> Michelle was surprised, as her previous company had run this practice for years with full approval from PricewaterhouseCoopers, its accounting firm. I said: “That’s all fine and good, but I still need Jordan to review it first.”
Jordan came back with an answer that I did not expect: “Ben, I’ve gone over the law six times and there’s no way that this practice is strictly within the bounds of the law. I’m not sure how PwC justified it, but I recommend against it.”
One of the foundational reasons for the spectacular implosions of both Enron and WorldCom was the behavior of their common auditor, the ginormous accounting firm Arthur Andersen (https://en.wikipedia.org/wiki/Arthur_Andersen). Andersen was willing to certify pretty much anything these companies wanted to do as fully legal and above-board, because these were big clients and Andersen didn't want to lose them to some other accounting firm by inconveniently insisting that they keep honest books. So they were free to rip people off in all sorts of creative ways for years, protected from close scrutiny by Andersen's seal of approval.
All of which is to say that, if you represent serious cash flow and you're tempted to push the legal envelope, you probably shouldn't expect a Big Four accountant to be the one to talk you out of it.
This is a useful bit of knowledge, but to guard against people making irrational judgments about Accenture, it's important to note that (1) It was primarily Anderson's consulting divisions that went to Accenture, and (2) these large auditing firms have offices all over the US and world, and in these types of cases, it was really only a branch or two that were complicit in the fraud.
In the same way that we shouldn't condemn the employees of <INSERT TECH COMPANY> because senior leaders decided to <Censor/Abuse/Manipulate users> we shouldn't condemn otherwise ethical accountants because of the misdeeds of their colleagues - especially when they pass more stringent ethical requirements than developers.
Ironically, people couldn't differentiate the isolated incident, and AA liquidated/sold because no one wanted to do business with them. [0]
I've seen a couple comments about Arthur Andersen, Enron, and Accenture in this thread and I just want to detail everything that went down in that situation.
Full Disclosure: I recently left a position with one of Accenture's subsidiary. I also hate that company.
The Supreme Court actually vacated Arthur Andersen's conviction for their actions in Enron. The SC basically said the jury instructions were too vague, and the jury could have believed that Arthur Andersen thought they did everything right and legally but still voted to convict. Arthur Andersen was never retried since there wasn't much left at that point anyway.
Arthur Andersen Accounting (or whatever they formally called themselves) and Arthur Andersen Consulting had already broken up into two different companies. They set up some weird agreement where the more profitable of the two would pay a cut of the profit difference to the other company. Consulting is always more profitable than accounting (which is why all the Big 4 have gotten back into even in the age of Sarbane-Oxley, where they can't audit a company they consult for), so Arthur Andersen consulting had to send a big-ass check to the accountants every quarter and they wanted to get out of that. The blow up of Arthur Andersen accounting presented the perfect opportunity. Arthur Andersen Consulting changed their name to Accenture to distance themselves from the Enron scandal, but it was mostly PR because they didn't have anything to do with Enron anyway.
McKinsey, however, had consultants all through Enron. I believe Skilling worked for McKinsey right out of college and threw them a ton of work. There's no way people at McKinsey didn't know what Enron was up to, but they somehow got off scot-free
> Andersen Consulting changed their name to Accenture to distance themselves from the Enron scandal
The name change was in place before Enron went bankrupt, and was a condition of the settlement with Andersen Consulting. It was very fortunate timing indeed.
McKinsey wasn't their legal auditor, blessing their financial statements. That's like saying any management consultant or contractor at Enron at the time should be punished. That makes no sense.
Andersen was willing to certify pretty much anything these companies wanted to do as fully legal and above-board, because these were big clients and Andersen didn't want to lose them to some other accounting firm by inconveniently insisting that they keep honest books.
Anecdotally, this happens at all levels of accounting.
I've hired two accountants in my lifetime. Both times I was asked something along the lines of, "I can be as as clean or dirty as you want me to be. Just let me know now, before we get started."
I'm reminded of an anecdote I heard once: When interviewing an accountant, the founder showed the accountant some financial and asked the accountant "What story do these numbers tell?" to which the accountant replied "What story do you want them to tell?"
That is the complete opposite of any of my experience.
CPAs are generally extremely conservative. And unless you are paying them immense amounts of money, they are almost always reticent to do anything even remotely risky.
