Analysis Of Ethical Dilemma Case In Business

1 Running Head: ETHICAL DILEMMA

Analysis of Ethical Dilemma Case in Business [Student Name] [Course Title] [Instructor] [Date]

2 Analysis of Ethical Dilemma Case in Business Business Ethics Business or corporate ethics are a set of norms, rules and principles of what people generally consider right in a workplace environment. It can also be referred to as a guideline of what actions are considered ethical and moral in a business environment. All businesses should apply business ethics principles in the workplace not only to promote a healthy and professional environment but also to improve and sustain a better image of the company in general public. A company or business must consider several factors to ensure ethical practices are applied in all aspects of the business. Ethics is referred to the phenomenon or action which people normally consider right and moral and one which does not have any immoral or deceiving impacts on the stakeholders of a company and social environment a company operates in (Ferrell, Fraedrich, & Ferrell, 2000 pp. 2-25). If a business does not implement effective ethical practices it may face various risks such as fines, image deterioration and loss of business. Some unethical issues are also considered unlawful which may subsequently result in major losses for the company and heavy penalties, fines and punishments being levied by regulatory bodies or government. The people working in organizations also face several problems while fulfilling their job requirements. In most cases people get confused about what decisions to make which are acceptable and ethical to all entities and individuals affected by the decision. Several companies have faced ethical issues in the context of doing business and most of these companies were involved in unethical accounting and business practices and one of the biggest examples of corporate scandals involving unethical issues was the case of Enron. In this case several key employees of the company and external auditors of the company were involved in unethical practices in business which eventually resulted in huge losses for shareholders and eventually the

3 government had to intervene where consequently Enron went bankrupt and Arthur Andersen which was the largest accountancy firm was closed down. The regulators not only imposed huge penalties and fines on both companies but severe legal action was also taken against the senior executives of both companies. The license of Arthur Andersen was revoked and the company could no longer provide accounting and auditing services. This implies the immense impact of unethical procedures on a company and its employees. Therefore in order to steer clear form such risks, organizations should implement an ethical code of conduct where all employees of the organization are trained in the aspects of ethical practices in organizations. Even after the implementation of an ethical code of conduct and guidelines, employees and personnel face several ethical dilemmas during their tenure in the organization. These ethical dilemmas need to be resolved using various ethical theories and recommendations should be made on making a decision which is ethical and acceptable to all parties involved in an case. This paper presents and describes an ethical dilemma in the workplace and various aspects of the dilemma with reference to ethical principles involved in the case and the influences on the key decision maker in the case. The last part of this paper provides recommendations to the key decision maker regarding decisions to be made which are considered ethical by all parties of the case (Ferrell, Fraedrich, & Ferrell, 2000). Introduction to Ethical Dilemma Case The case under consideration concerns the ethical issues confronting Mr. A who works for the ABC accounting firm. During the audit of a subsidiary of an important client Mr. A uncovers an incorrect reporting of a neglected building located in an unattractive neighborhood. The value of the company has been reported as $2 million whereas according to calculations done by Mr. A, the value of this property does not exceed $100,000. The reason given by the

4 client firm management on reporting the overstated value is that they intend to rent out the property in near future. The client firm refuses to write down the value of the property and his superior Mr. B disagrees with him and asks him to leave the problem and issue a clean report. Mr. A does not comply with the instructions and submits a report pointing out the overstatement of the balance sheet amount as the difference in the amount is substantial. The superior takes out the pages submitted by Mr. A from the file, attaches a clean report and issues a negative evaluation of Mr. A’s performance. Mr. A is now considering on the options available to him in this matter. The report will cover an analysis of stakeholder impact and will explain the course of action Mr. A should take. Ethical principle - Accounting manipulations and frauds The area of accounting manipulation is closely related with the field business ethics and numbers of organizations are sued just because of unethical accounting practices and using window dressing techniques. Accounting manipulations and accounting frauds are just playing with the numbers and the accountants through this act can either harm their own organization or in certain cases they affect the shareholders. The accountants and individuals that are related with finance department are mainly associated with these types of frauds. These frauds are deadly for an organization and it negatively affects an organization in both short and the long run (Wells, 2007). The repute of the organization is tarnished by these frauds and organizations suffer huge amount of losses because of these frauds and their customer base are reduced because of this. In the initial phases when an organization is a private limited company then the accountants of this organization can harm them if proper check is not placed on them. They can change the figures of receipts and in this manner they can harm an organization. Through

