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Penn Square Bank and the Down Corning Bankruptcy

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Penn Square Bank and the Down Corning Bankruptcy Today’s businesses struggle to survive in a volatile marketplace and frequently internal and external ethical pressures are placed upon employees and management in an effort to ensure the success of the company. Companies like Penn Square Bank faced ethical pressures regarding documentation, credit extension, and revenue recognition, which eventually led to the closing of Penn Square Bank. The Dow Corning bankruptcy raised many ethical questions. Speculations have been made about whether Dow Corning filed bankruptcy because of the financial hardship placed upon it by consumer lawsuits or whether Dow Corning used bankruptcy laws to shield itself from obligations to its consumers. This report will examine, 1) the ethical challenges and pressures each of these companies faced, 2) a review of Dow and Corning’s actions during the bankruptcy filing, and 3) a discussion of how Penn Square Banks ethical pressures might have been alleviated or offset.
Penn Square Bank Penn Square Bank is an illustration of improper asset valuation. In an effort to grow Penn Square bank into a merchant bank and have it become a major financial backer to Oklahoma’s oil men, Bill Jennings hired Bill Patterson to lead his new energy lending division (Caskey, 1985). The energy lending division was tasked to find borrowers for oil customers. As loans were passed to other financial institutions; Penn Square collected fees for originating and administering the loans (Caskey, 1985). As oil prices rose Bill Patterson became reckless with his lending practices, allowing customers to assume too much debt by over-valuing their gas and oil reserves and ignoring proven production records, which had been the basis for loans to oil customers prior to Patterson (Caskey, 1985). Generally accepted accounting principles (GAAP) require assets to be valued at either the cost of the asset or market value, whichever is lower (Wells, 2005, p. 342). Although GAAP had not yet been established, Patterson created a financial dilemma for Penn Square by allowing consumers to borrow more than they could afford to pay back. As long as Patterson could find a borrower, he would loan money. Penn Square loan documents were often incomplete or nonexistent; deals were drawn up on napkins and sealed with a handshake (Caskey, 1985). Penn Square’s assets increased fifteen-fold and its relationships with other major banks maximized its lending power. In 1981, oil prices dropped leaving Penn Square with an outstanding amount of questionable loans. As word spread regarding Penn Square’s financial complications, they found customers unable to repay their loans, banks unwilling to finance more of their loans, and to avoid loss of existing customers premiums had to be paid for their money market deposits (Caskey, 1985). Success and profit were Penn Square’s motivating factors. Ethical pressures to overlook documentation, extending credit without properly valuing inventory, refinancing loans without payment requirements, and recognizing revenue based on future hopes rather than on proven production records, played a part in Penn Square’s eventual demise. Many steps could have been taken to reduce or offset these ethical pressures. Bill Jennings unrealistic expectations placed pressures on Bill Patterson and the energy lending division. Jennings get-rich-quick plan seemed to motivate many of the short-cuts that were taken. Reducing the pressure and changing the goals may have resulted in a different outcome. In this situation a top-down strategy was needed to “promote strong values, based on integrity, throughout the organization” (Wells, 2005, p. 363). Internally, accounting records should have been accurately maintained (Wells, 2005, p. 363). Customers’ assets should have been valued on a variety of factors rather than on assumed future gains. According to Mike Markes, oil and gas reserve assets should be valued on timing and cash flow, which consists of; production rate and reserves, product prices, operating costs, capital investments, taxes, royalties, overhead, and ownership (2010). To deter practices such as these, accounting policies and procedures should have been in place with consequences and punishments for rule violations clearly communicated to staff (Wells, 2005, p. 363).
Dow Corning Bankrupty In 1942 Corning Glass and Dow Chemical agreed to form a joint venture to develop and manufacture silicone technology (Highlights from history, n.d.). In the early 1960s Dow Corning began manufacturing silicone breast implants for reconstructive surgery for cancer patients and for breast augmentations (Rumptz, Leland, McFaul, Solinski, & Pratt, 1992). In the 1970s surgeons questioned the role silicones played in hardening the breast tissues but were reassured by Dow that a study was underway, and they continued to use the implants. In 1984 Dow Corning lost its first breast implant lawsuit. Dow was found guilty of fraud and deceit after company memos were discovered discussing the lack of long-term testing and surgeons’ complaints about the implants bursting during surgery (Book Review, 1996). “Patients and doctors have associated silicone leakage with breast cancer, immune system deficiency, and other various symptoms” (Rumptz, et al, 1992). In 1991 Dow Corning was ordered to pay a settlement of $4.5 million to a woman who had accused Dow’s implants of causing her cancer, at this time documents were found indicating that Dow had also paid other women out-of-court settlements to keep their claims from going public (Rumptz, et al, 1992). In 1992 Dow set up a toll-free hotline for women who had questions about their breast implants. This toll-free hotline was closed a month later by the FDA when it was determined that Dow was de-emphasizing the potential dangers of the breast implants (Rumptz, et al, 1992). Dow claims the reason they did not address the issues publicly was because they did not want to worry unnecessarily the majority of their customers who have no problems with their implants (Rumptz, et al, 1992). However, by failing to disclose information more women were affected by implants they had believed were safe. Dow neither showed concern for the women whose lives and health had been affected by the implants nor took responsibility for their actions. In May 1995, Dow Corning filed for bankruptcy. Bankruptcy offered Dow protection from the filing of new lawsuits and had the power to delay indefinitely the existing settlements against the company (Feder, 1995). At the time of the bankruptcy filing, it was predicted that Dow Corning’s parent companies, Dow Chemical Corporation and Corning Inc., would lose their stake in Dow Corning as their stocks would be used to meet the affected women’s claims. However, beyond the loss of stocks, the bankruptcy was not expected to affect either company further (Feder, 1995). The ethical challenge Dow faced was whether to admit publicly that their product could pose serious health risks and accept responsibility for helping their customers remove the implants or seek medical treatment. To avoid lawsuits and stay profitable, Dow chose to keep the hazards a secret and continued with business as usual. When they could no longer hide, Dow offered hush money to some women and filed for bankruptcy to limit their exposure to lawsuits.