After all, their license and this livelyhood is on the line.
>Andersen was willing to certify pretty much anything these companies wanted to do as fully legal and above-board, because these were big clients and Andersen didn't want to lose them to some other accounting firm by inconveniently insisting that they keep honest books
According to friends in the Big 4, this seems like standard practice.
As much as Sarbanes-Oxley can be a pain in the ass there are reason for its existance. And having n to change your external auditor ever so often is a good thing. As is bein SOX compliant in general. Companies that aren't or just barely tend to have some ugly, not illegal just ugly, stuff going on sometimes.
Ramalinga Raju, Satyam’s then chairman, admitted to overstating the company’s cash balance by $1bn, as well as exaggerating the company’s headcount by 13,000. “It was like riding a tiger, not knowing when to get off without being eaten,” he wrote of the growing deception. The company later admitted that the total irregularities amounted to $1.7bn.
Here is Ben 3 years previously recommending that executives break the law to preserve their standing with each other:
"It is important to note that just about all of these kinds of policies violate the Right to Work laws in California. Specifically, if you block a hire based on this kind of policy and the employee loses their job and cannot find work, your company is liable for his wages. As a result, the business relationship with the other company must be extremely important for you to employ any kind of “hands off” policy."
> With that in mind, the best way to deal with these situations is openly and transparently. Once the you become aware of the conflict between hiring the superstar employee and double-crossing your valued friend, you should get the issue onto the table by informing the employee that you have an important business relationship with his existing company and you will have to complete a reference check with the CEO prior to extending the offer. Let him know that if he does not want that to happen, then you will stop the process now and keep the process to date confidential. By speaking with your friend before making the hire, you will be able to better judge the relationship impact of hiring her employee. In addition, you may avoid making a bad hire as often candidates who do well in interviews turn out to be bad employees.
I'm not sure "open and transparent" is how I'd describe that.
Thanks for finding that. I remember reading this in the book, and immediately thought of the anti-poaching deal Google, Apple, Intel, Adobe, etc had with each other. It's identical to the activity they were found guilty of... He actually recommends you do this.
When he suggested collusion with other companies, I realized the book may have some bad advice in it.
I read the book and this was one position I found indefensible. Employees must have the ability to move companies, and any attempt to block it is bad and immoral. If an employee of any of my friends applied we would absolutely consider them and give them an offer, over any objections their old boss had.
> A good rule of thumb is the reflexive principle of employee raiding which states: “if you would be shocked and horrified if company X hired several of your employees, then you should not hire any of theirs.”
This seems really childish. I would only be shocked if friendly/partner companies /actively recruited/ staff from me. I would never be shocked if they hired a current employee who felt the new job was a better fit. In fact I would be happy for everyone involved.
Frankly, the proprietary "your" or "my" employees is already the wrong way to think.
I don't belong to my CEO - my CEO needs to give a reason to want to offer them my time. And while it is unlikely I'd find out, if I did find that management at my company made slimy deals with other firms to hurt my career, I'd be out the door immediately, loudly explaining to my coworkers and extended network of technical types why.
The superhero-CEO myth in the valley needs to go. It isn't even healthy for them.
I mean, given the tone of this post and the talk of how important it is to run everything by the counsel, "not committing a crime that literally leads to the executives being jailed" is a pretty low bar.
its consequentialism 101. do the consequences deter you.
A criminal charge from the US FEDERAL GOVERNMENT WITH INFINITE RESOURCES vs a civil charge from a bankrupt state against the most capitalized entities on the planet
HMMM TOUGH CHOICE
you may have been indoctrinated to respect due process of all laws as written from any united state and from the national republic itself, thats not the same game that everyone is playing.
The game he was playing was "become a billionaire." I was a member of the protected class in the Apple-Pixar-Google etc case. When I left, I got a 50% raise. I estimate that that collusion cost O(10,000) people between $50,000 and $500,000 each (my settlement was less than $10K, and my personal loss was ~$40,000/yr * 5 years).
Given that Ben is discussing executives here, let's say: O(1,000) people what, $100,000 to $1,000,000 each?
Others mentioned that Sharlene Abrams is "Michelle" here and posted links but this link seems to be better [1].
