Case study analysis and applications

¶ … Smith & Smith (2003), ethics in business is vitally important on a number of levels, and particularly in terms of accounting. Accounting ethics means that a code of professional conduct is followed in order to encourage public confidence in the accounting firms. This is also important for investors, who rely on full and accurate disclosure to make sound investment decisions and create a reliable source of investment income. In the case of CBA Corp., generally accepted accounting ethics such as full disclosure are not adhered to. Although self-interest plays an important role in the actions of all role players, they have all transgressed in terms of their relationship and responsibility towards stakeholders in the company.

Employee 1 for example observed the basically unethical actions of the company during the five years of his employment at CBA. Although he understood that these actions were basically unethical, he nonetheless did not act in the interest of stakeholders, but rather in his own self-interest. This position dictated that he maintain his silence rather than disclosing the unethical actions of the company. In this way he was able to maintain the healthy relationships he had cultivated with his employers and his fellow accountants.

The same self-interest is what encouraged employee to finally disclose the situation during the formal investigation into the company. The employee showed little consistency in his personal ethics, as he followed only what the situation dictated.

This behavior indicated that Employee 1 adhered to a contingency theory of ethics. He did whatever the situation demanded in order to preserve his own self-interest. Initially, he acted in the interest of the company, as this was also in his self-interest. He was not able to disclose the ethical misconduct of the company, as there was no system of confidential reporting. Disclosure would have meant that he was ostracized at best or terminated at worst.

Once the investigation started, Employee 1's self-interest dictated that he cooperate with the investigation, as well as implicate others who were involved with the fraudulent activity. Rather than a sense of personal ethics, his previous actions indicate that this was also based upon self-interest. Not cooperating would have meant a possible prison sentence or other forms of prosecution. This would have badly affected Employee 1's reputation as an accountant and the possibility of obtaining another job. Employee 1 therefore acted in his own self-interest according to the dictates of the changing situations involved.

Employee 2 also acted in his own self-interest, according to the demands of the situation, although it appears that he did so with fewer misgivings than Employee 1. Whereas Employee 1 acted according to the demands of the situation, Employee 2's motivation appears to be based upon his sense of loyalty to his employer. He indicated that he merely acted according to the prevalent culture within the company. He did not seem to have a particularly strong set of personal ethics. There was also a lack of such ethics in Employee 1.

Employee 2 took longer than Employee 1 to cooperate with the investigation, and did so only once it appeared that he was implicated in the investigation. This indicates a weak sense of personal ethics and a tendency to act according to the dictates of the company and its general culture and ethics, or indeed lack thereof.

Employee 2's application for a new job also indicated that his loyalty to the company was not particularly strong, lasting only as long as the company's probable reputation. He also therefore acted according to the demands of the situation, like Employee 1, but from a weaker position of personal ethics.

I do not however believe that the examiner was correct in warning the new company of the employee's indiscretion at his existing place of employment. Employee 2 acted out of company loyalty, and would likely do so again only if the company demanded it.

The task of the examiner was to uphold accounting ethics and to investigate the accounting practices and principles at CBA in order to expose any lack of ethics. In this, the examiner has done adequate work in exposing the role players in the misconduct, and revealing the facts of the case.

The examiner's task is furthermore to uphold the interests of all stakeholders in the company in the interest of the accounting principle of full disclosure. The company has not been acting in the interest of its stakeholders, as it has encouraged its employees to engage in fraudulent practices. The examiner has adhered to its task to expose these practices in the public interest.

However, as mentioned above, the examiner has moved beyond his task description when interfering with Employee 2's attempt to find another job. Although it might be said that he acted in the interest of the second company, he was not within his rights to do so. He also did not take into account all the facts of the case or the basic motivations of Employee 2.

On the other hand, it might also be said that Employee 2 should have waited at least until the investigation was completed before looking for a new job. The examiner however acted unethically to contact the company where Employee 2 applied for a new job. In principle, he might at least have informed the employee of his intention to contact the new company.

