The world of multinational corporations has witnessed a myriad of scandals involving its top management. However, no scandal has drawn much attention like the Enron Scandal. In 2001, revelations about the Enron Scandal began to resurface. The scandal involving top level management led to the state of bankruptcy of the firm (Sterling, 2002). Additionally, it contributed to the dissolution of one of its partners, Arthur Andersen, an audit firm. Apart from being one of the biggest scandals in the United States history, the scandal exposed the weaknesses in the audit sector. The paper seeks to expound on the ethical issues raised by this scandal with at least two other scandals that have occurred in the past ten years. The two other scandals identified are the Refco Scandal and the Hewlett-Packard Scandal.
Briefly, Refco is a financial services firm based in New York. It is known for future contracts and broker of commodities. In October 2005, the company entered a crisis after it discovered that the chairman and chief executive officer, Phillip Bennet had concealed close to $430 million that had accrued in bad debts from the auditors and investors of the firm. On the other hand, the Hewlett-Packard Scandal was also another one involving the chief executive officer. In this scandal, the CEO by then, Patricia Dunn hired a group of security experts in 2006 to help her identify and verify the phone records of journalists and board members without their knowledge. The spying was meant to identify the source of information leak about the company’s long-term strategies that inadvertently appeared in one of the blogs.
In all the scandals mentioned above, there were serious ethical violations by the key players. Most firms have a social and moral responsibility to increase their revenues, employ more people, and pay more taxes to provide support to programs aimed at benefitting the public. However, towards this pursuit of higher earnings, the firms’ employees should not engage in activities that seek to distort the truth. The Enron Code of Ethics of July 2000 required that its officers and employees were responsible for conducting the business matters of the firm while following all the applicable laws and in a honest and moral manner. The code of ethics went further to illustrate that the activities of its employees should be at the best interest of the firm. The most important part of the ethics that was violated during the scandal stated that required that employees desist from engaging in activities that would lead to their financial gains at the detriment of the company. Even though the company had a strict ethical code of conduct, it still failed. The failure is attributed to a combination of the failure of the top management; the complicity of the investment banking sector and the corporate culture of unethical behavior.
In the Enron Scandal, the ethical issues raised revolved around the greed of its top executives and failure to follow the code of ethics. Moreover, the absence of CSR (Corporate Social Responsibility), situational ethics, and the attitude of getting things done even without following the laid down procedures contributed immensely to its downfall (Petrick & Scherer, 2003). The former CEO, Jeffrey Skilling, and ex-CFO Andrew Fastow created and implemented ideas that led to problems that could not be fixed legally or ethically. The business ideas forwarded by the two executives entailed doing too much within a short period but with little returns. Serious ethical breakdowns were visible from their actions. They wanted to make quick money whilst employing unworkable strategies (Bauer, 2009). The adverse moral impact was evident. The top managers chose to use stakeholder deception techniques and short-term financial returns for themselves. The result was a destroyed reputation and social status for both the company and the people involved. Serious questions were also raised about the oversight duties of the board of management. One clear thing is that the board of management was negligent in providing adequate oversight duties and moderation of top management excesses. The board members morally failed to provide the required oversight duties that would have averted the scandal.
The Hewlett-Packard scandal was another one where serious ethical standards were violated. The origin of the scandal stems back from the series of confidential boardroom meetings that took place to discuss the company’s long-term strategies. The information leaked to the public prompting the then director, Patricia Dunn, to conduct an internal investigation on its board members. Even though it was within the firm’s right to conduct the investigations, the manner in that it was conducted raised serious ethical questions. The CEO hired a team of experts that posed as HP employees, board members and journalists to tap phone conversations (Nakashima, 2006). The key ethical violation here was invasion of privacy. Acquiring personal phone conversations of its employees led to a serious breach of trust.
The CEO would have considered the utilitarian and moral approaches to ethical decision making. The utilitarian approach requires that directors should endeavor to offer the highest level of assistance to the largest number of employees at the least cost. The moral rights approach entails protecting and respecting the basic rights of individuals. In this scenario, acquiring the information would be to the greatest benefit of the firm. However, such a decision was considered unethical since it violated the basic rights of the concerned individuals. Through the application of the moral rights approach, it is evident that the CEO with her team of private detectives invaded the privacy of the individuals they obtained their phone records. They obtained private information without the consent of their owners.
