THREE COMPANIES FUND AN ACCOUNTING THINK TANK

By Tony Tinker, Association for Integrity in Accounting

What three things do Morgan Stanley, IBM, and General Electric have in common?

First, all three have been targeted in probes by securities regulators. Morgan Stanley was one of 10 investment banks that signed a $1.4 billion settlement over allegations that their research was tainted to win investment-banking business from corporate clients. IBM's revenue recognition practices became the subject of an SEC investigation in 2003, adding to an already long list of, 'questionable accounting practices that have emerged under Lou Gerstner's tenure' . GE's employment and postretirement contacts, signed with its former CED Jack Welch, became the topic of an SEC probe in September 2002.

Second, Morgan Stanley, IBM, and General Electric are now funding an academic center at Columbia University to improve standards for accounting and stock research. Morgan Stanley's settlement included a $50 million fine, and $75 million 'toward independent research'.

Third, Morgan Stanley, IBM, and General Electric, are already three of the top nine "Corporate Principal Sponsors" at Columbia --$250,000+. Others cited with Morgan Stanley in their settlement with federal and state prosecutors include Credit Suisse, Goldman Sachs, Merrill Lynch, Lehman Bros. This entire cast also looms large as "Sponsors" of Columbia University.

What do corporate partners ("Sponsors") get for their money from Columbia? According to Columbia, they glean some very practical benefits: including, ' ... priority registration for our popular executive education programs ... [access to]... the extensive networks of world class faculty members.... opportunities for executives to lecture at Columbia Business School...and for recruiters, full information about first and second year MBA students'.

Does this mean that fines imposed on financial institutions, are being handed back to them via a 'related-party' institution (Columbia University)? It would be wrong to analogize this situation with money laundering. After all, in the money laundering case, the prosecutors wouldn't actually help out in recycling the cash. Here, they are actively engaged: after fining a defendant for theft, the regulators are making a donation to the crooks favorite charity. This touching irony won't be lost on the millions of investors and pensioners, who lost billions in stock and accounting frauds. No doubt some entertain the whimsy that this loot might have been returned to them.

Thank heavens for the moral rectitude of those in academia. When Columbia's Professor Stephen Penman was asked if there would be a conflict if the findings of the center went against the commercial interests of the center's founding financiers, Penman said, "That is not a concern. As with the funding of any academic center in a university, the independence is maintained. It could be that the center's project teams may reach conclusions that are not consistent with their interests."

Penman's own theoretical commitments would caution against such starry-eyed optimism. He seems unshaken even by his own credentials and those of his co-director and ex-Columbia professorial colleague, Trevor Harris. Harris has recently abdicated the groves of academe for employment with (Guess who?) Morgan Stanley!". Penman is also a benefactor of that novel academic game of "Revolving-Doors-with-Musical Chairs". He is now Morgan Stanley Dean Witter Research Scholar. Harris and Penman are both graduates of the University of Chicago, and heavy contributors to that school's house journal, The Journal of Accounting Research (JAR). They (and JAR) have waged a 20-year academic war against regulatory institutions and have sidetracked the accounting academy into a fruitless quest to into the parallel universe of "The Economic Unreal". The consequences for accounting standard setting have been disastrous. Ill-conceived standards, created to produce dubious information, used by 'economic clods', living in a parallel Economic Universe. The result has been the shredding of protections and firewalls, bringing us to a new low watermark -- as denoted by the Morgan Stanley et al settlement for "independent" research. Would it be an indecent question to ask what kind of Morgan Stanley remunerations enrich these "independent" academics who have been hired to discharge Morgan Stanley's quest for "independent" research?

And thank heavens for the moral rectitude of those regulatory agencies. In commenting on the stock fraud settlement, the SEC's William Donaldson noted, "These cases reflect a sad chapter in the history of American business -- a chapter in which those who reaped enormous benefits from the trust of investors and who profoundly betrayed that trust"

Could it be that Donaldson was unaware that his million dollar fines, imposed on Morgan Stanley et al, would be routed back into that heap of 'enormous benefits', pillaged by financial institutions from their trusting investors? Could it be that William Donaldson and Eliot Spitzer have become mesmerized by their own humdrum pieties about conflicts of interest, firewalls, restoring integrity, revitalizing ethics (rhubarb, rhubarb, rhubarb...) and have forgotten the low-rent Ivory Tower?

Tony Tinker is member of the Association for Integrity in Accounting, a Professor at Baruch College at the City University of New York, and the Co-Editor of Critical Perspectives on Accounting & The Accounting Forum.

Last Updated October 14, 2003