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Wheel, Deal, and Steal: Deceptive Accounting, Deceitful CEOs, and Ineffective Reforms

Book Description

Global financial scandals didn't stop with Enron, WorldCom, or Tyco. In fact, they're still notover. In Wheel, Deal, and Steal, Harvard Business School professor Daniel Quinn Mills showsinvestors how imperial CEOs continue to steal from their investors - and how the rules intendedto protect investors continue to fail. Mills outlines comprehensive reforms to clean up the systemand keep it clean. Best of all, he shows small investors how to protect what's left - and maybeeven recover their losses.

Table of Contents

  1. Copyright
    1. Dedication
  2. FT Prentice Hall FINANCIAL TIMES
  3. Financial Times Prentice Hall Books
  4. Acknowledgments
  5. I. What Happened to Investors’ Money?
    1. 1. Why You Should Read This Book
      1. Investors Aren’t Primarily to Blame for Their Losses
      2. Power Is at the Root of the Corporate Financial Scandals
      3. The Internet Bubble and The Big Company Scandals
      4. The Decay of American Capitalism
      5. Returning to a More Honest America
      6. Talking Points
    2. 2. Scandals and More Scandals
      1. The Scandals in a Nutshell
        1. Sunbeam
        2. Enron
        3. WorldCom
        4. Global Crossing
        5. Tyco
        6. Adelphia
        7. ImClone
        8. Qwest
        9. Warnaco
        10. General Electric
        11. IBM
        12. Xerox
        13. Microsoft
      2. Why We Didn’t See This Coming
      3. Talking Points
    3. 3. Systematic Deception
      1. What Was Going On?
      2. Corrupt Accounting
      3. Restatements
      4. CEOs Ask for Misrepresentation
      5. Hiding Relative Importance
      6. Just Like the Others
      7. The Common Accounting Dodges
        1. Managing Earnings: Cookie Jar Accounting Using Reserve Accounts
          1. Not expensing options.
          2. Using one-time write-offs that occur year after year.
          3. Issuing pro-forma financial reports.
        2. Calling Something What It Isn’t
        3. Misclassifying or Fabricating Revenues
        4. Recognizing Revenue Too Soon
        5. Creating the Appearance of Sales via Small Acquisitions
        6. Creating Profits by Assumption from the Pension Fund
        7. Recognizing Expenses Too Late
        8. Disguising Loans to the Company
        9. Fudging Cash Flow
        10. Manipulating the Classification of Expenses
        11. Other Examples
          1. Disguising loans as sales.
          2. Vendor financing of high-risk customers.
          3. Disguising compensation as loans.
      8. SEC Oversight
      9. The Criminal Mind
      10. Talking Points
    4. 4. More Than a Few Bad Apples
      1. A Lot of Dirty Little Piggies
      2. Bad Actors but No Scandals
      3. Few Prosecutions Doesn’t Mean Few Violations
      4. Investors Made Too Little, and CEOs Too Much
      5. Changes in CEOs’ Attitudes Led to a Decline in Investors’ Trust
      6. Business Isn’t Only to Blame
      7. Not a Great Depression—Yet
      8. The American Economic System Is Not Broken
      9. The Business System as a Whole Is Not Broken
        1. The Financial System as a Whole Is Not Broken
        2. The Securities Industry Is Broken
      10. Conflicts of Interest: The Core of the Problem in the Securities Industry
        1. The CEOs: Benefiting Not with but without the Shareholder
        2. Members of Boards of Directors: Scratching the CEO’s Back
        3. Accountants: Doing Audits and Consulting for Clients
        4. Investment Banks
        5. Mutual Funds: Dealing on Their Own Account
        6. Managing Hedge Funds and Mutual Funds
        7. Brokerage Houses
        8. Public Officials
      11. Awards for “the Best” in Corporate America
        1. CFO Magazine’s “Excellence Awards”
          1. Scott Sullivan of WorldCom.
          2. Andrew Fastow of Enron.
          3. Mark Swartz of Tyco.
        2. Chief Executive Magazine’s Awards
