MGT7019+Fannie+Mae


 * Assignment:**

Assess the Ethical Dilemmas of Fannie Mae:
Fannie Mae was a company driven to earnings targets through a compensation system associative with those results. Moreover, Fannie Mae was able to smooth earnings through decisions on the recording of interest costs, and used questionable discretion in determining the accounting treatment for buying and selling of mortgage assets. A myriad of decisions allowed executives at the company to develop and maintain earning growth with a resulting guaranteed payout to them under the executive incentive plans.

Using Case 6.2 on pp. 267-274, Fannie Mae: The Most Ethical Company in America, answer questions 1-5 on p. 275. After reading the document and before answering the questions, initiate your paper with the problem statement; The problem to be investigated is.

Your answers should not simply be your opinion. For each answer to each question, include at least two outside, peer-reviewed articles that you can cite as academic research resources that validate your answer. Length: 5-7 pages


 * **MGT7019-8 ** ||  ||
 * **Ethics in Business ** || **6 Fannie Mae: The Most Ethical Company in America ** ||
 * Stephen **
 * Excellent work on this assignment. When “Humpty Dumpty” comes down like Fannie Mae did because of greed and unethical leadership, we all know that the pieces can never be put back together again in the same way. The Fannie Mae scenario is the perfect example of why we need both internal quality assurance and external quality control measures even in the absence of any “negative news” or warnings to safe guard public funds or investments. My favorite set of quotes from that nursery rhyme has always been: **
 * “When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less. **
 *  “The question is,” said Alice, “whether you can make words mean so many different things.” **
 * Your reference to Holmes, Langford, Welch, & Welch and their comment that “unethical charismatic leaders have dependent and compliant followers, who learn to rationalize their immoral behavior. These leaders manage to convince followers that immoral behavior is justified” (2002, p. 87). I guess the lesson to be learned is that when we “make words mean so many different things,” we can rationalize anything even immoral behavior. **
 * Excellent work on this assignment. **
 * Thanks **
 * Thanks **

