Governance and Fraud - Assignment Example

GOVERNANCE AND FRAUD ASSIGNMENT Name Professor Institution Course Date Governance and Fraud Assignment Part 1 Answer the following questions based on the case study: Discuss the ethical issues in the case above with reference to the principles of professional conduct. CMI came into existence as the United Mines Company in the 1870s by an American railway magnate. In 1985, the entity became Consolidated Mines International Inc. with the objective of incorporating mines in Central America and northern South American. In the course of deciding whether to accept the board seat, Alex did encounter two issues, which he did want to raise with Cameron Derry, the CEO of CMI. Firstly, Alex did raise concerns in relation to allegations of the questionable business practices. Secondly, Alex did raise concerns on the political instability in various Latin American nations in which the CMI mines did practice its transactions. In the course of identifying the ethical issues in relation to the case study, it is vital to review the meeting between Cameron and Alex concerning the history of the company, as well as the bad press. During this meeting, Cameron unveils diverse practices of the company relating to the political environment of the physical locations of the company. The company has been dealing with unsavoury organisations engaged in massacre, assassination, kidnapping, and torture of tens of thousands of Latin Americans. Alex notes this aspect of extortion in the course of the meeting. Under the leadership of Cameron, CMI continues to make diverse payments to these organizations for the protection of the employees. The trend has been on the offing since 1997. Nevertheless, the company has no invoices to offer substantive support the payments. In 2002, the institution did focus on making direct cash payment to the organizations for the protection of the company’s employees in the relevant mines within the Latin American locations. The outside legal counsel did provide extensive advice for the CMI to stop making the payments. Nevertheless, Cameron is afraid of what might happen to the employees. After all these revelations, it is the obligation of Alex to make valuable decisions within the board in relation to supporting the perception by Cameron to approve the relevant payments. According to the principles of professional conduct, it is the obligation of the financial and accounting practitioners, as well as professionals to promote ethical and responsible decision-making. In this context, Alex faces an ethical dilemma as to whether to support Cameron on his attempts to have the board approve the payments to inappropriate entities in Latin America. On the other hand, Alex might consider turning on Cameron by voting against the approval of the payments. Another ethical issue from the above illustration is the tendency by Cameron and CMI to ignore documentation of the payments to the unsavoury organisations with the intention of protecting the employees in the relevant mines. The principles of professional conduct demands ethics and integrity in the course of presenting financial reporting. Failure to report or document such payments is a violation of the principle of safeguarding integrity in financial reporting. Thirdly, Cameron seeks to go lobby for the approval of the payments through convincing Alex on the necessity of the payments towards protection of the employees in the various mines. On the other hand, Alex faces the dilemma of doing the right thing, which is voting against the approval of the payments, as well as putting the lives of the employees at risk in the various mines. What should Alex do? Analyse and discuss the case above using AAA ethical decision-making model. It is essential to focus on the integration of the AAA ethical decision-making model with the intention of arriving at the most appropriate decision for Alex in the midst of the above ethical issues (Wells, 2011). What are the facts of the case? In the case, Alex uncovers certain practices of the company in which he is to seat in the board. He seeks to acquire explanation for the practices or engagement of the company from the CEO of the CMI. In the first instance, Cameron informs Alex on the inaccurate allegations by diverse media outlets seeking to damage the image and reputation of the firm. The CEO notes lack of trial at any law court to determine that these are just but allegations or propaganda in relation to the operations and practices of the company seeking to exploit diverse opportunities within the mining industry. Nevertheless, Cameron attests to the fact that the company has been offering approximately $1.7 million to an entity with the intention of gaining protection for the employees. This explanation is not convincing enough because of lack of documentation by the financial department concerning these payments. What are the ethical issues in the case? The ethical issue in this case is whether Alex should accept the explanation by the CEO on the payments, thus voting for the approval of the payments within the board. In agreeing to Cameron’s proposal, Alex would be acting illegal from a professional perspective. In