Organizations that behave ethically are more apt to earn the trust of their customers, employees, and stockholders and to have a reputation as successful, competent and responsible professionals. It is important that organizations follow strict guidelines aimed high standards of quality, reliable services, high professionalism, social responsibility and ethical behaviour it their activity – only that way they can bring benefits to their clients, staff members and shareholders. The main ethical principles that each organization must follow in its activity are decency (avoidance of illegal and unethical practices), honesty (the urge to be honest with themselves, team members, customers and partners not only in the moment of success, but also in difficult situations), and responsibility (bearing in mind possible consequences for themselves, co-workers, customers and the company as a whole when taking decisions in any situation).
Unfortunately, not all companies follow the above mentioned principles and guidelines in their activity; some of them choose to provide deceitful information in order to attract clients or investors. In this paper we shall examine the problem of fraudulent information given in the financial statements of a publicly-traded company and shall determine whether or not such actions should be considered as unethical.
Background
As a publicly-traded corporation, Adelphia, Inc. was one of the largest providers of cable services in the United States. After the company went public, it was revealed that the company had materially misrepresented its audited financial statements by failing to disclose billions of dollars in debt. To make matters worse, the company’s independent auditors were found to have been complicit in the fraudulent activity, helping the company to conceal the lavish personal expenditures of the Rigas family.
Manipulation of Financial Statements
The first major ethical problem raised by the Adelphia, Inc. case relates to the manipulation of Adelphia, Inc.’s financial statements. John Rigas and his sons routinely “cooked the books”, purposefully inflating earnings in an effort to meet shareholders’ earnings expectations, and to demonstrate the company’s earnings power to prospective investors. Fearful of a plunge in stock price or defaulting on its creditor agreements, Adelphia, Inc. executives would hold secret meetings at the end of each quarter to discuss the company’s financial results (Grant, 2004). When Adelphia, Inc.’s quarterly numbers were out of line with creditors’ covenants, employees were tasked with making arbitrary adjustments to the accounting records, inflating the company’s revenues and reducing its expenses, ultimately bringing the numbers back into alignment with creditors’ expectations (Meier, 2004).
Unfortunately, Adelphia, Inc.’s fraudulent accounting practices went undetected by the company’s auditors, who failed to ensure that the company’s financial statements accurately reflected the company’s true financial position (Barlaup, Hanne, & Stuart, 2009). For instance, the funds owed to the company by the Rigas family went undisclosed in the statements, because the management at Adelphia, Inc. considered such disclosure as being “unnecessary” (Barlaup et al., 2009). Given that Adelphia, Inc. was a publicly traded company, the purposeful non-disclosure of this information caused potential investors to rely on the available financial records that were grossly misleading. The inevitable result of such actions was that the investors continued to inject money into a company that had all the appearances of profitability and sustained growth, but that was, in reality, rapidly becoming insolvent. Moreover, lending institutions also relied on the “independently-audited” financial statements, and they were more than eager to loan money to the company, given Adelphia, Inc.’s presumed state of financial “profitability.”
Use of the Corporate Funds for Personal Purposes
The second ethical problem in this case relates to the Rigas family’s use of publicly-held corporate funds as a personal “piggy bank.” The Rigases used the company jet for personal reasons (without approval of the Board of Directors): on one occasion the money was spent on flying to Africa for a safari (Markon & Frank, 2002); on another, one of John Rigas’s sons used a corporate jet to pick up an actress friend of his (Grant, Young, & Nuzum, 2004). The former CFO claimed that Adelphia, Inc.’s funds were used by one of Rigas’s sons to buy a condominium, and to build a $13M golf course (Grant et al., 2004). In another incident, the corporate jet was used to ship a Christmas tree from Pennsylvania to New York. The tree was not the right size, and a second tree was jetted to the daughter – the cost of the two trips to Adelphia, Inc. shareholders was $10,000 (Stern, 2004).
Definition of Wrong Actions by Duty Ethics
In duty ethics, it is the action or behavior itself that determines whether that action or behavior is right or wrong – and not the outcome or consequences of that action (Alexander & Moore, 2012). For example, most would agree that people have a duty not to steal. In duty ethics, it is the act of stealing that is deemed to be unethical – and not the outcome or consequences that may arise because someone has stolen something. Beyond the nature of the act itself, duty ethics is also focused on the rights of other individuals – that is, the rights of individuals take precedence no matter how good the outcome may be (Alexander & Moore, 2012). For example, while an individual has a duty not to steal from a property owner, the property owner has a reciprocal – and inherent – right not to be stolen from.