Interestingly, this case was about backdating _executive_ options _including her own_. I can't claim any knowledge of what PWC did or didn't approve of and some casual searching hasn't found any action taken by the DOJ or the SEC against auditors in relation to SV option backdating (please correct me if I'm wrong).
A quick search found that at one point option grants needed to be reported within 2 months but the SEC changed this to 2 business days and some companies and individuals were indicted because they failed to do so. Was this after this case or before? I'm not sure on the timing.
Whatever the case, this seems pretty wilful non-compliance (and, arguably, fraud) so I'm not surprised some went to jail. I'd also be surprised if anyone thought backdating anything that affected tax and legal obligations was legal, particularly a CFO.
As for anyone who thinks those who commit this kind of fraud shouldn't go to jail, I'd say jail is about the one thing the rich are afraid of. If you have $20m then a $3m fine might suck but it's not the end of your world. A year in jail in so much worse.
> As for anyone who thinks those who commit this kind of fraud shouldn't go to jail, I'd say jail is about the one thing the rich are afraid of. If you have $20m then a $3m fine might suck but it's not the end of your world. A year in jail in so much worse.
Except the intention here obviously was not to defraud, but to follow the law, which was so incomprehensible as to make even professionals fall into its traps. And it's not "the rich" going to jail here, but the professionals that are responsible for making that mistake. Maybe that professional happens to be "rich", but most people involved will walk free, as long as there's a scapegoat.
No, people shouldn't go to jail for this. These regulations shouldn't even exist. Even "socialist Europe" isn't as bad as the US in this regard.
"Abrams did not actually go to jail for backdating stock options. What she pleaded guilty to in a criminal case[1] was listing a false exercise date for her options on her tax returns. That meant more of her profits got taxed as capital gains (at a lower rate), less as ordinary income. Lowering your marginal tax rate is a silly reason to risk jail, but that’s a separate question. In his post, Horowitz says, “Michelle ultimately served 3 1/2 months in jail for her part in [her old employer’s] stock option practice — the same practice that we nearly implemented at Opsware.” Well, sort of. Certainly the charges against Abrams were a consequence of the backdating investigation.
It’s safe to guess, though, that backdating company loans to executives (something else that happened at Abrams’ earlier company) and switching around exercise dates to cut his own taxes weren’t practices Horowitz was planning to implement. You don’t need a great general counsel to steer clear of this. Just following the instructions on TurboTax would probably do it."
I don't think the rule that was violated here is very complicated at all. I'll get the technical details wrong, I'm sure, but the underlying ethic of the situation is obvious:
If you issue a stock option with a strike price equal to the day's market price of an option, it's "at the money". These options are tax-favored, presumably because it doesn't have intrinsic value (until it's "in the money", when the company shares later appreciate).
What you can instead do, if you're a cheat, is to pretend you're issuing tax-favored incentive options "at the money", but backdate them so that their price at issuance is the low price within some window. These options are effectively "in the money" (whatever the difference is between the low price set for the option and the current higher price is locked-in profit) when issued, have intrinsic value, and should be fully taxable, but you're falsely claiming otherwise.
These options are effectively "in the money" (whatever the difference is between the low price set for the option and the current higher price is locked-in profit) when issued, have intrinsic value, and should be fully taxable, but you're falsely claiming otherwise.
For what it's worth, options that are not "in the money" are still worth a lot of money and have intrinsic value. I'm not making a ridiculous claim here, this is what the Black Scholes model would say for example and it's why companies don't just hand out options freely to anyone. Yet according to our tax law they do not have value and are not taxable. (This is why options exist in the first place.) So, IMO the whole thing is complicated because the tax law has a somewhat arbitrary rule for determining what options are taxable.
IANAL but it is also not required to give out strike prices that match the exact day someone is hired. You have some flex in the time period. So these rules just aren't as simple as one might hope.
I guess my argument would just be that it seems pretty clear why it would be shady to go back in time and pick a false issuance date to create the impression that options issued at a higher price were really issued at a lower price in order to lock in untaxable profit.
Story seems to be that this lady went to jail from a knock-on effect of a stock option backdating scheme, which led to taxes being wrong. But many firms seemed to have done this, presumably with somewhat independent legal advice.
I'm not close enough to the details to really understand it, or even understand whether it smelled.
