September 19, 2007
Former Penn Traffic Execs Accused of Inflating Numbers
Retail executives have been found guilty in the past of intentionally inflating sales and earnings numbers by booking vendor promotional allowances before they were due. The question, after the latest indictment against two former executives who worked at Penn Traffic, is when will people wise up and put an end to the practice once-and-for-all?
According to a Bloomberg News report, a federal grand jury has indicted Les Knox, the former chief marketing officer at Penn Traffic, and Linda Jones, former vice president of non-perishable merchandising for the company, for improperly booking promotional fees that fraudulently boosted company earnings in 2001 and 2003.
U.S. Attorney Glenn Suddaby said, “The defendants caused Penn Traffic to ‘pull forward,’ or prematurely report more than $9 million in operating income.”
According to the Bloomberg report, Mr. Knox and Ms. Jones have been charged with conspiring to commit securities and mail fraud, as well as causing Penn Traffic to make false SEC filings. If convicted, the two could each get up to 20 years in jail and be forced to pay up to $5 million in fines. The accused were fired in 2006 after an internal investigation conducted by Penn Traffic.
Discussion Questions: Has this case, U.S. Foodservice and others put an end to companies booking promotional allowances before it is legal to do so? Have the individuals occupying executive offices at retail become more motivated by ethical business behavior in recent years? Is this reflected throughout the business organization?
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Honesty and ethical business behavior are too frequently transient in the ways of too many men. For such affected men it would be ingratitude to turn honest when they owe much to what they have to their knavery. Integrity, on the other hand, evolves from the heart of an honest child, not rules or laws.
There have been numerous complaints about Sarbanes-Oxley, but since it went into effect, scandal after scandal has been unveiled. I do not know if Sarbanes-Oxley led to the Penn Traffic scandal discovery, but it’s clear that more financial transparency = greater safety for investors. From time to time, legislators have discussed gutting Sarbanes-Oxley, but the flow of new scandals clearly points up its usefulness.
As long as there are temptations there will be people breaking the law. I agree that the costs of getting caught are way too high but the motivations can be very tempting and prevent the light of common sense from shining through. Besides, until recently, most probably thought that the chances of getting caught were very low and it wouldn’t happen to them. What a shame to ruin a great career and life by being disgraced and becoming a convicted prisoner. We need to publicize these punishments as much and often as possible to deter others from becoming tempted.
One would think that the recent and much publicized convictions of executives in companies such as Enron, Adelphia, and Global Crossing who were charged with willful corporate fraud, would be a significant catalyst for the reduction of such crimes.
This hasn’t been the case, as evidenced by the actions of these two executives at Penn Traffic.
Perhaps “ethics” and “citizenship” needs to be added back into curriculum in the U.S. educational system.
I agree with Charles about adding ethics back into the curriculum, but where would we get qualified instructors?
I’m usually pretty hard-ass on this stuff, but I do see a smidgen of gray here, at least in the case of Penn Traffic. Sarbanes Oxley went into effect in July of 2002; I don’t know how many of the Penn Traffic offenses may have pre-dated it, or came so soon afterward that it wasn’t fully understood. Fact is that until fairly recently, there were plenty of laws on the books that just were not enforced, particularly regarding Robinson-Patman, and “illegal” practices were so widespread and ignored by the government that people I consider “honest” routinely broke the law by signing off on co-op advertising invoices that weren’t kosher, for instance. Every company, and I mean every company, did this to some degree or other. I don’t know the details of the Penn Traffic case, but without knowing more, I’m not going to judge the two “offenders” harshly just yet.
I have to go back over 30 years and recall what my first boss told me early in my orientation. Companies don’t go to jail, people do. “Here is what is expected and here are the rules,” and that was that.
When your think about, the CFO should be reporting what happened, not what we “wanted/hoped/prayed/needed” to happen. Pulling things forward, adjusting inventories and the like may improve the gross a bit, but eventually they are reconciled.
I have always believed that it was the responsibility of management to remove or control as many of the temptations for illegal or immoral activities as possible. As a simple example, if you leave valuables unlocked and unwatched, it is only a matter of time until theft occurs. Was it the thief’s fault, of course. But it was also the manager’s fault for leaving the temptation. It’s easy in a simple example to assign blame, but it becomes more difficult as the business conditions increase in complexity. However, I still believe that it is senior management’s responsibility to remove as many temptations as possible and create an atmosphere that does not encourage these activities. Based on that shouldn’t the punishment reach further up the chain of management?