Lastly, the Refco scandal is also another one that generated a lot of heated debate. The case involved Phillip Bennet, the Chief Executive Officer, who was accused of securities fraud connected to a $430 million debt he hid from investors and regulators. The crisis led to the shutdown of one of Refco’s affiliates called Refco Securities (Anderson & Thomas Jr, 2005). Again, cases of unethical practices by the top management are evident. The issue of greed comes in since Bennet was buying the company’s bad debt using the same funds from the company while manipulating the accounting books to indicate the funds were his. Bennet engaged in fraud to the detriment of the company. Fraud entails engaging in deceptive practices to advance personal interest over the interest of the organization (Ferrell, Fraedrich, & Ferrell, 2010). In this case, Bennet engaged in accounting fraud that involved manipulating the accounting books for personal gain.
In this section, we look at the outcome of these scandals. Regarded as the greatest company scandal in the USA history, the Enron scandal’s outcomes were immense. First, more than 4,500 staff lost their jobs. Second, majority of the investors lost some huge chunks of money that they had invested as old-age security. Third, the company’s pension fund also collapsed, and the majority of the workers lost almost all their retirements’ savings. Fifth, the American citizens lost trust in the economic system (Sridharan, Dickes, & Caines, 2002). A key outcome that changed the way businesses handles their operations were the tightening of the rules companies had to adopt while making financial reports. The changes were made in the Sarbanes-Oxley Act of 2002.
After the Hewlett-Packard scandal had come to the fore, top members of its management including the then board chairperson, Patricia Dunn stepped down. The actions triggered the US Congress to pass a bill that made it illegal to acquire an individual’s telephone conversations without his or her consent. Additionally, the case impacted heavily on business journalists since thereafter, it proved difficult to obtain information from corporate board members while talking off the record (Zureick, 2005).
The Refco scandal had a big impact on the forex trade activities. The scandal’s effects are still felt in the brokerage market up to to-date. The scandal prompted investors to be more aware of the unregulated futures markets and avoid brokerage firms that offered co-mingled accounts.
In the light of the above-discussed scandals, several laws have emerged. Ferrell, Fraedrich, and Ferrell (2010) indicate that “after the various scandals that emerged in the early twentieth century, the scrutiny on financial reporting by companies increased drastically.” Presently, many firms always take a regular scrutiny of their books of accounts to avoid being drawn into such scandals. Further, they say, “the scandals led to a stricter code of ethics for accountants and auditors. The code created the concepts of integrity, honesty, due care, objectivity, and independence.” However, despite all these regulations, it has been difficult to weed completely out accounting fraud in the recent years. The passing of the Sarbanes-Oxley Act in 2002 provided hopes that it was going to be easy to address issues that would create conflicts of interests when accounting firms audited public corporations. However, a recent bankruptcy involving MF Global is a clear indicator that much needs to be done fully to implement the laws that resulted from the previous scandals.
Officers and directors, as well as shareholders and employees, need to learn a lot of lessons from the above-mentioned scandals. Most importantly, all stakeholders of the firm should always consider the ethical, legal and moral position of their actions before embarking on them. Even though punishment serves as a deterrent, firms should come up with clear-cut corporate code of ethics. The code of ethics serves as a foundation of decision making for employees, managers and even the board of directors. Firms should also ensure the governance mechanisms “on paper” are followed strictly. Cases should not arise where employees come up with their rules of operations disregarding the laid down laws. Finally, shareholders should focus more on strategies aimed at bringing long-term benefits, and not short-term benefits. Short-term prospects may make a company engage in activities that may hinder its long-term success as illustrates in the Enron Scandal (Silveira, 2013).
Is SOX a Strong Enough Law, or should it be Made Stronger?
The Sarbanes-Oxley Act of 2002 came into force at the wake of corporate accounting scandals. It was considered the most stringent act after the Securities Act of 1934. Since its enactment, the law has had commendable effect finance, commerce, business, and the accounting field in the United States economy. The SOX is a strong Act. One of its strength lies in the creation of the Public Company Accounting Oversight Board. The board is charged with policing the accounting profession and setting auditing standards. Additionally, the Act has provisions that require that CFOs and CEOs who acquire ill-gotten wealth return it to their employer. This helps tighten the noose on management of the firm’s finances.
Wagner and Dittmar (2005) says, “Section 404 of the Act requires that the management has the responsibility of maintaining a proper intern-control structure for making financial reports and assess the effectiveness.” The same section requires auditors to confirm acuteness of the assessment, and report on the overall state of the financial control system (Wagner & Dittmar, 2006). These provisions have made SOX a strong law. The section instills fear among the boards and the top management. Fear is a powerful tool for ensuring outstanding conduct. However, the law still needs further improvement to make it better. For instance, the section that requires the smaller companies to be edited by the Big Four is somehow expensive to such small firms. Additionally, clear guidelines on the implementation procedure needs attention to avoid the haphazard implementation currently being witnessed.
References
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