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:
- 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.
- 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.
- 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.