The renowned philosopher Immanuel Kant is well known for his Categorical Imperative, which generally states that a given act is ethical only if we can will that act to be universally-acceptable (Johnson, 2008). In other words, if we cannot say that we would want everyone to act or behave in a certain way – and at all times – then that act or behavior is not ethical. Stealing is wrong because none of us would want to live in a world in which stealing was universally acceptable, simply because such a world would be filled with chaos and unpredictability (nor could anyone safely own property). For this reason, duty ethics would consider stealing to be wrong – because stealing is universally held to be wrong.
Fraudulent Actions of Adelphia, Inc. Executives from the Viewpoint of Duty Ethics
If we are to apply duty ethics to the Adelphia, Inc. case, we will find that the Rigas family acted unethically. First, Rigas had a duty to safeguard the money invested by the company’s shareholders. Conversely, the shareholders at Adelphia, Inc. had a right to expect that Rigas would use their money only for purposes of running the business. Kant’s Categorical Imperative would say Rigas’ use of company money for personal use was unethical, simply because we would not wish to live in a world in which company executives could freely use stockholders’ money for personal purposes.
Of course, had Rigas truthfully disclosed the magnitude of the company’s debt, potential investors would have been apt to invest their funds elsewhere. As is true of Rigas’ use of company funds for his personal use, Rigas’ lack of disclosure was unethical because he chose to contravene his duty to disclose all of the company’s debt, and to hide the true value of the company from possible investors. Immanuel Kant would say that Rigas acted unethically because we would not want to live in a world in which the falsification of the accounting records of publicly-held companies was universally-held to be an acceptable practice.
Conclusion
In summary, it is very important that companies’ executives conduct their activities in an ethical manner in order not to cause disastrous consequences to other stakeholders. As it is possible to observe in the case that was analysed in this paper, this is especially true for the truthfulness of information that is provided in the financial statements of the company, because shareholders, potential new investors, banks (and other crediting institutions), suppliers and clients rely on this information when making decision to cooperate with certain company. Fraudulent actions, such as using company’s funds for personal purposes and providing deceitful information in the financial statements are considered unethical from the point of view of duty ethics because such actions cannot be universally acceptable and they violate the rights of the stakeholders. Thus, it can be stated that the actions of the executives of Adelphia, Inc. were unethical and as a result of such actions shareholders of the company lost their money and possible future profits.
References
Alexander, L., & Moore, M. (2012). Deontological ethics. Stanford Encyclopedia of Philosophy. Retrieved from http://plato.stanford.edu/entries/ethics-deontological/
Barlaup, K., Hanne, I.D., & Stuart, I. (2009). Restoring trust in auditing: Ethical discernment and the Adelphia scandal. Managerial Auditing Journal, 24(2), 183-203. Retrieved from ProQuest.
Grant, P. (2004, May 19). Adelphia insider tells of culture of lies at firm; Government's star witness says manipulation of reports began soon after company went public. Wall Street Journal, C.1. Retrieved from ProQuest.
Grant, P., Young, S., & Nuzum, C. (2004, March 2). Executives on trial: Prosecutors say Rigasesstole from Adelphia; Founding family is accused of a long list of abuses as the fraud case begins. Wall Street Journal, C.4. Retrieved from ProQuest.
Johnson, R. (2008, April 6). Kant’s moral philosophy. Stanford Encyclopedia of Philosophy. Retrieved from http://plato.stanford.edu/entries/kant-moral/#CatHypImp
Markon, J., & Frank, R. (2002, July 25). Adelphia officials are arrested, charged with ‘massive’ fraud – three in the Rigas family, two other executives held, accused of mass looting. The Wall Street Journal, A.3. Retrieved from ProQuest.
Meier, B. (2004, May 05). Witness tells of dual accounting at Adelphia. New York Times, C.4. Retrieved from ProQuest.Keegan, W.J. & Green, M.C. (2010). Global Marketing (6th ed.). Upper Saddle River, NJ: Prentice Hall.
Stern, C. (2004, Mar 02).Fraud trial begins for Adelphia's founding family. The Washington Post. Retrieved from ProQuest
