Business Ethics and Accounting Fraud Business Ethics Business ethics (also known as corporate ethics) is a form of applied ethics or professional ethics, that examines ethical principles and moral or ethical problems that can arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations. These ethics originate from individuals, organizational statements or the legal system. These norms, values, ethical, and unethical practices are the principles that guide a business. Business ethics refers to contemporary organizational standards, principles, sets of values and norms that govern the actions and behaviour of an individual in the business organization. Business ethics have two dimensions, normative business ethics or descriptive business ethics. As a corporate practice and a career specialization, the field is primarily normative. Academics attempting to understand business behaviour employ descriptive methods. The range and quantity of business ethical issues reflect the interaction of profit-maximizing behavior with non-economic concerns. Interest in business ethics accelerated dramatically during the 1980s and 1990s, both within major corporations and within academia. For example, most major corporations today promote their commitment to non-economic values under headings such as ethics codes and social responsibility charters. Adam Smith said in 1776, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."[3] Governments use laws and regulations to point business behaviour in what they perceive to be beneficial directions. Ethics implicitly regulates areas and details of behaviour that lie beyond governmental control. The emergence of large corporations with limited relationships and sensitivity to the communities in which they operate accelerated the development of formal ethics regimes. Maintaining an ethical status is the responsibility of the manager of the business. According to a 1990 article in the Journal of Business Ethics, "Managing ethical behaviour is one of the most pervasive and complex problems facing business organizations today." Accounting Fraud Accounting fraud is the intentional manipulation of financial statements to create a false appearance of corporate financial health. Furthermore, it involves an employee, accountant, or the organization itself misleading investors and shareholders. A company can falsify its financial statements by overstating its revenue, not recording expenses, and misstating assets and liabilities. Accounting Fraud of WorldCom WorldCom was formed in 1983 and was a multi-billion dollar company in the telecommunications industry. When the company became bankrupt, at that time it was the second-largest telecommunications company after AT&T. Bernard Ebbers, who was one of its nine investors, focused on the firm's internal growth by acquiring other small companies. The company expanded rapidly and by the 1990s, the telecommunications industry was expanding very rapidly. In 1996 WorldCom acquired MFS Communications Company. This company and its subsidiary gave WorldCom access to the international markets. By 2002, the company had about 60,000 employees. Its assets were $104 billion and had revenues of about $30 billion. In the year 2002, the fraudulent reporting activities were revealed for the first time. The income before tax of WorldCom in 2002 was overstated by $7billion and this was all done deliberately. After that the company had to make large write downs of its assets of about 75%, 17,000 employees were immediately jobless and its stock became worthless. Finally, it was on June 26, 2002, that a civil suit was filed again WorldCom for committing fraudulent reporting and criminal investigations began by the U.S Justice Department at WorldCom. Problems at Worldcom & Opportunities The problems that led the company to bankrupt were created by deliberate actions and deliberate decisions taken by the management of the company. There were a lot of problems prevailing in 2002 at WorldCom. There was a lack of communication between different departments. Each department had its own management style and its own rules. People even didnt recognize the people from the other offices if they called. The accounting systems of the company were not integrated and also the billing systems. There were no written policies in the organization and a policy manual was never created. Also, when, Ebbers, one of its eight investors, was told to create a code of conduct for the company through a joint effort, he called it simply a waste of time. There was a system in the organization that employees cannot question their seniors. It was also entirely the choice of Ebbers and Sullivan, the director, to grant the compensation to any of the employees and that too was above the approved salary. On the other hand, the Human Resource Department had no objection to such issues. There was an internal audit department in the organization but most of the employees of the organization were unaware that the internal audit department even existed in the organization. Also, the internal audit department was reporting directly to Sullivan, which made the employees feel that it was not productive in controlling the internal controls. The negligence of the board of directors was very high. Pressures that Lead Managers and Executives to Cook the Books There are a number of pressures that lead the executives and managers to cook the books. Two of the largest corporate frauds in history are the Enron Scandal and the WorldCom scandal. One of the main reasons for this is overconfidence. When the senior management of any organization is overconfident that might make an optimistic decision that actually could be achieved. A research study conducted on management styles has also proved it that, people who get promoted and reach higher ranks tend to take more risks and more chances. They want to achieve a lot within a short span of time. These managers and executives would have a lot of past experiences and they would also have a lot of assets that could make the company successful, but it is the poor decision making that these managers and executives make due to optimism and overconfidence which lead them to cook the books. Boundary Between Earnings Management and Fraudulent Reporting Legal and reasonable management decision making and reporting, which is intended to achieve predictable and fair financial results for the company is called earnings management. The concept of earnings management should not be confused with illegal manipulation of financial statements through creative accounting. These types of activities are called as fraudulent reporting or cooking the books. This involves misinterpreting and misrepresenting the financial statements through manipulating the financial statements. Creative accounting is the name for these kinds of illegal activities, but fraudulent reporting is basically the practice of violating the standard accounting standards prescribed and made compulsory to follow by the Generally Accepted Accounting Standards (GAAP) body. However, there is a very thin line between earnings management and fraud. Many people consider that earnings management is not illegal. Some people consider it an unethical activity. However, unless the external auditors do not identify the difference between them, thin line between earnings management and fraud will always exist. Questions 1. How accounting fraud can impact to the corporate organization and what is the reason for accounting fraud to be happened? 2. If you are the leader of the company, how will you prevent and control the risk of corporate accounting fraud? 3. If you see there is a potential event to be happened accounting fraud in your company, what will you do?