Ethics and Corporate Responsibility: Accounting Fraud

Ethics and Corporate Responsibility: Accounting Fraud The key issued described in the suit against Xerox Corporation is that Xerox had overstated its revenues during the past four years by almost $2 billion. The fraudulent scheme had misled investors about Xeroxs earnings to polish its reputation on Wall Street and to boost the companys stock price. These accounting fraud cases show us that ethics is a real issue, a very current issue and it is one that needs to be addressed. Unethical behaviour is common and reasons exist for such behaviour. Recent accounting scandals involving high-profile companies such as Xerox Corp have called into question accounting practices and undermined public confidence in the profession. These ethical scandals in the real world suggested a market economy being out of control and raised demands for more stringent and effective government regulation. Such deception by management hampers the ability of the users of financial statements from gaining accurate business information for decision-making and leaves their interests unprotected. 2.CASE DISCUSSION a)What are the ethical issues confronted in these cases? The term ethics refer to a system or code of conduct based on moral duties and obligation that indicate how we should behave; it deals with the ability to distinguish right from wrong and the commitment to do what is right. Unethical behaviour in the corporate world is political and business scandals, which arise with the disclosure of misdeeds by trusted executives of large public corporations. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities, sometimes with the cooperation of officials in other corporations or affiliates. For Xerox Corp. it has been defrauding investors since 1997 till 2000. In a scheme directed and approved by its senior management, Xerox falsely portrayed itself as a business meeting its competitive challenges and increasing its earnings every quarter. Xerox knowingly or recklessly increased revenues and earnings by accelerating the recognition of revenues through mostly non-GAAP accounting actions, overstated its earnings by using so called cookie jar reserves and interest income from tax refunds, disguised loans as asset sales and manipulated its accounting in violation of generally accepted accounting principles (GAAP). All of them should have been disclosed to investors in a timely manner because, singly and collectively, they constituted a significant departure from Xeroxs past accounting practices and misled investors about the quality of the earnings being reported. Besides that, senior Xerox management reaped over $5 billion in performance-based compensation and over $30 million in profits from the sale of stock. The practices summarized above constitute an unlawful scheme by Xerox to defraud investors through undisclosed accounting practices and other material transactions, some of which the company knew or should have known violated GAAP. Xerox failed to tell investors that these actions were the reason Xerox met or exceeded consensus earnings estimates quarter after quarter. b) The possible reasons or factors that may cause the unethical actions in the cases. The ethical issues faced by Xerox corp can be explained from a personal, organizational and systematic level and it possible reasons why they commit unethical actions. Personal Level Possible reasons: Individual moral failures and greed Personal level calls for the character evaluation of the main individuals that participated in the various fraud as for Xerox Corp Former Chairman and CEO, Paul Allaire, Former Chief Financial Officer, Barry Romeril and KPMG partner, Michael Conway, in a statement reported that they are the main person whom in charged by the SEC way back years of 1999. The values and ethical behaviours of these individuals have continuously been called into question. Many of the charges directed towards these individuals are a clear indication of acquiring personal interest. It is not that the senior executives did not receive any ethics training earlier on but it is their own individual moral failures and greed that led to the distortion of financial statements. They did not consider the social implications of their unscrupulous decision on their company and also all parties with interests in the company. What concern these executives are their own individualized interests especially in wealth maximization. Organizational Level Possible reasons: The need to follow orders from bosses and pressure from top management on their accountants to make the numbers add up. An unethical practices by the Top management to ensure that the accountant of the Corporation to make up the financial statement reporting to reflect the corporation financial position was on a good position no matter what it cost as long as they can manipulate the treatment of accounting practices. This might be the reasons for the accountant in that organizational tied up( unable to perform as an independent parties) with the mislead accounting practices in order to follow the command of the superior management. As in Nicor Energys overstated unbilled revenue by approximately $4.5 million for 2001 was a collusion between Johnson (senior-most financial officer) and Stoffer (NEs President CEO) in inflating