Smith & Smith 2003 Ethics Case Study

Excerpt from Case Study :

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.

Training sessions should then include basic accounting principles as well as general ethical principles. Each session should also include a section where employees can provide their own input and suggestions in terms of the company's current and future practices.

In this regard, the company should also maintain a principle of open communication among all levels of employment. Management should occur on an open and friendly basis, encouraging employees to discuss any problems, makes suggestions or ask for help. One of the company's main mistakes in the case was to follow a principle of punishment whenever the culture was violated. This principle should be replaced by a reward system. This will have the effect of cultivating loyalty that is sincere rather than artificially induced by negative practices.

All parties in the case were guilty of misconduct in some form. Employee 1 did not display a sufficient sense of personal principles to report the company's misconduct. Employee 2 was loyal to the company only as far as it served his purposes. He had no sense of misgiving to participate in fraud while he was employed by the company. The examiner transcended the boundaries of his work by interfering with Employee 2's attempts to find another job. The CBA company was guilty of misconduct towards its employees and its investors. In terms of the former, it encouraged fraudulent practices and rewarded dishonesty, while in terms of the latter the company deliberately deceived the public.

General accounting principles are important if a company is to make a success of its business. Dishonest accounting is seldom rewarding in the long-term. Even if it is, SEC investigations or indeed the simple course of time will eventually disclose misconduct, which in turn will result in a permanent tarnish upon the company's reputation, at best. Rather than engaging in misconduct in the first place, companies should have safeguards against dishonesty in place. A system of honest accounting, along with an open communication policy will result not only in long-term employee loyalty, but also in the long-term financial health of the company itself.


Eikner, E. (2004). Accounting Principles for Ethics Cases.

Schweikart, James A. Cognitive-Contingency Theory and the Study of Ethics in Accounting. Journal of Business Ethics.

Smith, Katherine T. & Smith, L. Murphy. (2003, June 21). Business and Accounting Ethics.

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