Livent, a successful live entertainment company, known for performances of Phantom of the Opera, Ragtime, and Sunset Boulevard, was sold in 1998 to buyers that found the value the paid for the company was an illusion. Livent’s chief financial officer, Maria Messina, who joined Livent in 1996 after serving as its auditor at Deloitte & Touche, had been immersed in what the Securities & Exchange Commission (SEC) charges was a “multifaceted and pervasive accounting fraud” (“At Livent,” 1999). By using special software to carry out accounting manipulations, the top executives at Livent masked losses and shifted costs, creating results that enabled them to raise more that $179 million in public equity and debt markets.
According to the SEC the manipulations were so exhaustive, the senior vice-president for finance, Gordon Eckstein, insisted that Livent keep two sets of books, one to keep track of Livent’s true finances and one for the phony numbers. Maria may have been kept in the dark while at Deloitte, but she admitted joining the scheme after her attempts to persuade Mr. Eckstein to stop the fraud failed. Maria did not disclose the manipulations to an outsider until July 1998 when she met the new owner’s chief executive officer, Roy Furman, and again in August 1998, when she met with the new executive vice president, Robert Wheeler. By this time, Maria had not only committed a felony crime, she also destroyed her credibility as a professional accountant and in her words, her life. 1. Did Maria blow the whistle at the right time? Why or why not?
Maria waited too long to blow the whistle and take action to disclose the manipulation of earnings and fraud occurring under her tenure at Livent. While it was reasonable to first seek to address the issues internally, as soon as it became apparent management was not interested in correcting the manipulations, Maria should have elevated her concerns and taken the appropriate actions in accordance with her professional accounting codes. Her campaign of baby steps and lack of courage resulted in jail time, fines, and the loss of her Chartered Accountant designation. 2. Was her planned response appropriate? Why or why not?
The planned response in this case was inadequate and inappropriate. As a professional accountant, Maria should have taken action to report the manipulations and fraud to the Board of Directors, audit committee, external auditors, or regulators as soon as she realized adjustments were being made to manipulate the company’s earnings and debt. When it became clear that management was not interested in remedying the situation Maria should have been prepared to act with integrity. A professional accountant is given the right to provide important fiduciary services to society because he or she undertakes to maintain the trust inherit in the fiduciary relationship, for this reason the accountant must apply their expertise with honesty, integrity, and due care in order to ensure that those relying on them can trust that proper care is taken of their interests (Brooks & Dunn, 2015, p. 355). Maria’s planned response did not display those characteristics and her choices favored the person paying her salary. 3. How would you suggest she should have dealt with the problem?
Upon discovering the fraud, Maria should have first sought to deal with the situation internally, either by bringing her concerns to her superiors and/or Livent’s chief internal auditor or the company compliance officer. If her efforts at that level failed, the next step would be to elevate the issue to the CEO and Board of Directors or the audit committee. If Maria wasn’t able to deal with the issue internally, she could disclose her concerns to the external auditors and appropriate regulators. Coming from Deloitte & Touche, Maria worked on Livent’s audit in the year prior to joining the company. She should have felt compelled to bring the manipulations to the attention of the external auditors. If her attempts to elevate concerns at the internal and external level failed she could have sought advice from the ethics officer for her professional accounting association or she could have gone public with the information. As a professional account, Maria had a responsibility to the public interest. If she was unable to maintain that professional responsibility she should have resigned her position after disclosing the manipulations. 4. Should whistle blowing be encouraged? Why or why not?
Whistle blowing should definitely be encouraged. In many cases, accounting fraud has been discovered after an employee became a whistleblower. Appropriate programs should be in place to protect employees who fear negative repercussions from the superiors. The existence of such programs and procedures encourages employees to come forward because they convey the expectation that whistle blowing is the appropriate and right thing to do. In this case, the SEC enforcement director Richard Walker said it best, “A whistle-blower is a good soldier to one person and a person who’s created a fraud to another. We charged them with fraud.” (“At Livent,” 1999). Assessment/Recommendations
This case reveals the pressures that are often brought to bear on professional accountants who discover manipulation and fraud, and who must decide what to do, and when to blow the whistle (Brooks & Dunn, 2015, p. 402). The choices Maria Messina made took her from outside auditor to inside player because she lacked the courage to do the right thing at the right time. A professional accountant facing a difficult choice should make that choice so as to preserve the trust inherent in the fiduciary relationships, first with the public, then with the profession, then with the client/employer, and finally with the individual professional. Maria could have avoided jail, fines, and time away from her daughter by abiding by that professional code.
At Livent, Is Fraud The Thing? (1999, February 14). Retrieved January 16, 2015, from http://www.businessweek.com/stories/1999-02-14/at-livent-is-fraud-the-thing Brooks, L. J., & Dunn, P. (2015). Business & professional ethics for directors, executives & accountants (7th ed.).