5 overstating the amount of account payable they can cheat an organization. This cheating can cause problems for the organization and accountants cunningly can balance the financial statement of an organization. Another process used by organizations is on a broader scale where they are advised by the directors and senior officials of the organization to change the figures of the financial statements. In certain cases they are even pressurized by the shareholders to change the figures of financial statements so the value of shares rises up. The organization use window dressing techniques in this scenario. Window dressing techniques are used by accountants to present the accounts of the company in a manner that enhances the financial position of an organization (Jones, 2009). In a broader sense it is described as a form of creative accounting which is used for flattering the figures of accounts. There are two aspects on which window dressing are solely based on these two aspects are liquidity and profitability. In the liquidity aspect the organization hides the diminishing liquidity position of the organization and the profitability massages the profit figures of organizations. There are different methods that are used by organization is window dressing their accounts. These methods are short term borrowing, chasing debtors, including of the intangible assets, changing the stock valuation policy, sales and lease back and etc (Coenen, 2008). The famous methods are stock valuation, inclusion of intangible assets, short term borrowing and depreciation policy. In the stock valuation method the methods used are LIFO, AVCO and FIFO (Biegelman & Bartow, 2006). A change in these methods would lead to different figures that are the reason why accountants use this strategy. The change the figures can affect the closing stock and impacts the profits of the company and the value of firm’s assets is

6 effected by stock in the balance sheet. Similarly, in the inclusion of intangible assets organizations use non depreciated assets to maintain a strong value of its assets and it gives a misleading view. Another window dressing approach is used through short term borrowing and the short term borrowing is made just before the date on which the balance sheet is drawn. All of these frauds are made just to enhance the performance of an organization but the process of enhancing the performance is not viable because organizations are infringing the laws and they are not complying with the ethics of business. The ethical code of conduct is not followed by organizations and that is the reason why organization can be successful in the short term but in the longer run these organizations suffer because they are not complying with the rules of business. The role of auditors and corporate compliance Auditors are present in nearly every organization and the role of auditors is to ensure the fact that organization’s financial position and financial reporting is appropriate. The element of fraud auditing is also used by them which basically are defined as the fact which creates an environment for the detection of frauds and prevention of frauds in transactions that are on commercial basis (Singelton & Bologna, 2006). The main goal of these auditors is to ensure corporate compliance and remove fraudulent activities in the organization. The modification of numbers and destruction of certain records are some of the examples of basic frauds conducted by accountants. Auditors check the entire accounts and related financial statement of an organization and the first objectives of a fraud auditor are to identify the fact that whether a certain level of discrepancy is present in the accounts or not. Then the auditor checks the element of human error present in the accounts. Fraud auditors check the tone in the entire organization

7 and he/she ultimately devises a corporate code of conduct for the organizations financial policies. These auditors inspect the normal course of business of the organization. As far as auditing is concerned there are basically two types of audits in an organization. These two types are internal audit and external audit. The internal audit is basically conducted by the organization itself and for external audits certain auditors are hired from auditing firms to check the corporate compliance of the organization. Besides changing the figures and deleting the accounting records another issue arises which is related to disclosure requirement and certain organization don’t disclose their entire financial statements and they hide them from their shareholders and present a better picture. For fulfilling the disclosure requirements and to create corporate compliance a law was passed which is known as SOX (U.S Congress, 2002). The main purpose of this act was to ensure the disclosure requirements and organizations have to fulfill the requirements of this law. This act was passed because corporate giants like Enron, WorldCom, and Tyco International were involved in corporate scandals that were based on financial reporting. Although the act has certain shortfalls like it is working as a label for corporate compliance and those organizations that have adopted this act are free from corporate frauds and its posses high level of cost that is the reason why small organization cannot afford this act. However, a detailed compliance and security policy is devised is this act (Sarbanes Oxley, 2006). Stakeholder Impact Analysis In order to perform this analysis, the stakeholders in the case must be identified. There are three stakeholders who would be directly affected by the outcome. First stake holder is the accounting firm, the second stakeholder is the real estate subsidiary of an important client and the third stake holders are the people responsible for audit. The impact of the audit report on all

