The Significance and the Necessity of Ethics and Law in the Field of Business - Research Paper Example

? Final Paper Introduction The significance and the necessity of ethics and law in the field of business have long been recognized owing to the increasing unethical practices that are adopted by the business organizations. It needs to be mentioned in this context that ethics as well as laws in the business world need to be followed for the reason of avoiding possible legal accusations or procedures. The presence of the different forms of laws helps in establishing the minimum adequate and satisfactory norms relating to the conduct of behavior. The laws would help in ascertaining that the business organizations are operating in agreement with the laid down specifications so that the interests and the well being of the employees, the society, the environment, the country and the organization on the whole remain protected. This also gives rise to the need of comprehension of the subject matter of business ethics. It aids in making a distinction amid the right as well as the incorrect act. The law could be stated to be fundamentally a codification or rather an institutionalization of the ethical aspects into particular social regulations, legal guidelines and prohibitions. Therefore, the thesis statement for the paper is that legal issues in the present day business context certainly raise ethical concerns which in turn create a derogatory impact upon an organization’s sustainability in the long run. Analysis of a Legal Issue in the Business World The collapse of the company Enron and the downfall of its auditor Arthur Andersen could be cited as an instance with regard to the violation of legal issues along with unethical practices in the business world. Enron was an American company which was part of the energy industry and was situated in Texas. The company had indulged in unethical as well as illegal practices for the reason of keeping up their share prices by displaying a positive performance of Enron. These made the company with the help of its workforce conceal the huge amount of debt that arose and was suffered by the company arising from unsuccessful ventures as well as transactions. The actual financial position and the poor performance were concealed by the company with the help of misleading financial statements along with improperly audited financial reports. The auditor of the company Arthur Andersen was found to be involved with such illegal practices. The revelation of the corruption and the deliberate fraud proved fatal for both the company Enron as well as for Arthur Andersen. The company was compelled to announce itself to be a bankrupt and the subsistence of the ace auditing firm came to an end with the exposure of this scandal. The particular scandal was observed and analyzed to entail both unethical as well as illegal conducts (Healy & Palepu, 2003). The chief problem that arose for the company, Enron was to predict the market worth of its contracts, few of which were for a time period of as long as 20 years. The revenue was predicted or calculated on the base of the current worth of the net cash flows in the coming years. The other significant issue associated with these kinds of predictions was the practicability of the contracts and costs relevant to them. All these issues along with other accounting problems were faced by the company. These gave rise to accounting abnormalities and business malfunctions and ultimately led to the final breakdown of the company (Healy & Palepu, 2003). The Issue The business model of Enron was stated to be quite complicated as it involved a broad range of products from trading functions, physical assets as well as going beyond the national borders. All these factors extended the boundaries of accounting. Enron took the opportunity of exploiting these accounting boundaries to the maximum in controlling its revenues along with its balance sheet so as to depict a favorable performance scenario (Gupta, 2004). However, in this case two matters emerged out to be extremely problematic for the company. The company’s transactions related to trading engaged complicated contracts which involved extended time period. The form of accounting followed by the company compelled the management of the company to predict its future prices related to the energy operations along with the rates of interest. It was also found that the company depended broadly on the financial dealings that were considered to be quite controlled and engaged in developing or creating ‘special purpose entities’. These particular dealings involved sharing the possession of particular flows of cash as well as risks with lenders as well as investors from outside. The conventional form of accounting, which emphasizes on non-interfering dealings among autonomous entities, had to witness problems in handling such transactions (Collier & Agyei-Ampomah, 2009). There were stated to be numerous reasons that were attributed for the closure of the company. The most significant and the major reason was stated to be the difference in the interest that was witnessed by the auditing firm Arthur Andersen as it served the company in two different ways. Arthur Andersen not only acted as an auditor to the company but even as a consultant. The clash occurred with regard to the interest of Arthur Andersen being an auditor and a consultant was stated to be the chief reason. The other reasons which also contributed to such a sudden downfall of the company were the absence of enough awareness displayed by the individuals who formed a part of the company’s board of directors towards the financial units. These financial units were not recorded in the books although the