Monthly Archives: August 2015

Board Independence is Less Effective at Deterring Accounting Fraud in Family Controlled than in Publicly Held Corporations

An Annotated Bibliography by Todd Benschneider

Prencipe, Annalisa. Bar-Yosef, Sasson. “Corporate Governance and Earnings Management in

Family-Controlled Companies.” Journal of Accounting, Auditing and Finance. April 2011,

Vol. 26 Issue 2, p199-227. 29p. Database: Business Source Alumni Edition.

Annalisa Prencipe, PhD. and senior lecturer at SDA Bocconi School of Management with her team of researchers conducted a study of 249 firms to compare the quality (long-term sustainability) of profits in family controlled firms to earnings of publicly held companies. The study investigated the impact of “earnings management strategies” a term that The Journal of Accountancy defines as “the discretionary distortion of revenue, expense and depreciation schedules to optimize short term goals such as executive bonuses, budget targets or manipulation of stock prices.”  The results of the study were intended to provide accounting firms with new tools for identifying ratios and patterns that detect shareholder fraud in family controlled firms.

In publicly held firms strong incentives such as performance bonuses, performance reviews and salary bonuses lure executives to portray company financials in the most positive light, while concealing negative information from financial reports. However, over reporting earnings provides inaccurate feedback to the product development, finance and marketing departments who rely on accurate reporting to steer future products and operations strategy. Extended periods of inaccurate market feedback can undermine the long term economic health of the company. Stockholders can reduce mismanagement by electing an independent board of directors who hire, evaluate, supervise and fire top level executives to ensure that strategic decisions represent the shareholders’ best interest.

Prencipe explains that “A typical board structure is composed of outside directors and top company officers. Outside directors are appointed by the company’s shareholders and are assumed to be acting in the shareholders’ interests. However, the inclusion of top management among board members may give rise to a conflict of interest as management may attempt to transfer wealth from stockholders by taking advantage of information asymmetry. The results show that the increase in shareholder wealth is significantly higher when the board is dominated by independent directors.”

Recent trends in corporate governance now encourage firms’ directors to enforce accurate financial reporting. Board oversight can identify executives who exploit short range strategies that inflate profits to capitalize on performance bonuses. By the time the earnings management schemes unravel, the executives involved have often retired or moved on to other companies, which limits the legal recourse available to the stakeholders. Public demand in response to recently publicized investor fraud cases have prompted legislators to issue regulations that hold board members accountable to shareholders for fraudulent reporting of the executives they oversee. Regulatory changes in corporate governance have been eliminating the participation of company executives from the board of directors to reduce their influence over the boards’ objectivity, especially by eliminating CEO’s from also serving as the Chairman of the Board.

However, family controlled companies face different incentives to publish inaccurate financials, and further compounding the distribution of power, the CEO is often times also the largest stockholder of the company, entitling them to serve as the Chairman of the Board.  Prencipe wrote “Current literature suggests that, although founding family ownership seems to be associated, on average, with higher earnings quality, the extent of earnings management remains an open issue for family controlled firms. Since most families with controlling interest in their company possess a long term vision for growth and therefore make decisions that favor long range goals rather than boosting quarterly profits.”

Prencipe believes that while experts agree that there is less incentive for family controlled firms to over report earnings, that instead those companies manage earnings to secure the family’s controlling interests, minimizing the distribution of wealth to minority shareholders. She hypothesized that recent corporate governance restructuring would be less effective in family controlled companies whose self-interest lies in underreporting earnings, especially present in where the family also served in salaried executive positions by increasing family members bonuses or siphoning private benefits at the expense of other shareholders such as supplier kickbacks, travel expenses and other concealable business write offs.

The study was expected to validate previous research that had shown a lower incidence of earnings management under a board of directors with independent decision making authority, especially those boards lacking a CEO chair holder.  A board possessing low levels of independence has many of the company executives voting on board decisions, with the CEO also serving as the chairman of the board. In cases of a highly independent board the CEO does not hold a seat and possesses only subordinate levels of authority in regulating corporate accounting. However this study would specifically compare results from widely held public corporations against those from private firms and measure the estimated earnings management strategies present in the financial reports. Levels of earnings management in the companies would be calculated from a fraudulent accounting indicator: abnormal working capital accruals (AWCA).

Prencipe and Bar-Yosef conducted a study of Italian corporations by applying AWAC audit calculations to a sample of 249 Italian corporations consisting of four publicly traded corporate governance structures:

1-      Family Controlled with CEO on the Board of Directors

2-      Family Controlled with no executives on the Board of Directors

3-      Publicly Held with CEO on the Board of Directors

4-      Publicly Held with no executives on the Board of Directors

The intent of their study was to see if a correlation could be found that suggested that any of these four governance structures yielded a higher quality long range financial growth. The results validated several previous studies that found higher quality earnings generated by publicly held corporations with a highly independent board of directors. The results also supported Prencipe’s hypothesis that family controlled firms outperformed publicly held firms in earnings quality; however there was a less pronounced advantage to private firms with a highly independent board when compared to public firms with an identical governance structure.

Prencipe’s closed her article with:

“Our conclusions may lead regulators and academics to reevaluate the effectiveness of some corporate governance models when applied to family controlled companies. In particular, our results suggest that regulators should pay special attention to the selection of board members. For the benefit of all shareholders, it is important to guarantee substantial independence of the board. Our results are also useful to users of financial statements, suggesting that a company’s ownership structure and its corporate governance characteristics should be taken into account when accounting numbers are used.”

Managers Rationalize Ethical Dilemmas in Accounting Fraud

An Annotated Bibliography by Todd Benschneider

Johnson, Eric. Fleischman, Gary et al. Managers’ Ethical Evaluation of Earnings Management                         

              And Its Consequences. Contemporary Accounting Research. Fall 2012, Vol. 29 Issue 3,                                         p 910-927. 18p. Database: Business Source Premier.