8 three stakeholders is discussed one by one. First let us observe the impact of the amendments made in the audit report by Mr. B, on the accounting firm. The outcome of this report on the company would be very helpful in securing the client account for the company but on the other hand there is a threat to the company as well because when the client company uses the audit report issued by the company to sell or rent out the property to potential customers, they will be mislead and sue the accounting firm for the losses incurred due to this report. The company will face a lawsuit and its reputation will be tarnished as ABC is considered a strong advocate of ethics and morality especially after strong measures have been taken in ethical and moral standards of audit firms in the accounting standards as well as the constitution. If the original report submitted by Mr. A was issued to the client the most drastic impact it would have is that the accounting firm could lose the client but retain its image of a firm which gives value to ethical and moral standards. Now the affects of this report on the second stakeholder which is the subsidiary of the client company is discussed. If the clean report is issued the client company would not have any problems regarding the proper disclosure of this amount as the overstated amount is not substantial in respect of the company’s consolidated financial statements but the amount is substantial in the financial statement of the subsidiary as it has a 7 percent impact on the net income of the subsidiary. If the clean report is issued the task of selling or renting out the property would be much easier for the subsidiary. The same legal problems would be faced by the company in case of material losses to the buyers who would file for damages due to misrepresentation. However, if the original report by Mr. A is issued, it would be difficult for the management of the company to sell or rent out the property or even take out a loan by mortgaging this property. There would be no significant positive impact on the client company but it could avoid any future litigation from the potential buyers or tenants of the property. The

9 company could also avoid any future external audit anomalies if the values reported on the financial statements are accurate and truthful. The third and the last stakeholder of the scenario is Mr. A himself because if the clean report is submitted he will be the first person to face the lawsuit as he was directly responsible for auditing the financial statements of the subsidiary. The positive impact for him would that his one year promotion would be guaranteed if the client account is secured solely by the accounting firm. The original audit report submitted by Mr. A would have resulted in the accounting firm’s loss of the client account. Influence of Organization Culture Organizational culture plays an important role in the decision making and different strategic decisions are taken with respect to the prevalent culture of the organization. In the similar manner it can be said that organizational culture is important in both the short and the long run. The culture of the organization incorporates the norms and rules of the organization. Furthermore, it can be said that when an organization is making ethical decision making then in this scenario culture of that organization plays an important role. Researchers and strategist actually believe that an organization culture can be considered as a proactive culture when it incorporates all the elements of ethical decision making in both the short and the long run (Ferrell, Fraedrich, & Ferrell, 2000 pp. 113-141). In the similar manner it can also be said that when the decision making is free from the menaces of bribery, red tapping, harassment then an organization can prosper in both the short and the long run. In the similar an organization that does not focuses on the culture and just focus on the primary aspect of profit making might suffer in the long run. Therefore, it can be clearly said that the influence of organizational culture is huge on the organizations decision making. In the scenario of the case it can be said that Mr. A is facing a

10 dilemma regarding ethical considerations in ABC Company. The supervisor Mr. B has actually changed his report and awarded the client “non-qualified”. However, the ethical analysis actually depicts that this organization is a qualified company because it is not fulfilling the ethical code of conduct and the client is focusing on the faulty accounting practices. That is reason why Mr. A is quite confused about the situation and what strategy he should opt. Mr. B (supervisor) has actually implemented this scenario because the ABC company can progress in this aspect when they award a tag of non-qualified to the client. This situation depicts the organizational culture and it shows that this organization is working on unethical practices because for the attainment of profits they can opt for unethical business practices. The organizational culture actually defines the norms of an organization and the norms that are present in ABC Company actually depicts that they are reluctant to ethical implications and it can be easily predicted that since the culture of this organization is not ethically enriched that is the reason why it can be easily predicted that the directors of the company would go with Mr. B and they would opt for his policies. Thus, it can be said that organizational culture of ABC Company is not appropriate and that is the reason why this culture is creating problems for Mr. A in both the short and the long run. Furthermore, the dilemma in this scenario is that what should Mr. A opt for his personal opinions about ethics or he should opt for the performance of the company which is due to unethical practices. Influence of Ethics / Compliance Programs The development and implementation of an ethics program is not only crucial for organizational success but it also proves to be effective in various human resource issues. The