=Fannie Mae: The Most Ethical Company in America = The problem to be investigated is whether there is a tie between corporate governance, social responsibility and ethics. In 2004 it was reported that Fannie Mae has overstated its earnings over the previous six years by billions of dollars. This paper will reflect on the ways that outsiders viewed “the most ethical company in America” and the reality of the internal workings and machinations that resulted in Fannie falling from a huge wall, and the implications this has on ethics.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">How Did Fannie Get on the Wall in the First Place?
<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">Fannie Mae was established to facilitate the perceived social responsibility in the United States of encouraging the growth and affordability of housing, especially for disadvantaged groups. During the period in which Franklin Raines was at the helm, the company could seem to do no wrong, garnering recognition for many socially responsible accolades, being “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">near the top of everyone’s ‘best’ list <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">Jennings, 2010, p. 268 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). For a company, is social responsibility the only mandate? Perhaps for Fannie Mae who was established by federal charter to meet such a mandate, this might be the case, but Milton Friedman argues that “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">there is one and only one social responsibility of business. . . increase its profits <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">1970, para. 33 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). This author believes that if a company does not minimally maintain cash flow, or “real” profits, over the long term, it will be unable to meet any contrived social responsibility or survive.* <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">How an organization goes about maintaining or increasing cash flow brings into play the idea of governance, which “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">comprises the roles, responsibilities, and balance of power among executives, directors, and shareholders <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">Ryan, Buchholtz, & Kolb, 2010, p. 673 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). According to Aguilera and Cuervo-Cazurra (2004) there are two purposes of corporate governance policy; improving quality of governance (or the running of the company), and increasing accountability of the leadership. Fannie Mae’s leadership was fixated on a single indicator of company success, while using its other accolades as a means of inviting investment. Ethics indicates the behavior that all individuals should take in any given situation. In regards to Fannie Mae’s governance, the behaviors engaged in by upper management were contrary to good governance, and ethics. <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">This author believes that there is no direct connection between social responsibility and ethics – because responsibility is an individual acceptance of behavior and obligation, while ethics deals what is right and what is wrong for all individuals. On the other hand, good governance of a company tends toward the continuation of that company. Continuation, works toward the maintaining of jobs for employees, the receipt of quality goods and services by customers, and a solid investment for shareholders. In this way there is a connection between good governance and ethical behavior. <span style="font-family: 'Times New Roman',Times,serif; font-size: 15.6px;">* =<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">How Many Kings’ Men Passed Fannie and Took No Notice? = <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">The signals that were “overlooked” in Fannie Mae’s devolution, listed by Jennings (2010), were: <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">In each case, Fannie Mae’s management took no action to investigate these claims. In part this was due to the way that the company was organized, and contributed to their minimal internal controls. The Ethics and Compliance Office at the time was part of Fannie’s litigation division. The principle responsibility of the individual in charge of this office, however, was to “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">defend the company against allegations and suits by employees <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">Jennings, 2010, p. 272 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). So, even though Barnes included specific information regarding suspected wrong doing in regards to Fannie’s accounting practices, no steps were taken by either that office or The Office of Auditing. Jennings further states that in interviews “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">many of the officers at Fannie were aware of. . . Barnes allegation. . . but none followed up on the issue or required an investigation <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">p. 273 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">Holmes, Langford, Welch, & Welch noted that “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">unethical charismatic leaders have dependent and compliant followers, who learn to rationalize their immoral behavior. These leaders manage to convince followers that immoral behavior is justified <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">2002, p. 87 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). The implication of Jennings case is that management was on the same page to ensure the attainment of the major goals of the corporation, and did nothing to endanger their paychecks, or their bonuses. =<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">Did Fannie Climb or Was It Helped? = <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">With bonuses up to 100% for the attainment of a single accounting measurement each year, each officer was invested and motivated to meet the targeted goal, this is human nature. Without stringent methods of internal control, and empowered external auditors, however, this was a situation fraught with peril to the ethical nature of everyone involved. No one benefitted from a negative report, all of the benefit was in allowing discrepancies in policy or numbers to not be investigated. According to Howell & Avolio (1992), “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">Unethical. . . leaders follow standards if they satisfy their immediate self-interests. They are adept at managing an impression that what they are doing conforms to what others consider “the right thing to do.” By applying their enormous skills of communication, they can manipulate others to support their personal agenda <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">p. 49 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">It is ironic that Raines, while engaging in non-standard accounting practices to “smooth” the earning profile of his company, publicly stated that the boards of public corporations should “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">select and oversee competent and ethical management <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">”, and that those managers are responsible to “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">operate the company in a competent and ethical manner. . . never put[ting] personal interest ahead of or in conflict with the interest of the company <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">Jennings, 2010, p. 274 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). By tying incentives to a single accounting measurement, Raines ensured that each officer’s self-interest was potentially in conflict with the interest of the company. <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">If policies had been put in place, and the organizations structure organized in such a way that safeguards had been put in place to ensure the quality and accuracy of the numbers without the personal involvement of those who were to benefit, then the conflicts of interest between the personal and professional interest of the officer’s may have been mitigated. The use of earnings per share as Raines single determiner of Fannie’s success, however, is even more questionable. Earnings per share should be a straight-forward calculation since it’s supposed to be the net revenue of the company, less dividends to preferred stockholders, divided by the number of common shares extant. With accounting strategies this simple indicator is not as simple as it would appear, as there are GAAP EPS, and pro forma EPS, and EBITDA EPS. It is possible for two companies to have the same EPS number, with one flush with cash, while the other bleeding cash and accruing large amounts of debt. It is a poor investor, and a terrible management team, that relies on one financial measure without it being used in conjunction with statement analysis and other measures or corporate health. =<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">How Do We Achieve Fannie-“ness”? = <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">By working the books backwards Fannie Mae officers were assured of making their goals, and their bonuses. The only way that this could be done over the long haul is to resort to funny numbers and creative bookkeeping. The problem with this strategy is that reality does not change just because you report it differently. For Fannie they were able to build in this fudge factor by invoking the volatility adjustment. This way the numbers worked out, the executives took home huge paychecks, investors were encouraged, analysts supported and the scheme continued. <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">The longer any measured system is skewed from reality, however, the larger the divergence and the more obvious the difference becomes to knowledgeable observers. A con cannot go on forever, sooner or later it must collapse because it is not built on a sound, square, or true foundation. The longer the scheme goes, the more likely it is to be discovered. If a pilot heads on a bearing that is one-half of a degree off, it may be some time before the pilots error might become noticeable, but in time it would put the airplane hundreds of miles off course if not corrected. This is why honesty is truly the best policy, for any other policy must ultimately result in failure. In the case of Fannie Mae, the volatility adjustment must have been important in the smoothing of financial statements, because after six years of “smoothing” there was the need of a “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">$6.3 billion restatement of revenue <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">p. 274 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). <span style="font-family: 'Times New Roman',Times,serif; font-size: 15.6px;">* =<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">Few Noticed the Potential Fall = <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">When Raines decided the goal for the company, the remaining executives got on board. The Vice President of operations risk (auditing) gave a talk to the auditors in 2000, setting a culture for the attainment of the goal – a form of tunnel vision. It has been shown that where lax management attitudes exist in regards to internal controls of accounting there is also the likelihood of fraud, and that auditors should “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">be especially vigilant in assessing the ‘tone at the top’ and control weaknesses <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">Holmes, et al., 2002, p. 86 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). If the auditors were more invested in the goals of the company, than they were in ensuring the accuracy of the numbers, as is the case with Fannie, they were not doing their jobs. Holmes, et al.’s study indicated that “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">a lax attitude by top management encourages unethical activity and discourages the reporting of it <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">p. 88 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">), which is also seen in the Fannie Mae story. Graham (1995) compared leadership styles in a study to determine the “moral development and organizational citizenship behaviors” of each styles followers ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">p. 48 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">), and found that leaders who follow a transactional model emphasize “influencing subordinate behavior by connecting it to specific rewards and/or punishments” which allows for “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">dependable task accomplishment <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">”, but also “provides no check on the possibility of unethical rules or instructions” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">p. 49 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">). <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">The ethical implications of the Fannie Mae failure are many. Perhaps more than any other lesson this author takes from this scenario is that one should not believe the hubris of one’s own moral superiority.* Fannie Mae seemed to be the penultimate poster child of social responsibility and ethics, but this was a specious picture that masked the internal workings of a company that was anything but responsible, or ethical. How much of the corresponding rationalization from their dishonest practices came because the executives “knew” they were doing something worthwhile in the service of the disadvantaged, and the down-trodden, the “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">huddled masses yearning to breathe free <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” (Lazarus, 1883)? Just because one is doing good, does not mean that one’s every action IS good. The long-term consequences of actions and inactions need to be carefully considered, and if the direction of those decisions are deviant, one needs to apply an immediate course correction.
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">“ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">In 1998, Armando Falcone of the OFHEO issued a warning report that challenged Fannie Mae’s accounting and a stunning lack of internal controls <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">p. 272 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">).
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">In 2002, the Wall Street Journal raised issues about Fannie’s accounting practices.
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">In 2002, Fannie shifted income by lending $40 million to Radian Insurance, listing said investment as an insurance policy.
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">In 2003, employees “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">expressed concerns about the company’s accounting policies <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">p. 273 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">).
 * <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">In November of 2003, Roger Barnes “ <span style="color: #0000ff; font-family: 'Times New Roman',Times,serif; font-size: 120%;">provided a detailed concern about the company’s accounting policy <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">” ( <span style="font-family: 'Times New Roman',Times,serif; font-size: 90%;">p. 272 <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;">)