A 2012 study performed by the Universities of Wyoming and North Dakota questioned 264 experienced managers with a hypothetical ethics scenario. The researchers wanted to discover whether “The ends of positive consequences justify the means of earnings management?” in current managers. To test the idea, managers were given a hypothetical scenario of measuring the scale of severity that upper managers would reprimand lower level managers who were found to be managing earnings reports to increase  salary bonuses. Fleischman wrote “Our findings suggest that the current generation of managers have a tendency to behave as if the end justifies the means, which raises the issue of rationalization of unethical conduct.”

Earnings management is defined by the Journal of Accountancy as “the discretionary distortion of revenue, expense and depreciation schedules to optimize short term goals such as executive performance bonuses, budget objectives or the manipulation of stock prices.”   Earnings management typically involves optimizing of income and expense schedules to achieve short term benefits resulting in salary bonuses and positive evaluations, often resulting in negative consequences for the firm. Biasing earnings reports to achieve short range goals can disrupt market feedback, product development, production, and customer relations in the supply chain.

The study was broken into four separate hypothetical scenarios which found that the managers surveyed agreed that the practice was unethical; however, the positive or negative impact on the firm’s profits was factored into how severely they would reprimand the subordinate manager. The study found that managers overall viewed unethical management practices less negatively if the behavior resulted in a positive short term benefit to the firm. The study suggests that the foundation is detected for the ethical dilemma of “incrementalism” where an acceptance of minor unethical practices gradually lead to large scale corruption and loss of investor confidence.

The researchers surveyed 264 participants who were currently employed in business management positions while enrolled in working adult MBA programs at a variety of universities. The hypothetical situation each manager assessed involved one of the four following basic situations which resulted in either positive or negative repercussions for the firm.

The initial hypothetical situation below presents the subordinate as the originator of the unethical behavior:

“Terry Patton, an automobile dealer manager that you supervise, is anxious to maximize his incentive compensation that is based on budgeted net income for the dealership. Terry receives a higher bonus if he achieves 120 percent of this target, and a lower bonus if he achieves only 80 percent of this target. The sliding scale between these two performance extremes is not linear and encourages achievement of net income in excess of the budget (100 percent). Terry calculates that if he accelerates or delays revenues and expenses to increase the variability of his dealership’s net income over time he will, on average, receive higher bonus income than if he does not manage revenues and expenses.”

The study then presents one of the following two consequences to Terry’s strategy:

  1. Positive Outcome – “Terry tells his friends at dealerships for another company about his compensation strategy and is able to convince these very able managers to join Terry’s company because the compensation is so much more attractive. This causes Terry’s company as a whole to become better managed and 18% more profitable this year.”
  2. Negative Outcome – “Terry tells his friends at other dealerships within the same company of his plan and they also engage in the managing of revenues and expenses, which cause the company as a whole to experience an 18 percent decline in profitability for the year, which is discovered could be solely attributed to Terry’s strategy.”

The alternated basic scenario involves the subordinate Terry being the whistleblower of the bonus manipulation plan described above of other dealer managers: “Terry Patton, an automobile dealer manager that you supervise, has overheard other dealer managers at other locations within Terry’s company discuss their incentive compensation maximizing strategy.” Following this basic story line the participant is presented then offers one of the two following outcomes:

  1. Terry brought up the practice at a dealer managers meeting and discouraged this manipulation. He obtained support from some managers but criticism from others. Over the next twelve months the company as a whole was 18 percent more profitable because those managers that stopped manipulating their dealer net income based on Terry’s recommendation.
  2. Terry brought up this practice at a dealer managers’ meeting and discouraged this manipulation. He obtained support from some managers but criticism from others. Some talented managers were so upset by Terry’s comments that they left the company, which suppressed overall company profitability by 18 percent this year.

The study found that either case, being the supervisor of the conspirator or of the whistleblower that the managers surveyed would have reprimanded the hypothetical subordinate “Terry” more harshly in situations which resulted in losses to the annual profits than in identical dilemmas resulting in improved annual profits. These findings support their hypothesis that in terms of ethics, the management participants surveyed would lean toward “the end justifies the means” attitude to management in ethical dilemmas.

Researcher Eric Johnson concluded: “Our findings suggested that, overall, the ethical nature of an act had the greatest influence on manager judgment of the act and the intention to intervene, however positive organizational consequences significantly reduced the reprimand. This finding answers the question: the end did justify the means. In addition to advancing literature on the ethics of earnings management, these results also provides empirical support for understanding how managers actually respond to such ethical dilemmas, rather than stating what they should do.”

Enron Collapse: A Case Study in Audit Failure

August 29th, 2015

News broke in October of 2001 that energy conglomerate Enron was declared insolvent; the story that followed revealed the largest case of accounting fraud in history. As a result, Enron declared bankruptcy and one of the nation’s largest accounting firms Arthur Anderson was forced out of business. Analysts were shocked to discover how long Enron had been able to manipulate its reported earnings without discovery by auditors or the board of directors (Catanach. 2012).

Today it is still uncertain whether auditors from Arthur Anderson’s Houston office were compensated to overlook the numerous accounting discrepancies or instead, simply unqualified to decipher the unique accounting procedures developed by the Enron management. The catastrophic loss to shareholders and employees pensions serves as a warning to auditors of the devastation that inadequate accounting procedures can cause (Mclean. 2001).