addition, Alex would be negligent of his professional and ethical duties as a board member focusing on promoting integrity in the financial reporting in accordance to the demands and expectations of the target audiences. Moreover, there is an ethical question as to whether Alex should enlighten the board on the revelations concerning undocumented payments relating to protection of the employees in the various mines. What are the norms, principles, and values related to the case? The norms, principle, and values are that financial and accounting practitioners operate on the assumption (by shareholders and others active in the capital markets) of impeccable integrity. In addition, the board has the obligation of assuring that the company is offering a ‘true and fair view’ of its financial situation at the time of audit or any potential examination. The practitioners have the obligation of assuring a company’s financial accounts (Lampe, Finn, Gaa, & Malley, 1992). Anything, which tends to prevent this or interfere with the objectivity of the practitioner, proves to be a failure of the practitioner’s duty to the shareholders. From this perspective, Cameron has been failing to offer quality and appropriate information with lack of integrity on the actual financial performance of the company, thus failure of his duty to the shareholders. What are the alternative courses of actions? In this context, Alex proves to have two options. In the first option, Alex might decide to accept whatever Cameron puts on the table to ignore the irregular cash payments, thus encouraging the board to approve the payments in accordance with the CEO’s expectations. Secondly, Alex might refuse to buy into Cameron’s perspective while taking appropriate actions accordingly in relation to the principles of professional conduct and ethical obligation to the shareholders. What is the best course of action that is consistent with the norms, principles, and values in step 3? The course of action, which is consistent with the norms, principles, and values in step 3 is to refuse to agree to Cameron’s proposal of ignoring illegal payments and taking appropriate action in accordance with the principles of professional conduct (Langenderfer & Rockness, 2006). In the first instance, Alex should consider reporting the initial irregular or illegal payments to unsavoury organisations, which Cameron claims to be for the protection and security of the employees in the mines. Secondly, Alex should consider reporting Cameron for lobbying for the approval of the payments by the board. These actions are consistent with the norms, principles, and values in the third step of the AAA model. What are the consequences of each possible course of action? There are diverse consequences in relation to the possible course of action. For instance, in the first option, Alex might agree to the request by Cameron to ignore the illegal payments or irregular financial attributes. This action might provide the perfect platform for Alex to increase his financial prowess by demanding undocumented payment (bribe) from Cameron to propagate his demands. These aspects will probably increase Alex’s standard of living. Nevertheless, Alex will expose himself to the professional and legal implications in case of uncovering of the engagement between the two. From this perspective, Alex will have the obligation to ‘live with himself’ knowing that he had taken a wrong action, thus continuously indebt of the shareholder and Cameron. In this context, Alex will have to live with the feeling of indebt to Cameron for potential exposure at any time for the engagement in the approval of the irregular payments by the board (Flanagan & Clarke, 2007). On the other hand, the second option would require Alex to make appropriate decision in relation to refusing to be part of the deal with Cameron on the approval of the irregular payments by the board. The course of action will probably have diverse or unfortunate consequences for the client, as well as the adversity in relation to the future of the relationship between Alex and Cameron. Nevertheless, the action will be appropriate in maintaining, as well as enhancing the reputation and social standing of Alex. In addition, the course of action will be appropriate in maintaining the public confidence in Alex, thus consistent engagement towards addressing or serving the best interests of the shareholders. What is the decision? From the above illustration, the most ethical decision in relation to this case should be the second option. In this context, Alex should consider supporting integrity in the financial reporting, thus refusing to engage Cameron and his arrangement concerning the irregular payments. Part: Answer the following questions based on the scenario: Financial Statement Fraud: Olympus’ Case This type of fraud occurs when an employee causes a misstatement or omission of material information in the financial reports of an organisation intentionally. In some cases, financial practitioners or professionals refer to this kind of fraud as the fraudulent financial reporting. Some of the examples include recording fictitious revenues, artificial inflation of the reported assets, and