Expediency of Federal Regulations in Eliminating Corporate Financial Fraud - Dissertation Example

? The Expediency of Federal Regulations in Eliminating Corporate Financial Fraud of Table of Contents Introduction 3 The rational model 3 The model of bounded rationality 4 The garbage can model 7 Challenges in ethical decision making 8 Expediency of Federal Regulations in Eliminating Corporate Financial Fraud 10 Recommendations 11 Research questions 12 Quantitative Method 12 Mixed method 12 References 14 Introduction There are different theories of decision making presented by different experts. These theories might be found in the existing literature. The proponents of some of the major theories of decision making are G. P. Huber (1981), and T. K. Das and B. S. Teng (1999). The most commonly used models of decision making are the rational model, the model of bounded rationality and the garbage can model. Aptness of the process of decision making is justified by the methodological fitness of the decision to the demand of the concerned situation, reliability of the evidence used for decision making, relevance of the decision to context, transparency in the findings and the extent up to which consensus reached within the decision making individuals. In this paper the mixed method of research has been compared with quantitative and qualitative methods of research. Result of this comparison has been used to study the different models of decision making and the most preferred method of research has been described (Baba & HakemZadeh, 2012). The rational model The neoclassical theory of microeconomics is based on the assumption that man is a rational economic agent and is an informed decision-maker. This process shows involves four different steps, intelligence, design, choice and review. Intelligence of an individual or an organization helps them to find the appropriate occasions for decision making. Design of the decision making process allows them to invent new ways and analyze all the probable ways to choose the course of action. It helps in selecting some particular line of action from the available range of choices and review of the choice made helps in judging the outcomes of the decisions made in the past. In the classical model or the model of perfect rationality, numerical values are used to determine the level of utility of each of the alternative options which are then used for the process of decision making or during ‘choice phase’. The alternative choice that provides the maximum amount of utility (subjective level of utility depending on the decision maker) is selected. In business organizations, implementation of the rational model of decision making entails the following assumptions involving the managers in the organization. These assumptions include knowledge of all likely alternatives, awareness of the expected consequences of each of the alternatives, having a predetermined and organized preference set corresponding to all the consequences and finally, having strong computational ability and deep insights to compare these consequences and determine which one of these is the most preferred (Turpin & Marais, 2004). The model of bounded rationality The notion of bounded rationality explains that while individuals make decisions, rationality of their behavior is limited by three important factors; availability of access to information, cognitive precincts of human minds, and time constraint within which the decision has to be made. According to Simon (1979), the leaders in an organization always do not make completely informed choices. In many occasions they make choices on the basis of available information and the insights and forecasting capabilities of the decision maker. Therefore, the choice made by these leaders is not always the optimal choice. Rational behavior by human beings is mainly influenced by two factors; the situation in which the decision has to be made and “the computational capabilities of the actor” (Turpin & Marais, 2004, 147). Study of rationality of human behavior has become easier since the study can be made within these two boundaries. Simon suggests that the study of the model of bounded rationality entails two distinct activities; “searching and satisficing” (Simon, 1979, p. 495). Decision makers search for the different alternatives available to them and evaluate them sequentially on the basis of the utility or benefit gained. These alternatives are judged against a certain minimum criteria or bench mark mentioned explicitly for the judgment of good decision making. In the bounded model, once the decision maker reaches the alternative that provides a benefit level that matches or exceeds the predetermined minimum criterion, search for alternatives is stopped. This alternative is taken as ‘satisficing’. Regularities in the task of decision making are identified prior to searching of the alternatives, which makes the search easier. The fundamental difference of this model from the rational model of decision making theory is that while in the rational model evaluation of the alternatives is made on the basis of numerical values assigned to these alternatives; in the model of bounded rationality evaluation of the alternatives is made against the benchmark alternative set by common