As a result of the intentional manipulation of reported profits, sixteen Enron executives were convicted of defrauding investors. The primary defendant, company founder and financial advisor to President Busch: Kenneth Lay was sentenced to 45 years for his crimes, but died of heart failure before serving his sentence. CFO Andrew Faustow cooperated with SEC investigators and was sentenced to 10 years without parole for insider trading, tax evasion and defrauding investors. CEO Jeffrey Skilling was sentenced to 24 years. Accounting firm Arthur Edwards and several key employees were convicted of obstructing justice by shredding thousands of pounds of documents and deleting thousands of emails as the scandal made the news. The Arthur Anderson employee convictions were later overturned by US Supreme Court (Mclean. 2001).

The combined losses of over $150 billion dollars to shareholders, creditors and employee pension funds negatively impacted the US economy in a sum equal to that of every American man, woman and child losing $533 for 2002. Public outcry over corporate irresponsibility resulted in the drafting of the Sarbanes-Oxley Act of 2002 which was created to address every loophole that Enron used to elude detection. Today SOA regulations dictate many of the federal accounting reporting standards and policies. Despite SOA guidelines, many privately held companies and several major publicly held companies continue to fail after earnings management schemes unravel (Jain. 2013).

The catalyst to Enron’s aggresive cycle of earnings management tactics was ignited by the deregulation of the electric power industry in the years prior to the scandal. With newfound freedom from government oversight, Enron management was able to sell hedge contracts on energy futures and report hedge values as actual sales; this practice greatly overstated annual revenue and gave the illusion of record breaking growth and profits. Enron management gradually created a highly competitive corporate culture that rewarded high performing employees for generating short term solutions that would make the company look good in quarterly reports and continue to attract investors and drive stock prices. Many employees even at lower and middle management received large percentages of their salary as stock options for hitting bonus levels or at least creating the illusion of achieving performance goals (Watkins. 2002).

The sheer complexity of accounting the true values of energy futures hedging using market to market costing and uncovering the management earnings schemes that were created by the 20,000 employee army who were all being encouraged to boost their bonuses by finding creative ways to manipulate Enron’s stock prices (Helman. 2013). The corporate culture snowballed out of controlled as management began to actively recruiting new hires who showed promise of financial creativity and also held flexible attitudes towards ethics, with this strategy the managers of Enron were able to create an ingenious army of professional corporate swindlers, and provided them a rich environment to capitalize on those talents. These and other factors created an accounting system so elaborate and deceptive that investigators had difficulty uncovering the flow of cash even after the scandal unraveled (Watkins. 2003).

Enron for several of their final years poached the best and the brightest performers from competing firms by offering salaries at twice the market rate being offered by competitors. Recruiting top talent combined with a policy of automatically culling the lowest 15% performers from the workforce every year generated a culture where every employee carefully avoided  bearing bad news and their mistakes or losses were swept under the rug to protect jobs (Watkins. 2003).

Not only were the salaries aggressive but perks and extravagant expense accounts made available jobs at Enron highly sought after. This ultra-competitive culture pushed all employees to find creative and innovative ways to inflate their own contributions to the company’s bottom line, at least for short term gains with little regard for long term repercussions (Jain. 2013).

A recurring theme to Enron’s development was the massive expansion into industries and locations that Enron was poorly equipped to compete in. The corporate background in supplying natural gas to the western US could not have prepared them for the projects they would undertake such as building a $900 million power plant in India that failed to ever produce revenue after disagreements with the government of India. Another failed “get rich quick scheme” was the Wessex Water Co in England which Enron paid $3 billion for and then offered its shares to the public in an IPO which lost nearly $100 million per month until its collapse in August 2000 (Watkins. 2003).

Possibly the nail in the Enron coffin was their overconfidence in their ability to provide the distribution of utilities to the public. In 20000 Enron invested billions in fiber optic technology to provide cable television and internet to over half the households in the US. The fiber optic division managed to lose over $10 million per month (Catanach. 2012)

Enron initially built a track record of performance while under the guidance of CEO from 1990-1996 Rich Kinder, a business attorney, who in comparison was credited for his conservative management style. Under Kinder’s leadership Enron earned much of the credibility that would later be used to attract investment capital and industry credibility. The talents of Kinder are later substantiated as the driving talent, as he later went on to build multibillion dollar energy conglomerate Kinder-Morgan (Mclean. 2001).

The rise and fall of Enron ends with the losses in billions of dollars to defrauded investors. These losses resulted from a decade of greed driven earnings management schemes that enabled Enron employees to participate in a Ponzi like deception of stockholder funds. A corporate culture is created from the top down and exaggerated by recruiting and hiring policies. One of the defining points of Enron’s downward spiral was hiring the most intelligent candidates who also exhibited a moral flexibility toward earnings management policies and held a Robin Hood disdain for constrictive industry regulations. While it is important that we hone our auditing policies to detect earnings management schemes such as those at Enron, we cannot overlook that a recurring theme is the human resources failure to screen out candidates who would overlook long term sustainability for personal gain for their share in the corporate greed (Watkins. 2003).

Work Cited

Catanach Jr., Anthony H., and J. Edward Ketz. “ENRON Ten Years Later: Lessons To       Remember. (Cover Story).” CPA Journal 82.5 (2012): 16-23. Business Source Premier.

Helman, Christopher. “10 Reasons Why Houston No Longer Cares About Enron Or Whether          Jeff Skilling Gets Out Of Jail Early.” Forbes.Com (2013): 1. Business Source Premier.          Web. 10 Jan. 2014 Web. 10 Jan. 2014.

Jain, Pravin. “Confessions Of An Enron Executive: We Lacked Finesse.” Emergence:           Complexity & Organization 15.2 (2013): 104-109. Business Source Premier. Web. 10 Jan.           2014.

Mclean, Bethany, et al. “Why Enron Went Bust. (Cover Story).” Fortune 144.13 (2001): 58-68.           Business Source Premier. Web. 10 Jan. 2014

Watkins, Thayer. “The Rise and Fall of Enron” 2003.            Web.

