Risk Insider: Beaumont Vance

VW, Enron and the Root of Evil

By: | October 15, 2015

Beaumont Vance is an executive risk manager. He has managed strategic risk for Fortune 100 firms for the past 15 years. His multidisciplinary approach weaves together such disparate fields as quant modeling, statistics, behavioral economics, biology and game theory into practical solutions and insights.

Topics: ERM | Risk Insider

VW was caught altering its automobile software in order to thwart environmental tests in the USA. The world is aghast and outraged.

How could this happen?

Enron collapsed overnight after massive accounting fraud was uncovered. The world was aghast and outraged.

How could that happen?

Despite the differences between these two companies, they share something.

After the experts combed over the remains of Enron in the wake of the scandal, they found something profound: The malfeasance was not the result of evil, greedy criminally minded people disguising themselves as finance professionals and accountants.

When senior leadership says, “failure is not an option,” what they often mean is “anyone not reporting success will be fired.”

The perpetrators of the fraud were, instead, just normal, unexceptional finance professionals and accountants.

So how did they create such a large fraud?

In both cases, there was a strong message from the top: Failure is not an option.  While this sounds like a very worthy and American credo, one worthy of being put into book form as a motivation to all people seeking blinding success in business, it is actually a hallmark of corporate fraud.

When senior leadership says, “failure is not an option,” what they often mean is “anyone not reporting success will be fired.”

So imagine a typical, law-abiding manager putting together his reports at the end of the fiscal quarter. If he reports the truth, he is not going to meet the very lofty goals set by the CEO. But if he fudges the numbers, he won’t be fired — at least not this week.

This finance person is not a criminal. However, he has a mortgage, children to support, a car payment or two. He knows that being honest will likely cause him to lose his job (“failure is not an option!”).

However, maybe if he just adds some of next quarter’s revenue into this quarter, he can get by and make it up later. No one will ever know.

I have no knowledge of what happened inside VW other than what is reported. However, it was clear that there was a No Failure policy when it came to the CEO’s goals. At some point, someone responsible for the software and emissions requirements faced a similar dilemma. Report the truth and get fired, or fudge something.

In the case of VW, the answer was to simply fudge the emissions software on the diesel cars. After all, if the cars could not be designed to comply with emissions standards, and failure was not an option, what other option was there?

In looking for fraud and moral hazards, it is easy to assume that it will be the result of greed and criminal intent.

But perhaps this wild-eyed fanatical dedication to succeeding at all costs is a more likely cause.

The risk is not so much a moral failing as it is a figment of a certain type of corporate culture.

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