Theranos: Cautionary Tale of Ethical Failings

  The Theranos Case is complex, and many ethical questions come to mind when we hear about the intricacies of it: What are the ethical principles and standards that were breached by Theranos’s founder/CEO and president/COO? On January 4, 2022, the CEO, Elizabeth Holmes, was found guilty of one count of conspiracy and three counts of wire fraud “in connection with a multimillion-dollar scheme to defraud investors in Theranos, Inc.” COO Sunny Balwani is currently on trial, charged with 10 counts of wire fraud and two counts of conspiracy to commit wire fraud.   It’s important to understand the ethical dimensions of the case to be able to spot red flags indicative of potential fraud and know how to react, including the decision on whether to blow the whistle.   Henry Mosley, former CFO of Theranos, was fired after he confronted Holmes and accused her of deceiving investors and consumers with her new blood testing device that she claimed was advanced, when, in fact, the device was unreliable and provided inaccurate test results.   Tyler Shultz, a former Theranos employee who oversaw the recording of blood testing results, also blew the whistle to alert the public sector about the alleged fraud. Shultz emailed Holmes to complain about the accuracy of the testing device, which was 65% to 85%, according to Shultz, while the company was reporting a 95% success rate. Shultz claims to have been belittled by Balwani in reaction to his complaints, which led him to resign and speak up publicly against the wrongdoing.   After the jury reached a verdict that found Holmes guilty of committing fraud against investors and three charges of wire fraud, we can conclude that there was a huge breach of ethical principles and standards such as honesty, integrity, and credibility.   The principle of honesty and the standard of integrity were breached when Holmes provided false statements to investors and showed them fake demonstrations of the medical testing device to persuade them to invest in her company. That led to her losing credibility as an entrepreneur and being found guilty of defrauding Theranos investors.   Spotting red flags in such cases is very challenging, especially since Holmes showed a lot of confidence in the device, even in internal meetings, and it was alleged that she was known for her charismatic personality that made it easy for her to convince many employees and prospective investors to believe in Theranos’s device and strategic plans. The red flags, some of which were easier to spot than others, included:  

1. Absence of a CFO: If we look closely at the hierarchy of the company, we can spot the absence of a CFO except for about eight months between the time that Mosley was hired and subsequently fired by Holmes. This lack of a CFO is unusual. A big part of a CFO’s job, besides managing the finances of a company, is to be involved in strategic planning and making decisions to fuel sustainable growth. Also, CFOs are investors’ financial guardians who must be skeptical in their work since they’re managing the finance function of a company that other people invest in.

 

2. Absence of an auditor’s opinion report: The absence of an official auditor’s opinion is a serious red flag. An external auditor’s reports are supposed to grant financial statements credibility based on which investors and financial institutions make their decisions. It shows how much investors trusted Holmes because they invested in her company without even requesting an auditor’s opinion report.

 

3. Culture of extreme secrecy: Employees should respect the ethical standard of confidentiality. But imposing extreme secrecy on employees raises a red flag. Employees should feel free to ask any question or raise their concerns, which wasn’t allowed at Theranos.

  Former employees claimed that they were fired after raising an ethical issue. What are the options available to an employee to report wrongdoing or unethical conduct while protecting themselves to the extent possible?   Option 1: Tell senior management about the wrongdoing and be prepared to get ignored or fired. Usually when unethical conduct happens at a mid- or entry level, management will resolve the situation properly. But when the witness is at a lower position than the individual committing the wrongdoing, the situation can get messy, and, in far too many instances, ethical employees who speak up get terminated or retaliated against in other ways.   Option 2: Stay silent and consider this beyond your responsibility. Depending on the witnessed infraction, this could be considered a dereliction of your ethical duty.   Option 3: Research whistleblower programs, such as the U.S. Securities & Exchange Commission’s Office of the Whistleblower, and seek an attorney’s advice before saying anything to make sure that you’re protected, especially when dealing with financial frauds.   Mosley and Shultz chose to confront Theranos’s leaders and got terminated and pushed to resign, respectively. When the fraud occurs at the top, as it did at Theranos, employees can’t do much to seek help internally. In cases of fraud, employees are faced with the choice of staying silent or speaking up either publicly or anonymously. After witnessing fraud, you must be prepared to leave the organization.   When employees decide to stay silent after witnessing unethical behavior, it causes more long-term damage to stakeholders than speaking up does. Blowing the whistle on misconduct might force employees to leave their job but will increase their credibility and, because it’s an indication of a commitment to ethics, could lead to long-term benefits to their career. Staying silent in the face of wrongdoing makes the employee complicit in it, so it’s a professional’s ethical duty to call it out.   Ethical dilemmas occur daily all over the world, in every industry, at all levels. Financial professionals like Mosley and employees like Shultz are real-life examples of the ways in which even more unethical conduct starts after people begin to speak up.