Enforcing Ethical Business Practices in Fraud in Financial Reporting - Causes and Solutions

During my courses, I frequently remind students that most corporate executives, accountants, and auditors are honest and ethical. This case provides a stark and powerful example of one such individual. When I discuss a case such as this in my courses, I try to provide other examples of positive role models among corporate executives. Granted, most of these examples do not involve accounting or auditing matters, but, nevertheless, they help to blunt the impression that students may receive from studying my cases that most corporate executives are “crooks.”

“Unethical thinking is not just “bad business”; it is an invitation to disaster in business, however rarely (it may sometimes seem) unethical behavior is actually found out and punished” (Solomon, 1997:17) An ethical dilemma happens when an intricate circumstance which often originates from a struggle amongst the moral requirements of two persons.

This study aims to understand what effect has an ethical framework in accounting. In particular, we examine the influence of ethics on earnings management, financial reporting, and external accounting. Today, the commercial environment reveals the unethical behavior of management and accountants through the manipulation of accounting records to boost the company’s stock price, falsified financial statements to mislead investors, failure of auditors to correct errors and omissions due to client’s pressure and personal material interests.

2. Ethical Issues in Business. It seems that every day in the news we are hearing of new company that has acted at least unethically and possibly illegally in the operation and financial reporting of their company's business dealings. There are many ethical issues in business. One major issue that we see is over and under reporting net income. Companies like to show that every quarter the net income of the business has an increase or profit. In order to show this they adopt unethical or illegal means in the operation and financial reporting. One such method is the indiscriminate use of stock options for employees that enable companies to take employment costs off balance sheet and inflate earnings. With the recent ethical issues we have

On March 15, 2005 former CEO of WorldCom, Bernard Ebbers sat in a federal courtroom waiting for the verdict. As the former CEO of WorldCom, Ebbers was accused of being personally responsible for the financial destruction of the communications giant. An internal investigation had uncovered $11 billion dollars in fraudulent accounting practices. Later a second report in 2003 found that during Ebber’s 2001 tenure as CEO, the company had over-reported earnings and understated expenses by an astonishing $74.5 billion dollars (Martin, 2005, para 3). This report included the mismanagement of funds, unethical lending practices among its top executives, and false bookkeeping which led to loss of tens of thousands of its employees.

Ethical issues have greatly transformed in our lives since the great Enron, Xerox and other huge corporations proposed big profits showing earnings of billions of dollars and yet in reality facing bankruptcy. These corporations faced great trouble with the federals and state for manipulating financial statements. But not only corporations can be blamed on this, accounting firms were involved in this as much as the corporations were. With the business stand point, ethics comprises of principles and standards that guide behavior. Investors, traders, customers, and legal system determine whether a specific action is ethical or unethical. Ethical issue is a vast subject, but we will look at the niche

Ethical and legal obligations apply to all members of society. As one in society, the obligation to act in an ethical, law abiding manner on a daily basis is vital to the integrity of daily life. Many professions have their own code of ethics. Financial reporting is not exempt from such ethical and legal standards. One’s lively hood depends on decisions made in the business world. Business transactions are done daily and can impact one’s economic stability. Trust is placed in the hands of corporate America and an obligation of financial reporting to reveal a complete honest and legal picture of an entity’s accounting practices is important in attaining trust. This paper will discuss the obligations of

WorldCom was the ultimate success story among telecommunications companies. Bernard Ebbers took the reigns as CEO in 1985 and turned the company into a highly profitable one, at least on the outside. In 2002, Ebbers resigned, WorldCom admitted fraud and the company declared bankruptcy (Noe, Hollenbeck, Gerhart, &Wright 2007). The company was at the heart of one of the biggest accounting frauds seen in the United States. The demise of this telecommunications monster can be accredited to many factors including their aggressive-defensive organizational culture based on power and the bullying tactics that they employed. However, this fiasco could have been prevented if WorldCom had designed a system of checks and balances that would have

Business Industry has witnessed the outcomes of bad moral decisions taken by business leaders. Enron’s story is only one example of corporate scandals and cases of bad moral decisions, which has not only shaken the public trust in corporations, but also affected the bank accounts of investors and employees. Before the bankruptcy of Enron; it was included in one of the fortune 500 companies after its fraudulent accounting case the share went down to $1 (Enron scandal, 2010; PBS, 2002; Godwin, 2006; Godwin, 2008).

It seems like business morals and ethics are being whisked to the side in lieu of the ever growing demand of higher stock prices, rising budget goals and investor profits. Despite the increased regulation of corporations through legislation, such as, Sarbanes-Oxley, some corporations still find themselves struggling to maintain ethics and codes of conduct within the workplace. In reviewing the failings of the Enron Scandal, one can heed the mistakes that both individual and organization malaise, such as, conflicts of interest, lack of true transparency and the sever lack of moral courage from the government, executive board, senior management and others, contributed to the energy giant’s downfall.

Finances have long been a part of ethical dilemmas, since the creation of the stock market. Common ethical issues involving finances are also considered legal issues at most, such as fraud, misuse of company resources, and dishonesty. However, according to textbook M: Business, Fourth Edition, a more common issue in finances involves conflict of interest, because there is usually nobody to watch over ratings. In fact, the book states that “many cited rampant conflicts of interest between financial firms and the companies that rate them as part of the reason no one recognized the impending financial disaster” (29). Conflicts of

The overwhelming facts point to a shady underworld of self-dealing and opportunistic exploitation of the poor and working class, which was until recently, well hidden from the commoner. The executives of WorldCom and Enron provide real world examples of unethical business practices, where the desire to make money for their shareholders transcended into an addiction to greed and self-dealing that were displayed by their, “excessive pay, perks, and golden parachutes”(Carson 392) at the expense of all stakeholders. All is not lost, there are corporations that pride themselves in their sound business model and commitment to ethical business practices. Such companies as Eaton Corporation, and Weyerhaeuser, who according to Ethisphere.com, a business ethics watchdog, are among the “2010 World`s most ethical companies.” (Ethisphere)

Ethical Lessons Learned from Corporate Scandals Ethics is about behavior and in the face of dilemma; it is about doing the right thing. Ideally, managerial leaders and their people will act ethically as a result of their internalized virtuous core values. The Enron scandal is the most significant corporate collapse in the United States and it demonstrates the need for significant reforms in accounting and corporate governance in the United States. It is also a call for a close look at the ethical quality of the culture of business generally and of business corporations (Lessons from the Enron Scandal).

A multitude of choices made by executives at WorldCom led to the ultimate demise of the company as it was previously known, the employees and their livelihoods’, and the trust of the American people. In a time when corporations fail to set ethical standards and provide transparency to investors, how do we change corporate culture on a national level? By analyzing choices made to improve stock prices and company image that ultimately result in failure-- we can guide

This paper will discuss the corporation WorldCom, a telecommunications company that was based in Mississippi. In 2002 WorldCom was involved in one of the largest accounting scandals in the United States. WorldCom inflated its assets by nearly $11 billion dollars, which eventually lead to about 30,000 employees losing their jobs, as well as, 180-billion dollars in losses for its investors. The CEO at the time of this accounting fraud was Bernard Ebbers and led to him receiving a 25-year prison sentence. This paper will go into the details of how WorldCom was able to manipulate its accounting records to deceive its internal auditors, as well as, investors.