The CBA company acted unethically by not adhering to the full disclosure principle. It did so on a number of levels. In terms of the public and stakeholder interest, the company acted unethically by deliberately deceiving them. CBA acted in its own self-interest while ignoring the interest of stakeholders. It fraudulently inflated its stock value by incorrectly indicating its accounting figures. Although initially appearing to be in the interest of stakeholders, there was no way in which this practice could be sustainable in the long-term.

The company also did a great disservice to its employees by encouraging them to engage in its fraudulent activities. It forced employees to act in the interest of the company by ostracizing and even terminating those who would not do so. This is an abuse of employee rights. Employees should have the right to act according to accepted accounting principles, and also according to their own personal core values.

In this, the company has not adhered to accounting accuracy or fairness towards its employees. Like Employee 1 and 2 above, it has acted in its own self-interest rather than in the interest of either its stakeholders and its employees. The overall result is a complete loss of reputation, in which employees are also implicated. Furthermore all the company's stakeholders and investors are likely to lose the majority of their investment, as the company has inflated its value. Such actions can lead to a public scandal that is very difficult to transcend in the long-term.

Several safeguards could be put in place in order to prevent the situation from reoccurring in the future. Various tasks and principles could for example be followed by the CEO of the company, as well as its trustees to ensure a better adherence to accounting principles in the future.

Firstly, the CBA company appears to have a lack of basic core values. Its main principle was to artificially inflate its value for the purpose of deceiving investors and stakeholders and creating a false sense of security. In the future, it is therefore suggested that a set of clear core values and principles be established that take into account the interest of stakeholders rather than only those of the company itself.

These core values should be widely publicized among both the company's management teams and employees. It should be ensured that every employee is aware of the principles, as well as their role in upholding these principles.

Secondly, an adherence to these principles should be upheld in various ways. This can be done fore example by establishing a formal internal auditing body to ensure that employees adhere to a generally accepted code of conduct. Fraud should also be discouraged by establishing penalties for such practices. All employees and employers should then be aware of these penalties and the possibility of being terminated if the published principles are not upheld.

Furthermore, the public interest should be upheld by publicly publicizing the principles that the company will uphold during its operations. Such public awareness will serve as further deterrent for fraudulent activities.

On the formal level, periodic investigations should form a part of the company's policy. A non-partial, non-interested entity should be employed to handle these investigations. These investigations can be scheduled on both a random and planned basis. For planned investigations, employers and employees should be made aware in advance of scheduled investigations. These can occur once or twice per year. In addition, it is also suggested that at least one random investigation per year should be conducted. These should happen on an unknown basis, where no company employee or manger is not given advance warning of the investigations. This will then ensure that the company's affairs will always be in order.

In terms of the employees, a system should be made available to provide them with the confidence to report any suspected fraud within the company. This should occur on a confidential basis to prevent situations such as those of Employee 1 above. The employee was fully aware of the fraud and felt that it was unethical, but was reluctant to report it because of the lack of adequate systems by means of which to do so. Managers and employees alike should be aware of this reporting system, and therefore encouraged to report any suspected misconduct.

This is not to say that company loyalty should not be an important part of the company's operations. Employees should be encouraged to be loyal to the company and to take pride in the work they do. Without such loyalty and pride, the work that employees perform will not adhere to the necessary standards of excellence. A culture of honesty and pride should therefore be cultivated, rather than one of dishonesty and fraud in the interest of the company rather than its stakeholders.

A reward system can also be implemented to provide an incentive for excellent work. Such a reward system can then be used to promote honesty and to publicly honor those who display such honesty.

Finally, it is suggested that a training system be implemented by means of which new and existing employees are made aware of the generally accepted accounting principles within the company. Once a new employee is appointed, and individual training session should be provided by means of which the person is made aware of these principles. The person can also be assigned to an existing employee in order to learn not only the tasks involved in his or her job, but also the principles behind these tasks, and how these should be upheld to ensure honesty and integrity within the company.

Collectively, at least one training session per year should be conducted for all employees within the company. These training sessions can include speakers from various accounting firms, as well as ethics professionals. Training sessions can be held for both management-level employees, and for lower level employees. Sessions can also be held collectively for all levels of employees together.