consensus. Secondly, in the rational model it is assumed that the decision maker has detailed knowledge of all probable alternatives and is also aware of the expected consequences of each alternative. The rational model of decision making is deemed the perfect model of rationality. On the other hand, in the bounded rationality model, it is assumed that the decision maker might not make a completely informed choice, i.e., the individual makes the choice on the basis of the present situation and with the help of personal reasoning capabilities. Herbert Simon had proposed this model long back in late 1970s as an alternative to the mathematical modeling of decision making theory suggested by the rational model derived from neoclassical economic theory. In the bounded model notion of rationality is viewed as an optimization problem. In this theory, decision making is viewed as the process of finding the optimal choice subject to the available information. In this model, the individual does not have complete knowledge of the consequences of all these alternatives. Decision makers face the lack of resources to reach the optimal solution, due to which they compensate this lack with their ability to logically deduce the inference of a certain strategy that might be implemented in a particular situation. In this framework the decision-maker is acts as a ‘satisficer’, i.e., one who seeks a specific solution that would be satisfactory in the given situation, rather than being the optimal solution (Princeton, n.d.). Several researchers often contrast these two models on the basis of these two paradigms (Turpin and Marais, 2004). However, many others are of the opinion that Simon (1979) model of bounded rationality is just an extension of the rational model of decision making. This model describes the rational model after subjecting it to some constraints. Simon suggested three precise dimensions that can be added to the classical model of rationality so as to make this model more realistic and to increase its applicability in real business scenario. These dimensions are, clearly defining the utility functions that are used for the process of decision making, using "multi-valued" utility functions wherever possible to define all relevant factors influencing decision making and identifying the cost incurred for gathering information required for decision making and processing them. Hence decision making according to this model is termed by these researchers as ‘constrained rational behavior’ (Turpin & Marais, 2004). The garbage can model The garbage can theory of decision making refers to the process of making decision in a situation of ‘organized anarchy’. This theory has been proposed by Cohen, March and Olsen (1972). Through this model the proponents have emphasized that in business organizations the process of decision making is often chaotic in nature and is fragmented. The garbage can model stipulates that “a decision is an outcome or interpretation of several relatively independent streams in an organization” (Turpin & Marais, 2004, p. 147). These streams relate to various problems and solutions corresponding to different participants involved in the business process. In this framework, decision makers are not centrally unified, but are scattered in the different ranks throughout the organization. When faced with problems they look for opportunities that would allow finding a solution to the problem, when they have a wide range of possible solutions they try to match the problem with the best solution. This shows that the participants in this model interact with one another at some choice opportunity and this equilibrium is not pre-determined. Hence this choice opportunity is symbolized as garbage can. Participants in the garbage can are the agents that are responsible for the generation of the garbage and they themselves belong to the team of decision makers in this model. When the decision is ultimately reached this situation is symbolized to the act of removing the garbage can. This model contrasts with the other two models from the point of view that in this model the decision makers are scattered at the various levels of the organizations and there is no pre-determined benchmark that the decision makers would follow for making their own decisions. Besides, in this model, the best outcome depends on opportunity and therefore is not much dependent on the computational capability of the decision makers. The foundation of this model is on the notion that decision making in a demanding situation is the outcome of the best opportunity that arrives in the current context. Unlike the rational theory, in this model it is not assumed that the decision makers or the organizational leaders are aware of all the possible alternatives of choices and also knowledgeable of the most likely consequences of these alternative actions. Challenges in ethical decision making Making ethical choices often entail risk factors and undergo a situation of uncertainty (Suhonen, 2007). Ethics is at the core of leadership skills. The term ethics connotes the notion of moral code of conduct by business organizations (Phillips, 2003; McDaniel, 2004). It is directly associated with effective leadership practices in corporate organizations and refers to the values