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Ethics and Legal Obligations

Essay by review  •  November 16, 2010  •  Research Paper  •  1,085 Words (5 Pages)  •  929 Views

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For most organizations, values statements are simply rhetoric that sits on a fancy plaque on the wall. The real values are seen in the halls, not on the walls. High performing organizations are clear about their values and about what they translate into in day-to-day behavior. They use their values strategically, to guide every decision and action.

The challenge with values is that they are usually vague concepts that have different meanings to different people. Every person usually has a strong sense of what typical values (trust, hard-work, etc.) mean, but the definitions different people have for the same value are usually not the same.

Most people, for example, may say they have integrity. If asked what integrity means to him or her, what is found is that the internal definition each person has is unique. Thus, while two people may seem to agree on the concept, they may come into conflict when in comes time to put that value into practice in day-to-day action. Although some choices seem common sense to us, others take the less traveled road.

Financial reporting is the latest area hit with the ethical bug. On November 8, 2001, people were shocked when one of the hottest companies of the booming nineties, Enron, admitted to using accounting practices that had inflated its income figures by $586 million over a four-year period (Kadlec, 2002). Less than a month later, Enron filed Chapter 11 bankruptcy, and early in 2002, the Justice Department launched a criminal investigation into the company's practices. Investigators wanted to determine how much executives knew about the company's status, as they told their employees to hold their shares of Enron, but sold more than $1 billion of their own (Kadlec, 2002). The company went belly-up, employees' retirement savings were all but wiped out, and millions of investors lost a total of more than $60 billion (Thomas, 2002). People began to worry.

A few months later, on March 27, 2002, Adelphia Communications announced that it also had financial problems. Founder John Rigas, along with his three sons were accused of using company assets as collateral for loans totaling $3.1 billion to make personal purchases and finance family projects (Lieberman, 2002). The Rigases were removed, the company restated its earnings and later filed Chapter 11 bankruptcy. The value of the stock plummeted, and on June 3, 2002, Adelphia was delisted from NASDAQ (Lieberman, 2002). Even more people became worried about ethics in business.

Later that year, Time magazine declared it to be the "Summer of Mistrust" and reported, "Most Americans - 72% in the Time/CNN poll - fear that they see not a few isolated cases but a pattern of deception by a large number of companies (Gibbs, 2002). And that was before word got out about WorldCom, who announced that an internal audit found improper accounting procedures. Their profits from 2000 to 2002 had been overstated by $7.1 billion, and they said $3.8 billion in expenses had been improperly reported during five quarters. The consequences: 17,000 workers lost their jobs, WorldCom restated its financial results (wiping out all profits during those quarters), and shares of its stock fell in value by 75% (World-Class Scandal, 2002).

There are three distinct bodies that help police financial reporting, and help shield us against these types of unjust. They are the U.S. Securities and Exchange Commission

(SEC), the Financial Accounting Standards Board (FASB), and the Public Company Accounting Oversight Board (PCAOB).

The primary mission of the SEC is to protect investors and maintain the integrity of the securities markets. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation's securities self regulatory organizations (SRO's). The various stock exchanges, such as the New York Stock Exchange, and American Stock Exchange are SRO's. The National Association of Securities Dealers, which operates the NASDAQ system, is also an SRO (U.S. Securities and Exchange Commission, 2004).

The FASB is a private body whose mission is to "establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors and users of financial information" (Reh, 2004). The FASB publishes GAAP.

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