Che Guevara – Revolutionary Idealist or Fanatic

The life and times of 1960’s cultural icon Che Guevara remain a topic of heated debate, with a growing legion of modern American supporters who idolize him as a Robin Hood Revolutionary contrasted against opponents who despise him as ruthless, aspiring dictator. Extremes of each belief are heavily influenced by which period of Che’s life falls under critical scrutiny, his behavior in his early twenties could support an argument for sainthood, in his later years the evidence could support the accusations of madness.

Guevara first gained political notoriety as the right hand of Fidel Castro during the Cuban Revolution, however his career later ended while plotting a foiled coup de taut against the Bolivian government. In modern American culture in recent years his legend was reignited with recent award winning films about the journals he wrote during humanitarian mission in South America researching leprosy while studying medicine. Today his admirers envision him as a selfless revolutionary, liberating the common people from corporate exploitation, poverty and oppression.

Che’s critics suggest that he was a narcissist, power-hungry dictator, driven by his own vanity and addiction to adventure and chaos. Some critics claim that his underlying motives were only to exploit popular anti-government sentiment to build a power base in his climb toward dictatorship with empty promises for wealth to the poor as his justification for terrorist tactics.

One thing that both sides seem to agree on was that Che was focused on eliminating United States political presence in the Spanish speaking regions of the Americas, which easily made him a hero to many South Americans. The actions of his 40 year life were influential enough to land Guevara on Time Magazines “100 most influential people of the 20th Century”.

His beginnings, biographers on both sides unanimously agree that Che was born Ernesto “Che” Guevara to a prominent and politically active Argentinian family. Influenced by his father’s friends comprised of intellectuals, politicians and powerful businessmen, he showed an interest in political leadership at an early age. As a boy Ernesto overcame asthma to excel in athletics and academics. He was remembered as an aspiring medical student, fascinated with the psychological principals of Sigmund Freud and the political philosophies of Nietzsche and Machiavelli. His own father made many references to Che’s persistent lifetime conflict with authority figures and was quoted with “Ernesto was born with the blood of Irish Rebels coursing through his veins”. On several occasions Che was reprimanded by the Catholic elementary school he attended for condescending remarks he had made about the church (Guevara Che Prologue). 

Guevara is most widely known in modern American culture for the diaries he kept during a 5000 mile 1951 road trip across South America to volunteer at a village of lepers in Peru which became the inspiration for a best-selling book titled “The Motorcycle Diaries”, later made into a popular film in 2004 by the same name. His area of study in medical school was on the disease of leprosy (Guevara Motorcycle 146-149). His emotionally charged speeches on poverty and the corporate exploitations of peasant workers are considered by many intellectual critics to be the wisdom of an insightful philosopher. During his now famous trip across South America he was caught up in the revolution to liberate corporate owned land in Guatemala and redistribute that land to the peasants who farmed it. The Guatemalan revolution was quickly put down by U.S. troops, which forced Guevara to leave the country (Guevara Che 24).

Near Mexico City, after his escape from Guatemala, Che was introduced to a like-minded revolutionary named Fidel Castro, who was dedicated to overthrowing the corrupt Basque leadership in Cuba. At this time, several biographers noted that Guevara seemed to grasp the importance of propaganda in their revolutionary tactics as he began to publish a newspaper that criticized the opposition to the movement and later a started radio station he called “The Voice of Free Cuba” (135). During this period he first became feared as a leader who killed any members of the revolution that deserted the cause to return home or serve as informants for the opposing government. Several military analysts credit Guevara with brilliant combat and counterintelligence tactics. His surprising successes earned the respect of his opponents of the US military, conceding that he possessed an apparently brilliant military intuition and found that Che’s unique guerilla tactics very surprisingly effective  (Guevara Che 8).

The period that Guevara served with Fidel Castro building a newly communist Cuba is the period of his life that is most publicized by his critics. During his tenure in Cuban government Guevara managed to redistribute land and factories owned by capitalists to the working class of the Cuban population, however he also made it his personal goal to educate the peasant population and managed to quickly raise the rural literacy rates from 70% to 96%. The sincerity of his humanitarian gestures is uncertain, but these policies did prove effective at loaning Guevara positive image to offset the ordered executions of political prisoners that soon followed (Guevara Che 93-95).

Che’s military successes as well as administrative effectiveness led to his promotion to Cuban Finance Minister.  Revered for working for days without rest, never stopping to eat or sleep, earned the respect of his followers. However his ineffectiveness as finance minister became his political undoing and is seen as the first failure of his career, undermining public support of the Cuban Revolution. Guevara’s assumption that citizens would be more productive under communism proved to be much less effective than he expected. His perceived failure governing the economy and later his own disillusion following Soviet concessions during the Cuban Missile Crisis may have been the catalyst driving Che to leave Cuba to serve as an anti-capitalist spokesman around the world. He disappeared quietly from Cuba to join a band of revolutionaries in the Congo of Africa (Guevara Che 167-176).

In Africa Guevara joined an army of Cuban-African guerilla fighters who were attempting to overthrow the government of the time. Detractors believed that Che envisioned himself becoming the Castro of the Congo if their coup was successful. However, Guevara underestimated how much the Swahili language barrier would limit his ability to lead and inspire the people. Ultimately his leadership of the Africans is universally seen as a humiliating failure that began to cast doubt even among his supporters Che’s political wisdom (Fontova 167-174).

A year and half after aborting the African campaign, Guevara disappeared into the Bolivian jungle to train an army of guerilla fighters for an attempt to overthrow the Bolivian government. Che’s critics believe his motives were to gain power needed to become the new dictator of Bolivia if the overthrow was successful. It was a fear of his future power that motivated the CIA to locate him and secretly undermine his effectiveness in Bolivia. It is believed that in his 11 month stay Bolivia that United States CIA were using traitors close to Che to sabotage his radio equipment, intercept his supplies and spread anti-Guevara propaganda to potential local supporters, all of which ultimately left the Che’s guerilla army isolated, starving and in need of medical supplies. Political theorists attribute Che’s harsh and condescending attitude to other guerilla leaders undermined his ability to gain the financial and political support needed to grow his revolutionary movement (Guevara Che 147).

