Sample business ethics research paper: employee fraud

Employee Fraud

Frauds are nothing new in the big and established companies. Enron leaders Kenneth Lay and Jeffrey Skilling were caught in a scam that led to their trial that became popular and labeled as the ‘Trial of the century’. Former WorldCom mangers are in jail for pulling off one of the largest frauds in history. More recently, an internal audit at Scottish mineral water company Campsie Spring uncovered a 14 million pound fraud. A statement at on the Greencore website said concerns about the accounts emerged after an internal audit on 6 June. While it is true that all of these cases and dozens other similar are cases of fraud, and hence criminal activity, what is important for us here is to take stock of the nature of lapses and how they impact the issue of ethics in business.

According to the BBC News datelined 25 June 2005, Campsie's parent company, Greencore that bought Campsie in 2001, admitted the loss had been incurred through a deliberate concealment of costs rather than embezzlement. The fraud was committed by a former financial controller who left before the problem was discovered, according to the BBC. Some of the other information gathered from the report may be briefly stated as under:

(a) Three managers in supervisory roles at Campsie, have since left the company.

(b) A new managing director and financial director have been appointed at Campsie Spring's headquarters in Lennoxtown, East Dunbartonshire.

(c) Financial consequences have been severe for Greencore: Its overall operating profit in this financial year is likely to be reduced by more than £7m

(d) The company will also have to restate its accounts to reduce profits by more than £6m in 2007 and more than £3m in 2006.

(news.bbc.co.uk)

In context of past business frauds we know for sure that Enron had a Code of Ethics. The same hold true for WorldCom that certainly didn’t lack extensive internal controls. In the present case, too, Greencore is a sound company with their ethics in place and controls intact. Nonetheless, they presumably had cultures where engaging in unethical conduct was tacitly condoned, if not encouraged.

Today the focus in business has shifted from building a compliance infrastructure to building a right culture. Companies no longer expend their resources on monitoring what is going on inside organizations that are either keeping people from doing the right thing or, keeping people away from doing misconduct. The organization that wants to reduce the risk of unethical conduct must focus more effort on building the right culture than on building a compliance infrastructure (Strategic Finance, May 2006, p.30). This trend toward recognizing the role of corporate culture is evidenced by the Ethics Resource Center’s 2005 National Business Ethics Survey (NBES), based on interviews with more than 3,000 employees and managers in the U.S. The survey revealed that, “despite the increase in the number of ethics and compliance program elements being implemented, desired outcomes, such as reduced levels of observed misconduct, haven’t changed since

1994. Even more striking is the revelation that, although formal ethics and compliance programs have some impact, organizational culture has the greatest influence in determining program outcomes” (Strategic Finance, May 2006, pp.30-31).

In order to understand what is ethical for business it is imperative that we understand how business differs from all other activities and associations. Defining business is not an academic trick. Business must have a precise definition. Technical specifications rely on exact definitions as descriptions. That is also the case with contracts. Financial statements depend on strict definition. For instance to draw them up or to use them it is necessary to understand what differentiates ‘current assets’ from ‘non-current assets’ and ‘net operating profit from net profit’. In tackling business ethics, it is business itself that needs to be defined. Merely dealing with vast sums of money does not automatically make an organization a business. A business must also be distinguished from a profitable hobby at the other end. Therefore, we must in the first place understand what a business is to appreciate what is business ethics. Unless business is clearly distinguished and differentiated from organizations it may closely resemble, it might be difficult to determine what might be good in business or for it (Sternberg p.31).

People manning businesses are not criminals in the ordinary sense. They transgress business ethics and norms that require to be scrupulously followed. The statements from WorldCom executives might be enlightening:

“I’m sorry for the hurt that has been caused by my cowardly behavior.” —Scott Sullivan, CFO

“Faced with a decision that required strong moral courage, I took the easy way out....There are no words to describe my shame.” —Buford Yates, director of general accounting

“At the time I consider the single most critical character defining moment of my life, I failed. It’s something I’ll take with me the rest of my life.” —David Myers, controller

But the most disturbing case was that of Ms Vinson. U.S District Judge Barbara Jones noted at sentencing that she was among the lowest ranking members of conspiracy that led to $11 billion fraud that sank the telecommunication company in 2002. She said that “had Ms Vinson refused to do what she was asked this conspiracy might have been nipped in the bud.” However, even as Ms Vinson was among the least culpable members and acted under extreme pressure that does not absolve her from her offence as Judge Jones noted. Vinson admitted that “she improperly covered up expenses by drawing down reserve accounts—some completely unrelated to the expenses—and by moving expenses off income statements and listing them as assets on the balance sheet” (Strategic Finance, May 2006, p.30).

