Words: 4450
The World case and scandal occurred because accountants as well as former CEO Bernie Beers and Scott Sullivan failed to live the virtues of accountancy as well as failed to adhere to the moral principles and ideals of their profession and further analysis reveals the ways in which these irregular accounting practices were carried out along with the consequences and charges laid by investigators such as conspiracy, fraud and many false claims regarding their accounts and profitability. The Arthur Andersen… No More: What Went Wrong? Ease is another scenario where a series of unethical accounting practices resulted in he firm’s decline and the role they played in the accounting fraud at Enron. The way in which these corrupt practices took place is an obvious indication of the culture of the organization and the moral standings of employees, close relationships which affected both the company and clients such as Enron. Understanding business ethics in these cases we used ethical decision making frameworks such as the Triple Font Theory, Double Effect as well as Formal and Material points.
Case 5 & 6 History Accounting Irregularities at Warm-blooded J. (Bernie) Beers from the beginning ‘6″as a man who lived in himself and his company” a statement which was best expressed by the way in which he performed duties to his company. World thus, became the second largest telecommunications company in the United States through the acquisition of over 70 companies by 2000. Experiencing explosive growth encouraged competition driving costs down from 19% to O in 2002 and declining $28 billion in debt.
The board of directors then loaned Beers $366 million, to marginally pay off the debt to which investigators launched a probe into the loan which revealed ‘extraordinary accounting irregularities’ aging profits before taxes and other charges to eventually be $11 billion higher than they actually were. They did this by: double counting revenue from a single customer, keep delinquent account even after they stopped paying as well as not closed dead accounts.
Eventually some of the charges against former CEO Beers and SCOFF Scott Sullivan included: fraud, conspiracy, making false statements as a result of their unethical accounting practices. Arthur Andersen… No More: What Went Wrong? Arthur Andersen was once one of the leading auditing and consulting firms in the world yet, his case showed the deliberate attempt to destroy evidence of illegal accounting practices related to the highly investigated Enron incident. They did this by deleting thousands of email messages, other electronic files and shred thousands of documents.
The relationship between Enron and Arthur Andersen was seen as a “cozy/’ one which made it easy to maintain the improper accounting practices by both parties. Through further analysis, it was not the first time Anderson encountered situations like Enron but also with Waste Management Inc. Where shareholder lawsuits were settled which aided in the U. S Department of Justice to win a conviction against Andersen for obstruction of justice. Business Ethics 4th De: Cases 5 & 6 pig. 01-unwillingness ethical frameworks as discussed in class such as Triple Font Theory, Double Effect as well as Formal and Material points we drew our analysis from the questions pertaining to both cases:CASE 5 are the potential ethical implications of pursuing a corporate strategy of rapid growth? When a company lends one of its key executives a substantial amount of money, is a wise business decision being made, why or why not? How did World cook its books, what made these accounting irregularities so extraordinary?
CASE 6:Would you destroy electronic or paper records within a firm for which you worked to eliminate evidence that might be used against you why or why not? Explain how Andersen’s loose internal controls created the potential for ethical failures, such as the one at Enron. Why are the “arm’s length relationships” crucial for ethical integrity in auditing? How did Andersen fail to maintain an “arm’s length relationship” with is the logic of indicating an entire company for ethical failures rather than indicting only the responsible individuals? Do you think he destruction of Andersen as a company was justified? Limitations/ Assumptions – “Is there conduct ethically right or Recommendations – both cases exhibited unethical accounting practices resulting in not only the fall of their Coos, partners and board of directors but also the loss of jobs (such as the 85,000 of Anderson), also instilling an organizational culture of immoral practices that tarnished the names of top management, the minds of former employees and their potential employers and the international business field on a whole.
CASE question 1 :What are the potential ethical implications of pursuing a corporate strategy of rapid Roth? Len the business environment where information asymmetry and moral hazard readdressed, management must make rapid decisions and the correct ones in order to stay deaf the competition. However, poor decision making and a disregard for moral scruples indecision making can lead to disastrous results in the long-run.