Guevara’s condescending attitude toward other party leaders remains a recurring theme in his diaries, the December 31st  1966 diary entry describes a clash of egos on his first meeting with Mario Monje, head of the Bolivian communist party who was about to extend the political support of the party to Che’s revolution. Monje’s only request in the discussions was to be considered to be the leader of the revolution movement that took part on Bolivian land, however Che insisted that he was the self-appointed leader of all procommunist revolutionary activity in South America. The incident even in Guevara’s own self-delusional spin reveals his Achilles heel as a complete lack of interpersonal tact with other party leaders and hints that his true aspirations were to become the totalitarian ruler for all of South America, if indeed his revolution proved to be a success (Guevara Che 125-140).

In a story that sounds remarkably similar to the recent capture and execution of Osama Bin Laden, a group of 1800 soldiers led by US Special Forces surrounded Che’s camp and overtook it in a quick battle. Che was taken wounded, interrogated, then by order of Bolivian president, executed immediately before news of his capture could incite supporters. After he was shot he was put on public display for proof of his death and his hands were amputated and sent to Buenos Aires where fingerprints on file could confirm that it was indeed Che Guevara’s body. Much in line with the stories of Osama Bin Laden’s burial at sea, Guevara’s remains were disposed in an undisclosed location by Bolivian soldiers. Years later a Bolivian General, divulged that the body had been buried in a mass grave near an airstrip. Archeologists located the grave and confirmed remains to be Guevara and transported to Cuba for formal burial (Fontova 209).

Today Che Guevara’s legend seems to have more followers that idolize him than those who demonize his life. In 2008 the Bolivian government released several of Che’s diaries taken during his capture, these recent publications have sparked a renewed interest in the life and times of Che Guevara, the context of his final writings has caused a swing of public opinion that many view him now to be a Robin Hood martyr at best to be worthy of sainthood rather than the murderous egomaniacal dictator that his detractors believe. Regardless of his motives, it seems evident that his actions were all ultimately leading to his self-appointment to position of dictator in any country he could gain control of in effort to apply his visions of a communal utopia.

From the reading and research I completed for this paper, I conclude that the anti-Guevara theorist Fontova’s book is so heavily contaminated with emotional bias and blatant anti-Castro propaganda on the life of Che that it is difficult to take his accusations against Guevara seriously. The book draws some hard character conclusions that would seem unlikely for Fontova  to support with real evidence.  Fontova makes little attempt to cite academically credible sources in his expose on Guevara; however I do assume that there must be some first-hand historical sources and personal interviews that lend might him some credibility on the subject to gain the support of the publisher.

The extremity of radical accusations made by Fontova prompted me to research the credibility of Fontova as a political analyst, from what I could gather, outside of a degree in political science, Fontova has spent most of his career writing for hunting and fishing magazines, later writing two fictional adventure books. Fontova’s own self-promotional website even further undermines my ability to consider his point of view as a self-declared expert. I did not find much evidence that Fontova was a qualified expert on US foreign affairs and his short childhood in Cuba does not qualify in my opinion qualify  as enough first-hand experience to be the expert on Cuban politics that he claims to be.

In my opinion Fontova’s book can be criticized under the same principles that he charges Guevara with,  Fontova’s book seems intended to incite hatred against supporters of socialized ideals or those who oppose democratic expansionism, just as Che sought to create fear and hatred in opposition of capitalism. Today’s society recognizes the dangers of radical idealists and fear targeted propaganda. In hopes of preventing future wars, individuals must examine emotionally charged propaganda like Fontova’s book “Exposing the Real Che Guevara and the Useful Idiot’s Who Idealize Him” with a critical eye and question the simple logic that millions of people supported the ideals that Che proposed were as purely evil as Fontova would like us to believe.

For the Guevara supporters, they have the luxury of Che’s first hand opinions, in his own handwriting, on those historical events. What I detect in those diaries were not the personal private thoughts of Guevara as much as his own propaganda tools, I suspect that no man in a position of power writes his beliefs down in a notebook and expect them to never be read by prying eyes. Over his lifetime, his diaries were often left behind at deserted guerilla campsites and  found by opposing troops, because of this pattern I believe that the contents of those diaries were his weapons in the propaganda war.

However much that Guevara tried to spin the events to paint himself in a favorable light, it is not a far stretch to assume by reading between the lines of Guevara’s two diaries that he was driven by a manic fueled sense of self-delusion that evolved from compassionate ideals  into sociopathic behaviors. I can see that it is his eloquent writing and his ability to spin events with a flattering self-delusion to portray himself as a heroic martyr that masks his underlying obsession with thrill seeking adventure and a quest to obtain legendary power and fame.

I believe that ultimately Che Guevara suffered from the grandiose delusions, often observed in cult leaders, referred to as “The Messiah Syndrome”, self-appointed leaders who believe that they were put on earth by a higher power to change the future of the world. In layman’s terms we typically label those cult leaders as “Madmen”. A clue to this personality disorder is a very revealing tale that childhood classmates at Guevara’s elementary school shared during  interviews for biography on the Discovery Channel, they recited a  story about an outburst Che had in a discussion about the sainthood of Jesus Christ, where Che exploded and insisted that Jesus was (in loose translation) “Overrated” and that Che planned to make Jesus’ accomplishments pale in comparison. Many years later, during a public address he is cited with one of the most damning quotes of his career when he declared: “In fact, if Christ himself stood in my way, I, like Nietzsche, would not hesitate to squish him like a worm”. To further support conclusions of madness, in Che’s Bolivian Diary he confesses to stabbing his horse in the neck for walking too slowly, two journal entries later, Che makes a reference to the horse stabbing and questions his own sanity. There is certainly an opportunity to publish a very critical view on Guevara’s life today, however Fontova’s radicalism on the topic has done very little to advance the cause of Guevara critics.

