Deontological Framework and Categorical Imperative: WorldCom - Essay Example

? Deontological Framework and Categorical Imperative: WorldCom (Add (Add (Add Deontological Framework and Categorical Imperative: WorldCom Introduction The WorldCom scandal, occurred in 2002, was considered to be the largest corporate insolvency. Although WorldCom failure is attributed to the company’s aggressive acquisition strategy, accounting fraud also played a notable role in forcing the organization to file for bankruptcy. The WorldCom case reflects a range of ethical problems that are likely to cause further corporate failures in future. This paper will discuss the ethical issues in the WorldCom case using deontological framework and Kant’s categorical imperative. Ethical Problems While analyzing the WorldCom case, it is obvious that criterionless loan lending to senior executives at shamelessly low rates was unethical even though this practice was legal. The company’s senior executive Bernie Ebbers received $341 million in loan and this figure represented the largest amount any publicly traded company has loaned to its senior executives in the recent past. According to the former SEC enforcement officer Seth Taube, “a large loan to senior executive epitomizes concerns about conflict of interest and breach of fiduciary duty” (as cited in Moberg & Romar, n.d.). Due to such huge loans, WorldCom’s management struggled to maintain a good image of shareholder wealth and market growth. AS Moberg and Romar (n.d.) point out, the company management was forced to do some unethical activities in the best interest of the organization although they were not in the best interest of shareholders and customers. The company could have survived if it had not lent huge amounts to senior executives. The case study also reflects many unethical accounting practices. Unethical book keeping practices assisted WorldCom to present its financial status look better than its actual condition. This unethical practice benefited the company to deceitfully retain the interests of its shareholders and customers. The inflated profits of the company attracted many new stockholders even though the firm had been really underperforming. Referring to the view of Velasquez, Andre, Shanks, and Meyer (n.d.), this practice involves a conflict of rights. In addition, this situation is certainly unethical because a publicly traded company has an ethical responsibility to disclose true and fair view of its state of affairs to its stakeholders. Although auditors proved some questionable accounting practices in WorldCom even since 1999, they did not bring the matter to the notice of stakeholders timely. This practice was also against auditing ethics. A professional auditor has an ethical responsibility to mention doubtful accounting practices in the audit report if he/she discovers any. It was found that the company kept nearly $7.683 billion in improper accounting over the past 3-4 years before its insolvency (Find Law, n.d.). The company’s internal check systems such as internal auditing also performed unethically. If they had timely reported accounting manipulations to the board of directors, the WorldCom would not have become the world’s biggest corporate accounting fraud. The following table illustrates how the company used unethical accounting practices to inflate its earnings in profit. -$ in millions- 1997 1998 1999 2000 2001 Revenue 7384 17678 35908 39090 35179 Operating Income 1018 (975) 7888 8153 3514 Total Assets 23596 86401 91072 98903 103914 Operating Margin (%) 13.78 (5.51) 21.96 20.85 9.98 (Source: Chary, 2004, p. 47) During 1990s, the company was aggressively performing takeovers to expand its market boundaries; however, the company could not maintain a proportionate profitability as it failed to integrate acquired businesses effectively. The table clearly indicates that the company’s operating margin was not satisfactory even in 1998. Although subsequent mergers contributed to WorldCom’s business complexity or did not actually improve its profitability, the organization managed to improve its operating margin in 1999 and 2000 using accounting manipulations. Hence, the company stakeholders believed that WorldCom had improved its financial status despite a huge operating margin decline in the previous year. However, the WorldCom’s planning was inadequate for maintaining the operating margin over the next years and therefore profit margin dropped to less than half in 2001 as compared to the previous year’s earnings. In short, the company used a range of unethical management, accounting, and auditing practices to hide the actual debts and other obligations of the organization and thereby retain stakeholder interests in the company. Deontological Framework “Deontological theories judge that actions or policy measures must be right or wrong for reasons other than only their good consequences”(Graafland, 2007). The