Fraud as a Common Unethical Issue - Assignment Example

Ethics Empress Luxury Lines’ case depicts an issue of fraud. Fraud is an unethical practice carried out by companies to embezzle funds from stakeholders. Phil Bailey commanded Kevin Pfeiffer to dig up nearly all the underground wire and cable before the insurance agency arrived. Kevin had conducted a survey of all the damaged underground wires and cables and approximated that their repair would cost about $15,000. Phil had other intentions of defrauding the insurance company. His fraudulent actions requiring Kevin to dig up nearly all the underground wires and cables would have increased the repair costs to approximately $500,000. Phil covered up his ill intentions by saying that the tidy sum would enhance a complete system overhaul. Fraud is a common unethical issue among firms that aim to make money through unscrupulous activities (Richardson p 18). Kevin’s intentions were not for the good of the company, but for his personal satisfaction. Fraud affects a company’s financial statements. It is much more expensive to cover-up fraud when the financial statements are undergoing audit procedures. 2. Fraudulent activities in Empress Luxury Lines have a material impact on various stakeholders. Kevin Pfeiffer, the computer technician is likely to get fired for two reasons; first, he declined Phil’s order to dig up nearly all the underground wires and cables. Phil is Kevin’s supervisor who has the authority to dismiss him on grounds of declining to perform duties (which is also a fraudulent activity by Phil). Secondly, Kevin was still a new hire under probation. He was well aware that failure to heed to Phil’s orders would have dire consequences on his career. His job was at stake as it is evident from what he told Antonio that his integrity did not matter. The orders he declined were performed by Matt, who would also benefit from the abhorrent actions. The insurance company would also have suffered from fraud. The insurance company was defrauded sums thirty times more of what would have been the real amount. Antonio claimed that he had heard rumours that the company successfully defrauded insurance companies before he arrived. Phil’s fraudulent activities brought truth to those allegations. The fraudulent activities had adverse effects on the company’s shareholders and financiers; the main source of capital for the company. The financial statements they received did not reflect a truthful and fair financial operation of the business. In fact, the parties involved in the fraudulent activities embezzled the company’s funds; considering that the CFO was also involved. The company’s employees also suffered from fraudulent activities. Antonio claimed that any employee who would blow the whistle on fraudulent activities was likely to be penalized. The employees did not have any channel for reporting such activities, and there were subjected to fear and threats of being penalized. Auditors would also be interested in the company’s financial statements. They would be responsible for ensuring that information represented in the statements reflects an honest view of the company’s financial operations. 3. According to the deontological approach on moral decision-making, the right decision would have been to repair the damaged underground wires and cables at the cost of $15,000. Digging up nearly all the underground wires and cables to increase the amount received from the insurance company results to fraud, which is an unethical business practice. It would not have been right to commit fraud in such a subjective manner. Phil’s actions would not have been fraud if they followed the bureaucratic channels. Deontological preferences are related to religiosity and perspective-taking (Richardson p 37). If an overhaul for the entire computer system is required, actions towards the process ought to be transparent and involve all the relevant authorities. 4. The utilitarian approach on moral decision-making classifies morality of an action as being the subject of its consequences. The best decision was to dig up the underground wires and cables so that the insurance company can fund the computer system upgrade. Empress Luxury Lines faced a bubble burst during the 1990s which adversely affected the business. The company needed a system overhaul to recover from the recession period. Committing the fraud would enhance business operations since the new computer system would improve the company’s aesthetic value. The utilitarian approach aims at enhancing cognition. Opting for the computer system overhaul would have improved business operation way further than repairing the damaged underground wires and cables. 5. There are multiple policies which a company may adopt to mitigate fraudulent behaviour among employees. Some of the policies should ensure the following; proper authorizations, independent justification of transaction accuracy, adequate supervision, protection of employees, and proper documentation. Proper authorizations would provide a justification for the computer system upgrade. The insurance company ought to assess the computer technician’s report regarding the underground wires and cables. The insurance company would prevent cases of fraud by ascertaining whether the computer system requires a complete overhaul or comprehensive repairs to the damaged underground wires and cables. Auditors are responsible for the independent justification of transaction accuracy. They should compare the company’s financial statements with the financial records to justify whether the transactions were required and followed the bureaucratic channels. Adequate supervision by the management would ensure that there is no collusion between the company’s staff. In the case of Empress Luxury Lines, the company’s CFO (Rodger) colluded with Phil to defraud the insurance company. Employees would feel safe if the company established platforms for reporting fraudulent activities. Efficient internal controls ensure that employees are protected from unfair penalties attached to whistle-blowing. Kevin would not have allowed the fraudulent activity to occur if the company had efficient platforms for reporting such incidences. Proper documentation is a positive internal control to ensure that transactions are not adjusted to cover for fraud. The documentation process ought to be automated to avoid mutilation. The initial report from Kevin would have been documented to ensure that the insurance company is served with the correct quotations for the repair. 6. Kevin debated on calling the insurance company but decided to report to Antonio Melendez. Kevin placed a huge responsibility on Antonio, which had significant benefits for the company but dire consequences on his job. As an employee of the company, Antonio had an obligation of reporting fraudulent activities to the upper-level management. Although he felt that the upper-level management was not keen to thwart the scheme, his job description did not allow him to report to the insurance company. Every employer ought to report any incidences to the top-level management for further scrutiny. Reporting the scheme to the upper-level management would have amounted to whistle-blowing. Although whistle-blowing has dire consequences, the benefits surpass the risks associated with such an act. The upper-level management would have safeguarded the company from fraud. Defrauding the insurance company would have a causal effect to defrauding the company. Antonio would prevent long-term fraudulent activities on the company by reporting the matter to the upper-level management. In the case, Antonio claimed that choosing the right course of action would bear dire consequences. His boss, Rodger, had a significant presence in the fraud due to his position in the company. Reporting the unethical practice and misuse of office by Rodger would mean that Antonio risked losing his job. Antonio also claimed that the whistle-blower was highly likely to be penalized. 7. An ethical climate can be physically induced within a company’s employees. Developing an ethical climate revolves around enhancing positive internal controls (Richardson p 49). Empress Luxury Lines should establish an efficient and concern related internal control environment. Proper internal control measures would enhance a series of steps to guide the company’s employees to make more ethical decisions. The CEO and managers should establish a communication network between them and the employees. An efficient communication network entails vertical, horizontal, and diagonal communication. Such a network would ensure that the employees make more ethical decisions than before. The CEO and managers should also motivate the employees extrinsically to enhance a moral decision-making approach. Motivating employees would ensure that job satisfaction prevail within all employees. The CEO and managers ought to audit employee performance on a regular basis. Audit procedures on employee performance would ensure that they are accountable for all their action; hence, they would be compelled to make more ethical decisions. Reference Richardson, John E.. Business ethics, 07/08. 19th ed. Dubuque, IA: McGraw Hill Contemporary Learning Series, 2007. Print. Read More