Running head: BUSINESS RESEARCH ETHICS

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Business Research Ethics

RES 351 February 28, 2013

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Business Research Ethics Before the debt crisis of 2008 exploded, one of the two American banks that backed a large portion of United States mortgages was fined in 2006 because of improper accounting practices. Ethics are a set of standards derived by individual or company ideals of what is right and wrong. Looking back, it should have been clear the poor ethics of this bank would contribute to the economic disaster that would follow. A report conducted by the Office of Federal Housing Enterprise Oversight (OFHEO) from 1998 to 2004 discovered that Fannie Mae’s senior management deliberately influenced improper accounting by swaying internal auditors resulting in undeserved large bonuses. This was accomplished without advising any stockholder or other interested parties; the rest of the world. During this time, Fannie Mae reported unfettered profit growth and reaching publicized earnings targets per share for each quarter. "The image of Fannie Mae as one of the lowest-risk and 'best in class' institutions was a façade" (Fannie mae: Unethical, 2006). During this investigation, Fannie Mae evaded the OFHEO further adding to their harsh fine levied by them and the Securities and Exchange Commission. Fannie Mae’s mismanagement, manipulation of earnings, and unhindered growth culminated in $10.6 billion in losses, “well over a billion dollars in expenses to fix the problems, and ill-gotten bonuses in the hundreds of millions of dollars” (Fannie mae: Unethical, 2006). In the management of earnings between 1998 and 2003, Fannie Mae Chairman and CEO Franklin Raines was compensated over $90 million. From this, over half of his income and incomes for other high-compensated executives, “came from bonuses and arrangements directly tied to achieving earnings per share targets” (Fannie mae: Unethical, 2006). Fannie Mae paid $400 million in fines to settle this case.

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The unethical behavior involved in this case was intentional misrepresentation of financial research presenting false financial data. This calculated misrepresentation gave a false account of Fannie Mae’s worth, thus driving up their earnings and return on investment while contributing to executive’s bonuses. Additionally, Fannie Mae strong-armed their internal auditors and stalled the OFHEO. These tactics were highly unethical. Though the Fannie Mae executives and to a degree stockholders initially benefitted from this unethical behavior, the injured parties came to be the stockholders, US government, and US taxpayers. Covering up a $10.6 billion loss would not hold up and over time became known. With this, the taxpayers eventually would come to bail them out as the government took control in four years’ time. It was akin to a financial hand grenade waiting to go off. Effects of this unethical behavior for the organization were a steep $400 million fine and new government regulations and oversight. Future effects are government bailout and takeover. Individual effects were an overhaul of the banks management affecting nearly every executive and their compensation terms. Societal effects materialized in loss of confidence in the United States banking system resulting in a near economic collapse four years from event discovery. Nearly every family in the country would be affected by this in one way or another. This unethical behavior could have been avoided with more strict government oversight and tighter controls on banks deemed too big to fail. Call them out and expose banks for the fraud perpetrated. Let these institutions suffer the loss of consumer confidence. Let market forces run its course and devour those who do not act in an ethical manner. When this unethical behavior is discovered, it can be resolved by applying the above. In the interest of preserving those banks that are too big to fail, public and stockholder demands in replacing management in

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addition to fines will also resolve the issue. Hold the guilty bank up as an example of what lies in store for those who practice unethical behavior. Fannie Mae was discovered manipulating its books as far back as 1998. An investigation uncovered wrongdoing and fines were levied. Billions of dollars were lost and consumer confidence was shaken. Fannie Mae’s stockholders suffered however, the United States taxpayer ultimately suffered in the long term by bailing out this bank and several other financial firms in the ensuing years. It is fitting to let Congress provide stricter regulations and oversight on US institutions that hold the largest portion of America’s financial interests and directly influence world economic health. It is also fitting that Congress review its own policies and procedures to identify laws in place that promote this kind of recklessness and close any loopholes or repeal said laws. Ultimately, it is on financial institutions to police themselves and practice ethical standards.

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Appendix What unethical research behavior was involved? The unethical behavior involved in this case was intentional misrepresentation of financial research presenting false financial data. This calculated misrepresentation gave a false account of Fannie Mae’s worth, thus driving up their earnings and return on investment while contributing to executive’s bonuses. Additionally, Fannie Mae strong-armed their internal auditors and stalled the OFHEO. These tactics were highly unethical. Who were the injured parties? Though the Fannie Mae executives and to a degree stockholders initially benefitted from this unethical behavior, the injured parties came to be the stockholders, US government, and US taxpayers. Covering up a $10.6 billion loss would not hold up and over time became known. With this, the taxpayers eventually would come to bail them out as the government took control in four years’ time. It was akin to a financial hand grenade waiting to go off. How has the unethical behavior affected the organization, the individual, and society? Effects of this unethical behavior for the organization were a steep $400 million fine and new government regulations and oversight. Future effects are government bailout and takeover. Individual effects were an overhaul of the banks management affecting nearly every executive and their compensation terms. Societal effects materialized in loss of confidence in the United States banking system resulting in a near economic collapse four years from event discovery. Nearly every family in the country would be affected by this in one way or another. How could the unethical behavior be avoided or resolved? This unethical behavior could have been avoided with more strict government oversight and tighter controls on banks deemed too big to fail. Call them out and expose banks for the fraud perpetrated. Let these

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institutions suffer the loss of consumer confidence. Let market forces run its course and devour those who do not act in an ethical manner. When this unethical behavior is discovered, it can be resolved by applying the above. In the interest of preserving those banks that are too big to fail, public and stockholder demands in replacing management in addition to fines will also resolve the issue. Hold the guilty bank up as an example of what lies in store for those who practice unethical behavior.

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References Fannie Mae: Unethical. (2006). Multinational Monitor, 27(3), 53-53. Retrieved from http://search.proquest.com/docview/208861159?accountid=35812