author also testifies that “an act is only right if it conforms to the relevant moral obligation” (Graafland, 2007, p. 174). The deontological framework implies that the act of keeping a promise or respecting others’ right is a duty as well as a right regardless of whether such an act adds to utility or not. In addition, there are moral standards independent of actions’ consequences. Referring to Graafland (2007), deontological theories argue that a person who derives pleasure from causing loss or harm to others has basically no right whatsoever to his enjoyment as an individual has a moral duty not to cause any loss or harm to others. In short, deontological framework thus limits satisfactions those have value and those have not (p. 174). While analyzing the WorldCom’s ethical problems using deontological assumptions, it is clear that all those issues were against the fundamental principles of the deontological concept. It is obvious that the act of increased credit lending to senior executives at very cheap rates negatively affected the interests of company stakeholders, especially shareholders. As a result, stockholders lost increased rate of dividends that could have obtained out of higher profit margin. In addition, the company’s inflated financial status achieved through accounting manipulations prevented shareholders from terminating their business relationship with the company, and investors from making a potential investment decision. In short, those unethical business practices caused much harm to the firm’s stakeholders. The deontological framework suggests that WorldCom management did not have the right to enjoy business growth by hurting the interests of its stakeholders. Although the company management had falsified its accounts on the strength of the belief that it could survive the crisis in near future, the management’s act was immoral according to the deontological framework. As Graafland (2007, p. 174) clearly indicates, this model only takes into account moral value of the act but not the value of future outcomes. Kant’s Categorical Imperative Categorical imperative is the moral philosophy concept developed by Immanuel Kant. Kant’s categorical imperative can be defined as “an unconditional moral obligation that is binding in all circumstances and is not dependent on a person’s inclination or purpose” (as cited in Arnim, 2007, p. 103). According to Kant, categorical imperative is the central concept of morality. In other words, he argues that all duties and obligations derive from the central concept of morality. He precisely indicates that an imperative is a command. This concept also argues that expected consequences of a particular act are irrelevant to moral deliberation. The moral value’s objective basis may be the only reasonableness of good will. Hence, even though WorldCom management used unfair accounting practices to maintain its market reputation, the moral value of the act was not good. In other words, Kant’s categorical imperative disapproves WorldCom’s business ethics despite the management’s inclination or purpose. Conclusion From the above discussion, it is clear that huge loans to WorldCom senior executives at very low interest rates constituted the major ethical problem in the organization. In order to conceal the debts caused by the firm’s aggressive acquisition strategy, WorldCom management used unethical accounting practices. If falsified the firm’s financial position. Thus, the company deceitfully retained the interests of its stakeholders. The deontological framework proposes that WorldCom’s management did not have the right to enjoy any benefit by hurting the interests of stakeholders. Kant’s categorical imperative theory says that the company management’s act was immoral regardless of its inclination or purpose. References Arnim , L. A. (2007). The Marriage Blacksmith. USA: Wehrhahn Verlag Chary, V. R. K. (2004). Ethics in Accounting. Global Cases and Experiences. India: The ICFAI University Press. Find Law. (n.d). Class action complaint of Lead Plaintiff H. Carl McCall, Comptroller of the state of New York, as administrative head of the New York State and local retirement systems and as trustee of the New York state common retirement fund, on behalf of purchasers and acquirers of all WorldCom, Inc. publicly traded securities. United States District Court; Southern District of New York, 1-168. Retrieved from http://www.osc.state.ny.us/press/worldcomsuit.pdf Graafland, J. J. (2007). Economics, Ethics and the Market: Introduction and Applications. New York: Taylor & Francis. Moberg, D & Romar, E. (n.d). WorldCom: Markkula Center for Applied Ethics. Santa Clara University. Retrieved from http://www.scu.edu/ethics/dialogue/candc/cases/worldcom.html Velasquez, M., Andre, C., Shanks, T & Meyer, M. J. (n.d). Rights: Markkula Center for Applied Ethics. Santa Clara University. 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