Conclusion Ethical pressures and challenges affect corporations daily. Training management and employees how to respond to these situations is crucial when looking at the examples provided by Penn Square Bank and Dow Corning. Allowing customers to over-extend their credit or receive breast implants with known health hazards were not the acts of ethical organizations but organizations motivated by profit. Penn Square customers were forced to declare bankruptcy and many women are no longer able to enjoy a quality of life or contribute to society as a result of these unethical organizations. By focusing on profit, Penn Square and Dow Corning have damaged not only their reputation and the lives of their customers but also have taken away from society and the economy by forcing these people to become burdens to others as well.

References
Book Review: Informed consent: A story of personal tragedy and corporate betrayal . . . Inside the silicone breast implant crisis . (1996, FEb). HealthFacts, 21(201), 5. Retrieved from http://web.ebscohost.com.ezproxy.apollolibrary.com/ehost
Caskey, J. (1985). Review Belly Up: The Indecent Exposure of American Banking/Funny Money . Challenge, 28 (4).
Feder, B. J. (1995, May 16). Dow Corning in bankruptcy over lawsuits. The New York Times. Retrieved August 27, 2011, from http://www.nytimes.com/1995/05/16/business/dow-corning-in-bankruptcy-over-lawsuits.html
Highlights from the history of Dow Corning Corporation. (n.d.). Retrieved August 27, 2011, from http://www.dowcorning.com/content/publishedlit/01-4027-01.pdf
Markes, M. (2010). Oil and Gas Evaluation Report. Obsidian Energy Company, LLC. Retrieved from http://www.oilandgasevaluationreport.com/2010/01/articles/asset-valuation/oil-and-gas-asset-valuation-101/
Rumptz, M. T., Leland, R. A., & McFaul, S. A. (1992, Summer). A public relations nightmare: Dow Corning offers too little, too late.. Public Relations Quarterly, 37(2), 30-32.
Wells, J. T. (2005). Principles of fraud examination. Retrieved from The University of Phoenix eBook Collection database..

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