"Tone at the top" is a term that originated in the field of accounting and is used to describe an organization's general ethical climate, as established by its board of directors, audit committee, and senior management.
The concept of tone at the top originated in audit firms, where it referred fairly narrowly to the attitude of an organization's senior leadership towards internal financial controls.
It was popularized following a series of major corporate accounting scandals such as those affecting Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom, when the concept was strongly emphasized in the Sarbanes–Oxley Act of 2002 as important in the prevention and detection of fraud and other unethical financial practices.
Questions commonly asked include "how is the board compensated," "how active is the audit committee," "what is the nature of the organization's corporate culture," "what pressures are there to make sales and earnings goals," "how is wrong-doing dealt with," "do employees understand their individual responsibilities for controls," "do monitoring controls signal failures in a timely fashion so corrective action can be taken," and "is there evidence that the employee code of ethics is complied with.
[13] Executives at Enron used accounting loopholes, special purpose entities, and misleading financial reporting to hide billions in debt from failed deals and projects.
Chief Financial Officer Andrew Fastow and other executives not only misled Enron's board of directors and audit committee on high-risk accounting practices, but also pressured Andersen to ignore the issues.
The Enron story demonstrated many common features of failed tone at the top, including inappropriate hostility to critics and a misunderstanding of public expectations.
The SEC charged that former CEO Paul Allaire and his second-in-command G. Richard Thoman, who were among the six fined, "set a tone at the top of the company which equated business success with meeting short-term earnings targets.
"[18] Business experts say that although the U.S. Federal National Mortgage Association (FNMA), colloquially known as Fannie Mae, gave the appearance of setting the appropriate tone at the top, its actual conduct fell short.
"[20] Former OFHEA head Armando Falcon attributed Fannie Mae's problems to "the arrogance and huge egos of senior management," saying "it was always just groupthink and if you ever raised a dissenting voice, your career would be over.
[26] However, in the year 2000, the telecommunications industry entered a downturn and WorldCom's aggressive growth strategy suffered a serious setback when it was forced by the US Justice Department to abandon its proposed merger with Sprint in mid 2000.
[26] During 2001, Ebbers persuaded WorldCom's board of directors to provide him corporate loans and guarantees in excess of $400 million to cover his margin calls.
However, this strategy ultimately failed and Ebbers was ousted as CEO in April 2002 and replaced by John Sidgmore, former CEO of UUNET Technologies, Inc. Beginning modestly in mid-year 1999 and continuing at an accelerated pace through May 2002, the company (under the direction of Ebbers, Scott Sullivan (CFO), David Myers (Comptroller) and Buford "Buddy" Yates (Director of General Accounting)) used fraudulent accounting methods to mask its declining earnings by painting a false picture of financial growth and profitability to prop up the price of WorldCom's stock.