Work Cited

Fontova, Humberto. Exposing the Real Che Guevara: And the Useful Idiots Who Idolize Him.

New York: Penguin Books, 2007. Print.

Guevara, Ernesto. Che: The Diaries of Ernesto Che Guevara. Melbourne, AU:

Ocean Press, 2008. Print.

Guevara, Ernesto. The Motorcycle Diaries: A Journey Around South America.

                 London: 1996. Print.

Big Sugar: Florida’s Sugar Industry and its Influence on U.S. Economic Policy

Research Article by Todd Benschneider:

Taxpayer subsidies of United States agricultural commodities have survived over 90 years of political attacks since their introduction in The Farm Bill of 1922. Today U.S. taxpayers pay nearly 20 billion dollars per year in direct farm subsidies, of which about 3% are spent on the Federal Sugar program. Farm Bill critics claim that farm price subsidies are counterproductive and restrict international trade. Supporters of the Federal Sugar Program argue that price supports are needed to compete in the international marketplace against the most economically advanced countries of the European Union and Japan that spend twice the amount per capita in agricultural subsidies. Subsidy supporters argue that price supports level out the peaks and valleys of price fluctuations which result in economic and government stability (Sumner, 2008).

In 1996, in response to growing voter outrage over the taxpayer support to some of Florida’s wealthiest and politically connected elite, Al Gore launched an attack on Florida’s sugar industry, promising to cut the subsidies to wealthy sugarcane growers and rescue the Florida Everglades from further agricultural contamination. However, Gore underestimated the political clout that the sugar growers possessed and found he was unable to deliver on that very heavily publicized campaign promise (Roberts, 1999).

The political influence that sugar growers continue to accumulate could be attributed to the millions of dollars in campaign contributions made by Florida sugar producers. According to investigative journalist Paul Roberts (1999):

“from 1990-1998…. sugarcane producers spent at least $26 million on everything from referendums to supporting Jeb Bush for governor in 1998 ….. and, America’s sugar industry is among the most subsidized on the planet, enjoying a domestic price of 22 cents a pound while producers in much of the rest of the world get about 8 cents. Each year, critics say, the federal sugar program not only adds $1.4 billion to consumers’ bills but funnels some $560 million of it back to domestic producers, who then funnel some back to Congress, which ensures the program’s reauthorization under the once-every-six-years Farm Bill. It’s a classic political love triangle, obscenely lucrative for the big corporate farms–Florida Crystals makes an extra $64 million annually under the program, followed closely by U.S. Sugar, at $55 million.”

Public backlash for Florida’s sugarcane industry is often attributed to several highly publicized expose’s that showed taxpayer money funnels straight into the pockets of wealthy sugar baron heirs, who use the monies to buy additional political alliances. Outspoken critics, such as Senator Charles Schumer of New York, described the subsidy as “one of the most invidious, inefficient, Byzantine, special-interest, Depression-era federal programs.” And according to Paul Roberts (1999) current perception has grown to believe that rather than provide aid to small family farms that the sugar subsidy actually serves to pamper several billionaire Miami playboys. Roberts describes in his Harpers article The Sweet Hereafter:

“The (Fanjul) brothers’ reclusiveness isn’t surprising. Whereas Fairbanks and U.S. Sugar have continued to bank on their image as sugar pioneers with close ties to the land, the Fanjuls have no such cachet. Rich, controversial, and Cuban-born, with Palm Beach mansions and a $500 million fortune (note: 2012 estimates of Fanjul brothers combined net worth estimate nearly to $100 billion) the brothers are easy targets for muckrakers from 60 Minutes to the National Enquirer, most of whom portray the Fanjuls, in not so subtle racist undertones, as symbols of why America is going down the toilet.”

Ending the cycle excesses allotted to Florida sugar barons are difficult to implement, because those subsides include allocations for many small farm operators in the mid-west who produce sugar beets, honey, maple syrup and corn. These subsidies are woven into the fabric of the American food supply chain and the sugar industry has grown so essential that price subsides are needed to create a diverse collection of producers. The governmental support functions as a hedge against shortages that would occur if any large region would suffer catastrophic crop losses (de Gorter etal, 2008).

Critics of the 1.4 billion dollar Federal Sugar program claim that it adds about 14 cents to every pound of sugar produced in the United States when compared to world sugar exports on the open market.  of which $560 million is sent directly to producers and estimates that $50 million goes directly into the pockets of the Fanjul family (Van Wyk 2013). Supporters of the domestic sugar program argue that foreign produced sugar also reaches the global marketplace with the aid of price supports from their exporting countries. In fact on supermarket shelves US sugar retails for around 39 cents per pound, priced much lower than sugar sold in France for 68 cents or Japan at $1.04 per pound (Pye-Smith, 2002). Paul Roberts (1999) summarized global sugar market data with: “When analysts factor in all sugar programs worldwide, the adjusted world price is around 16 cents a pound–or about a nickel less than American consumers are forced to pay.”

However unjustified the payments to the wealthy Fanjul family seem in the present political environment, it would be easy to overlook how sugar subsidies came into play and how the Fanjul family gained its political favors. The Fanjul family sugar venture began as a heavily subsidized pro-American propaganda tool at the height of the cold war. The Fanjul family, at one time, controlled the sugar production in Cuba until their family’s cropland was confiscated by Fidel Castro during the Cuban Revolution. The Fanjul family was forced to flee to Florida without much of their Cuban wealth and the plight of the once powerful Fanjul family became world news. The US government seized the international publicity as a propaganda opportunity and provided support to the Fanjuls to launch an American based sugar venture with the hope that their success would advance global support for American capitalism. If successful the new American sponsored Fanjul empire could also be used by politicians flood the world market with taxpayer subsidized sugar and devastate the rival Cuban economy that relied heavily on sugar exports. Success of American sugar would provide clear proof that capitalism would prevail over communism, and hopefully slow the communist global expansion (Warben, 2004).