I don’t know if the practice should end, but I don’t think it will end. Our country has a tendency to respond to bad behavior with new laws or restrictions. New laws won’t keep people from committing crime. In most cases, the laws are already in place…enforcing them is the issue. Laws might prevent some crime but for the most part it is a person’s character that keeps them in line. Lying and cheating have been part of society since the beginning of time. More legislation won’t stop that, it will just waste more of our tax dollars and add to our bloated government bureaucracy.
The infractions occurred prior to Penn’s trip into bankruptcy, 2001-2003. So, the case is somewhat dated and to some extent pre Sox. I agree that prior to Sox that “creative accounting” was more prevalent. Regardless, these executives still knew the law was being broken or at least twisted, and assumed they could get their accountants to sign off and get away with it. I was familiar with a young and fast growing retail company (since liquidated) that often capitalized administrative payroll costs, just to please Wall Street. They knew it was illegal, but the auditors looked the other way.
Now, Sox has helped push executives the other way, towards remaining within the law, by requiring the executives and auditors to sign off to not only the fact that it believes the financial reports were prepared accurately…but also that the processes underlying the preparation of those results are adequate from an internal control perspective. With Sox there is less wiggle room for unethical behaviour.
Ryan: ever consider teaching?
No end in sight as far as I can see. What happened at Penn Traffic is very minor compared to what goes on daily in many other companies. This makes me think that all the financial reporting laws are meaningless. A company can be reporting excellent results one day and filing for bankruptcy the next. There are a lot of retailers today reporting some improved sales and results, yet I certainly don’t see that taking place at store level. It’s easy to spot the next SEC investigation when comparing the hyped up articles in the press to the depressed state of store conditions.
The illegal behavior that pre-dated Sarbanes-Oxley or that was identified after the passage of Sarbanes-Oxley clearly identified that that behavior was taking place. The fact that this behavior misled people about the value of a company indicates that something needed to be done to change behavior so that company valuations were more accurate. While there may be a lot of discussion over the specifications of what and how things are reported under Sarbanes-Oxley, changing the way numbers are reported to generate more transparency was necessary.
In terms of teaching ethics, most psychologists say that people’s values are formed by the time they are 7 to 10. Making a discussion of ethics explicit is important to demonstrate the importance of ethical behavior, but discussing ethics in business school is not likely to change anyone’s values.
I don’t think it will put a complete end to the practice. After all, people still rob banks despite the fact that most bank robbers get caught. As to ethics, I think Sarbanes Oxley has had more to do with any changes in behavior than a rare wind of enlightenment blowing through the corporate world. The stakes for getting caught are just too high.
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Honesty and ethical business behavior are too frequently transient in the ways of too many men. For such affected men it would be ingratitude to turn honest when they owe much to what they have to their knavery. Integrity, on the other hand, evolves from the heart of an honest child, not rules or laws.
There have been numerous complaints about Sarbanes-Oxley, but since it went into effect, scandal after scandal has been unveiled. I do not know if Sarbanes-Oxley led to the Penn Traffic scandal discovery, but it’s clear that more financial transparency = greater safety for investors. From time to time, legislators have discussed gutting Sarbanes-Oxley, but the flow of new scandals clearly points up its usefulness.
As long as there are temptations there will be people breaking the law. I agree that the costs of getting caught are way too high but the motivations can be very tempting and prevent the light of common sense from shining through. Besides, until recently, most probably thought that the chances of getting caught were very low and it wouldn’t happen to them. What a shame to ruin a great career and life by being disgraced and becoming a convicted prisoner. We need to publicize these punishments as much and often as possible to deter others from becoming tempted.
One would think that the recent and much publicized convictions of executives in companies such as Enron, Adelphia, and Global Crossing who were charged with willful corporate fraud, would be a significant catalyst for the reduction of such crimes.
This hasn’t been the case, as evidenced by the actions of these two executives at Penn Traffic.
Perhaps “ethics” and “citizenship” needs to be added back into curriculum in the U.S. educational system.
I agree with Charles about adding ethics back into the curriculum, but where would we get qualified instructors?
