The Lost Art of Integrity in Business and Accounting
Doing the right thing and blowing the whistle do not always pay off and can be an arduous task. A case in point is what happened to Anthony Menendez in his whistle-blowing ordeal at Halliburton. One day in February 2006, Menendez received an email from Halliburton’s chief accounting officer, Mark McCollum that was addressed to much of the accounting department. It read: “The SEC has opened an inquiry into the allegations of Mr. Menendez.” Everyone was told to retain their documents until further notice. Menendez had been outed.
Tony Menendez served as the Director of Technical Accounting Research and Training at Halliburton. Menendez’s journey as a whistleblower began in May 2006 when he brought a claim under the Sarbanes-Oxley Act based on retaliation, but the Department of Labor would not take up his claim. He brought separate lawsuits, but lost. Starting in 2008, he decided to represent himself in the appeals process. It went on for three years. In September 2011, the administrative law appeals panel ruled that he had been retaliated against for blowing the whistle, just as he had argued all along. However, Halliburton appealed the decision and it took three additional years until November 2014 for Menendez to be fully vindicated when the appeals process ended in his favor.
The accounting matter at Halliburton was so basic that virtually all of my students recognized the deficiency right away. Halliburton contracts with energy companies to find and exploit huge oil and gas fields. It sells services of its geologists and engineers who work intricate machinery built by Halliburton and sold to its customers. The company’s accountants had been allowing the company to count the full value of the equipment right away as revenue, sometimes even before it had assembled the equipment. But the customers could walk away in the middle of the contracts. Menendez knew that if the equipment were damaged, Halliburton, not the customer, absorbed the loss.
Menendez recommended the company wait until the work was completed to record the equipment sales as revenue. Even though top Halliburton accounting executives, including the chief accounting officer, Mark McCollum, agreed with Menendez’s analysis, they didn’t act to correct the accounting because of concern about its impact in slowing revenue growth.
Unbeknownst to Menendez, his complaint went to the Halliburton legal department as well as the board committee, an apparent violation of company policy. The audit committee was supposed to keep such reports confidential. A few days later, the SEC notified the company that it had opened an investigation into the company’s revenue recognition. Then, the email from McCollum got distributed. Halliburton’s general counsel said “the SEC is investigating Mr. Menendez’s complaints” to the company’s chief financial officer, KPMG, other top executives and McCollum. McCollum had forwarded it to at least 15 of Menendez’s colleagues in accounting. As far as Halliburton was concerned, they had a traitor in their ranks.
During his nine-year long ordeal, Mr. Menendez fought off the efforts of a mega company to silence him. Halliburton threw everything but the kitchen sink at him through legal maneuverings. Menendez stood strong. He exhibited the strength of character that led to his being chosen for the Sentinel Award given out by the Association of Certified Fraud Examiners.
What makes one person do the right thing while another might cave into the pressure to act otherwise? The answer is “integrity.” Integrity is the whole of a person’s character. Integrity means to be a principled person, act with courage when ethical dilemmas arise, and be strong-willed in following through ethical intent with ethical action.
In my research into ethical behavior I have found common elements of people who act with integrity. They include: religious and/or educational background in ethics; role models who “walk the talk” of ethics; persistence: not giving up until the “right” outcome has been achieved; and a supportive environment. Of course, Menendez did not have that supportive environment – at least in the workplace – but he did on the home front.
There aren’t enough Tony Menendez stories. One that does come to mind is Cynthia Cooper, the former director of internal auditing at WorldCom who is credited with blowing the whistle on the $11 billion accounting fraud. We, as educators, need to focus more attention on our heroes to counterbalance the unfortunate emphasis of the press on the bad actors.
Blog posted by Steven Mintz on July 21, 2016. Dr. Mintz is Professor Emeritus from Cal Poly San Luis Obispo. He also blogs at www.ethicssage.com.