shared by the employees of the organization and also the values that they maintain while their interaction with the stakeholders, including the common public (Johnson, 2011; Muhr, Sorensen & Vallentin, 2010). As a person moves up the hierarchy ladder in an organization, different roles get attached to his or her position. An additional responsibility is entrusted to him, that is, to follow ethical rules in every phase of decision making. True leadership skills are nurtured through the practice of ethical leadership qualities and the ethical climate of the organization is formed through the activities and the decisions made by the organizational leader (Johnson, 2011). Leaders are the forerunners of the ground on which the lower echelons in the organization run. Hence, the biggest challenge faced by the leaders in involving in any kind of unethical behavior or practice is the risk of ruining the ethical climate within the organization and disrupting the healthy work environment which consequently hampers the reputation of the organization. On the other hand, the good work environment in the organizations is built by the healthy thinking and determined attitude of the leaders towards ethical decision making. This allows the organization to maintain its reputation in the long run (Johnson, 2011). Leaders face various challenges in their course of action both in their professional career and their personal lives. These challenges are not always synonymous with problems. In many cases challenges are faced by leaders as decision makers as to how the different situations are utilized by them so as to maximize profit for the institution as a whole. The opportunities that arrive in their way are sometimes laden with different kinds of benefits, sometimes for the whole organization and sometimes utilization of these opportunities might create negative consequences for the organization in the long run, some of the issues include Religious problems Market positioning shift Degradation in product or service quality in long term and Rift among shareholders. While leadership offers the person the opportunity to express their skills and demonstrate the best of their expertise, this platform also exposes their limitations. Good leaders are trusted with the responsibility to overcome these limitations and follow the objective of the business. In this process, personal values of the leaders also help them in making ethical decisions. Some of the personal traits that might act as barriers to leadership are lack of confidence, fear, intolerance, insecurity and impatience. One of the major issues for leaders is the problem of leader burnout. This refers to the situation when the leader is overwhelmed with stress, frustration, high demands of the role, uncertainty and excessive workload. This affects the performance of the entire group that the leader is in charge of. The leader has the responsibility of leading by example in demanding situations. Another kind of challenge occurs when the leader faces a ‘burn-down’. This phase comes for some leaders after they have been in the position for a long time. They might still care for the work that they are doing but, might not be as enthusiastic about the work as before. It becomes even harder to deal with leader burn down than leader burn out (Rabinowitz & Berkowitz, 2013). These are the internal challenges faced by leaders. Leaders also face external challenges. These come in the form of media scrutiny, public criticism, issues related to interpersonal groups in the industry, financial or political crises and hostility from powerful lobby groups. Collaboration with other major players in the industry depends on firm decision of leaders and success of these collaborations depends on the efficiency of leaders in maintaining beneficial relationship with these firms. Expediency of Federal Regulations in Eliminating Corporate Financial Fraud Fraud cases have become frequent in the United States in the private sector. This shows lack of ethical decision making by organizations. This problem shows an increasing trend in the last century. The Federal government has therefore intervened by making regulations for the private enterprises. These regulations are aimed at preventing and eliminating corporate fraud. Several acts have been passed, such as “the Securities Act of 1933 and 1934 and the Sarbanes Oxley Act (SOX) of 2002” (Alleyne & Elson, 2013, p. 95). Some of the major financial crises that have occurred in the USA and have affected the global economy are credit-market crisis, housing bubble and the subprime crisis. The federal government has collected data from The Association of Certified Fraud Examiners' Report, for the period between 1996 and 2008. This data has been used to study whether the amount of dollar involved in white collar fraud crimes are increasing or decreasing over the years (Alleyne & Elson, 2013). Results show that fraudulent statements, misappropriations and corruption schemes have been increasing over the years. Implementation of the SOX in 2002 has been successful in decreasing the cases of fraudulent disbursements. In 2009, the US has made bank reforms and established the Consumer Financial Protection Agency under the authority of the Federal Reserve. It has been entrusted with