Introduction
According to Trevino & Nelson (2011, p. 35), fraud does not happen as a coincidence. To be specific, fraud in organizations is usually premeditated and has to happen in the right conditions and members of the organization in authority often set these conditions. As such, identifying the root causes of fraud, which is called fraud deterrence, should be one of the priorities of corporate governance. Since fraud has been a common menace in the history of organizational management, various strategies, government regulations, and acts have been developed to prevent the occurrence of fraud (Giroux, 2013, p. 32). These procedures cover both the internal and external environment of an organization. Internal control systems are employed specifically to deal with the particular needs of an organization. On the other hand, external control systems are enforced (by the government of public bodies) to ensure adherence to certain regulations. This paper seeks to analyze the case of Rite Aid, an American Corporation that has had a history of fraud. The paper will analyze the case using ethical theories
Company Overview
Rite Aid is a drug chain company based in Cumberland, Pennsylvania. It is one of the highly rated firms in the country having a place in the 500 fortune companies. The company's shares are traded on the New York Stock exchange market. Affected by the 2007-2009 great recession, its shares fell to under $ 500 million. This is very low compared to the current market capitalization. In the 2015 fiscal year, Rite Aid had a market capitalization of $ 7.15 billion (Bouchoux, 2009, p. 143). The company was performing comparatively well during the period.
The Parties Involved in the Graft
The Middle District Court of Pennsylvania found the three top officials of the company that is Mr. Martin Grass the former chair and chief executive, Franklin Brown, former chief counsel and vice chairperson and Franklyn Bergonzi, the then chief financial officer with several counts of accounting fraud. Accounting problems from the fraudulent activities of these executives surfaced in early 1991 following a dip in the company's shares (by more than $ 50) (Bouchoux, 2009, p. 264). At the height of the scandal, other company officials were found guilty of either direct involvement defrauding the business or corporation with the above officials. This increased the number of parties involved in the graft to six. Among the individuals who had a hand in this defrauding scheme is the then vice chair of pharmacy purchases, Eric Sorkin. Having conspired in the criminal activities of Grass, Erik was to be tried separately, and as it will be seen below, his punishment was less serve. According to the serving regional director of the security and exchange commission, Mr. Wayne Carlin, these individuals had a committed one of the worst crimes for a big corporation like Rite Aid (Bouchoux, 2009, p. 254).
This had serious consequences for the shareholders who had entrusted this senior manager with improving the performance of the shares to gain better dividends. The Commission, which had earlier dealt with a similar case during the Enron corruptions scandal, was determined to use all its resources to put these individuals to justice. Two of the parties named by the Commission had, however, committed entirely different crimes at various times. However, the case of Mr. Grass was the most significant to the court due to the direct intention he had to defraud the company and enrich himself in the process. At the same time, his actions led to the biggest restatement of earnings to be recorded at the time.
Crimes Committed
According to the Security and Exchange Commission, Mr. Grass and his accomplices were guilty of the following crimes, all that they intended to defraud the company for personal interest.
1. Upcharges. The company's senior managers named above had intentionally and systematically inflated the deductions taken against balances owed to suppliers for damaged or otherwise expired products. The company employed an arbitrary multiplier to the proper deduction amount applied to damage of goods to be returned to vendors. The result was inflated deductions ranging from 35 to 50 percent. Due to this, the individuals reported a false pre-tax income of $28 million in 1999 (Margret & Peck, 2014, p. 154).
2. Stock Appreciation rights (SARS). Rite Aid neglected to record a collected cost for stock appreciation rights it had conceded to the representatives, in a system that gave the beneficiaries the privilege to get trade, or stock out amounts attached to increments in the business sector cost of the Rite Aid stock. Custom Aid ought to have accumulated a cost of $22 million in FY 1998 and $33 million in FY 1999 for these commitments (Margret & Peck, 2014, p. 198). At the point when addressed by Rite Aid's independent inspectors about the presence of any SARs, Bergonzi erroneously denied that any had been issued.
The analysis above gives the managerial wrongs committed in the heart of the management of the Rite Aid Company, that saw many of the company's resources wasted or stolen and its reputation spoilt. The organizational fraud triangle helps understand the occurrence of the actions that lead to fraud. This could be helpful to the corporate governance of a company such as Rite Aid in preventing another incidence as the 2002 corruption scandal. The organizational fraud triangle comprises of the conditions that must be present for fraud to occur.