But I can remember a time when accountants were shopping around tax-saving schemes in the City of London, and I came across one of the sales guys. There would be all sorts of strange schemes, for instance involving the schemers "advising" P Diddy on his lyrics. Or publishing a book of their own poetry. And the explanation diagram would always fill up entire A4 pages with various sorts of entities. I'd get told the scheme was sound, approved by top lawyers, etc.
But I never participated, it just seemed too contrived to make sense. The stuff was always marketed as "you'll save tax" but everyone knows whether they're making an income, and what the rough tax rate is. So if you're paying a lot less something smells.
Michelle got actual jail time for a simple, honest accounting mistake? I don't buy it. Rich, connected people don't serve time for white collar crimes in the USA unless the criminality is severe.
Right. The person in question plead guilty to criminal tax evasion, an exceedingly rare charge. Nobody gets charged with tax evasion for reasonable but incorrect interpretations of the tax code. In this case the evasion was intentional, flagrant, and large.
I still think something is missing from the story. They state the scheme was designed by outside legal counsel. Lawyers are paid to know the law. Under federal law, for it to be criminal tax evasion, the conduct has to be willful. Doing something with advice of legal counsel is almost definitely not a willful violation of the law.
It wasn't a mistake, she should have known better. That's her job. She knew it was sketchy but got signoff from some sketchy accountants. That doesn't means she's no longer liable, just that the accountants are also liable.
I'm not sure the author would have gone to jail as the title implies. He seems to think that the cops would have arrested everyone standing within 50 feet of her, but since their firm was apparently operating inside of the bounds of the law it's hard to figure out what they would charge him with. Of course he still had to fire her to keep his company's name out of the headlines, but not because he was personally liable for her actions at her previous job.
PWC is supposed to be the definition of non-sketchy accountants, and like 50% their fee goes to maintain that appearance. Not saying they didn't sabotage that prestige here, but it's not like she deliberately selected for sketchy accountants.
So I generally sort of agree with this as a rule of thumb, but you should keep in mind that you're essentially refuting the premise of "Three Felonies A Day", a very popular book on HN. (I don't think it's an especially cogent book, but still, worth thinking about!)
Readit News
Jordan came back with an answer that I did not expect: “Ben, I’ve gone over the law six times and there’s no way that this practice is strictly within the bounds of the law. I’m not sure how PwC justified it, but I recommend against it.”
One of the foundational reasons for the spectacular implosions of both Enron and WorldCom was the behavior of their common auditor, the ginormous accounting firm Arthur Andersen (https://en.wikipedia.org/wiki/Arthur_Andersen). Andersen was willing to certify pretty much anything these companies wanted to do as fully legal and above-board, because these were big clients and Andersen didn't want to lose them to some other accounting firm by inconveniently insisting that they keep honest books. So they were free to rip people off in all sorts of creative ways for years, protected from close scrutiny by Andersen's seal of approval.
All of which is to say that, if you represent serious cash flow and you're tempted to push the legal envelope, you probably shouldn't expect a Big Four accountant to be the one to talk you out of it.
Accenture is a spinoff from Anderson Accounting.
Do with that knowledge what you will: https://en.wikipedia.org/wiki/Accenture#Emergence_of_Accentu...
In the same way that we shouldn't condemn the employees of <INSERT TECH COMPANY> because senior leaders decided to <Censor/Abuse/Manipulate users> we shouldn't condemn otherwise ethical accountants because of the misdeeds of their colleagues - especially when they pass more stringent ethical requirements than developers.
Ironically, people couldn't differentiate the isolated incident, and AA liquidated/sold because no one wanted to do business with them. [0]
[0] en.wikipedia.org/wiki/Arthur_Andersen#Demise
Full Disclosure: I recently left a position with one of Accenture's subsidiary. I also hate that company.
The Supreme Court actually vacated Arthur Andersen's conviction for their actions in Enron. The SC basically said the jury instructions were too vague, and the jury could have believed that Arthur Andersen thought they did everything right and legally but still voted to convict. Arthur Andersen was never retried since there wasn't much left at that point anyway.