understating the expenses during the reporting. Olympus Corporation is a Tokyo-based entity, which focuses on manufacturing digital cameras and electronic equipment inclusive of the medical imaging equipment (Woodford, 2012). In 2011, Michael Woodford did become the president of Olympus, thus becoming the first non-Japanese president of the organisation. During the same year, he did express concerns in relation to possible inappropriate acquisitions, as well as large payments to the financial advisors by the chairperson of Olympus and an executive vice president (Elam, Madrigal, & Jackson, 2014). In the course of expressing his concern, Mr Woodford did write a letter to the members of the Olympus board with the obligation of questioning the relevant transactions, thus demanding explanations for more than $600 million to unnamed recipients in the Cayman Islands (Woodford, 2012). This led to the commissioning of the Price-Waterhouse-Coopers to investigate the questionable transactions. It is essential to note that the former chairperson Tsuyoshi Kikukawa, as well as other former executives did plead guilty in 2012 for the aspect of covering up losses at Olympus for 13 years since 1990s. From this illustration, it is note that the company’s former president Michael Woodford did blow the whistle to uncover the financial statement fraud amounting to $1.7 billion in 2011 (Elam, Madrigal, & Jackson, 2014). In the first instance, the incident or fraud did have diverse implications on the fraudsters. This is because of the action to arrest seven individuals for their involvement in the case, as well as falsification of the financial statements. Moreover, the scandal or fraud did lead to the death of the Japanese managing director of Olympus Medical Systems following the suicide, which took place in India after the arrests in Japan (Woodford, 2012). On the other hand, the regulators (auditors) did experience diverse implications in relation to their image and reputation within the financial and accounting sector. In addition, the auditors did terminate their contract with the company because of their involvement in the case or the financial statement fraud, thus enabling another firm to take over in the process of auditing the financial statements of the company. Similarly, the victim organisation did have the obligation to encounter diverse implications. One of the influences on the victim organisation was the destruction of the image and reputation of the firm concerning the role or influence of the management team to cover up the scandal from the public domain. Moreover, the institution did have to part with substantive financial resources in attempts to cover up the scandal. Furthermore, the determination of the case did demand the organisation to pay 700 million yen in damages over the 13-year accounting fraud. Asset Misappropriation: Clive Peeters’ Case Asset misappropriation occurs when an employee steals or misuses the organisation’s resources such as cash, false billing, and inflated expense reports. Clive Peeters was an electrical and white-goods retailer with various stores in the case of Australia. In 2009, it came to the public domain that the senior financial accountant did commit $20 million in the essence of payroll fraud, which is an example of misappropriation of assets over 24 months (Fung, 2014). This is through inflating the payroll expenses, thus the perfect platform towards transferring the difference to her bank account. In addition, the senior financial accountant did maintain two sets of financial records with the objective of covering her trails in the asset misappropriation. In 2010, the company did become insolvent because of the payroll fraud, as well as poor sales. Steve Rowarth, the financial controller at retailer Clive Peeters, did focus on the utilisation of face-to-face approach with the intention of informing his boss Greg Smith on the discovery of a rat in the ranks. This relates to the confession by Sonya Causer on her role in the asset misappropriation fraud. It is vital to note the ambiguity in the role of Causer in the course of volunteering to help attempts to aid in the identification of the source of the financial questions or queries (Margret & Peck, 2014). Nevertheless, her influence did focus on altering the numbers with the objective of eliminating the imbalances. The fraud did have diverse implications in relation to the fraudster. In the first instance, the fraudster did have to encounter termination of her contract with the company because of her role in the misappropriation of assets of the company. In addition, she did suffer ethical implications for her influence in the fraud. This relates to the decline in the public confidence in her professionalism in the course of adhering to the principles of professional conduct. In addition, the fraud did have implications of the victim organisation. Firstly, there were financial implications since the fraud played a critical role in aiding the influence of the poor sales to ensure that the company did become insolvent. Moreover, the company did experience massive reduction or decline in the image and reputation because of the fraud, thus decline in the confidence