the unbilled revenue number. Stoffer also directed a reversal of a portion of the incurred expense of 2001 into 2002 to meet year-end earnings targets. Besides that, Johnson who was responsible for setting the level of the bad debt reserve was under pressured by Stoffer to purposely understate the bad debts reserve. Systematic Level Possible Reasons: Cosy relationship the firms have with their corporate clients and Enormous pressure from Wall Street investors to keep up short term earnings. As been spell out, many external factors have contributed to the confront of this unethical issues. Such possible factors from the external forces are Corporations often hire accountants and other personnel from their auditor and accountants and much of the pressure brought to bear on accountants; stems from the cosy relationships the firms have with corporate clients. As for Xeroxs auditors, KPMG kept silent when it found out about the accounting discrepancies in Xerox so that they can maintain their relationship and businesses with Xerox. There was no watchdog ( legal and structure) at Xerox. KPMGs bark sounded no warning to investors; its bite was toothless. Beside the possible causes that might led them to commit in these unethical actions possibly might be due to the investment climate of 1990s added insults to injuries. Cited back, year of 1990s, Companies that failed to meet Wall Streets earnings estimates by even a penny often were punished by significant declines in stock price. In addition, compensation of Xerox senior management team depended significantly on their ability to meet increasing revenue and earning target. c).Who were the stakeholders (individual or groups) that are affected by the unethical actions? How are they affected by the fraud or unethical actions? Stakeholders are those groups who can affect or [are] affected by the achievement of the firms objectives. Stakeholders in a company may include shareholders, directors, management, suppliers, government, employees and also the community. The unethical actions in Xerox Corp have affected the stakeholders in a way or so. Shareholders Shareholders are invariably the first victims of top management fraud. When news of fraud by a firm becomes public knowledge, it immediately reduces the stock market value of the companies involved. Bondholders and other creditors of the firm can also end up bearing the negative effects of management fraud. After news of the financial fraud at Xerox Corp. is released, Xeroxs stock has been declining sharply and is now trading at about $7. Shareholders can no longer assume that management is acting within the law or with their best interests in mind. Shareholders now require greater openness on the part of their senior managers. Society Fraud also depresses the overall moral climate in a society. It can lead to a general lack of faith in the integrity of senior managers, erosion in the confidence in the free market system, including its political institutions, processes, and leaders, and a general growth of cynicism in a society. The failure of accounting firms to detect managerial fraud has also led to less faith in audited financial statements. Worse still, many believe that the accounting firms have compromised their own integrity because of the lure of lucrative consulting contracts from firms they were auditing. In Xeroxs case, their auditor, KPMG complied with management at Xerox to allow the accounting irregularities to continue. Employees Employees of companies whose top managers engage in fraud often are hit the hardest, even when they are unaware of their executives illegal activities. Fraud can cause employees to lose their jobs, their retirement savings (which often are tied up in company stock) and their reputations. Frequently, the very fact that employees have worked for a fraudulent company taints their resumes to the point that some find it difficult to find jobs elsewhere. The negative impact of Xeroxs fraud was that Xerox has laid off thousand of workers in the past two years and may make further retrenchments in the future. d) Discussion on the governance and control issues arising from the companies experienced. The highly visible accounting scandal in Xerox Corp showed us one significant matter; the corporate governance and internal controls is failed in the corporations. The worst incidences of fraud are usually committed by insiders, among whom those executives figure prominently who are assigned to manage and control their organizations. Corporations are now looking at how they can make their respective boards of directors more effective. Xerox Corp, has made a good progress on corporate governance and control issues arising from the companys experience. They have adopted strict new guidelines on what constitutes director independence. Applying this definition, 75% of their directors are independent. Proactively integrated Sarbanes-Oxley Act and proposed NYSE rules into their governance processes. Revised and strengthened the charters for their Board of Directors committees. Hold regular executive sessions of outside directors without Xerox management present. Launched a massive effort to strengthen internal controls, train their people and promulgate a clear and strong Code of Conduct. Established an Ethics Help line for their employees and have taken other measures all aimed at making Xerox a role model in ethical behaviour. Bear in mind that, no laws or policies will ever be sufficient to end all corporate misbehaviour. We are confident, however, that truly independent and inquisitive boards of directors will provide the best safeguard against corporate wrongdoings. such Audit Committees must be autonomous and vigorous, Financial Information is inherently judgmental ,give Sarbanes-Oxley a chance to work, excessive executive compensation can be tamed by the Compensation Committee and directors must be selected and appraised by Independent Nominating Committee. 