We might wonder what makes senior executives in a company act as they do? Do they think of implications and consequences – moral, ethical, and legal – before committing a fraud? Is their action a moment’s aberration or well thought out plan of action? While it is true that the business has self interest as its goal but the ethical approach takes into account what is known as enlightened self interest that does not impinge upon rights and interests of others.

Adam Smith argued in Wealth of Nations, “It is not from the benevolence of butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our necessities but of their advantages”. Managers who believe in this view act so that the consequences of their actions bring about the greatest good for themselves. John Nash who was awarded the 1994 Nobel Prize in Economic Science for his work on game theory pointed out that economic behavior could not be explained by self interest alone. The interests of the others had to be considered as well. Both Adam Smith and John Nash looked at consequences or the utility of behavior as a valid starting point in the analyses of economic behavior (Rahim et al. p.40).

It is not always an extrinsic motivation that prompts an individual to commit corporate fraud. Take the case of Ms Vinson, she acted under pressure but that does not absolve her. She didn’t begin her career as a criminal seeking to defraud the organization she was working for. Scott Sullivan was a powerful leader with a well-known reputation for integrity. If any of us were in Betty Vinson’s shoes, could we say with 100% confidence that we would say “no” to the CFO if he asked us to do something and promised that he would take full responsibility for any fallout from the actions we were going to take. Today’s managers work under extreme pressure without the powers to resist unlawful commands from above. Therefore, the companies looking to insulate themselves from corporate frauds must take a hard look at their own culture. Doe it promote or overlook ethical behavior in the organization? Compliance programs and ethical codes of conduct have simply failed the test of time. (Strategic Finance, May 2006, p.30).

An orgaqnization moves towards an ethical culture only if it understands full range of values and behaviors needed to meet its ethical goals. The key indicator of success is whether the company has made significant progress in achieving key program outcomes. The National Business Ethics Survey listed four key outcomes that help determine the success of a program:

  1. Reduced misconduct observed by employees,
  2. Reduced pressure to engage in unethical conduct,
  3. Increased willingness of employees to report misconduct,
  4. Greater satisfaction with organizational response to reports of misconduct

How can an organisation put culture in place? One approach is to categorize different types of values in a way that lends itself to determining specific strengths and weaknesses that can be assessed and then corrected or enhanced (Strategic Finance, May 2006, p.32).

Conclusion: Corporate frau ds often attract public and media attention because people in general have high expectations from them. The successful businesses are in fact built on a long association and trust from people, consumers, and clients. No one would want to deal or do business with a company found on the wrong side of law. The companies themselves go a longway in building trust among their clients. They spend a lot of money on PR, and they go an extra mile in building their image of an ethical enterprise. However, a lot of companies land in controversies despite their solid background and reputation. What could be the reason when the companies have their best practices, and ethical codes of conduct in place? In this paper we have argued that instead of focusing on ethical codes of conduct and compliance structure, the companies might do well to focus on their internal culture. An organization’s culture is not something that is created by the senior leadership and rolled downwards. It is an objective picture of an orgnization; the sum of its values and behqaviors of all employees, managers, and leaders. Also, the success of ethics and comliance programs cannot be superficially evaluated by tallying the percentage of employees that have certified that they read the code of conduct and attend ethics and compliance training. The organizations must take a serious stock of their ethical culture and must evaluate themselves on indicators of success that tells them whether they have made significant progress in achieving key program outcomes. The National Business Ethics Survey has listed four key outcomes.

References

BBC News “Water company hit by £15m fraud” Wednesday, 25 June 2008. Retrieved on August 26, 2008 <http://news.bbc.co.uk/2/hi/uk_news/scotland/glasgow_and_west/7472958.stm>

Gebler, David “Creating an Ethical Culture” Strategic Finance May 2006: 29-34

Rahim, M A., Golembiewski, R T., Mackenzie, K D. Current Topics in Management,

Transaction Publishers, 2004

Sternberg, Elaine Just Business: Business Ethics in Action, Oxford University Press, 2000


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