Unethical business practices have been an escalating issue in the United States. Business ethics has become such a problem, that the federal government has created numerous laws and regulations to thwart unethical decision making in business. Businesses must be in full compliance with these rules or will face some very serious consequences. In this paper, I will discuss some of the past and current legislation that directly impacts business operations today, the reasons for the legislation, and the future of businesses in the United States and globally.
The Fraud Triangle
A discussion regarding ethics and ethical behavior begins with the question of why unethical business decisions, fraud, or other types of deceptive practices in business are perpetrated. To understand why employees, managers, and executives commit these acts, the discussion begins with the fraud triangle which was developed by Dr. Donald Cressy, a criminologist. The majority of people who commit these acts were not criminals. They may be trusted employees who have worked for the company for many years. The three factors that must be present in order for the average person to commit these acts are pressure, opportunity, and rationalization. Pressure includes financial need, need to meet corporate earnings to keep investor confidence, the need to meet productivity targets, and the desire for major status symbols in ones' life- a bigger house, a nicer car, etc. Opportunity is the method of performing the crime, or unethical act. The person sees a way to use the person's position of trust and perceives that the risk of getting caught is very low. Rationalization is justification for the unethical behavior or crime, the person sees themselves as an honest person caught in a bad circumstance (AICPA).
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Business Ethics is a relatively new term. There was a changing attitude toward business beginning in the 1960s. The United States Civil Rights Act of 1964 was the first piece of legislation that began the move toward ethics in business. The Act prohibited discrimination on the basis of race, color, religion, or national origin in public establishments connected with interstate commerce, and other public places. Because of this act, many corporations added “equal opportunity offices” to their human resources departments to ensure compliance with the act.
Business Ethics came into common use in the early 1970s due to various business scandals that were occurring. In 1977, due to a series of scandals involving United States firms that did business with multi-nationally, the United States government passed the Foreign Corrupt Practices Act. This act was the first piece of legislation that attempted to control the actions of U.S. corporations in foreign countries. The Act prohibited U.S. businesses from bribing foreign high level government officials in return for preferential treatment in the foreign country.
By the 1980s, many businesses were adopting ethical codes and including ethics training for their employees. In 1984, there was a disaster at a Union Carbide plant in Bhopal, India, which focused world attention on the chemical industry due to the fact that thousands of people died and hundreds were injured by the disaster. This led to the chemical industry adopting a voluntary code of ethical conduct known as Responsible Care, which was a model for other industries. This scenario did not produce legislative acts by the government; however, I felt it was important to mention. Not often do businesses see the need for regulation and act on it without government interaction. In 1986, in response to a series of reported irregularities in defense contracts, a special Commission report led to the establishment on a Defense Industry Initiative (DII) on Business Ethics and Conduct, signed by 50 major defense industry contractors.
The DII led to the 1991 United States Federal Sentencing Guidelines for Corporations. This law provided an incentive to corporations to incorporate ethics into their businesses.
If a company could prove that it had taken steps to prevent and detect illegal and unethical behavior, the sentence, if the company was found guilty of illegal or unethical behavior, would be reduced. Fines that may have reached as high as $290 million could be reduced if the company took appropriate measures against corporate illegal or unethical acts. Measures were introduced into the corporate structure, including establishing a code of ethics, creating an oversight position within the organization, creating an ethics training program, and a “hotline” for employees to report suspected illegal or unethical behavior. A corporate position known as the Corporate Ethics officer was established (De George).
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The most recent legislation regarding corporate ethics was the Sarbanes-Oxley Act of 2002. This act was passed as a result of the most current business scandals involving WorldCom, Enron, Arthur Andersen, a prominent accounting firm, and other corporations. Before giving detail regarding the act, I would like to present some background as to the history of the corporate worlds that existed prior to the act.
WorldCom used fraudulent accounting methods to hide its declining financial position by presenting a misleading picture of its financial growth and profitability. By the end of 2003, it was determined that WorldCom's assets were inflated by approximately $11 billion. In 2005, the CEO, Bernard Ebbers, was convicted of fraud, conspiracy, and filing false documents with the regulators. He was sentenced to 25 years in prison. Others in the conspiracy were given reduced sentences.