Pursuing a policy of rapid growth may dramatically improve the value Of a firm, its share price, and the confidence of dissimilarities, but if this policy of rapid growth is not carried out in a transparent and accountableness, the consequences of the illegal assure to facilitate this growth and prosperity would’ve a rapid burnout of this strategy. At World Com, management including CEO Bernard Beers and CEO Scott Sullivan were involved in unlawful financial reporting activities of the firm’s financial results. On the surface the company appeared profitable, but in reality World Com was in serious debt.
The consequences of these poor ethical and moral decisions made by management resulted in the company going bankrupt. Stockholders, creditors, employees, and their families were negatively affected by the poor judgment of management. Employees lost their jobs and lives were ruined. Individuals lost tremendous amounts of cash when the firm went bankrupt and when it experienced a rapid decline in share price. When the strategy of rapid growth is done in such a way so as to inflate share prices and promote a sense of wellness in the business, a series of ethical implications arise.
The business is jeopardizing the equity and capital of its present and future stockholders to justify a continued existence. This can lead to serious consequences for the company such as solvency and jail time for the individuals who are expansible for falsifying records and employing questionable accounting practices. Corporate Strategy determines the way in which business will be conducted and the relative importance of all the stakeholders expectations; investors, customers and employees. At the same time Corporate Strategy must strike a balance between the goals of different business units within the corporation.
Pursuing a corporate strategy of rapid growth may result in management departing away from an organization’s vision and mission statement. If rapid growth becomes the main driving force of an organization which is to be attained regardless of the means, the organization may suffer in the long-term. Customer retention, goodwill, favorable reputation, employee morale and job satisfaction, a strong sense of corporate culture, and building relationships with stakeholders are some of the other criteria management must be mindful of when enacting corporate policies.
Question 2 :When a company lends one of its key executives a substantial sum of money, is a wise business decision being made? Why or why not? While World’s annual revenue growth was declining significantly, the executive road of World decided to loan its CEO Bernie Beers $366 million to pay off margin debt so that he would not have to sell his 1 7 million shares of World stock. This action in essence, would have prevented any external parties from taking control over World. The Principle of Double Effect is a doctrine, which distinguishes between the consequences intended and those that are unintended but foreseen.
Before this principle could be used to analyze the decision of the company three preliminary questions must be answered;What is the action in question:Lending the CEO Beers substantial mums Of money to repay marginal debt. What is(are) the good Beers able to pay off debt and also retain his ownership of 17 million shares unworldly. What is(are) the bad effect(s):The loan triggered investigations by the United States Securities and Exchange Commission (SEC), which then led to the resignation of CEO Beers.
Under the Principle of Double Effect, given the fulfillment of four conditions, an action with at least one good effect and with one or more evil effects may legitimately be performed. The conditions are as follows: 1 )Lending money to repay a debt is generally considered morally good. )The pay off the debt, and CEO Beers retaining his 17 million shares in World were not obtained through the investigation started by SEC nor the resignation of CEO Beers. 3)The executive board of World did not intend for an investigation to commence because of the loan to Beers, nor did they plan to pressure CEO Beers to resign. )The existence of the loan to CEO Beers caused an investigation to commence, which the executive board had not control over, therefore it had to be allowed. As a result of this investigation, CEO Beers was forced to resign. With the four conditions being proved, it can be said hat the act of lending a significant sum of money to a top executive was morally tolerable, however the decision to lend CEO Beers a large sum of money may not be seen as a wise business decision. Question 3 :How did World cook its books? What made these accounting irregularities so extraordinary?
Workroom’s Chief Financial Officer Scott Sullivan employed a variety of tricks to manipulate its financial results. Firstly, World treated routine expenses as capital investments. These normal operating expenses must be subtracted from a company’s must be subtracted from the company’s revenue in that year. These are expenses that arise from the daily operations of a business and should be matched against the revenues of the business in that year as stated with the prudence concept of accounting. On the other hand capital expenditures are subtracted from revenues a little at a time over many years.
