Corporate Fraud in Richards Letter - Essay Example

Corporate Fraud in Richards Letter Abstract Corporate fraud entails the violations of the Internal Revenue Code (IRC) and other related rules committed by vast, publicly or privately traded corporations or by senior executives. These violations may cause harm to the organizations since individuals serving in the organizations, responsible for the violations, may end up facing charges due to lack of following accounting ethics. It is necessary for organizations to follow the accounting code of ethics in reporting its revenues and any accounting information. The executives should take managerial responsibility in order to avoid violations of corporate ethics in accounting. This paper will analyze the case represented in Richard’s letter. Seriousness of Richard’s action Richard, as the global head of sales, in the Computer Associates Corporation, he was involved in various acts, which affected his responsibilities in the company. One of his actions was the facilitation of an extension of the fiscal quarter (Soltes 4). This was indeed serious since it affected the reporting of the other fiscal quarters. Effectiveness of the information reported by extension of a fiscal quarter would be affected. Richard was also accused of allowing his subordinates to obtain contracts after the end of a fiscal quarter (Soltes 4). This is serious because it will influence the accuracy of the financial reports used by the stakeholders. Accuracy of financial information for the organization is remarkably essential for both the management and other stakeholders involved such as the investors. Inaccurate financial information may affect the expectations of the prospecting investors and shareholders of the organization. It is better for an organization to give accurate financial information rather than falsehood representation. Information represented falsely can lead to extortion of investors emanating from misleading financial information. Another action done by Richard that indicated seriousness of the matter, was failing to alert the accounting and finance departments of contracts that might have been backdated. This affected the revenues related to a certain fiscal quarter. Since revenues are supposed to be recognized after the signing of a contract, and recorded in the fiscal quarter of its recognition; this will affect the revenues pertaining to a certain fiscal quarter. Although the actions of Richard emanated from the company’s culture of maintaining its performance, the actions of Richard did not follow ethical standards. When proper accounting approaches according to GAAP are used, accurate and efficient financial information is obtained. The chief reason for carrying out investigations on Computer Associates Company was because SEC doubted the accounting reporting of the company. When GAAP approaches are not used in a company’s financial reporting, it is most likely that the company’s financial reporting would have problems. For instance, one of the GAAP approaches is the matching principle, where revenues are recognized in the period of their earning or in the period, when expenses that match the revenues are paid. In Computer Associates Company, there was a problem regarding the recognition of revenues. It was noted that; some of the contracts were signed after the last day of a fiscal quarter. This had an impact on recognition of revenues since revenues obtained from the contracts signed after the end of a trading quarter, could either be related to the first quarter or the following fiscal quarter. Falling of stocks by 42% and fall in expected financial results in the first quarter of 2001 made SEC notice that some accounting procedures of the company were not proper (Soltes 3). If the company achieved the same accounting results through GAAP, it would have implied that there could be other contributing factors other that the use of wrong accounting principles. For instance, there could be misappropriation of funds, which could also be investigated by the relevant authorities. Competition among different companies either trading with similar or different commodities and services is remarkably essential for the performance of a given organization. Competition within the same industry can affect the organization positively or negatively. For example, competition within the same industry may affect the sales of an organization since the organization may not make prodigious sales due to competition for customers purchasing the product or service provided by the organizations in the same industry. On the positive side, competition within the same industry may make an organization advance its services or commodities leading to the development of new services, thus improving the number of individuals seeking services from the organization, which will in turn increase sales and revenues of the organization. Hence, competition matters a lot in determining the performance of an organization. Although Computer Associate experienced competition from other entities, both in and out of its industry, there was no indication to show or prove that it was being affected by the competition. For instance, its revenues indicated an increasing trend from one quarter to the next without experiencing constant income or a drop in the revenues, which could indicate the presence of competition. This indeed was an indication that some actions of the company were questionable, and led to investigations being launched, in the company, to establish the irregularities in the company. The management of the company had developed a culture of being sales-driven. This made the company set sales target for different sales associates. The sales associated received incentives through being paid through commissions. This acted as an incentive, which made the sales associates work towards reaching the assigned target. The more sales an associate made, the more commission he earned. The company gave sales associates motivation through compensations. Sales associates, who met or exceeded the set target, were richly rewarded (Soltes 2). The company had a choice of not of accepting nonperformers. Computer Associates had created a culture of performance, only those individuals with the capacity of performing were accepted by the company. This made the company employees embrace tactical execution of responsibilities rather than seeking strategies to cope with different responsibilities in the company. The company chose to work from analysts opinions. The analysts projected the performance of the company, which made the management handle issues tactically rather than strategically since analysts’ opinions could not be influenced by using strategic criteria. Different set targets were usually influenced by pressures from opinions of analysts and investors. Hence, the company worked on the basis of customer satisfaction. This helped in maintaining the revenues of the company since there was customer satisfaction. Another motivation from the company was the increasing earning per share. This increased the investors confidence, making them invest more in the company. Investors will invest more in a company, where they have confidence in earnings per share. Increased investors in the company led to increased earnings in the company and this helped in maintaining the company’s earnings. According to Richard, it is difficult for one to work in the gray (Soltes 13). It is not an individual’s wish to operate in the gray, but circumstances do force an individual in taking some actions, which may end up him in such a scenario. According to Richard’s letter, one can operate in gray due to various factors. One of such factors includes the culture of a company. It is due to a culture of a company that an individual make operate in gray while consciously knowing, where he is operating. For instance, a company’s culture may be target-driven, where the company seeks to reach a certain sales target or performance target. An individual will do everything, beyond his means, in order to reach the performance target (Soltes 2). This was the case for Richard; since he tried reaching the performance targets set by the analysts of Computer Associates. Another factor, which can lead to an individual operating in gray, is the need to satisfy customers. A company, which is customer-centric, would make managers, and other individuals involved in operations of the company, to operate in gray with the need to satisfy customers. Richard is of the opinion that; different people operate differently based on how they take what they have learnt and apply to business while others take the business and apply, and apply to be business what they have learnt (Soltes 12). Most people apply what they have learnt to business, which is risky. As an individual moves up in the management role of a company, his accountability should increase drastically. This will help an individual in working towards the corporate ethics, which will avoid operating in gray. I strongly agree that it is difficult to operate in gray, and individuals must act responsibly in order to avoid the scenario. Richard was under pressure of performance emanating from the pressure from investors and targets set by analysts. It was through these pressures that made Richard be forced to extend the fiscal quarter. Although it was unethical, Richard ended up acting this way in order to please the investors and work towards maintaining the culture of excellent performance of the company. Placed in Richard’s position, I would not extend the fiscal quarter since this would work against the GAAP provisions. According to the company, it had provided its financial reporting at quarterly level, which implies that extending the fiscal quarter would affect the financial reporting of the fiscal quarters. By not extending the fiscal quarter, the GAAP approaches will be followed, and issues that affected Richard would not affect the actions that I take. Failure to extend the fiscal quarter will not affect the performance of the company since it would follow the corporate ethics. This would imply that individuals involved in different scandals, in the company, would not be involved in the scandals. Conclusion From Richard’s case and letter, it is clear that an individual can act in a managerial position under the influence of the company’s culture. The culture of the company was guided by setting performance targets. These targets were usually set by analysts, who were working against strategies but tactical execution of responsibilities. Individuals should work in favor of corporate ethics in order to avoid violations of set statutes, which can lead to prosecution. Individuals should work based on corporate standards and not based on a company’s need of performance. Works Cited Soltes, Eugine. A Letter from Prison. Harvard Business School, 2011.Print. Read More