What Ways Executives Have Acted Unethically in Financial Management,
and What Drives Them to Do So
June 3, 2018
Aditya Garimella
What Ways Executives Have Acted Unethically in Financial Management,
and What Drives Them to Do So
For ages people have struggled with the choice to act ethically or unethically. In business this is no different. When faced with a corporate finance situation, often one that is stressed with profit or loss concerns, an executive makes certain choices when reporting financial details on the company. The executive looks at the revenue, the inventory, the fixed costs, the variable costs, and a myriad of other components of the income statement to provide corporate reporting that may be used for managerial accounting, internally, or for financial accounting, externally. In this paper, the authors will address a number of real-world cases that highlight some of the ways that executives have acted unethically in financial management, explain what drives them to do so, and relate those cases to the textbook case study for comparison. A reflection on each author’s professional life will also be included at the end of each section. Each author’s perspective will provide the reader with insight regarding some of the common threads found in financial ethics.
The different forms of unethical behavior in organizations have received significant attention in the corporate finance and caused the accounting profession to reevaluate and reestablish accounting procedures (Apostolon & Crumbley, 2005). Financial scandals in the business community worldwide have experienced a syndrome of ethical breakdowns. An organization’s financial statement provides the company’s financial position and periodic performance. Financial statements are a part of good management and provide valuable information to external stakeholders. Reporting of financial fraud is primarily a top down form of fraud that impact individuals, organizations and society. This paper provides discussion on what drives the executives in the business world to act unethically in providing false information to portray the outlook of the company in good health rather than the reality.
The case study from Chapter 1- 31 describes how an executive behaved unethically to represent the company financial statement in a positive way, by providing inaccurate information on inventory value in the financial statement. The behavior aspects of the fraud have focused on many theories of management, one of which is the agency theory (Albrecht et al., 2004). This theory explains the relationship between principals and agents. Under agency theory, the managers of the company act as agents, whose interests might not be aligned with the company and shareholder goals. As such, executives will commit fraud to meet the short-term interest. To limit the financial fraud and make executives act ethically, the incentives provided to them must be aligned with the shareholders’ interests.
The cause for unethical behavior of executives fall into three primary factors represented as a fraud triangle and consist of perceived pressure; perceived opportunity and rationalization. (Cressey, 1953).
Step 1: Perceived pressure, is the motivation of the fraud, and this can be either personal financial problem, debt problems etc. Some of the common examples are maintenance of lifestyle; gambling etc.
Step 2: Perceived opportunity, is the way the person identifies the method of doing the fraud with the perception that it is undetectable. If the individual finds this, then he or she will more likely consider the opportunity to do unethical actions.
Step 3: Rationalization, is the final stage, where the individual requires justification of the fraud. Most of the cases the individual does not realize of doing unethical things, instead act as a victim of the circumstances.
Consider a real world situation, where the company executives found that not meeting the publicly available earning forecast will decline the market value of the stock. The management has put a lot of pressure to meet the analyst expectations. So, in fact there is top down executive pressure to increase the earnings per share for the company. When management looks at the financial statement and found that EPS (earnings per share) is not meeting the analyst expectations, unknowingly they modify the statements to show high value to increase the earnings per share value.
One of the top reasons for an individual acting unethically is because of the power and authority. Below are some of the common examples where executives do commit the fraud:
- Hire family members or friends with large salaries.
- Falsify the financial statements
- Eliminate the voice of dissent (either by termination or retaliation)
- Provide incorrect information to auditors
- Make decisions for self-benefit, rather than thinking of what is good for the company or shareholders.
To reduce the unethical behavior, the companies should execute some of the below activities:
- Ethics training: Irrespective of the authority and power, each and every employee of the organization should get trained on the right ethical behavior.
- Internal controls: Create internal audits and place controls on each level, to avoid individuals acting unethically.
- Incentives: Create the incentives to support ethical behavior in the organization.
- Resources to complain: Provide the resources to encourage employees to provide information on unethical activities seen from their peers or executives, without the worry of retaliation.
- Tone at the top: Apart from the training, in any organization the “tone at the top” is important as it influences the morale and behavior of the employees.
So, to analyze the case study on (chapter 1-31), it clearly shows that the controller knows the inventory information is wrong but failed to correct in the financial statement. Tino Mariano should have raised the flag internally to the management on the unethical behavior of the controller and provide the right value of the inventory to both the management and auditors.