3.Conclusion Fraud had damages the reputations of the individuals and firms involved. Revelations of top management fraud have caused the public to question the ability of boards of directors to monitor senior executives and protect shareholders wealth. As for Xerox Corp, in order too minimize the harm caused by the unethical actions by the executives, firstly Law and regulations are, and will remain, the most influential external drivers of corporate ethics, but legislation is no substitute for the presence of leaders who support and model ethical behaviour. The single most important ethical leadership behaviour is keeping promise, followed by encouraging open communication, keeping employees informed and supporting employees who uphold ethical standards. Corporate leaders need to communicate ethical values throughout the organization, but they must do more than talk the talk in order to establish and sustain an ethical culture. As for specific programs and practices, a corporate code of conduct is viewed as being most important to prevent or minimize accounting frauds. Such a code must reflect and reinforce the values and principles of an organization. Besides that, ethics training for all members of the organization, corporate social responsibility programs, ombudsman services and help lines can be done to combat unethical behaviour. In summary, employees need to have a code to set the ethics foundation, training to help people truly understand it, and programs that permit them to inquire about and report ethical violations. A comprehensive Whistleblowers Act to provide wide-ranging protection for whistleblowers in all sectors too can help encourage whistle blowing. Study Of Knowledge | Empiricists Vs Rationalists Study Of Knowledge | Empiricists Vs Rationalists The dispute between empiricism and rationalism begins within epistemology, the study of knowledge. Epistemology attempts to answer the questions: what is knowledge?, what can we know?, and what is the difference between opinion an knowledge? The study of knowledge began in Greece with the Pre-Socratic thinkers, as far back as the sixth and fifth centuries B.C.E. Zeno, a Pre-Socratic, is the first thinker to bring about the two schools of philosophy, rationalism and empiricism, which would grow to become a popular focus among other philosophers. Rationalism is defined as the epistemological view that true knowledge is derived from reason and from within the mind. This school of thought is based off of the a priori: truths that can be known independently of observations, and innate ideas: ideas believed to be present from birth. Empiricism, on the other hand, is the view that true knowledge is derived from sense experience. Empiricists believed that a priori and innate ideas were none existent, and rather all significant knowledge came from the a posteriori, the belief that truth is established only through observation. Zeno chose to focus on information derived from mathematics or rationalism, because he believed this information to be certain. He thought that information derived from the senses, or empiricism, could be deceiving. From there, the way by which we obtain knowledge continued to be argued over. During the seventeenth and eighteenth centuries, philosophers began to take sides as to what they believed was the source of knowledge. They formed two groups: the Continental rationalists and the British empiricists. In the Continental rationalist group were philosophers Rene Descartes and Baruch Spinoza. The philosophies of Descartes and Spinoza are similar because they are systematic, logical, and rational. Both Descartes and Spinoza sought a system of thought that possessed the certainty of mathematics and was free of Scholastic tradition, because they believed scholasticism could not be trusted. They thought that judgments must be made from a mathematical basis and believed in a mechanistic worldview, the real world is not the world as known by the senses but rather by mathematical physics. They were also both pantheists, which meant that they equated God with nature. Spinoza worked off of Descartes ideas from his Cartesian Method, that nothing is true unless it is clear and distinct. This idea of only believing what is certain was an idea brought up years ago by the Pre-Socratic thinker, Zeno and developed further by the Continental rationalists. The biggest difference, however in Spinozas p hilosophy was his opinion on substances. Descartes defined substance as that which can exist by itself, without the aid of any other substance. He divided the world into two kinds of substances, thinking substance (the mind) and extended substance (the body). He then divided thinking substance into