However, today using tax dollars to support land that can barely support sustained sugar production no longer makes economic or political sense. “Paying lavish subsidies to produce sugar in Florida makes as much sense as creating a federal subsidy program to grow bananas in Massachusetts,” quips James Bovard of the virulently anti-subsidy Cato Institute. “The only thing that could make American sugarcane farmers competitive would be massive global warming (Roberts, 1999).”

Despite the widely publicized excesses and abuses of farm subsidies in general and the sugar program in specific, one simple truth continues to recur: Despite decades of  opposition, commodity subsidies including agricultural price supports have continued to survive unhampered by the best efforts of disgruntled taxpayers and political opposition. Price support advocates insist that price support programs are much more complicated than the limited perspective seen as increasing producer profits. Supporters of subsides suggests that subsidies need to protected in the interests of national security and global self-sufficiency. Many supporters believe that it is vital to economic growth to maintain domestic supplies of social and industrial staples such as agricultural commodities, petroleum, mining and timber. While most analysts agree that Americans could import these same commodities for lower costs than they are supplied domestically; however, doing so would result in dependence on those exporting nations which may be a larger risk that than the cost of subsidizing domestic production (De Gorter etal, 2008).

A supporting argument could be made that the United States is not alone in subsidizing major commodities, in fact every one of the top ten countries in GDP per capita production also subsidizes raw materials and agricultural commodities (Sumner, 2008). It could be argued that regardless of the drawbacks of taxpayer price supports that a century of economic natural selection suggests that the benefits of these supports outweigh negative impact that they have had on these nations’ economies. In Daniel Sumner’s article Agricultural Subsidy Programs he summarized:

“The highest national average support equivalent rates, across all major commodities, are offered in Norway, Switzerland, and Iceland, with average subsidies of about 65–75 percent of the value of production, and in Japan and Korea, with support rates of 60–65 percent. The lowest subsidy rates (less than 4 percent) are found in Australia and New Zealand. The average support rate in the European Union is about 35 percent of the value of production (Sumner, 2008).

It also seems worth noting that according to 2005 data published on the United Nations Development Programs website ( that four of the five countries providing the highest percentage of agricultural subsidies are also among the top twelve ranked countries in GDP per capita. Decades of agricultural subsidies among prosperous companies would suggest that it would be unlikely to conclude that the cost of the farm subsidy programs outweigh the economically stabilizing benefits. The website also provides a “Quality of Life Index for 2014” that ranks the top countries in the following order: Switzerland, United States, Germany, Sweden and Finland in terms of standards for living. All five top countries are also criticized for commodity subsides and production quotas (Zhu, 2010).

In conclusion, while the obvious costs and abuses of the Florida Sugar Industry are very similar to the drawbacks found in the national welfare system. In the American welfare system there are many obvious cases of abuse and excess; however, it would be difficult to predict how the economic impact if the social safety nets were removed. Much like the commodity subsidies, social welfare programs exist in every global superpower. Cutting costs on welfare programs has historically resulted in increased spending on law enforcement, expense in housing prisoners and mediating the costs of property crimes. The explosion in destitute poverty could quickly climb as citizens who have failed to assimilate into the workforce could no longer provide essential food and shelter, the civil unrest that often coincides extreme poverty often results in political instability. So much like welfare programs, the stability that results from supporting prices of commodities such as the sugar, oil and timber industries are not an easily measured expense to those of us who see only a small slice of how such subsidies are spent.

Historically individual grain and livestock farmers are capped to receive a limit of $100,000 per year in taxpayer subsidies to support their single family production operations, many with annual revenues of less than $200,000 per year. However; the design of the sugar program circumvents per farmer subsidy caps by way of subsidizing the market price of sugar by the pound rather than allocated as grain farmers in per acre farmed. This form of price support lends itself to exploitation by the two large corporate producers who control the production of 80 percent of American grown sugarcane, and as a politically embarrassing result funnels between $50 and $100 per year into the pockets of two immigrant billionaires: Alfy and Pepe Fanjul. Several million per year that the Fanjul brothers then kick-back to state and federal politicians who protect the sugar bill from tax reformers, environmentalists, labor lawyers (Pye-Smith, 2002). However, if history repeats itself, economic Darwinism will prevail and like the fate of many fortunes before, America can expect that it will be unlikely that this subsidized monopoly will survive for the heirs of the Fanjul fortune in the hundred years to come.

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Regulatory Failure: Peregrine Financial Group Accounting Scandal of 2012 – Todd Benschneider

On July 9, 2012 CEO and founder of Peregrin Financial Group, Ralph Wasendorf drafted a detailed suicide note, rigged a hose from his car exhaust through a window, started the engine, and drifted off to sleep. However, his suicide attempt failed, the following morning a passerby noticed the car running and called police. Paramedics removed Wasendorf unconscious but alive, the suicide note was passed onto the regulatory office of the Commodity Futures Trading Commission (Touryalai. 2012).

Despite Wasendorf’s brilliance in brokering futures trades, he had much to learn about the genius of clean air automotive emissions controls. Todays automobiles generate only trace levels of poisonous carbon monoxide, so instead of death by poison gas, Wasendorf was merely exposed to about 8 hours of low oxygen levels and made a complete recovery. Had Wasendorf used today’s mobile browser technology and Googled “suicide by car exhaust”, Google would have guided him to choose the much deadlier 1959 Thunderbird over the 2001 Chevrolet Cavalier Convertible from his car collection.