Arthur Andersen Accounting (or whatever they formally called themselves) and Arthur Andersen Consulting had already broken up into two different companies. They set up some weird agreement where the more profitable of the two would pay a cut of the profit difference to the other company. Consulting is always more profitable than accounting (which is why all the Big 4 have gotten back into even in the age of Sarbane-Oxley, where they can't audit a company they consult for), so Arthur Andersen consulting had to send a big-ass check to the accountants every quarter and they wanted to get out of that. The blow up of Arthur Andersen accounting presented the perfect opportunity. Arthur Andersen Consulting changed their name to Accenture to distance themselves from the Enron scandal, but it was mostly PR because they didn't have anything to do with Enron anyway.
McKinsey, however, had consultants all through Enron. I believe Skilling worked for McKinsey right out of college and threw them a ton of work. There's no way people at McKinsey didn't know what Enron was up to, but they somehow got off scot-free
The name change was in place before Enron went bankrupt, and was a condition of the settlement with Andersen Consulting. It was very fortunate timing indeed.
Anecdotally, this happens at all levels of accounting.
I've hired two accountants in my lifetime. Both times I was asked something along the lines of, "I can be as as clean or dirty as you want me to be. Just let me know now, before we get started."
CPAs are generally extremely conservative. And unless you are paying them immense amounts of money, they are almost always reticent to do anything even remotely risky.
After all, their license and this livelyhood is on the line.
According to friends in the Big 4, this seems like standard practice.
--------------
Ramalinga Raju, Satyam’s then chairman, admitted to overstating the company’s cash balance by $1bn, as well as exaggerating the company’s headcount by 13,000. “It was like riding a tiger, not knowing when to get off without being eaten,” he wrote of the growing deception. The company later admitted that the total irregularities amounted to $1.7bn.
----------------------
How these things get past auditors is beyond me.
"It is important to note that just about all of these kinds of policies violate the Right to Work laws in California. Specifically, if you block a hire based on this kind of policy and the employee loses their job and cannot find work, your company is liable for his wages. As a result, the business relationship with the other company must be extremely important for you to employ any kind of “hands off” policy."
https://a16z.com/2011/02/23/is-it-ok-to-hire-people-from-you...
> With that in mind, the best way to deal with these situations is openly and transparently. Once the you become aware of the conflict between hiring the superstar employee and double-crossing your valued friend, you should get the issue onto the table by informing the employee that you have an important business relationship with his existing company and you will have to complete a reference check with the CEO prior to extending the offer. Let him know that if he does not want that to happen, then you will stop the process now and keep the process to date confidential. By speaking with your friend before making the hire, you will be able to better judge the relationship impact of hiring her employee. In addition, you may avoid making a bad hire as often candidates who do well in interviews turn out to be bad employees.
I'm not sure "open and transparent" is how I'd describe that.
When he suggested collusion with other companies, I realized the book may have some bad advice in it.
Referring to the latter as "break[ing] the law" in the context of discussing criminal activity is misleading.
This seems really childish. I would only be shocked if friendly/partner companies /actively recruited/ staff from me. I would never be shocked if they hired a current employee who felt the new job was a better fit. In fact I would be happy for everyone involved.
I don't belong to my CEO - my CEO needs to give a reason to want to offer them my time. And while it is unlikely I'd find out, if I did find that management at my company made slimy deals with other firms to hurt my career, I'd be out the door immediately, loudly explaining to my coworkers and extended network of technical types why.
The superhero-CEO myth in the valley needs to go. It isn't even healthy for them.
> your company is liable for his wages
doesn't cross his threshold of
> In this business .... we will not go to jail
its consequentialism 101. do the consequences deter you.
A criminal charge from the US FEDERAL GOVERNMENT WITH INFINITE RESOURCES vs a civil charge from a bankrupt state against the most capitalized entities on the planet
HMMM TOUGH CHOICE
you may have been indoctrinated to respect due process of all laws as written from any united state and from the national republic itself, thats not the same game that everyone is playing.
Given that Ben is discussing executives here, let's say: O(1,000) people what, $100,000 to $1,000,000 each?
Interestingly, this case was about backdating _executive_ options _including her own_. I can't claim any knowledge of what PWC did or didn't approve of and some casual searching hasn't found any action taken by the DOJ or the SEC against auditors in relation to SV option backdating (please correct me if I'm wrong).
A quick search found that at one point option grants needed to be reported within 2 months but the SEC changed this to 2 business days and some companies and individuals were indicted because they failed to do so. Was this after this case or before? I'm not sure on the timing.