<span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;"> [e1] This is true! The trick is to be able to perform the balancing act and do both so that neither is sacrificed and both are done in proportion to one another. <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;"> [e2] Excellent point! <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;"> [e3] Isn’t this amazing? <span style="font-family: 'Times New Roman',Times,serif; font-size: 120%;"> [e4] Excellent point!


 * = References ||
 * * Aguilera, R., & Cuervo-Cazurra. A. (2004). Codes of governance worldwide: What is the trigger? //Organization Studies//, 18, 93-117. Retrieved from http://search.proquest.com.proxy1.ncu.edu/docview/222443452/abstract/embedded/6OD5VW49FX047A7C?source=fedsrch
 * Friedman, M. (1970, September 13). The social responsibility of business is to increase its profits. //The New York Times Magazine//. Retrieved from http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-respbusiness.html
 * Graham, J. (1995). Leadership, moral development, and citizenship behavior. //Business Ethics Quarterly//, 5(1), 43-55. Retrieved from http://web.ebscohost.com.proxy1.ncu.edu/ehost/pdfviewer/pdfviewer?sid-8f3654eb-be6d-4a2e-a2f1-796812Oeaaf3%2540sessionmgr4&vid=2&hid=14
 * Holmes, S. A., Langford, M., Welch, O. J., & Welch, S. T. (2002). Associations between internal controls and organizational citizenship behavior. //Journal of Managerial Issues//, 14(1), 85-99. Retrieved from http://xt6nc6eu9q.search.serialssolutions.com.proxy1.ncu.edu/?sid=CentralSearch:null&genre=article&atitle=Associations+between+internal+controls+and+organizational+citizenship+behavior&volume=14&issue=1&title=Journal+of+Managerial+Issues&issn=1045<span style="font-family: 'Cambria Math','serif';">‐ 3695&date=2002<span style="font-family: 'Cambria Math','serif';">‐ 04<span style="font-family: 'Cambria Math','serif';">‐ 01&spage=85&aulast=Holmes&aufirst=Sarah
 * Howell, J. M., & Avolio, B. J. (1992) The ethics of charismatic leadership: Submission or liberation? //The Academy of Management Perspectives//, 6(2), 43-55. Retrieved from http://search.proquest.com.proxy1.ncu.edu/docview/210518333/fulltextPDF?accountid-28180
 * Jennings, M. (2009). //Business Ethics: Case Studies and Selected Readings// (6th ed.). Mason, OH: South-Western Cengage Learning.
 * Lazarus, E. (1883). The new colossus. Retrieved from http://en.wikipedia.org/wiki/The_New_Colossus
 * Ryan, L. V., Buchholtz, A. K., & Kolb, R. W. (2010). New directions in corporate governance and finance: Implications for business ethics. //Business Ethics Quarterly//, 20(4), 673-694. Retrieved from http://xt6nc6eu9q.search.serialssolutions.com.proxy1.ncu.edu/?sid=CentralSearch:null&genre=article&atitle=New+Directions+in+Corporate+Governance+and+Finance%3A+Implications+for+Business+Ethics+Research.&volume=20&issue=4&title=Business+Ethics+Quarterly&issn=1052-150X&date=2010-10-01&spage=673&aulast=Ryan&aufirst=Lori ||