Accounting Ethics and Corporate Misconduct: CBA Corp Case Study

Introduction: Ethics in Accounting and the CBA Corp Case

According to 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 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, each party has transgressed in terms of their relationship with and responsibility toward stakeholders in the company.

Employee 1: Contingency Ethics and Self-Interest

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

The same self-interest ultimately encouraged Employee 1 to disclose the situation during the formal investigation into the company. He showed little consistency in his personal ethics, following only what each situation demanded. This behavior indicates that Employee 1 adhered to a contingency theory of ethics — doing whatever the situation required in order to preserve his own self-interest. Initially, he acted in the interest of the company because it was also in his personal interest. He was unable to disclose the ethical misconduct, as there was no system of confidential reporting available. Disclosure would have meant ostracism at best, or termination at worst.

Once the investigation began, Employee 1's self-interest dictated that he cooperate and implicate others involved in the fraudulent activity. Rather than reflecting genuine personal ethics, this cooperation was also driven by self-interest: failing to cooperate would have risked a prison sentence or other prosecution, damaging his professional reputation and future employment prospects. Employee 1 therefore acted consistently in his own self-interest, adapting to the demands of each changing situation.

Employee 2: Company Loyalty and Weak Personal Ethics

Employee 2 also acted in his own self-interest according to the demands of the situation, although he appeared to do so with fewer misgivings than Employee 1. While Employee 1 responded primarily to situational pressures, Employee 2's motivation seems rooted in loyalty to his employer. He indicated that he merely acted in accordance with the prevailing culture within the company, and he did not appear to possess a particularly strong set of personal ethics — a deficiency also evident in Employee 1.

Employee 2 took longer than Employee 1 to cooperate with the investigation, doing so only once it became clear that he was personally implicated. This suggests a weak sense of personal ethics and a tendency to act according to the company's general culture and norms — or, more accurately, the absence of such norms.

Employee 2's application for a new job further indicated that his loyalty to the company was not deeply held, lasting only as long as the company's probable reputation remained intact. Like Employee 1, he acted according to the demands of the situation, but from an even weaker foundation of personal ethics.

That said, the examiner was not correct to warn the prospective new employer of Employee 2's conduct at his existing place of employment. Employee 2 acted out of company loyalty and would likely repeat such behavior only if a new employer demanded it.

Conclusion: Accountability and Long-Term Integrity

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 own purposes, and demonstrated no compunction about participating in fraud while employed there. The examiner exceeded the boundaries of his role by interfering with Employee 2's efforts to find new employment. CBA Corp itself was guilty of misconduct toward both its employees and its investors — encouraging fraudulent practices and rewarding dishonesty on one hand, and deliberately deceiving the public on the other.

Sound accounting principles are essential to any company's long-term success. Dishonest accounting rarely pays in the long run. Even where it appears to do so temporarily, regulatory investigations — or simply the passage of time — will eventually expose the misconduct, resulting at minimum in permanent reputational damage. Rather than engaging in misconduct at all, companies should implement robust safeguards against dishonesty from the outset. A system of honest accounting, combined with an open communication policy, will produce not only long-term employee loyalty but also the long-term financial health of the company itself.

Sources

Eikner, E. (2004). Accounting Principles for Ethics Cases. www.txstate.edu/slac/business/accounting/AccPrnEC.doc

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.