Whatever the case, this seems pretty wilful non-compliance (and, arguably, fraud) so I'm not surprised some went to jail. I'd also be surprised if anyone thought backdating anything that affected tax and legal obligations was legal, particularly a CFO.
As for anyone who thinks those who commit this kind of fraud shouldn't go to jail, I'd say jail is about the one thing the rich are afraid of. If you have $20m then a $3m fine might suck but it's not the end of your world. A year in jail in so much worse.
[1] http://retheauditors.com/2014/02/13/vc-horowitz-implicates-a...
Except the intention here obviously was not to defraud, but to follow the law, which was so incomprehensible as to make even professionals fall into its traps. And it's not "the rich" going to jail here, but the professionals that are responsible for making that mistake. Maybe that professional happens to be "rich", but most people involved will walk free, as long as there's a scapegoat.
No, people shouldn't go to jail for this. These regulations shouldn't even exist. Even "socialist Europe" isn't as bad as the US in this regard.
It’s safe to guess, though, that backdating company loans to executives (something else that happened at Abrams’ earlier company) and switching around exercise dates to cut his own taxes weren’t practices Horowitz was planning to implement. You don’t need a great general counsel to steer clear of this. Just following the instructions on TurboTax would probably do it."
https://web.archive.org/web/20150108121957/http://go.bloombe...
[1] https://web.archive.org/web/20130530050608/http://www.justic...
If you issue a stock option with a strike price equal to the day's market price of an option, it's "at the money". These options are tax-favored, presumably because it doesn't have intrinsic value (until it's "in the money", when the company shares later appreciate).
What you can instead do, if you're a cheat, is to pretend you're issuing tax-favored incentive options "at the money", but backdate them so that their price at issuance is the low price within some window. These options are effectively "in the money" (whatever the difference is between the low price set for the option and the current higher price is locked-in profit) when issued, have intrinsic value, and should be fully taxable, but you're falsely claiming otherwise.
For what it's worth, options that are not "in the money" are still worth a lot of money and have intrinsic value. I'm not making a ridiculous claim here, this is what the Black Scholes model would say for example and it's why companies don't just hand out options freely to anyone. Yet according to our tax law they do not have value and are not taxable. (This is why options exist in the first place.) So, IMO the whole thing is complicated because the tax law has a somewhat arbitrary rule for determining what options are taxable.
IANAL but it is also not required to give out strike prices that match the exact day someone is hired. You have some flex in the time period. So these rules just aren't as simple as one might hope.
I mean, besides free workplace cafeterias, work shuttles, and employer health coverage.
Story seems to be that this lady went to jail from a knock-on effect of a stock option backdating scheme, which led to taxes being wrong. But many firms seemed to have done this, presumably with somewhat independent legal advice.
I'm not close enough to the details to really understand it, or even understand whether it smelled.
But I can remember a time when accountants were shopping around tax-saving schemes in the City of London, and I came across one of the sales guys. There would be all sorts of strange schemes, for instance involving the schemers "advising" P Diddy on his lyrics. Or publishing a book of their own poetry. And the explanation diagram would always fill up entire A4 pages with various sorts of entities. I'd get told the scheme was sound, approved by top lawyers, etc.
But I never participated, it just seemed too contrived to make sense. The stuff was always marketed as "you'll save tax" but everyone knows whether they're making an income, and what the rough tax rate is. So if you're paying a lot less something smells.
I'm not sure the author would have gone to jail as the title implies. He seems to think that the cops would have arrested everyone standing within 50 feet of her, but since their firm was apparently operating inside of the bounds of the law it's hard to figure out what they would charge him with. Of course he still had to fire her to keep his company's name out of the headlines, but not because he was personally liable for her actions at her previous job.
> Once the SEC decided that most technology company stock option procedures were not as desired, the jail sentences were handed out arbitrarily.
The SEC does not jail people, courts do. I don't see how the SEC's motivations would lead judges to hand out arbitrary jail sentences.
Tell that to Jeffrey Skilling.
https://en.wikipedia.org/wiki/Jeffrey_Skilling
The one exception to this rule is rich people who screw over other rich people. Arguably Skilling falls under this rule, as does Bernie Madoff.
Previous discussion: https://news.ycombinator.com/item?id=7191642
Dead Comment