company entered into transactions with such entities. The management of the company also concealed facts and true scenarios regarding the health and the business functions as well as the dealings of Enron. All these reasons led to the final collapse of the company. Few of the senior managerial personnel believed that the company had to keep up its superior performance in any circumstance and those personnel felt the need to defend their repute along with their respective compensation. This made them to indulge in illegal as well as unethical conducts or practices when few of the deals related to the business projects started to prove unsuccessful and also for the reason of hiding their own respective inferior performances. Few of the managerial personnel of the company concealed the information and facts regarding the performance of Enron which resulted to be a risk with regard to the constitutional rights of the stakeholders along with a risk that was posed to the effectual functioning in relation to free market. The concealing of the particulars by the management of Enron was regarded as information asymmetries which further led to insider trading. This was stated to be a serious legal offence and few of the directors as well as employees were found to have been engaged with the particular conduct. This proved to be a legal violation of the Insider Trading Sanctions Act of 1984. The failure to conceal material facts by the company was also stated to be a legal violation of the Securities Exchange Act of 1934 relating to section 10(b) (Seitzinger, et al., 2002). With regard to concealing of information, the company or rather the employees also violated the Securities Exchange Act of 1933. The legal violations pertained to section 11 which refers to the ‘Civil Liabilities on Account of False Registration Statement’ and section 15 ‘Liability of Controlling Persons’ (U.S. Securities and Exchange Commission, 2012). Enron’s auditor, Arthur Andersen was mainly held responsible for not being able to identify and detect the company’s problems. The auditing firm Arthur Andersen was charged of implementing negligent specifications and regulations with regard to their auditing practices that were applied on the company. It was stated that such an act was committed by the auditing firm owing to a difference in interest on the issue of consulting charges that was offered to the firm by Enron (Niskanen, 2007). In the year 2000, an amount of US$25million as audit charges along with US$27 million as consulting charges were received by Arthur Andersen. It became tough to ascertain that whether the company’s audit related problems which rose because of Arthur Andersen was for the reason of holding on to the company to be an audit client, consulting client or both owing to the financial inducements offered by the company. However, the amount of just the audit charge was stated to possibly create a noteworthy influence on the local associates with regard to their cooperation between them and the management of the company. The audit charges of the company attributed approximately around 27 percent of the total audit charges paid by the public clients to Arthur Andersen (Knapp, 2010). Enron had to gravely suffer for the auditing firm who was unsuccessful in implementing and practicing proper and appropriate business judgment while evaluating the company’s transactions. The dealings of the company were found to be evidently structured or developed for the intention of financial reporting and not for business reasons. However, the reason for not being able to identify and find out such faults in the transactions was yet to be determined. Either the individuals who worked as auditors in the firm had disagreement over the inducements or there was dearth of needed expertise to assess such financial complications sufficiently. Once the faults in the transactions of the company became evident then the auditors finally gave in to the demands made by the management of the company. This made the auditors permit Enron to postpone accepting the allegations that were made against it with regard to the accounting assessments (Barreveld, 2002). On the other hand, the internal management at Arthur Andersen which was structured to safeguard against disagreed inducements of their local associates also collapsed. For instance, the office of Arthur Andersen at Houston that was in charge for conducting the audit of Enron, was permitted to take precedence of the grave assessments that were made regarding the accounting judgments of Enron by the Practice Partner of Arthur Andersen in Chicago. Ultimately, Arthur Andersen tried to obscure its lack of good behavior with regard to its audit practices by way of destroying the supporting papers after the inquiries that was made by Securities and Exchange Commission of Enron was flashed in public (Rapoport & Dharan, 2004). Enron had also undertaken unethical accounting practices to hide its poor performance. The financial statements of the company were not accounted in accordance with the Generally Accepted Accounting Principles (GAAP). The company was also found guilty of violating the Generally Accepted Auditing Standards (GAAS). The financial statements were considered to be a misrepresentation which did not truly reveal the actual financial position of the company. The misrepresented financial statements got audited with the involvement of unethical and wrong practices leading it to the violation of the GAAS. The guidelines pertaining to GAAP makes it necessary to evaluate the exposure of loss with regard to a loan portfolio and entailed the requirement of making alterations for the reason of displaying the guesstimate of the losses made by the management