11 ethics and compliance to ethics program involves a variety of stages which are comprehensively designed and developed by the company management. It is to be understood clearly that the ethics and compliance program is not just a code of ethics or code of conduct but comprises of a variety of elements. The elements in an ethics and compliance program are lucid organizational values, ethical strategies and ethical goals for decision making purposes, ethical policies and procedure for implementation of programs, measurement mechanism for effectiveness of the ethical programs, reward structures in ethical behaviors, guidelines for implementation of ethical decision making, implementation of ethical training programs, support programs for implementation of ethical policies and convergence of employee values and corporate values. There are several benefits of implementing an ethics and compliance program in an organization which include the loyalty of customers, reduced ethical meltdowns, increased employee loyalty and productivity, improvement in sales, avoidance and reduction in penalties and fines, decrease in opposition from various circles of the society, increased financial performance and decrease in ethical incidents (Ferrell, Fraedrich, & Ferrell, 2000). The ethics and compliance program of ABC organization would greatly impact the decision made by Mr. A in regards to the current ethical dilemma. If the ethical and compliance program is implemented effectively in ABC Company then Mr. A would have no difficulty in arriving at a conclusion in the current case and could make a decision on whether to report the ethical misconduct of Mr. B to proper management personnel. If there is in fact an ethical and compliance program implemented in the company Mr. A would not even have to worry about the incident happening in the fist place as a strong ethical program would discourage any unethical behavior by personnel whether old or new. If the management applies an effective ethics and compliance programs all employees would be properly trained in dealing with ethical issues and

12 making proper decisions in ethical dilemmas such as the current situation. In the absence of such a program employees would be motivated to indulge into unethical behavior without any check and balances for their personal benefits. Mr. A issued a qualified report for the client who had overstated the value of one of its assets on the balance sheet but Mr. A’s supervisor replaced the previous report with a non qualified report and made negative comments on the report which were quite damaging for Mr. A’s career. As a proper ethics and compliance program has not been implemented in the organization Mr. A is confused about the situation and what to do in this regard. He must now make a decision based on his own interpretation of ethical misconduct and moral actions. If a comprehensive ethics and compliance program was implemented in the organization then Mr. A would not face any difficulties in making a decision instantly regarding the current situation and in an ethical program a proper channel would have been available to Mr. A in respect of the current ethical dilemma. Influence of Rewards and Discipline Rewards play a very important role in a person’s decisions in the workplace. There are two types of rewards for employees in an organization which are intrinsic rewards and extrinsic rewards. Extrinsic rewards are money oriented whereas intrinsic rewards are esteem oriented. The extrinsic rewards include benefits such as salary increments, bonuses and special cash rewards on achievement. The intrinsic rewards are more esteem oriented and focus on a person’s esteem needs rather than cash rewards. These rewards include promotions, acknowledgement in front of peers, performance appraisal and appreciation in front of others. Employees of a company are highly motivated with both of these rewards in different situations. The discipline in an organizational environment entails that all employees and personnel adhere to the rules,

13 policies and procedures implemented in the organization. Several companies have discipline policies which impose penalties on employees who do not concur with or follow the policies. Employees usually make decisions which provide them with rewards and provide safety form disciplinary action. Following the ethical code of conduct may also bring intrinsic rewards and save employees from penalties and punishments. Alternatively when an ethical code of conduct is not effectively implemented in an organization, employees may make decisions which are unethical or immoral for gaining extrinsic or intrinsic rewards without fear of any penalties being imposed (Ferrell, Fraedrich, & Ferrell, 2000 pp. 141-164). In the current situation A’s supervisor has replaced the original qualified report with a un qualified report for the benefit of the client which could result in confirmation of the client’s account to the company and both A and his supervisor could get rewards after the confirmation of the account. Mr. A would also get promoted to a higher level in the organization if the client signs a contract for future services. As ABC Company is more profit oriented and although an ethical code of conduct is present in the company but it is not implemented quite effectively. The present scenario would motivate any person in place of Mr. A but he has quite strong personal ethical values which create a dilemma for him and he is now confused whether to ignore the actions of his superior and let the unqualified audit report pass on to the superiors or report the situation to the superiors. If A ignores the matter it may result in rewards for A in the form of a promotion and if he reports the matter to superiors it may result in failure of acquiring the client’s account which may prove quite beneficial for the company in monetary terms in future periods of operation. Thus the rewards and discipline culture of an organization impacts the decisions of a person in an ethical dilemma quite significantly.

