Editors’ Note: The debate over the ethical responsibilities of CPAs and how to fulfill them has always been at the center of the profession. Recently, The CPA Journal discussed this subject with Tony Menendez, the CPA who blew the whistle on Halliburton’s violations of accounting rules in 2005, and Steven Mintz, an expert in business ethics and author of Ethical Obligations and Decision Making in Accounting. A video supplement to this article is also available on our website
Chris Gaetano for The CPA Journal: Can you talk about what you discovered at Halliburton and what prompted this whole thing to begin?
Tony Menendez: Well, it wasn’t that hard. I mean, I was the director of technical accounting and reporting training, and essentially I was asked to approve a contract for revenue recognition within a few weeks of starting. It was your typical bill-and-hold, recognized revenue for the product up front. And I immediately said, “That’s not appropriate.” I got a tremendous amount of pushback from within the organization, and then I found out this was basically their business model. But when I went to accounting, I could find no evidence to support what they were actually using as a justification to recognize revenue. Finally, they produced this bill-and-hold decision tree, which was an unbelievably flawed accounting model. And because of the resistance I was getting from within the company and the significance of the issue, it took us months to finally put out a draft memo on what the proper accounting treatment was.
CPAJ: When you finally made the decision to call the SEC, was it a difficult decision for you?
Menendez: Oh, absolutely, as it would be for anybody, I imagine. I essentially was told by the audit executive that Halliburton and KPMG had negotiated away the accounting issue and I should essentially save everything for the subpoena. And this individual was obviously as upset and distraught as I was at the time. I knew that this was big and it was serious, and so I confided in my wife. We took a small road trip, and eventually she was so adamant that I shouldn’t have to run from Halliburton. I hadn’t done anything wrong, so I needed to stand my ground, and I felt like I had an obligation.
I believed in the consequences of Enron and the importance of what CPAs were doing at the time. This was shortly after Sarbanes-Oxley [SOX, the 2002 act], right around the time that people were going to jail. But beyond the threat of going to jail, there was an importance to it that this profession had something to live up to. And this was also Halliburton. I could look out the window and protestors were walking around. It was certainly not a decision we made lightly, but it was so much the right thing to do.
CPAJ: What’s the status of the case right now?
Menendez: Well, from a SOX perspective, I got an ultimate victory in the Fifth Circuit Court of Appeals officially in March of 2015. Halliburton didn’t file fo ran appeal to the Supreme Court, so as faras the SOX case is concerned, it’s over.
CPAJ: Is there another component?
Menendez: Well, there is still the financial statement fraud component, which unfortunately has never really been addressed or resolved; the SEC dropped their initial inquiry in 2007 and haven’t done anything since. I find it incredibly disturbing that they, to this day, are allowing Halliburton to getaway with one of the most common, perennial revenue recognition schemes.The bill-and-hold transactions are associated with more financial statement frauds than just about any other scheme you can think of, so there is really no basis for ignoring it. What it says is that big companies like Halliburton get to play by a different set of accounting rules because no one in the world knows they’re doing it outside of ahandful of academics and journalists. And I think it’s something that the profession needs to know. If we’re going to have accounting rules, they’re not going to mean anything unless someoneis enforcing them.
CPAJ: During this process, you also faced retaliation from Halliburton.
Menendez: Well, the retaliation was actually fairly swift and fairly recognized. And quite simply, they breached the promise of confidentiality that was provided by the company’s accounting process, butalso by law [SOX]. People will not come forward if they know the minute they come forward, they’re going to be outed. Their argument that they were trying to do mea favor, that I would appreciate being outed, is disingenuous at best. That alone would eviscerate the purpose of SOX.
CPAJ: You mentioned whistleblower protections. The Dodd-Frank [WallStreet Reform and Consumer Protection] Act introduced several more. Do you feel that these particular reforms would have protected you?
Menendez: One important change that Dodd-Frank instituted was it created the bounty system, if you will, which gives whistleblowers the opportunity to receive10% to 30% of whatever fines are collected. There have been huge payouts. And I think that right there is probably the most significant component of the Dodd-Frank Act. Not because it’s encouraging more whistleblowers; most whistleblowers come forward out of a sense of duty, a sense that they’re doing the right thing, not money. But it encourages lawyers to get involved. My first attorney dropped me because I wouldn’t settle and there was no money in the case. After we lost at the ALJ [administrative law judge] level, my second attorney dropped me. So I had to, as an individual accountant, non-lawyer, represent myself through the appeals process. If these are the hurdles that individuals have to go through, it’s impossible to say we’ve got a functioning whistleblower protection program.
How many times does someone have to come forward and put themselves at risk to get no result?

