ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Corporate Fraud

Updated on August 7, 2014
Source
Source

Unethical Behavior

Business ethics are very important part of financial strategic management. The chief executive officers and chief financial officers are held accountable for the ethics of a business. Violations of ethics are caused by misrepresenting financials, misleading the public, and other acts that give certain investors an advantage over others. Many firms in the past have used unethical accounting to show performance results that were untrue.

 Companies such as Enron and WorldCom are two of the biggest accounting scandals in the world. The scandals have changed legislation and forced the SEC to pass the Sarbanes Oxley Act of 2002. Unethical reporting and transaction will decrease the investors’ confidence in the capital market systems. The regulators must enforce rules and observe the ethics of companies to ensure they are reporting accurate financial numbers. If the investor’s confidence decreases and the reforms do not work then the capital market systems will fail and companies will not have limited options to raise finance for expansion, new products, or innovation.

Enron

Enron was a major energy trading company. The company grew to becoming the largest company in the industry. The company continued to generate revenues and grow through transactions and acquisitions. The company always had strong financial statements that showed the company was financially strong. The problem with Enron is all the manipulation that was going behind the doors of the company. They had colluded with board members, the auditing firm, and banks to hide losses and show revenue growth.

The company manipulated the financial statements by changing historical values to market values to show financial strength. The forecast were optimistic and market values were reported much higher than assets were worth. Enron directors approved many transactions and reporting techniques that were unethical. The company was trading futures and marking down revenues from optimistic forecast before any funds were transferred. The company reported many revenues that had not taken place and were at risk to never take place. The expenses were marked down in quarters in the future that had profits to hide any losses the company would have shown. The company bribed their auditor, analysts, and creditors to sign off on the financial strength of the company by offering them stock options. The company was hiding losses in many places and inventing companies to show growth.

The company was also involved in limiting the power supply to areas in California to increase the price of their electric bills. Enron traders had power companies working at less than half capacity to invoke the blackouts in California to raise the price of electricity. Many stock options were given to the people involved in the scandal and many of them profited from the scandal whereas the public and employees lost everything they had. The company invented various types of accounting to hide losses and show profits even though the company was losing money.

WorldCom

WorldCom was a telecommunications company that was acquiring the competition. The company was showing revenue growth from acquisitions of companies. The company acquired rival MCI communications even though MCI was the larger company. The scandal WorldCom was involved in was accounting fraud. The majority of the company’s assets on the balance sheet were from goodwill. The reported goodwill was from optimistic values that allowed the company to acquire more long-term debt. The company was listing goodwill even if the acquisitions were losses or accumulated debt. The misrepresentation of goodwill allowed the company to portray that it was financial strong and have high credit ratings.

Another fraud the company was a part of is not reporting operating expenses. The company had operating expenses charged as capital expenditures, double revenue counting and undisclosed debt. This method hid expenses and showed lower operating costs that generated more profit. The company had to pay other telecommunication company for the use of their physical assets to provide services for their customers. The company was misleading investors and showing profits when the company was generating losses. An audit of the company found 3.8 billion dollars of undisclosed debt. The investigation that led to the company’s bankruptcy revealed more than 10 billion dollars of undisclosed debt. The company mislead the public and investors to show profitability when debt and losses were the real picture.

Business Ethics

Business Ethics are defined as the standards of conduct or moral judgment of persons engaged in commerce. The directors and senior management are held accountable for any unethical behavior. If unethical behavior is discovered the officers and managers face severe penalties including fines and imprisonment. Ethics is an important factor in strategic financial management because the managers must know how to react to different scenarios. The key to every financial strategy should be to maximize shareholder wealth. Longevity and future cash flows are good ways of succeeding in this objective. A company that acts unethical can harm their reputation and the cost to repair it may be insurmountable. Keeping loyal customers cost a company less time and money than attracting new customers. Ethical behavior will allow customers and investors to have confidence in the company and their products to generate loyal relationships. A company faces many decisions during the financial planning stage and managers’ act ethically will reward the shareholders and stakeholders of that company.

Deception = Collapse

The examples of Enron and WorldCom show what happens when unethical behavior is involved in the operations of a company. The companies tried so hard to show investors profits and portray strong financial condition that many people involved were hurt. Employees and investors lost their life-savings and were subjected to lies and fraud. The people involved in the fraud were sentenced to jail and had to pay large sums of money back to creditors. No one benefited from the fraud when it was discovered. Ethics are an important factor for all stages of business and financial reporting and strategic management are no exception.

Comments

    0 of 8192 characters used
    Post Comment

    • pramodgokhale profile image

      pramodgokhale 

      5 years ago from Pune( India)

      : Web Link

      Your hub is eye opener and as an Indian i am more concerned about Enron . Enron did big fraud in India as power finance company, they managed our government and conditions which were forced that was against sovereignty of our country. Finally they left.Ethics and corporate culture and practice are different things and while gaining large deal ethics have no place in business.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)