These conditions represent the weakness of the internal controls of an organization to monitor the growth of unauthorized activities. One of the components of the triangle is leadership. Sometimes, the overall management or the line managers put excess pressure on their units/ departments to perform, which may lead to the employees recording false information implying the required performance levels. Another factor is the management controls, where weaknesses in the systems designed to identify and report fraud in the company. A company should design efficient systems to ensure the compliance of all members to the culture (Free, et al., 2007., p. 7). The third factor in the organizational triangle is the company's culture. A loophole in the organizational code of acceptable behavior could allow some unethical staff members, especially those at the top of the management to commit fraud (Chandra, 2010, p. 143). This was the case at Rite Aid where members of the top managements including the company's CEO disobey the organization's ethics and take millions of dollars from the company for their personal interest.
Following this, there is a need for the organizational corporate governance to formulate more efficient internal control systems, which is one of the most important measures in preventing fraud. The systems should comprise of regular audit at various levels of the organization to detect any anomalies in the internal activities. Moreover, there should be better and more efficient management controls to ensure compliance with the management with the internal and external accounting standards. This would go a long way in preventing the fraudulent activities at the management level of Rite Aid. As seen above, organizational ethics have a large role to play in discouraging unethical activities at any level of the organization.
Analysis of Rite Aid Fraud with Ethical Theories
At this point, it is imperative to analyze the fraud case at Rite Aid using some of the ethical theories used in organizational management. Most of the ethical theories used in the management of contemporary organizations focus on the question of what is right or wrong. The ethical theories provoke the use of a moral intuition among the organizational staff while undertaking their duties to the company (Trevino & Nelson, 2011, p. 214). There are several ethical theories used in management and the design of organizational culture. Some of the most common, however, include consequentialism and deontological approaches.
Consequentialist Theory
This is one of the widely used ethical theory and provides a unique view of the Rite Aid fraud case study. The focus of this approach is the consideration of the consequences of a person's actions. Utilitarianism is the most popular approach under consequentialism. According to the utilitarian, the right or wrong of an action should be based on the outcome of the same. As such, one should consider the moral outcome before engaging in a particular action or activity (Trevino & Nelson, 2011, p. 276). The utilitarian focus on the happiness of all that is what should be the right effect of any action.
In this case, the actions of the Rite Aid management team Franklin Brown, Martin Grass, and Franklin Berngozi did not take into consideration what would be the effect of their fraudulent activities. These members of the management did not consider the effects their actions would have on the reputation of the company to both the stakeholders and the customers (Goldmann, 2010, p. 32). As seen above, the fraud case at the company led to the biggest restatements of company financial statement in the history of organizational fraud. Additionally, their actions led to the loss of several millions of the stakeholders' money creating difficulties in the company's dividend allocation in the period and the following years (Goldman, 2010, p. 165). In line with the utilitarian view, these managers did not consider the greater good for the most significant number of parties to the organization that is the stakeholders, the rest of the staff, the SEC, as well as the company's customers.
Although the consequentialists do not provide a model for predicting the outcome of an action, the actions of the management team named above were by all standards going to result in harmful effects for the majority of the company's stakeholders. As such, this was a violation of the utilitarian view of the wrong or right of an action. Following this view, the fraud committed by the top official at Rite Aid was wrong which have been evidenced by the adverse effects surfed by the company (Birsch, 2013, p. 176). Moreover, the activities represented a breach of the ethical responsibility the leaders had for the organization. For example, the company's chief financial officer at the time of the scandal, Mr. Bergonzi used his position and the trust the organization had put in him to protect the firm's fund to embezzle millions of dollars.
The Deontological Theory
Contrary to the utilitarian view, the deontological approach focuses on the means in which an action is undertaken. One of the most widely used deontological views is an Immanuel Kant theory called Kantianism. This theory focuses on the mean of undertaking an action in line with other deontological theories. One of the most interesting premises, which relates to the fraud committed in Rite Aid, is that members of a community should make an effort to make the rules and take part in following them. In this case, the community is the organization (Ward, 2013, p. 67). The paradox is that the management members who should have been involved in eliminating fraud were the same people who perpetrated the fraud. According to the Kantians, the management should have focused on the rules and laws of the organization, which by all standards prohibit fraudulent activities. In so doing, they would have laid a strong foundation of good and ethical behavior of other staff members to follow (Wilshusen, 2009, p. 6). At the same time, this would have prevented the effects on the company such as loss of shareholder's money and tighter regulations of the Securities and Exchange Commission.
Fraud Prevention
This would have provided them with an opportunity to detect individuals involved in illegal accounting activities and seek legal action. Assuming that this was done since it is a big possibility, the committee should have notified the SEC or any other government agency for that matter (Petrucelli, 2013, p. 234). Additionally, as demonstrated above in the utilitarian and Kantianism, following the acceptable code of behaviors at the organization is the fundamental step in preventing unethical behaviors such as fraud. It is rather unfortunate that the fraud emanated from the top members of the management. Otherwise, it would be imperative to review the integrity of the management in handling the interest of the company and the stakeholders. The rest of the company staff should also be trained on the acceptable code of conduct to prevent such incidences in the future.
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