top executives manage to get themselves fired with excellent severance pay.
9. Stock prices nose dive. Since the top executives have already been safely bailed out, it is now time for the government to work out the bail out details of the corporation.
10. Finally employees and investing public are left holding the bag not knowing what to do next.

I am sure in any of the above stages there are a few honest souls with a troubled conscience who would only be too relieved to blow the whistle. But they would have been restrained from doing so for fear of consequences.

I think in the Internet age it is not difficult to post anonymously about things going wrong in the corporate world. Even if this is considered to be too risky, they can give notice about failing entities in a circuitous (hush-hush) fashion giving appropriate clues for the readers to solve the puzzle.

My sincere request for the people ‘in the know’ is to speak up before it is too late.