of the company on a periodical basis. During the period of 1997 to 2003, no quantitative assessment was conducted which resulted in the failure of setting up and putting into application a suitable framework for ascertaining the quantity related to Loan Loss Reserve (LLR) which further led to the legal violation of GAAP (Jickling, 2003). Therefore, it could be stated that the company had indulged in fraudulent activities for displaying superior performance and hiding the losses so as to keep its stock prices high and made a legal violation of the laws pertaining to fraudulent practices. Impact on the Government Corporate governance is considered to be immensely important for the ethical purpose and proper functioning of the companies in accordance with the laws. The rise of few grave corporate scandals like the Enron made the general people lose their trust from the structure of corporate governance. This made it important for the government to develop legal guidelines and laws for the reason of again restoring the faith of the people in such a system. Since the previous three decades, the regulators and the government have been continuously introducing enhancements on the management and organization of auditor independence. This is being seriously done with the intention to bring back the lost trust of the people which happened because of the Enron case and to fortify the auditor’s independence. However, it needs to be mentioned that not much success has been attained in this regard. In the UK, the progress of auditing along with accounting standards was done by the way of approach that was based on principles and a method that was self-regulative. To be specific, professional entities that are identified by the Department of Trade and Industry (DTI) like the Ethics Standard Board (ESB) and Auditing Practices Board (APB) have been entrusted with the responsibility of dealing with issues related to auditor independence. The auditing and the accounting regulatory method of the UK have been referred to as an appropriate model and example for other countries. This has been inferred owing to the existence of a powerful professionalism which did not call for the requirement for numerous alterations in the UK standards. Preferably, the APB has been given the responsibility to build the future of UK auditing (Stevenson, 2002). In the US, the American Institute of Certified Public Accounts (AICPA) and the Securities and Exchange Commission (SEC) have been largely entrusted with the responsibility of regulating as well as screening the practices related to auditing existing there. The Independence Standard Board (ISB) that was initiated by AICPA and SEC in the year 1997. The ISB has been stated to be acknowledged to be the entity or unit of standard-setting. This particular unit structures and designs standards as well as concepts related of the profession of auditing. Alternatively, it has been found that the Eight Council Directive (Eight Directive) of the European Commission (EC) that was agreed to and implemented in the year 1984, passes on to the Member States. This was adopted so as to make certain of adequate independence of the statutory auditors from their auditing clients (Stevenson, 2002). The government had also developed the Sarbanes Oxley Act in the year 2002 in order to restore the faith of the people with regard to corporate governance. This act was intended to defend the interests of the investors by way of enhancing the correctness as well as dependability regarding the corporate revelations (Fletcher & Plette, 2008). This particular scandal even proved to be damaging for the government as the political custom of America which implied the leasing of those companies and which acted in the interest of the public got violated (Petrick & Scherer, 2012). Impact on the Society The illegal along with the unethical practices made the institutional as well as the individual investors loose a huge sum of their invested capital owing to the false representation of the financial performance with regard to the company. The employees of the company were misled regarding the authentic financial condition of the company. This made them suffer hugely as they did not feel the need to branch out their respective retirement portfolios (Sterling, 2002). Conclusion & Recommendations From the above discussion, the implication of a corporate violation of legal issue could be inferred evidently. The vested interest of the auditing firm as an auditor and a consultant also led to the collapse of the company which was quite lucid from the analysis of the case. Legal guidelines need to be developed so as to limit the offered services of the auditing firms as consultants. The conduct of strict corporate governance needs to be ensured in companies for the reason of preventing any kind of unethical practices which could further lead to legal violations of the laws. The companies also need to maintain an internal monitoring system which would keep a record of the ways the business functions would be conducted. The rules as well as the regulations also require to be modified in accordance with the new set economical standards and should not entail any kind of relaxation and no kind of favoritism should be displayed by the government as well. Thus, it can be evidently stated that legal issues certainly raise ethical concerns which in turn affects the sustainability of an organization. References Barreveld, D. J. (2002). The Enron collapse: Creative accounting, wrong economics or criminal acts?: A look into the causes of the largest bankruptcy in U.S. history. United States: Iuniverse. Collier, P. M. M., & Agyei-Ampomah, S. (2009). 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