          1. Enron.
          2. Chief Executive of the Year Sandy Weill.
        3. Fortune Magazine’s Awards
          1. Enron.
          2. Citigroup.
      12. Talking Points
  6. II. Infectious Greed: Who Got the Money?
    1. 5. Shareholders versus CEOs: The CEOs Make It Big
      1. CEOs Made Fortunes without Building Companies
      2. Aligning CEO and Investor Interests
        1. Shifting to Options
        2. The Failure of the Theoreticians
      3. Stock Options Begin to Dominate CEOs’ Pay Packages
        1. Preferential Accounting Treatment
        2. Consultants, CEO Compensation, and CEO Egos
        3. The Company as the CEO’s Piggy Bank
      4. Behind the Executive Pay Explosion
      5. Why Options Pay Off When Companies Don’t
      6. Stock Options and the Link to Performance
        1. Indexing
        2. Follow-Up Option Grants
        3. Reissuing
        4. Repricing
        5. Rescinding
        6. Hedging
        7. Rigging
        8. Reloading
      7. Shareholder–CEO Alignment in Tatters
      8. Is Alignment of CEO and Shareholder Interests Possible?
      9. Talking Points
    2. 6. Osama Bin Andersen: The Role of the Accountants
      1. Peer Review
      2. Deceiving Investors Legally
      3. An Insidious Dynamic Develops
      4. Other Commercial Ventures
      5. The “Integrated Audit”
      6. Widespread but Not Ubiquitous
        1. A Scapegoat
        2. Becoming an Arthur
      7. Talking Points
  7. III. The Failure of Checks and Balances
    1. 7. Neither Prevent nor Punish
      1. Rubber Stamps—Boards of Directors
      2. Protection for Deception: The Role of the Attorneys
      3. The Failure of the Regulators
      4. What the Prosecutors, Courts, and the SEC Didn’t Do
      5. What the Fed Didn’t Do
      6. Talking Points
    2. 8. Ordinary Business at the Banks
      1. Conniving with Corporations to Deceive Investors
      2. Greasing the CEO’s Palm via IPO Allocations
      3. Talking Points
    3. 9. The Corruption of the Analysts
      1. Use It or Lose It
      2. May Day
      3. Maybe 20 Percent Are Honest
      4. What’s Said Isn’t What’s Done
      5. Actual and Potential Clients
      6. The Language of Recommendations
      7. Efforts at Reform
      8. Independent Analysts
        1. Daniel Scotto
        2. Mike Mayo
        3. Kenneth Boss
      9. Praise (or Rebuke) for Pay
      10. Stealth Marketing
      11. Talking Points
  8. IV. Why It Happened
    1. 10. The Temptation to Steal
      1. The New Very Rich: CEOs
      2. How CEOs Get Rich
        1. Cashing in Early
        2. Taking Golden Parachutes or Walkaway Money
        3. Getting Paid for Failure
      3. The Ignorant CEO
      4. So Strong a Temptation
      5. The Crucial Importance of Leadership
      6. The Courage to Speak Out
      7. Talking Points
    2. 11. The Ethics of the Gutter
      1. Do What’s Right: Why Ethics Are Very Important
      2. What Are Ethics?
      3. The Failure of Ethics Programs in Companies
      4. The Decline of American Ethics and How it Happened
      5. The “Push the Limits” Environment
      6. Hamstringing Ethics in America
      7. The Role of the Business Schools
      8. Talking Points
  9. V. Reforms to Help Investors
    1. 12. Ties, Belts, and Shoelaces: Changing Incentives for CEOs
      1. What To Do about CEO Compensation
        1. Standard Options
        2. Indexing Options
        3. Summary of the Major Elements of Optimal Option Packages
      2. A Critical Change Needed in Federal Tax Law
      3. Boards of Directors versus the CEO in Setting Pay Packages
        1. Expensing Options
      4. The CEOnistas—A Parody
      5. Talking Points
    2. 13. Total Regulatory Reform
      1. A System Full of Holes
      2. Imperiling Investors by Keeping the SEC Weak
      3. Strengthening Investor Protection via a Consolidated Agency
      4. Letting Investors Leave the Market
      5. Keeping Investors in the Market
      6. Overuse and Abuse—the Gnomes of Norwalk
      7. Talking Points
    3. 14. Restraining the Imperial CEO
