Deontological Ethics in WorldCom - Case Study Example

RUNNING HEAD: Deontological Ethics Deontological Ethics of Problems Introduction This paper seeks to critically evaluate the ethical issues involved in the case of WorldCom as cited by Moberg (2010) and using deontological framework. The paper will identify first the ethical problems, discuss possible alternative courses of action, evaluate the alternatives and make decision using the deontological ethics and other relevant principles. Kant’s categorical imperative will be specifically used to make decision for the ethical issues involved. 2.1. What are the ethical problems raised in WorldCom case? Two ethical problems raised in the case were identified for this paper. One problem is how the company or WorldCom management would interpret the accounting rules in preparing the financial statements. The second ethical problem is how the external auditor would perform his function in the conduct of external audit.. 2.2 The deontological framework in resolving ethical issues Deontological framework takes a normative ethical position that judges the morality of action based on latter’s conformity to rules or rules. It is sometimes called duty-based ethics or rule-based ethics because a person is bound to ones duty (Hartman, 2004). It is differentiated with consequentialism where the rights are determined by the consequences. The primacy or importance of the rules is clear in deontological. The validity the rules would have to relate them with what is universal and rational man ought to do under the circumstances. Thus, Kant ethics which will be used in this is paper since it is deemed to under this type of ethics because of the principle of universalism (Weiss, 2008). 3. Using Steps 1-4 suggested by ERC (2011) as decision making model in evaluating WorldCom, critically evaluate the WorldCom’s ethical problems using deontological framework. Step 1 is problem definition. Step 2 is identification of alternatives. Step 3 is evaluation of alternative and Step 4 is making the decision. 3.1 Step 1 This should be deemed accomplished as found in section 2.1. The first issue is on the interpretation of accounting rules in the preparation of the financial statements. Case facts provide in the preparation of its financial statements, that WorldCom used a liberal interpretation of accounting rules. Interpretation could of course be liberal, strict or just be neural enough to balance the two extremes. Since the company has a purpose in having a liberal interpretation which is make it appear that its profits were increasing, the company must have reason for doing so. It has done the same by writing down in one quarter earnings the cost of company expenses expected in the future so that is it would have bigger losses in the current quarter but smaller ones in the future quarters (Moberg, 2010). The idea was to show trend of constant growth in the profit of the company as a sign of growing or sustainable company. In other instance involving its acquisition of MCI, WorldCom had the accounting opportunity to reduce the book value of some MCI assets by several billion dollars but with the increase in the assets of WorldCom under the value of "Goodwill", by the same amount of reduction (by (Moberg, 2010). The practice also allowed WorldCom to manipulate its earnings presentation that would produce trending. It accomplished the same by charging a smaller amount per year against earnings and scattering these big expenses over longer period. In effect by so doing liberal interpretation, the company was able to show constantly growing profit of the company that would paint a really stable and growing company although not true (Moberg, 2010). Another problem is the proper behavior of the auditor. This problem is relevant in the light of the decision made the Andersen Consulting to have consented to the liberal interpretation of the rules with its role as external auditor of WorldCom. 3.2 Step 2 Alternative courses of action Under the first issue, the first alternative is to practice liberal interpretation which means allowing management to make whatever it takes to accomplish its end of presenting favorable information to investors. The second alternative is to practice a strict or very conservative financial reporting standard in the preparation of the financial statements. There seems to no advantage of this choice as far as management is concerned except if doing so, the result will still show a positive light of WorldCom. The other alternative is just to apply fairly the provisions of the accounting standard. The effect of this last option is for investors to be advised of too strict but no longer fair presentation of the financial statements in as standard actually require. Another option would be to be neutral and apply fairly the accounting standards. The advantage would in compliance. Deontological frame considers compliance as ethical without need to see the effects. Under the second issue, the first alternative is for the auditor to connive and agree to whatever management may want to do as long as the auditor gets paid from the engagement. The second alternative is to allow the auditor to have independence and is allowed to make an honest opinion on the financial statements of the company that he or she audits. The third alternative is to decline the audit if it would compromise the auditor’s independence. 