the infinite thinking substance (God) and finite thinking substances. Although Descartes believed that there was only one infinite substance (God), he believed that there were many finite thinking substances, so he was a pluralist. Spinoza rejected Descartess divisions of substances and his plurality of finite substances. He did not agree with Descartess division of infinite and finite thinking substance. For Spinoza, there was only infinite substance, and no thinking substance and extended substance. Spinoza claimed that there was only one substance, infinite substance, which he equated with God. Spinoza also argued that the definition of substance makes it impossible for the mind and th e body to be distinct substances. He said that mind and body are modes of that single substance. So, Spinoza took Descartes idea of substances and built upon it, but Spinoza was a monist rather than a dualist like Descartes. The other major philosophical group during the seventeenth and eighteenth century was the classical British empiricists. The empiricists believed that all knowledge is derived from observation. Hume and other British empiricists rejected the intuition/deduction thesis and the idea of innate knowledge proposed by Descartes. Hume believed that true knowledge came from a posteriori, sense experience, rather than from a priori. A major difference between Hume and Descartes is their take on the issue of Gods existence. When the two applied their very different theories to the topic of Gods existence, they arrived at different conclusions. In Descartes efforts to doubt everything, he realized that only one thing was certain, I think, therefore I exist. Descartes concluded that God exists when he realized that if he himself is subject to doubt, he is imperfect, and cannot be the cause of his existence. Because he had an idea of perfectness, this idea must come from a perfect being, or God. However, Hume was not able to prove Gods existence. Hume built upon Leibnizs analytic synthetic distinction in creating his Humean Method. He separated ideas into three categories: analytic propositions, synthetic propositions, and nonsense. He created a set of questions that one could ask to come to the conclusion as to what category an idea fell under. In contrast to Descartes conclusions about Gods existence, the Humean method suggests that God should be placed under the nonsense category because it is not possible to trace God back to sense data. Descartes, the rationalist and Hume, the empiricist had differing opinions. However, the two philosophers are similar because they both raise very skeptical issues. Descartes idea of the possibility of an evil demon putting thoughts in our heads and Humes conclusion that the idea of God is nonsense caused people to begin questioning traditional teachings and what they had always thought to be true. New ideas like the ones presented by D escartes and Hume later caused problems because as people became more aware of these ideas, more rebellion from authority and religion began to occur. Part Two: Immanuel Kant In the Preface to the second edition of the Critique of Pure Reason, Immanuel Kant compares his philosophy to the Copernican Revolution. It is said that as Copernicus believed that all heavenly bodies moved round the sun, Kant believed he was the center, and that everything moved around his philosophy. The philosophy of Immanuel Kant was so revolutionary because he brought together rationalism and empiricism. Because of Kant, the debate between rationalists and empiricists ended, and epistemology could move forward. Kant was inspired to build his philosophy after he encountered a copy of Humes Inquiry. He realized that he disagreed with many of the issues Hume brought up, and decided to refute them. In his book, The Critique of Pure Reason, he combined the ideas of Hume and the ideas of rationalists. Kant agreed with the empiricist claim that sense experience is the source of all beliefs, but disagreed with the conclusion that those beliefs may not necessarily be true. He also disagreed with the rationalist idea that truths about what does or does not exist could be decided through reason alone. He eliminated the debate by claiming that thinking and experiencing cannot let us know how things really are. Instead, Kant asked if it was possible that we have metaphysical knowledge. He claimed that the mind analyzes the data it perceives in terms of space and time. So, space and time are not features of external reality, as the empiricists and rationalists before him believed. Kant said that in order for human beings to interpret the world the human mind imposed certain structures on the incoming sense data. Kant defined these structures in terms of twelve categories: substance, cause/effect, reciprocity, necessity, possibility, existence, totality, unity, plurality, limitation, reality and negation. These categories were characteristics of the appearance of any object in general. However, these categories are related only to human language. When making a statement about an object, that person is making a judgment. A general object, that is, every object, has attributes that are contained in Kants list of Categories. In a judgment, or verbal statement, the Categories are the predicates that can be asserted of every object and all objects.