The suicide note contained a detailed confession for defrauding PFGBest investors for the past 20 years. The letter apologized to his family for disgracing the family name; however, the note justified his fraud by directing blame toward vindictive regulators who he had long believed were jealous of his success and unnecessarily burdened his firm with regulatory expenses that made the success of honest small firms cost-prohibitive. The note also belittled the regulatory agencies for their incompetence at detecting fraud and alleged that they were so consumed with punishing honest mistakes made by traders that they could never find deliberate fraud that they were assigned to be investigating.

Wasendorf claimed that regulatory failures for verifying bank records allowed him to create false bank records for over 20 years, forgeries that were being mailed back to auditors from a fake PO Box he had created in bank’s name. In a melodramatic closing, the suicide note announced that Wasendorf had punished himself far harsher than he would suffer at the hands of prosecutors by sentencing himself to death (Reinitz. 2012). However it could be argued that prosecutors trumped his death sentence with their alternative: 50 years of maximum security prison, $215 million in restitution and a life sentence of isolation, shame and regret.

The path toward uncovering the fraud began in 2009, in response to a string of high profile financial scandals; new advancements in audit technology were being developed that would soon to plug loopholes that had made accurate auditing a challenge. The changes included a newly developed electronic clearinghouse which allowed for an immediate and simultaneous verification of all account balances, discrepancies in those balances would quickly reveal PFG’s falsified bank statements. However regulators met with strong resistance to the new audit technology, which resulted in many firms such as FGBest being carefully scrutinized for their refusal to participate in the new verification clearinghouse ( 2012).

The beginning of the end for PFG came the wake of a multitude of regulatory scandals caused by PFG traders, which resluted in an agreement to open the company books for a detailed audit to ensure future compliance. That final audit came to a head on the afternoon of Wasendorf’s  suicide attempt when the National Futures Association froze all PFGBest accounts after discovering that $220 million dollars in investor deposits were unaccounted for and that Wasendorf himself had forged bank documents to hide those missing funds from auditors. Wasendorf was warned by a tipster that the following morning he would be arrested on embezzlement charges (Zwick. 2013).

Some company insiders believe that the motive for suicide was to protect his personal assets from prosecutors. In the final weeks before the scandal was exposed, Wasendorf secretly married his girlfriend and changed his will to name her as his sole beneficiary. He also deposited $50,000 in a bank account for his new stepdaughter under the guise of a college fund; money that she quickly withdrew the day of the suicide attempt. If his suicide had been a success, the reassignment of his estate, would have created a unique challenge for prosecutors to return the misappropriated funds from Wasendorf heirs to the victims of his fraud and ultimately he may have enjoyed a final victory of once again outwitting regulators. However, death with dignity would be denied, as emergency crews resuscitated the Wasendorf forcing him to witness his own disgrace and watch his new wife file for divorce the following week. With no assets at his disposal and no allies to offer financial assistance, Wasendorf was unable to afford his own attorney, with his defense case presented by an inexperienced public defender and Wasendorf found himself sentenced to 50 years of maximum security prison (Reuters. 2012).

In the months that followed prosecutors began an online auction to sell Wasnedorf’s personal assets including estate items as trivial as his clothing and kitchenware, most importantly to the press was his vintage wine collection. His estate including a home that was built for $1.4 million along with two vacation homes, sold for pennies on the dollar and in total netted just over $4 million. The newly built  PFG $24 million corporate headquarters brought a mere $2.8 million and still carried a mortgage balance of $6 million which was co-signed for by Wasendorf’s only son Russell Wasendorf Jr.

The son, Russell Jr.former COO of PFG later relocated to Orlando, FL and was forced into a bankruptcy by the mortgage shortage, along with hundreds of thousands of dollars in legal bills from investor suits (Bunge. 2013).  After the liquidation of Wasendorf Sr personal assets the bankruptcy trustee estimated that $190 million in misappropriated funds were lost or missing, the bulk of those losses occurred at the peak of the recession (Reintz. 2013).

In the final years of PFG several long term employees began to question Wasendorf’s mental health. Former employee Phil Flynn an employee of five years, who left months before the scandal was revealed began to see a recurring theme of inappropriate behavior. For Flynn, the final warning came in February of 2012 after PFG admitted some wrongdoing and agreed to pay the NFA $700,000 in trading violations. Flynn also retold a story of the final PFG Christmas party in 2011: “Wasendorf Sr. gave an awkward, rambling speech at the company Christmas party about his early business career and what it takes to become a success. It was kind of a downbeat thing for a Christmas party, kind of out of place and weird (Reinitz. 2013).”

Following the discovery, analysts were shocked by the transparency of the PFG fraud and questioned how so many obvious red flags could be ignored by auditors and regulators in regards to PFG’s finances. Investigators suspect that the small accounting firm Veraja-Snelling had been cooperating with Wasendorf to aid in defrauding regulators. Critics now question why a small, locally-owned  firm was allowed to audit the complex books of a commodities trading firm with over $500 million in assets (Reuters. 2013).

While in comparison to the Enron scandal, which was remarkable by how intricately complicated and untraceable the flow of money became as it flowed from deal to deal and back and forth through subsidiary accounts; however,  in contrast the PFGBest scandal will be remembered by how amazingly detectable the fraud would seem to any investigator with fraud training. Using a remarkable lack of technology tools, Wasendorf’s scheme relied solely on doctoring PFG’s paper bank statements with a scanner and household grade Photoshop software, later having those falsified documents mailed in preaddressed envelopes that he provided from auditors to his fake post office box. The simplicity of the process left industry analysts in shock that in 20 years the red flags were continually failed to uncover this simple forgery (Reintz. 2012).

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