      1. American CEOs Have Too Much Power for the Safety of American Investors
      2. Proposals to Strengthen Corporate Boards
      3. Increased Shareholder Activism
      4. America’s Imperial CEOs
        1. How Imperial CEOs Control their Boards
          1. The CEO chairs the board.
          2. The CEO is the source of information and initiatives.
          3. Exploiting the dual and conflicting roles of the board.
      5. The Danger of Ineffective Reforms
      6. Power Struggle: What Will Happen with Governance Reforms if the Imperial CEO Retains His or Her Power
        1. Alternatives to the Imperial CEO
      7. America’s Leadership Paradigm Is Upside Down
      8. We Don’t Have to Have Imperial CEOs
      9. Reining in the CEO
      10. Talking Points
  10. VI. The Market’s Role in a Solution
    1. 15. Let the Market Choose
      1. Limitations of the Market
      2. Freeing the Market from Ideological Constraints
      3. Trusting the Imperial CEO Again
      4. Finding a Market Solution in the Not-for-Profit World
      5. Relying on the Market to Reform the Securities Industry
      6. Comments of Fed Chairman Alan Greenspan on the Corporate Financial Scandals
      7. Talking Points
    2. 16. Ethics Can Make the Market Work
      1. Corporate Leadership’s Role
      2. Business Schools’ New Role in Teaching Ethics
        1. Should Ethics Be a Separate Subject or Part of Other Courses?
        2. Better Selection of Business School Applicants
        3. Improved Course Content
      3. The Importance of Continuing Education about Ethics
      4. Will Society Reinforce Courses in Ethics?
      5. Talking Points
  11. VII. Getting Your Money Back
    1. 17. Freezing and Seizing: A Direct Route to the CEO’s Pocketbook
      1. Three Routes to the Money
      2. Getting the Company to Sue for You
      3. Appropriate Limitations
      4. Filing a Claim against Your Broker
      5. Going Directly to the Courts
      6. Can Investors Get the Law Enforced?
      7. What Happened to Chainsaw Al
      8. Proving that CEOs Were at Fault
        1. Individual Suits
        2. Class Actions
      9. Getting Money if You Win the Suit
      10. Talking Points
    2. 18. Getting Congress to Get it for You
      1. Taking Money from Perpetrators and Giving It to Victims
        1. A Restitution Fund
        2. Voluntary Assumption of Risk
        3. Paying for a Fund
      2. Idle Redress—Excessive Legalism
      3. Talking Points
  12. VIII. Protecting Yourself from New Dangers
    1. 19. How Should I Invest?
      1. A Tough Time for Investors
      2. How to Invest
      3. The Fundamentals of the Market: The Economic Environment
        1. Learn How the Game is Played
        2. Set Your Expectations Reasonably
      4. Deciding Whether the Market as a Whole Is Becoming Less Dangerous for Investors
        1. Three Steps to Making an Investment
        2. Key Things to Watch for
        3. How to Pick Individual Stocks
      5. Which Way Will the Market Go?
        1. The Case for Another Bull Market
        2. The Case for a Bear Market
      6. Special Considerations for Investing Pension Money
        1. Picking Individual Companies in Which to Invest
      7. Talking Points
    2. 20. Hedge Funds That Don’t Hedge
      1. The Next Big Thing—The Fund of Funds
      2. Hedge Funds
        1. Regulating Hedge Funds
        2. The Impact of Hedge Funds on the Market
      3. Talking Points
    3. 21. Do Investors Dare Return to the Market?
      1. A Bear Market, Yes, But Not Only a Bear Market
      2. Diagrammatic Summaries of CEO and Investor Conflict in the Securities Markets
      3. The Temptation Remains
      4. It’s Still Going On
      5. Reform, Justice, and Restitution
      6. The Irony of the Investor as a Victim of American Capitalism
      7. The Trembling Foundations of Wall Street
      8. Sources of Investor Risk
      9. American Investment Markets without Investors
      10. Key Ideas of This Book
      11. Talking Points
  13. Notes