the responsibility to prevent bank failures. The regulators can split the big banks so that the risk of bank failure drops significantly (Reuters, 2009). The Obama government has proposed more stringent financial regulations under economic campaign of the government. The Securities and Exchange Commission (SEC) centrally looks after the financial regulations made by the Federal government and ensures their implementation. Recommendations This paper presents the opinion strongly that decision making occupies the central position in management practices in the public and private sectors. The study presented here underlines the importance of making sound and professional managerial decisions. The value of evidence depends on the firmness of the information delivered by the evidence and the bearing of the evidence to the situation in question in which proper decision has to be made. This paper has presented challenges in making ethical decisions have been elaborated in the context of the decision making theories. Companies can abide by the regulations of ethical decision making by following the most important rule that the leaders would have to imbibe the values of making ethical decisions (Rieley & Crossley, 2000). Interests of the corporate shareholders and other stakeholders would have to be cared for by the organizations. Besides regulations made the government would act as guide for these firms while they make moves with profit maximizing motives. Research questions Quantitative Method Quantitative method of research refers to the process of research that uses data and analyses the data statistically to reach the inference (Saunders, Lewis & Thornhil, 2009). The method includes following steps; achieving an agreement on sampling techniques which matches the attributes of the sample population, the size of sample selected from the sample population for the study, gathering different types of information from the respondents and finally analysing the outcome of the study to reach the conclusion. The analysis of the information is made using different statistical tools (Watsham & Parramore, 1997). The method of quantitative research is based on the deductive approach of search (Mouton, 2011). The steps in this approach are making predictions, developing and testing hypotheses that have been stated earlier during the study of the topic and establishing facts on the basis of these outcomes achieved after the testing of hypotheses (Nykiel, 2007). Mixed method The mixed method is a combination of the quantitative and qualitative methods. It is based on the idea that information is collected in such a way that both quantitative and qualitative analysis can be made on the data (Singh & Bajpai, 2008; McLeod, 2007). It is evident that the mixed method is not a different method is not a different method of research, but it is an approach that uses multiple research methodologies (quantitative and qualitative methods) (University of North Carolina, 2008). Use of mixed method Mixed method can capitalize on the good points of both these approaches and utilize them to strengthen the current research project. In this method the weaknesses of both approaches can be avoided to some extent (Somekh & Lewin, 2004). Since the quantitative method does not give scope for deep study of the factors under study and the qualitative approach does not make any use of statistical methods to make the study, mixing these two methods, or using both these methods to make the study allows researcher to reach better and comprehensive answers to the questions under study. The research questions can be addressed in a more all-inclusive manner since the researcher has the liberty to go beyond the restrictions placed by a single research approach. Hence this research method is preferred by most searchers. The mixed research approach would be followed for this study since it would give better scope for studying the reach the topic and finding answers to reach the most desirable research result. References Alleyne, B. J. and Elson, R. J., 2013. The impact of federal regulations on identifying, preventing, and eliminating corporate fraud. Journal of Legal, Ethical & Regulatory Issues, 16 (1), 91-97. Baba, V. 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(2011). The practice of social research. Cape Town: Oxford University Press. Muhr, S. L., Sorensen, B. M. and Vallentin, S. (2010). Ethics and Organizational Practice: Questioning the Moral Foundations of Management. Massachusetts: Edward Elgar Publishing. Nykiel, R. A. (2007). Handbook of Marketing Research Methodologies for Hospitality and Tourism. New York: Routledge. Phillips, R. (2003). Stakeholder Theory and Organizational Ethics. California: Berrett-Koehler Publishers. Princeton, n.d. Bounded rationality. Retrieved from http://www.princeton.edu/~achaney/tmve/wiki100k/docs/Bounded_rationality.html . Rabinowitz, P. & Berkowitz, B. (2013). Recognizing the Challenges of Leadership. Retrieved from http://ctb.ku.edu/en/tablecontents/sub_section_main_1126.aspx . Reuters. (2009). Financial initiatives. Retrieved from http://www.reuters.com/article/2009/06/22/financial-regulation-idUSN2126458420090622?sp=true . Saunders, M., Lewis, P. & Thornhil, A. (2009). 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