level of the shareholders or potential investors in the company. These aspects contribute to the reduction in the profitability levels of the company at the end of the financial or strategic period (Fung, 2014). Finally, the regulators did experience certain implications concerning the asset misappropriation fraud in the retailing firm. Firstly, the fraud did violate the principles of professional conduct with reference to integrity in the financial statements and reporting by the financial, as well as accounting practitioners in the case of Australia. Secondly, the regulators did have the obligation to punish Causer for her role in the fraud. This is through revocation of her certificate or license to operate as a senior financial accountant for the business entities with reference to the case of Australia. In addition, there was need for the regulators to adopt and implement appropriate mechanisms with the intention of ensuring that such issues do not occur again. Corruption: Hewlett-Packard’s (HP) Case (HP-Russia) This type of fraud occurs when an employee decides to misuse his or her influence in the business transaction in a manner that violates his or her duty to the shareholder or employer with the intention of gaining direct, as well as indirect benefit. In 2010, the Russian investigators did raid HP Russia’s offices in Moscow at the request of the prosecutors from the German Public Prosecutor’s Office. This is because of the continuous investigation of HP for the allegations concerning bribery in connection with the sale of computer equipment to the Office of the Prosecutor General in Russia. Accordingly, there were allegations of HP Germany paying EUR 8 million in bribes to the Russian officials between 2001 and 2006 with the expectations of securing a EUR 35 million contract relating to supply of the art computer system to offer secure communications for the relevant prosecutors across Russia (Goel, 2012). The scandal did come to the public domain through the action of the German and Swiss police to issue search warrants focusing on the illustration of the allegations against ten existing or previous HP Germany employees. In 2014, HP did agree to plead guilty of the charges, thus the obligation to pay $108 million to settle the scandal relating to the bribery of the public officials. Like in the previous fraud incidents, this corruption scandal did have critical implications on the fraudsters. Firstly, the fraud did affect the image and reputation of the fraudster. In addition, the fraudster did have the serve jail term because of the engagement in the fraud while also incurring financial losses. The fraudster did terminate the contract with the company, thus unemployment and revocation of the rights to handle activities and transactions on behalf of the company (Crawford & Searcey, 2010). Similarly, the victim organisation did experience negative implications in relation to the image and reputation within the industry and market of transactions. This associate with the reduction or decline in the cost of shares of the company, thus decline in the confidence levels of the shareholders on the company. The company did face the obligation of hiring new officials to aid in the acting or executing the duties in pursuit of competitive advantage in the market and reputation. The regulators had to deal with the loss or decline in the public confidence in relation to the ability and potentiality of the regulator to handle or identify corruption issues, which might lead to financial implications on the growth and development of an organisation. In addition, there was need for the regulators to focus on the development and integration of new approaches to aid or facilitate in the identification and curbing corruption issues among the business entities (Goel, 2012). These approaches were essential in the course of limiting the essence of the fraudsters seeking to damage the image and reputation of the company within the market and industry of operation. List of References Crawford, D & Searcey, D. (2010). US joins HP bribery investigation. The Wall Street Journal, 16, B5. Elam, D., Madrigal, M., & Jackson, M. (2014). Olympus Imaging Fraud Scandal: A Case Study. American Journal of Business Education (AJBE), 7(4), 325-332. Flanagan, J., & Clarke, K. (2007). Beyond a Code of Professional Ethics: A Holistic Model of Ethical Decision‐Making for Accountants. Abacus, 43(4), 488-518. Fung, S. (2014). Hong Kong Auditing: Economic Theory & Practice. City University of HK Press. Goel, A. (2012). International Anti-Bribery and Corruption Trends and Developments. Lampe, J. C., Finn, D. W., Gaa, J., & Malley, P. L. (1992). A model of auditors' ethical decision processes; Discussions; Reply. Auditing, 11, 33. Langenderfer, H. Q., & Rockness, J. W. (2006). Integrating ethics into the accounting curriculum. Accounting Ethics: Theories of accounting ethics and their dissemination, 2(1), 346. Margret, J. E., & Peck, G. (2014). Fraud in Financial Statements (Vol. 16). Routledge. Wells, J. T. (2011). Principles of fraud examination. John Wiley. Woodford, M. (2012). Exposure: Inside the Olympus scandal: How I went from CEO to whistle-blower. Penguin. Read More