The Enron case was the most famous case of corporate fraud. Due to offshore dealings and questionable accounting practices, Enron had admitted to a $102 million loss, and hiding hundreds of millions of dollars of other losses. At the end of 2001, Enron collapsed, and its stock price was reduced to $1. Dozens of Enron executives and its external auditors, Arthur Andersen, were convicted of a broad range of financial crimes.
At the time of this scandal, Arthur Andersen was a highly regarded firm. There were 100 civil actions brought against it and the firm went out of business (InformIT).
The purpose of the Sarbanes-Oxley Act of 2002 was to protect investors by improving the accuracy and reliability of corporate disclosures. The act created new standards for corporate accountability as well as new penalties for acts of wrongdoing. It changed how corporate boards and executives must interact with each other and with corporate auditors. A CEO and CFO can not use the defense that he wasn't aware of financial issues. They are held accountable for the accuracy of financial statements. A CEO and CFO of a corporation must certify to the fact that the corporate financial statements are fair and accurate, with criminal penalties for knowing violations. In addition, it requires a code of ethics for the corporation's senior financial officers, as well as requiring much more public disclosure. The Act specifies new financial reporting responsibilities, including adherence to new internal controls and procedures designed to ensure the validity of their financial records (Sox-Online).
To first understand why people commit fraud and unethical behavior, I have discussed why people act unethical and the fraud triangle developed by Dr. Donald Cressy. Without the 3 factors that must be present for an unethical behavior to exist, our world would be an idyllic place in which to live. We also must discuss the history of the United States Corporation that begins with the Industrial Revolution of the 1800s. The Industrial Revolution began the United States emergence as one of the largest and most technologically powerful nations in the world. This power was not without a price. There was no such thing as business ethics. There was no place for ethics in industry then. It was a dog eat dog world, and the most corrupt and unscrupulous survived. It served us well in the 1800 and early 1900s; however, we as a people, could not continue to thrive on that type of behavior. It was obvious that, for the most part, corporations were not going to police themselves.
The Civil Rights Movements and the Civil Rights Act of 1964 led to major changes in our discriminatory practices against people of all colors, races, creeds. The 1980s, 1990s, and most recently, the Sarbanes-Oxley Act of 2002, brought about additional legislation that was needed due to scandals regarding unscrupulous business practices. This is not the end. Although corporations have begun policing their own behavior through the use of codes of ethics, ethics training of the employees, ethics oversight positions, the three factors of fraud or unethical behavior still exist and have not been erased.
"Business Ethics and Corporate Scandals - Part 1." InformIT: IT Management Reference Guide > Business Ethics and Corporate Scandals. 09 Mar 2007. InformIT. 5 Mar 2008 <http://www.informit.com/guides/content.aspx?g=it_management&seqNum=187>.
De George, Richard T. "A History of Business Ethics." A History of Business Ethics. 19 Feb 2005. Santa Clara University. 5 Mar 2008 <http://www.scu.edu/ethics/practicing/focusareas/business/conference/presentations/business-ethics-history.html>.
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Frulla, David. "Financial Institution Compliance with Government Ethics Laws." Financial Institution Compliance with Government Ethics Laws. Mar 2007. Business Network. 5 Mar 2008 <http://findarticles.com/p/articles/mi_qa5344/is_200703/ai_n21289525/pg_1>.
"Sarbanes-Oxley Act Basics." Sarbanes-Oxley Basics. Sox-Online. 5 Mar 2008 <http://www.sox-online.com/basics.html>.
"Understanding Why Employees Commit Fraud." Understanding Why Employees Commit Fraud. 2003. AICPA. 5 Mar 2008 <http://antifraud.aicpa.org/Resources/Auditors/Understanding+Programs+and+Controls/Understanding+Why+Employees+Commit+Fraud.htm>.