3.3. Step 3. Evaluating the alternative Under first issue, it would be unethical using deontological framework to engage in liberal interpretation as the same is fraudulent. To practice liberality in the applying accounting rules has the objective of influencing the outcome of the financial statements to make itself to look good to investors. The same could not therefore be justified ethically using the deontological frame work since reason dictates that fraud must be avoided. The fact the WorldCom want to have high prices of its even it would mean not doing what is proper and true in applying the accounting rules could only reveal unethicality of the decision. The alternative of pursuing the liberal application is supposedly grounded by the decision on another ethical principle which is consequentialism given the target to benefit the stockholders more particularly Mr. Ebbers who hold substantial holdings (Moberg, 2010). Having high prices cause by the wrong information is simply an act of deception but from their point of view, WorldCom is of the belief that it is advantageous to them. There is simply no valid reason to sustain the same under the deontological framework. To choose to be strict would not be good as well as would be against the interest of the company to unnecessarily paint a loss or unfavorable financial performance of the company. It would sound good to a be just neutral in the interpretation of the standard for the fair presentation of the financial statements in accordance with the generally accepted accounting principles. Under the second issue, the first option was to connive with management as implied done by Andersen. The second alternative is not conducting the audit, which would in effect not having an audited report that may sound not good to investors. Another option is for the auditor to be really independent from management in the conduct of his audit. It would be in accordance with good practice to do so such fair and objective thing as far as his client is concerned. 3.4. Step 4. Making the decision To decide is to choose the ethical framework that would accomplish the purpose of the decision maker. Thus in applying deontological, for the first issue, the choice is not to practice liberal interpretation of accounting rules. The better option is to follow the requirement of the accounting standards as the same can be presume to have taken the interest of all parties concerned. For the second issue, the best choice would also be for the audit to follow the auditing standard and he should conduct the audit while maintaining independence from management (Kleinman, et al, 2001). This would be in accordance with legal requirements better than the two other alternatives. 4. Assess WorldCom’s ethics from Immanuel Kant’s point of view – specifically, using Kant’s Categorical Imperative. From Kant’s categorical imperative, there is no place of fraudulent act of WorldCom. Misrepresenting the information by engaging to liberal interpretation to cause stock price increase is clearly violating universal principle of truth and fairness. To take advantage of another by providing wrong information is at its substance lying or deception of any kind and therefore would violate the categorical imperative. That lying is a universal wrong for Kant and therefore unethical (Geisler, 1989). 5. Conclusion This paper has found the found that choices in business are part necessarily laded with ethical issues as every act has a consequence affecting interest of various parties or persons. This was clearly seen in the case of WorldCom with its choice practicing liberal interpretation of accounting standards in its preparation of financial statements for users. The best alternative courses of action, using deontological framework is to become objective and neutral rather than too strict at one extreme and too liberal from another extreme. No valid justification could be to justify that it is ethical to do liberal interpretation under deontological framework. What could justify the same is another ethical theory but not deontological ethics. Therefore this reality of finding basis of decision using ethical frameworks could lean into invoking the validity of a another framework. The same conclusion could make to the choice that should be made by the auditor in conducting this audit. He cannot connive with management or just be passive to allow management to do what it wants in having the financial statements that could lead to better information to decision makers. Under deontological framework which uses universality of reason, only complying with legal and ethical requirement of audit would comply. References: ERC (2011). PLUS: The Decision Making Process. Retrieved 27 November 2011 Geisler, N. (1989).Christian Ethics. Baker Books Hartman (2004). Perspectives in Business Ethics, The McGraw-Hill Kleinman, et al (2001). Understanding auditor-client relationships: a multi-faceted analysis. Markus Wiener Publishers Moberg. D (2010). WorldCom. Retrieved 27 November 2011 Weiss (2008). Business Ethics: A Stakeholder and Issues Management Approach. Cengage Learning Read More