Japan: history, culture, and society

Ethics (BA Accounting)

In the rapidly changing business environment and all the industries suffering from very tight competition and numerous problems in the economies of different countries, it is vital for the business environment to work out the global morals and ethics which could be applied to any company operating in any market to avoid any possible abuse of business practices, which happened with Enron. More and more companies enter foreign markets, lend money to fund their expansion, issue more shares to attract more capital, which means that more than ever wealth of people and financial institutions is dependant on more than ever variables in different parts of this world. The Enron case hit the business ethics so much because it happened in the U.S.A., the country which is believed to sending business ethics practices to all the other parts of the world, and is a good example of creating country wealth through wise market economy, respect to property rights and strength of corporations.

But the recent audit and accounting scandals have revealed numerous problems, which have occurred in the corporate governance sphere and the possible severe economic outcomes of such problems within ethics of the companies. After the bankruptcy of Enron, not did only the employees and their relatives suffered who had all their life time savings in the company, pensions plans and money in the company shares, but did also the companies and their employees dealing with Enron in the due course of business. Thus, Andersen accounting company which was formerly a part of the biggest in its' industry in the world, with employees of about 85,000 globally, was objectively driven out of the business and currently has only 200 employees in Chicago office.

The whole trust to capital stock markets in the U.S.A. was violated by this case which could have extremely negative influence on the overall development of the whole U.S. economy. Furthermore, this could echo in the violation of the trust to other capital markets in other countries and thus have an external negative affect their also. For the last century, people perceived capital markets as one of the most efficient ways to save their funds, and the corporations in this way also achieved funds for their growth and development. The end purpose goal of any public company is to create and grow the wealth of shareholders, or the owners in the company, and the management is hired to achieve this. But the Enron case showed how many people at very big positions were not afraid to lose their businesses and image in the finance world for the money they were stealing from the company.

This whole system of capital markets was questioned and many issues were raised to improve the corporate ethics and governance. First of them is the issue of increasing competition negatively influencing the society in the way, where the company striving to achieve maximum revenues and profits, are not environmentally friendly and very often are not even human beings friendly, by developing and selling products which they know are not good for human beings health, but which will be a success due to possibility to create physical or psychological addictions to these products. The problem is worsened by the fact that often the big companies have very strong lobbies in the governmental bodies, which close their eyes on the real effects of these products and thus endanger the health and well being of the nation.

Also, the business operations have become much more arrogant and the competition is no longer fair in any of the markets, motivating the businessmen to increase the profits and approve any projects possible at any cost for the society or the population. The top management of the companies in very tight global arena is heavily pressured to show to the shareholders very high returns for the shareholders to leave the money with the company. Another problem, is the fact that typically shareholders require initial lower rates of returns on their money in the growth companies as they expect future higher than average pay backs. This motivates the management of such new, innovative companies to trace very high hope values in their balance sheets or business proposals, and exaggerate the worth of the intangible assets in the company. Even the business valuation methods are now more and more about trying to predict the future cash flows. Thus, the valuations of the company are based on virtual numbers, on the expectations which can materialize, but which very often do not materialize and thus the resources within the economy are not allocated optimally as shareholders invest money due to wrong signals and promises sent to them by the top management. For example, mergers and acquisitions are perceived as the latest fashionable trend to grow the company market share and profitability due to synergies affect. But as the practise has shown, out of the latest mergers, about 75% did not perform as they were expected by the top management.

The Sarbanes-Oxley Act was aimed to facilitate and solve some of these very difficult problems in the accounting and management of the companies. The companies now are restricted to the amount of intangible assets they can show in their balance sheets, which reduces the moral opportunism problems in the company. The company has also currently to hire the auditors which are completely independent from the management of the company and cannot carry out any other than audit services for the company. This solves the problems of insider trading, where the management take advantage of their internal knowledge of the real company situation. On the other hand, the agency problem, though is aimed to be solved, is at much higher cost for the companies now. Also, the auditors are currently under a very big pressure currently to confirm the very big numbers of the intangible assets of the companies.

Previously, as the auditors were heavily involved in the businesses of the company, the moral of the corporate governance suffered. Also, the company has to hire independent directors which is aimed to solve the ethics problem when the directors make the decisions not in the best of the shareholders, creditors and good name of the company, but for their personal wealth. The amount of loans which could be granted to the top management is reduced which solves the possible opportunism by the management. In general, the Sarbanes-Oxley act was aimed to reduce the utilitarianism behaviour of the managers who are tempted to receive the greatest amount of benefits and pleasure possible over the pain of the other. On the other hand, the amount of the reduced bonuses to the top management can create other ethics problems where the management is not sufficiently motivated to perform their best as they would not feel their personal efforts are rewarded as they do not have the stake in the company.