The Costs of Whistleblowing

CPAJ: Steve, let’s say somebody is listening to this story, and they say, “You know what? I have seen what happens to that guy. I’m going to keep my mouth shut.” Is that guy wrong? Is it unreasonable o be genuinely concerned about the impact on your career and on your life?
Steven Mintz: Well, it’s definitely an issue that each person has to deal with himself. It’s a very personal act. I do emphasize that there are costs. And Tony is a perfect example of the costs. But Tony’s is clearly a case of moral whistleblowing, if for no other reason than he didn’t ask for monetary compensation for his efforts.
My students find it very difficult to perceive they would ever blow the whistle against an employer. They just have that feeling, especially the undergraduate students, that “this is the person I work for. If I get fired, I get fired. If I quit, I quit.” So it’s difficult to get students to realize the issues that go into making a whistleblowing decision.
I think Dodd-Frank is a mixed blessing in that regard. The awards are designed to encourage people like Tony to come forward, but on the other hand, there have not been that many successful Dodd-Frank whistleblowing award cases. More often than not, the SEC doesn’t take up or doesn’t win the case.
CPAJ: You talk in a lot of your writings about the way that ethics training in corporate America tends to fall short.
Mintz: In my teaching, we start off talking about the traditional philosophical approach to ethical decision making. Students understand why they should do something, but that doesn’t get them to the point of actually making the decision and taking that tough action. Bad things could happen, things that Tony certainly had to deal with. And students have to make that leap. It’s one thing to know something is wrong; it’s another thing to act on it. And I think there is not enough ethics education on the latter.
CPAJ: Where do you think the current framework is going wrong in this?’
Mintz: I think a business ethics course should be a required university course. It’s not. We do have some colleges and universities in New York and California that now teach accounting ethics courses, which is a great thing.
Once you get into corporate America, whatever ethics you do have tend to get tested very quickly. The pursuit of the bottom line takes over. You have to meet financial analyst earnings estimates that have been put out in the press, and all of a sudden ethics becomes pretty secondary. And that’s unfortunate.
Menendez: About a month-and-a-half ago, I attended an ethics training [course]at General Motors. I was sitting in therein the class, and I remember one executive stood up. He was a CFO. And he asked, “What do we do in the situation where there is the lone dissenter?”
I believe it was a lawyer that was doing the presenting, and she replied, “Well, if that’s the case, the person has a choice to make.” And then in the back of the room, one of the individuals that’s responsible for investigating whistleblower complaints stood up and said, “Well, if that person can’t get onboard, their choice is either you can get on board or leave GM.” I was floored. I sat back and thought, “Every major catastrophe that’s ever probably occurred in human history probably had a lone dissenter, and that person’s decision was either get on board or leave.” And since then, I have left General Motors.
CPAJ: In what way do you think that this sort of training can help instill amore ethical culture?
Menendez: We talk about the training in ethical culture. I believe it needs to start even before that. I think people, especially in the CPA profession, need to realize that as a CPA, you have an obligation to the public. If you think about the importance of the trust that’s put into us, you realize you are doing something that’s more important than yourself. I think by having hat sense of importance, you can act from a different starting point.
Mintz: One thing I make very clear to my accounting students early on is the accounting profession is unique in many ways, but in one sense it’s the only profession where you put the public interest ahead of the interests of your client. And that’s a difficult standard to live up to.
The CEO of Tyco, Dennis Kozlowski, in 2000 was interviewed in jail by Morley Safer of 60 Minutes. And Morley asks him, “What made you think you could take $50 or $60 million of company funds and use it for personal purposes?” And Kozlowski said, “This is what my predecessor did. This is expected or standard practice around here. This is the culture.”And that in his mind made it right.