In the short term, treating normal operating expenses as capital expenditure lets money flow to the bottom line and boosts financial results, thereby conveying a situation of growth and profitability that is not true. This simple trick in manipulating the books was somehow missed by World’s auditor – Author Andersen. From the case it was stated that over a period of 15 months, more than $ 3. 8 billion of World’s daily operating expenses were recorded as the purchase of assets such as equipment or real estate. This in effect made World’s profit before taxes and other charges appear $3. Billion higher than they actually were. On June 25, 2002 World disclosed that it had improperly accounted for $ 3. 8 billion in expenses, by August 2002, this amount rose to $ 7. 1 billion. Eventually the amount of improperly accounted for expenses was a significant $ 11 billion. On September 23rd, 2002 Business Week revealed in a report a variety of there tricks used by World in cooking its books. The report stated that World double-counted revenues from a single customer resulting in overstated revenues.
Another trick World used was to keep delinquent accounts on their books long after the customer stopped paying. This allowed the company it as revenue instead of a liability for which it should really be accounted for. Yet another trick World used was not to close dead accounts, thereby inflating revenues. These dead accounts should have been treated as bad debts which represents a loss to the company. These erasures to inflate revenues and treat normal operating expenses as capital expenditure had a pervasive impact on the company.
Employees lower in the hierarchy who refused to follow with the scandal ran the risk of losing their job. This created fear among employees and they thus gave into the scandal. These accounting irregularities did not involve complex “doctoring’ of the books but rather they were very simple and could have been easily detected by the auditors, but what is strange is how these accounting professionals couldn’t detect such simple accounting irregularities. This was simply cause the auditors were involved in the cooking the books of World.
CASE question 1 :Would you destroy electronic or paper records within a firm for which you worked to eliminate evidence that might be used against you? Why or Why not? The electronic records or paper records of a company should not be destroyed even if they may be used against the employee. Firstly persons should not engage in any activity where there is need to conceal electronic or paper records. A high degree of honesty, integrity in a person’s professional life should be maintained at all times so that there would not be occasions where this sort of action may be perceived to be necessary.
After Enron Corporation’s financial difficulties became public in 2001, an attorney for Arthur Andersen, Enron’s auditor, instructed its employees to destroy all documents related to the Enron account except for the most basic work papers. This situation can be analyzed using the Triple Font Theory. The object in this case is the destruction of all electronic and paper records with intention of concealing irregularities in the company’s business operations.
The circumstances of this action are obstruction Of the rouser of justice, since important documents necessary for use by the Security and Exchange Commission in their investigation into the business activities at Enron were irretrievable. In addition, legal action against the employee can be taken if the data contained in the documents were revealed. There is not sufficient reason in this case to justify the action and therefore destruction of the records is not permissible. You should not destroy paper and electronic records of a firm which you are employability the sole purpose of eliminating evidence that may be used against you.
Clearly the only reason why there would be need to do this is because an action performed by an employee lacked honesty and integrity and therefore would have grave consequences so there was need to conceal the records. By doing this you would be protecting your self interests since these records may be used against you. However, at the same time those records would probably be vital to an organization. If you have done something wrong or engaged In some sort of activity that goes against the company’s policy you should own up to your actions instead of destroying the records of that firm at which you re employed.
Most companies also have strict record retention policies which will be violated if electronic and paper records are destroyed, Question 2 :Explain how Andersen’s loose internal controls created potential for ethical failures, such as the one at Enron. The nucleus of success of any organization should revolve around the fundamental values of integrity, honesty, accountability, stability and consistency. Adherence to these values ensures that the organization maintains not only financial success but also a sound ethical standing in society.
The critical element in attaining this type of reporter status is stringent internal control within the organization which would make certain that best practices are employed to circumvent the possibility of any unethical incidence. It is exactly this scenario which occurs in this case with Arthur Andersen and Enron, where loose internal controls and a lack of conformity to basic principles of corporate ethics were endorsed. This practice is what ultimately leads to their demise economically and ethically.
