A Company Going out of Business due to Ethical Issues - Research Paper Example

A Company Going out of Business Due to Ethical Issues Business ethics is a set of corporate morals and principles that regulate how business operations are conducted in the corporate environment. These regulations seek to streamline the business operations by agreeing on some manner in which business operations will be deemed right and ways in which they will be deemed inconsistent or unethical. So a company that is ethical is one that can discern the right actions from the wrong ones and thus come up with the right decisions to tackle some problem that is inherent (Shaw, 2008). It is the duty of the business organizations to act ethically to promote an enabling environment, which is conducive for business thus, ensuring no single company gets an unfair advantage over the others. Business ethics is not only limited to the manner in which organizations conduct themselves in the business environment but also to the manner in which they respond to legal obligations like adherence to laws & regulations governing the business environment in which they operate. Corporate social responsibility is also another front in which companies demonstrate business ethics. It is not in order for a firm to conduct business in a certain locality and make large turnovers without giving back to the society that is responsible for its success. A business firm will be deemed unethical if it fails to give back to the society in terms of corporate social responsibility activities since the society provides the enabling environment for it to exist and flourish economically (Shaw, 2008). Bayou Hedge fund is an American Company operating in the financial industry. It was established in 1996 by Samuel Israel. This fund group comprised a number of pyramid scheme companies that came together under the umbrella Bayou Hedge fund group. In its inception, the founder Mr. Samuel Israel duped investors to commit their money into the company in the hope that it will triple in a period of less than 5 years. Many investors bought the scrupulous idea and committed a substantial amount of money into Bayou hedge group. Records show that the initial amount of money that was raised by investors was approximately $450 million. The group’s founder convinced the investors who had come on board that in a period of five years that is 1996-2001, the investment would have regenerated to $4 billion. I think the investors failed to conduct due diligence feasibility on their investment as they would have come up with formidable reasons to forego the option of investing in the company, however, the deal was too sweet to decline with the kind of returns that they were promised hence they believed beyond reasonable doubt that their money was in a safe haven (Shaw, 2008). In the early days of operation, the company’s management would defraud its investors by making drawings from the company’s coffers for personal use. This money that was drawn was not reflected in the financial statements. Investors had no knowledge of these dubious operations that were being conducted behind their backs. With poor management in place, the company endured long periods of poor financial performance as the stakeholders’ investment was not safeguarded but rather they were in a bid to defraud those who had committed their money into the scheme. In 1998 the company recorded substantial amount of losses but the investors were not briefed of the same, instead the company management decided to set up their own dummy accounting firm and contracted it to audit the Bayou’s financial books. The auditing firm that was tasked with the job went ahead to provide a misleading reports that covered up the losses that the company had made. In the report that was presented all the losses were understated to give the impression that the company was doing well financially despite the poor turnover. In some instances, the losses would be replaced with gains that were not made by the company. Some gains were also overstated but in an inquiry that was conducted it was revealed that Bayou Hedge Company never made a single gain on its investment since it came into the business (Shaw, 2008). The decision of coming up with a fake accounting firm and tasking it with the auditing job was essentially a cover up scheme as the management of the company didnt want its financial rot to be exposed to the public and more so to the investors who had committed their funds into the company. In 2004, the company’s CEO together with the chief financial officer withdrew company funds approximated to be around $170 million from a number of banks and wanted to transfer the money to foreign accounts but were intercepted in the process. They were later arraigned in court to answer charges of fraud and conspiracy. In 2006, the company filed for insolvency and later was liquidated (Shaw, 2008). Bayou Hedge group of companies came out of business essentially because of the unethical practices that it conducted. To begin with it is evident from the investigations that were later conducted that the whole idea of Mr. Samuel Israel was to come up with a scheme to defraud investors rather than to set up a business that will make a return on their investment. It is indeed morally incorrect to woo people into believing that your business idea is brilliant and will indeed make a good return on investment in a short period of time only to turn around and conspire the very people who trusted you with their money (Shaw, 2008). It is recorded that the Bayou fraud was the costliest in history as no other financial organization has ever gone into that path. It would be understandable if the company conducted business and failed to meet the promised returns than having a straight idea of defrauding investors. Reports from investigation into the case indicate that the company never made any gains since it was founded thereby affirming the intention of Samuel Israel and his co-founder was to commit fraud. Presenting fake audit reports to investors was yet another unethical practice that pushed Bayou out of business. Business just like any other activity has its challenges thus it is prone to make profits at some time and in other times it may run into losses. It involves risks thus a company posting a negative index will not be an astonishing scenario as it is a situation that is prone to happen at some time in life. Bayou hedge group management decided to come up with their auditing firm, which they later contracted to audit the company. The investors feel cheated when presented with incorrect information regarding their investment. The company had posted massive losses as a large fraction