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Course of Action The audit report now in the records of ABC does not have A’s name as the report submitted by him was removed by Mr. B and a negative evaluation of his performance and instead of getting the important one year promotion he faces the threat of being removed of his position from the accounting firm. The options available to A include leaving the matter as it is and not reporting it to anyone; he has the right to take this matter to his partner counselor or personnel department. He personally feels that he should report this matter to an independent review board but a board like this is inexistent in ABC. A is a person who strongly believes in the ethical and moral duties of an auditor and strictly abides by them. He had discussed the report released by Senator Lee Metcalf which covered the biasness of accounting firms towards their clients with various partners of the firm and got the impression that the partners strictly believed in the ethical and moral representation of clients. It should also be noted that it has become more important for auditors to follow the code of ethics especially after the implementation of the Sarbanes-Oxley Act which requires the auditors to strictly follow the code of ethics under section 103 (U.S Congress, 2002). This was the reason ABC had its reputation of setting high standards of ethics during the auditing process of different companies. This indicates that if A discusses the matter with one of the partners, some action might be taken in respect of the situation. In order to provide a course of action we must compare the benefits and shortcomings of the options available to A. If A selects the first option and does not report the incident to anyone

15 there would be no benefit to him but the company may benefit in case the client account is acquired exclusively. The first option holds many disadvantages for A as the audit report now includes a negative evaluation of A’s performance and he is responsible for the reliability of the report. In case of any litigation he would be solely responsible for the consequences and both the negative evaluation and legal issue could jeopardize his position at the firm. The second option entails that Mr. A reports this situation to a partner, the benefit of this plan would be that the original audit report is issued and action is taken to ensure that code of ethics is strictly followed in future. The disadvantage of this option could cause the client company to cancel its account with the firm. If A is pushed hard to amend the report or do nothing about it he can go to the Public Company Accounting Oversight Board which was established with the enactment of the Sarbanes Oxley Act. Provisions have been made in the act to protect whistleblowers and it has been clarified any retribution towards whistleblowers will not be accepted (Kleckner & Jackson, 2004). Conclusion From the analysis of the whole case and the ethical issues involved the viable option is that Mr. A report this matter to a partner counselor as this option is more beneficial for his career and the profession of auditing also demands that code of ethics be followed and financial information be disclosed appropriately in a transparent manner. Personally A is also very inclined towards the code of ethics and morality as he thoroughly studied the code of AICPA for his CPA exam. If the last option does not work he can eventually go to the Public Company Accounting Oversight Board.

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Reference List Biegelman, M., & Bartow, T. (2006). Executive Roadmap to Fraud Prevention and Internal Controls: Creating a Culture of Compliance. Wiley. Coenen, T. (2008). Essential of Corporate Fraud. Wiley. Ferrell, O., Fraedrich, J., & Ferrell, L. (2000). Business Ethics. Houghton Mifflin Company . Jones, M. (2009). Creative Accounting, Fraud and International Accounting Scandals. John Wiley and Sons. Kleckner, P., & Jackson, C. (2004, June). Sarbanes-Oxley and Whistle-blower Protections. Retrieved May 20, 2009, from nysscpa.org: http://www.nysscpa.org/cpajournal/2004/604/perspectives/p14.htm Sarbanes Oxley. (2006). Sarbanes-Oxley Compliance. Retrieved December 11, 2009, from Soxlaw.com: http://www.soxlaw.com/ Singelton, T., & Bologna, J. (2006). Fraud Auditing and Forensic Accounting. Wiley. U.S Congress. (2002). Sarbanes Oxley Act 2002. Washington: U.S Congress. Wells, J. (2007). Corporate Fraud Handbook. Wiley.

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