Arthur Andersen being an auditing firm and is supposed to rely heavily On confidentiality and responsibility; this Was clearly not the practice n their relationship with Enron and other clients with whom they conducted business. Several key factors can be attributed to this notion of “loose internal controls” at Andersen and it is a top-down deterioration of ethical behavior. There was corruption of values at each level of the organization, from the Chief Financial Officer, to the attorneys to the executives and other members of staff.
Anyone who opposed their practices was immediately dismissed from their duties. Since, this phenomenon permeated each executive level of the organization, there could be no effective control exercised so as to reverent any further degradation of its ethical obligations. There was destruction of all audit material related to the Enron account, deletion of emails and other electronic files and many regional partners and front-line executives overruled experts when it came to concerns over the actions of Andersen.
It seemed as though these practices were practically sanctioned within this space, and eventually it also permeated through to Enron, as former Andersen partners became staffers on Enron’s management team. Using the triple font theory, it can be noted that the moral object in this case s undoubtedly that of Andersen executing accounting transgressions, by inflating audit material in an attempt to enhance the financial status of its clients. The intention is clearly to augment its own reputation and financial standing in the process, and the circumstance is ultimately one where there were false auditing material and lack of honesty.
It can be notes that these practices can be deemed unethical in every sense of the word, as it was evincible ignorance on the part of everyone involved, they knew exactly what they were committing and the repercussions of their actions. Due to the loose internal controls, there was a complete failure and degradation of both Andersen and Enron and several senior executives faced grave consequences. There should have been stiffer control of senior management and their relationships with clients.
Also, these shoddy auditing practices should have been clearly detected and dealt with and not propagated at almost all levels of management. Therefore, because of this evolved culture within the organization whereby senior management endorsed these acts and there was no strict method of detection, there was an increased potential or the drastic ethical and financial failure of both companies involved. Question 3 :Why are “arms length relationships” crucial for ethical integrity in auditing? How did Anderson fail to maintain an “arm’s length relationship” with Enron? N a business where continued survival depends solely on one’s good reputation, strict “arm’s length relationships” are critical to upholding ethical standards in auditing procedures. It is extremely important that an employee is always held accountable for the actions they make. This is done to ensure that their ambition is first and foremost for the institution they serve and not themselves. Effective oversight of the accounting profession and of independent audits is critical to the reliability and integrity of the financial reporting process.
An example of a body that has developed a list Of general principles for oversight of audit firms and auditors that audit financial statements of companies whose securities are traded in the capital markets is the Technical Committee of the International Organization of Securities Regulators (CISCO). Oversight of auditors can occur in several ways, including within audit firms, by professional organizations and public or private sector bodies, and through government oversight.
In addition, oversight may be provided by supervisory boards as in the case with the Professional Standards Group (EGGS), and audit committees representing investors in matters relating to individual companies. The reasons for this oversight of auditors include the protection of investors, ensuring that practices are fair, efficient and transparent and the reduction of systemic risk. Full and fair disclosure is essential to investor confidence, and promotes market liquidity and efficiency. “Arms length relationships” are crucial for good customer relationships.
This promotes a more uniform method of serving the Mayans clients based on set procedures and standards. Preferential treatment is avoided thereby maintaining the credibility and good reputation of the firm, especially in this industry where reputation can make or break a business. Arms length relationships also promote better control over one’s business thereby ensuring that what is desired is in line with the views and mission of the company. The client is less likely able to dictate the auditing procedures implemented by the firm’s employees.
Employees would not feel obligated to fulfill favors to clients and in general, business like procedures loud be upheld. Arthur Anderson accounting firm had ingrained management practices which facilitated transparent accounting and guided the firm in the past. A team of experts known as the Professional Standards Group (EGGS) made up of senior members reviewed and passed judgment on the front line executives who audited client’s accounts. The front line “regional partners” were accountable to the Professional Standards Group.