of the invested capital was utilized to service debts while others were withdrawn by the company’s top echelon for personal use. It was evident that indeed the company is making no gain but to cover up the whole situation, the audit team came up with a fake report that did not reflect the real financial position of the company (Shaw, 2008). This act is not only unethical to the company’s stakeholders but also it is against the laws governing companies for a company to purport or make false reports for public scrutiny, with the intention of postulating sound financial stability. The aim of Bayou’s management was to cover up its losses and maybe attract additional investors. The regulatory bodies after a thorough scrutiny of the reports discovered inconsistencies, which on further investigation unraveled the whole ordeal. The company had to face a legal suit for its actions and failure to follow the procedures laid down by the relevant authorities and Acts governing the operations of companies. This eventually led to its insolvency and liquidation. In business, drawings can only be made in sole proprietorship or partnership types of business organizations. The company is an entity where everyone has limited liability to the amount of money he/she has invested in the company. The management of Bayou hedge group of companies by engaging in making personal drawings from investors’ money was not only an unethical act, but gross misconduct that is punishable by law, which amounted to fraud. It is against the Company Act for any one individual to make personal drawings from the company’s coffers without approval of shareholders. This was one of the avenues through which investors’ funds were lost, consequently leading to the company making losses and thus, the ultimate loss of invested capital (Shaw, 2008). Right business procedures were not followed as required by law since the management team depicted a number of inconsistencies in its actions. Decision making was centralized in the company as all major decisions were made by Mr. Samuel Israel, who acted as the CEO and Daniel Marino, who acted as the chief financial officer. All other officers and stakeholders were not consulted whenever critical decisions concerning the company were being made. The management was also not accountable to the stakeholders on how they are utilizing their capital as they did not engage the investors through any formal meeting. The tendency to flout the set business procedures lead to the company losing faith from investors who later went to court to apply for its bankruptcy and liquidation. It is not consistent to state that the company was meant to fail since on inception it was able to garner support from a number of willing investors a situation that is not always positive to any new business (Shaw, 2008). Thus, the collapse of Bayou hedge fund would have been averted if the management embraced the right procedures of conducting business and most especially focusing on business ethics. Samuel Israel had a brilliant idea of transforming the investors’ capital to triple in a period of less than five years. As the company’s CEO if he had upheld his moral integrity and ensured that the decisions and business procedures of the company are ethical, I think the company would have lived to be a huge success. For instance if the top management did not engage in fraudulent actions by making personal drawings it means that the investment that was injected into the company was only meant for business thus it would be impossible for the company to run into losses or be indebted (Shaw, 2008). The company would not have caught the regulator’s eye had it genuinely contracted a recognized firm to audit its books and presented a real report. Even if the report would have indicated a negative turnover the investors would have understood that business is always a risk venture whereby you can either make gains or incur losses. Thus, if all the required procedures were followed in presenting the financial reports of Bayou, then the company regulator would not have intervened to necessitate for an in-depth investigation to the company’s actions. That notwithstanding, the management would have been ready for a genuine audit of the companies statements since they would be certain of their actions and decisions, which undoubtedly would have been consistent with the set procedures and Acts. In a nutshell if Bayou hedge fund group of companies had given business ethics priority in its dealings it would have averted its collapse and liquidation because the investors would not have any formidable reason to petition the court to declare the company insolvent if all operations were going down as required and in accordance with the set rules and procedures. Any organization that engages into business will always strive to make profit or maximize the shareholder’s wealth, out of invested capital while at the same time safeguarding the invested capital (Shaw, 2008). If this objectives had been the driving force of the management at Bayou, the company would not have been declared insolvent because they would have had shareholders’ interest at heart, consequently protect their invested funds. Thus, the company would have maintained it liquidity and hence make earnings on investment. Similarly, if ethics had been prioritized in this company, the company would have flourished financially as the investors would be more confident of the company and thus willing to make additional investment. That notwithstanding, new investor would have been easily attracted to this business venture, ready to commit their funds into the business. The massive pool of capital would have given Bayou a competitive advantage over its close market competitors by ensuring it enjoys the benefits of economies of scale (Shaw, 2008). Therefore, business ethics, which is set of corporate morals and principles regulating how business operations are conducted in the corporate environment are imperative determinants of the success of the company because they help streamline the business operations by providing guidelines, rules and procedures that ensure businesses act ethically. Thus, it is the duty of the businesses to act ethically to promote an enabling environment, which is conducive for business operations and considers the various interests of the different stakeholders of the company like the owners of capital in our example. Ultimately, if the CEO and management of Bayou hedge fund group of companies had acted ethically to protect the interests of the shareholders/investors, the liquidation process would have been avoided. Works Cited Shaw, William H. Business Ethics. Belmont: Wadsworth, 2008. Print. Read More