I’m usually pretty hard-ass on this stuff, but I do see a smidgen of gray here, at least in the case of Penn Traffic. Sarbanes Oxley went into effect in July of 2002; I don’t know how many of the Penn Traffic offenses may have pre-dated it, or came so soon afterward that it wasn’t fully understood. Fact is that until fairly recently, there were plenty of laws on the books that just were not enforced, particularly regarding Robinson-Patman, and “illegal” practices were so widespread and ignored by the government that people I consider “honest” routinely broke the law by signing off on co-op advertising invoices that weren’t kosher, for instance. Every company, and I mean every company, did this to some degree or other. I don’t know the details of the Penn Traffic case, but without knowing more, I’m not going to judge the two “offenders” harshly just yet.
I have to go back over 30 years and recall what my first boss told me early in my orientation. Companies don’t go to jail, people do. “Here is what is expected and here are the rules,” and that was that.
When your think about, the CFO should be reporting what happened, not what we “wanted/hoped/prayed/needed” to happen. Pulling things forward, adjusting inventories and the like may improve the gross a bit, but eventually they are reconciled.
I have always believed that it was the responsibility of management to remove or control as many of the temptations for illegal or immoral activities as possible. As a simple example, if you leave valuables unlocked and unwatched, it is only a matter of time until theft occurs. Was it the thief’s fault, of course. But it was also the manager’s fault for leaving the temptation. It’s easy in a simple example to assign blame, but it becomes more difficult as the business conditions increase in complexity. However, I still believe that it is senior management’s responsibility to remove as many temptations as possible and create an atmosphere that does not encourage these activities. Based on that shouldn’t the punishment reach further up the chain of management?
I don’t know if the practice should end, but I don’t think it will end. Our country has a tendency to respond to bad behavior with new laws or restrictions. New laws won’t keep people from committing crime. In most cases, the laws are already in place…enforcing them is the issue. Laws might prevent some crime but for the most part it is a person’s character that keeps them in line. Lying and cheating have been part of society since the beginning of time. More legislation won’t stop that, it will just waste more of our tax dollars and add to our bloated government bureaucracy.
The infractions occurred prior to Penn’s trip into bankruptcy, 2001-2003. So, the case is somewhat dated and to some extent pre Sox. I agree that prior to Sox that “creative accounting” was more prevalent. Regardless, these executives still knew the law was being broken or at least twisted, and assumed they could get their accountants to sign off and get away with it. I was familiar with a young and fast growing retail company (since liquidated) that often capitalized administrative payroll costs, just to please Wall Street. They knew it was illegal, but the auditors looked the other way.
Now, Sox has helped push executives the other way, towards remaining within the law, by requiring the executives and auditors to sign off to not only the fact that it believes the financial reports were prepared accurately…but also that the processes underlying the preparation of those results are adequate from an internal control perspective. With Sox there is less wiggle room for unethical behaviour.
Ryan: ever consider teaching?
No end in sight as far as I can see. What happened at Penn Traffic is very minor compared to what goes on daily in many other companies. This makes me think that all the financial reporting laws are meaningless. A company can be reporting excellent results one day and filing for bankruptcy the next. There are a lot of retailers today reporting some improved sales and results, yet I certainly don’t see that taking place at store level. It’s easy to spot the next SEC investigation when comparing the hyped up articles in the press to the depressed state of store conditions.
The illegal behavior that pre-dated Sarbanes-Oxley or that was identified after the passage of Sarbanes-Oxley clearly identified that that behavior was taking place. The fact that this behavior misled people about the value of a company indicates that something needed to be done to change behavior so that company valuations were more accurate. While there may be a lot of discussion over the specifications of what and how things are reported under Sarbanes-Oxley, changing the way numbers are reported to generate more transparency was necessary.
In terms of teaching ethics, most psychologists say that people’s values are formed by the time they are 7 to 10. Making a discussion of ethics explicit is important to demonstrate the importance of ethical behavior, but discussing ethics in business school is not likely to change anyone’s values.
I don’t think it will put a complete end to the practice. After all, people still rob banks despite the fact that most bank robbers get caught. As to ethics, I think Sarbanes Oxley has had more to do with any changes in behavior than a rare wind of enlightenment blowing through the corporate world. The stakes for getting caught are just too high.