Ethical Challenges

CPAJ: Do you feel that the ethical challenges that are facing CPAs have changed over the years, or do you think they’re largely the same issues, just with a different set of names?
Mintz: I think it’s probably a little bit of both. I think the ethical challenges today are more difficult because of the pressures by management, the tighter relationships between the auditor, audit personnel, members of management, and the client. They’re getting involved too much on a personal level, on a business level. There have been cases of auditors getting involved in joint investments with members of the board of directors or audit committee of a client, things of that nature.
There’s also a lot of pressure for revenue today, and I think the profession is going back to some of its old habits. For example, at Ernst & Young, the firm was lobbying legislators on behalf of audit clients. You can’t have a more blatant advocacy violation of independence. Insider trading—an audit partner at KPMG gives a tip to a friend to buy stock in two clients, Skechers and Herbalife. What did he get? $50,000 and a Rolex watch. He sold his soul for those sorts of things.
Menendez: What I find fascinating is, back during the debates over Enron, they decided the big problem was this economic incentive. All these firms, how could they be independent or objective if they have these big consulting projects and they’re making all the money on consulting?
So audit firms had to get rid of their consulting practices. But how did that change anything? The economic concerns are still there. You still have to make the money off the audit. How are those independence and objectivity issues not still as prevalent today as they were back then?
Mintz: This brings up the whole problem of auditor rotation. As a result of SOX, we have audit personnel rotating off an audit every five years. There has been discussion for a number of years of actually having the firms rotate off the audit client, not just the audit personnel, but the firms. In fact, in the European Union they started doing this recently, and I believe the way it works is, at the end of year 10 of serving a client, you have to put the audit out for bid to get a new auditor, and it has to be completed no later than year 20. So far it’s gone nowhere [in the United States] because there is a lot of resistance.
The firms, for obvious reasons, don’t want it. There is a learning curve. They put a lot of time and effort into training their audit personnel. The companies say, “If you like your auditors and you want to have them for 40 years, maybe that’s not a bad thing.” On the other hand, it’s kind of sad that we have to say to the auditing profession, “You have to leave after 10 or 15 or 20 years because you may be lacking in ethics and independence.”I would like to think the audit professionals are a bit more professional than that, and they’re more committed to what they’re doing. But on the other hand, there have been these cases where firms have been there forever, and they get too cozy with management.
Menendez: My guess is they wouldn’t even know what’s happening. It’s so gradual over time that they wouldn’teven know it. I suspect over a long-term relationship, it just builds.
CPAJ: Do you think there is a sense where the very structure of the financial industry and of companies in general seems to discourage ethical behavior?
Mintz: I was thinking of it from an audit perspective when you started talking about it, the competitive nature of auditing and what firms will or will not do as a result of that.
Menendez: And that’s the way I thought about it too. If you’re squeezing fees, the only thing you can do is squeeze your costs. So you’re doing less auditing. I think there could be an economic bias towards less effective audits that result in less effective financial statements.
Mintz: One of the problems the profession dealt with for many years is opinion shopping. Management basically said, “Look, you don’t want to do it, you don’t want to go along with it, we’ll find a firm that will.” The audit ethics took a back seat. Now if auditing is a lower portion of your fees, you bid low to get the client with the hope that, “Once I have them, I’m going to get all this consulting revenue.” You kind of sell your soul in that regard.
Menendez: There is a common understanding that the audit—maybe it’s a commodity, a loss leader. We’re talkinga bout the thing that is the purpose for our existence as a profession. It’s a little disturbing to be sitting here so many years later going, “No one really values the audit.” And I think that needs to change.
CPAJ: How would you change it?
Menendez: I think we need to understand that the CPA is a brand. And that brand is tarnished when there is a perception that it’s not living up to why we’re here in the first place. I think we need to be starting from a different place. We need to be recognizing the importance of the profession itself and what the CPA designation means. I think we start there before we come up to an answer as to how do we change it.
But I think change comes from individuals, so it takes individuals to make that change. I used this quote yesterday from Edmund Burke: “The only thing necessary for the triumph of evil is for good men to do nothing.” So the only thing necessary for financial fraud to prevail over good financial reporting is for good CPAs to do nothing.
Mintz: A thought that occurs to me is to make the audit a statutory audit, required by law or the government. And then the firms are focusing on tax compliance, tax advising, consulting, and soon. I think it’s probably a little bit difficult to get that here, but it does occur in many countries in Europe.
Menendez: Actually, to be honest, I have always felt that that is a model that would actually improve financial reporting and auditing. I think when they created SOX and the PCAOB, there was some discussion about having an organization that would do the auditing. I think that would be much more effective.

Doing the Right Thing

CPAJ: I’m a CPA dealing with a real ethical dilemma. I’m wrestling with thi sissue, and I’m wondering whether to go forward. What advice would you give me?
Mintz: Well, if we’re talking about a CPA in public accounting, hopefully there is a mentor. Certainly the bigger firms have that. But beyond that, there ought to be some mechanism where a CPA in that situation can make a phone call to an individual, a body, such as a state CPA society, and get some expert advice without any fear of retribution or retaliation.
Menendez: I guess I go back to some guidance that was given to me one time by someone that I respected, Nick Cyprus from General Motors. He always said, “You can always get another job, but you can’t get another reputation.” I think that’s an important thought.
CPAJ: Is there anything else that either of you would like to go over?
Mintz: I would leave you with one thought. When I finish my accounting ethics class, I always say to my students, “Look, you’ve now gone through 10 weeks of intensive ethics and accounting ethics training.” And I ask them, “What do you want people to say, coworkers to say, peers to say about you at the end of your career?”And it gets them to focus on, “I want to be known as somebody who has done the right thing, who has been truthful, open, honest and treated others fairly.”
Menendez: And my message to students was, “If you’re going to do the right thing, it’s hard. But that’s what this is about. Nothing good ever comes without any sacrifice or any cost. But I think, over time, that the cost comes down and we end up with a better profession for it.”

This article is based on a joint interview conducted at the NYSSCPA offices; excerpts from that interview will be available at http://www.cpaj.com.

Tony Menendez, CPA, CFE is a forensic accounting litigation consultant, speaker, and writer based in Austin, Tex.
Steven Mintz is professor emeritus of accounting at California Polytechnic State University, San Luis Obispo, Calif.