However, Anderson allowed the regional partners the power to overrule the EGGS. This practice compromised one of the firm’s core principals of objectivity in their uncial reports and facilitated the possibilities for breaches in ethical and moral decision making. Anderson became dominated by its large lucrative corporate clients. Question 4:What is the logic of indicting an entire company for ethical failures rather than indicting only the responsible individuals? The company is the principal and the individuals are the agents working on behalf of the company.
Such being the case, the logic behind indicting an entire company instead of the individuals has to deal with an issue of corporate social responsibility (CARS). Corporate social responsibility encompasses overall core characteristics. The main ones are the commitment of companies to contribute to sustainable economic development, in collaboration with employees, their families and society at large, operating in a manner that meets or exceeds the ethical, legal, commercial and public expectations of society.
In short, CARS is about how companies manage their business processes to produce an overall positive impact on society. On the basis of corporate social responsibility, companies should be made accountable for the actions of its employees. When employees do great work, the companies benefit by reaping profitable rewards. Very often, companies take most if not all of the credit for great work done. On the flip side when employees commit wrong doings in the vein of the company’s transactions some degree of responsibility must be borne by the company.
If we were to put forward the Triple Font Theory (ET) in ethical decision making to the scenario, it may make the logic of indicting the entire company rather than the specific individuals a bit more visible. The Triple Font Theory identifies three sources or determinants of morality: the moral object or end Of the action, the subjective or personal intention of the action and the resistances including consequences. In the case of Arthur Andersen, the moral object was the use of fraudulent and illegal accounting procedures.
The subjective or personal intention was to inflate the revenues of Enron to make the company appear very profitable. The circumstances include pressure from Enron’s executives and the lure of money or that big pay-off to ” cook the books”. The consequences of the act(s) was the public scandal, the bankruptcy of Enron and the destruction of Arthur Andersen’s accounting firm, which all had far reaching impact since hundreds of people were left jobless. According to the ET, issues pertaining to rights and responsibilities are also to be considered under the moral object since they directly affect the nature of the act.
Responsibility or duty is defined as the moral obligation to do or to omit something. In the Arthur Andersen case, the executives defected on their moral obligation (responsibility) when they engaged in fraudulent and illegal accounting practices. The executives at both Andersen and Enron were at the helm of their respective companies and had a great deal of power. This power was abused and misused to facilitate their self- interests and greed. With great power comes great responsibility, but that required level of responsibility was clearly not exercised.
Due to the neglect of responsibility, the sources of morality as based on the T FT were violated. Conclusively, we can safely agree that by indicting the entire company a public example is being made which serves as a deterrent for other companies to engage in unethical practices. Indictment of the entire company sends a very strong message that corporate social responsibility must be made a top priority and practiced stringently and consistently for the benefit f wider society. Question 5 :Do you think the destruction of Andersen as a company was justified?
Clearly understanding the logic of indicting the Andersen Company for ethical failures it can be seen that the destruction of the company as a whole is not entirely justified. This is from the perspective that the actions of a few executive members of the company had far-reaching impact, in that hundreds of innocent employees lost their jobs, which in turn affected there personal lives. Individuals who have invested their entire life as well as time into this organization have no benefits to acquire such pension ND health insurance. In addition, person’s dreams and aspirations may be destroyed.
Individual’s family life may be disrupted to large extents, since the bread winners of theses home are now job less and their are no one to provide for the family, also people houses and land may be lost because they cannot afford to pay the various loans or mortgages that are required of them. In Andersen Company, some employees were pressured by executives to perform the various task and they conform in fear of dismissal from the company. Hence, one can see that by destroying the entire company not jus t he wrong doers suffered but also innocent person who knew nothing of what took place.
It is unfair to these employees since they have to face serious consequence for the actions of few ethical executives. There are some recommendations that could be use instead of the destruction of the entire company. The Stock Exchange Commission together with the relevant authorities should have indicted just the few executives who were responsible for committing the unethical as well as illegal acts in an effort to safe guard the interest and future of those innocent of the wrong doings.
In addition, the courts could have seized the properties of these individuals and liquidate where necessary and use the funds to rebuild the company’s image as well as provide for the long term benefits of the employees in terms of pension and health plans.