Introduction Ethics are a code of behaviour considered to be morally correct.

Business ethics can provide businesses with moral guidelines in conducting their affairs. An ethical decision means doing what is morally right as opposed to assessing the most profitable course of action. Recently significant emphasis is being placed on the ethical behaviour of businesses where fraud is concern. Fraud is any business activity, which resorts to deceitful practices or devices with the intent to deprive another of property or other rights, or to cause economic injury. In a wider definition, fraud is a deliberate misrepresentation which causes another person to suffer damages, usually monetary losses. Most people consider the act of lying to be fraud, but in a legal sense lying is only one small element of actual fraud. Example: A salesman may lie about his name, eye color, place of birth and family, but as long as he remains truthful about the product he sells, he will not be found guilty of fraud. There must be a deliberate misrepresentation of the product's condition and actual monetary damages must occur. Types of fraud Mail fraud Intrinsic fraud Serious fraud office Insurance fraud Election fraud Journalistic fraud Computer fraud Credit card fraud Accounting Fraud Corporate Fraud

I have chosen to give my opinion on Accounting and Corporate fraud. Accounting Fraud or Creative Accounting Fraud Refer to accounting practices that deviate from standard accounting practices. They are characterized by excessive complication and the use of novel ways of characterizing income, assets or liabilities. Sometimes the words "innovative" or "aggressive" are used. The term is used more seriously and disparagingly to refer to systematic misrepresentation of the true income and assets of business organisations. "Creative accounting" on this scale has led to a number of recent accounting scandals, and many proposals for accounting reform - usually centering on an updated analysis of capital and factors of production that would correctly reflect how value is added. Newspaper and television journalists have hypothesized that the stock market downturn of 2002 was precipitated by reports of accounting irregularities at the Enron, WorldCom, and other business entities. Bruce Dubinsky states that two major motivators behind accounting fraud: greed and ego. He then said that the sorts of people who commit these crimes are individuals with no criminal history. They know the difference between right and wrong, Dubinsky said. However, what happens is that there seems to be a gradual decline in an executives moral standards before the fraud occurs. In most accounting frauds the person started out with moral and ethical standards, but the status quo changed, Dubinsky said. Something changed in their lives. Corporate Fraud or Shareholder Fraud Corporate Fraud or Shareholder Fraud which also took place in these businesses is a form of fraud occurs when a corporation deliberately skews or conceals information in order to appear successful. A corporation may commit fraud by manipulating accounting records, hiding debt, or failing to inform shareholders of loans and bonuses given to executives. E.g. Imclone Martha Stewart 2

How are the Shareholders or Stake holders affected? The term stakeholder refers to a group or individuals who have an interest or stake in an entity in this case an organisation. In corporate terms, a companys stakeholders include employee, suppliers, members of the local community and customers. Each of these groups can affect or are affected by the according to Freeman (1984) actions, decisions, policies, practices or goals of the organisation. Adam Smith emphasize that the responsibility of the firm is to make profits but Milton Friedman expounded this theory by saying that there is one and only one social responsibility of businessto use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud. Thats the orthodox view among free market economists: that the only social responsibility a law-abiding business has is to maximise profits for the shareholders. Corporations have an interest in maintaining a successful front in the eyes of shareholders and securities analysts because investors buy shares of companies that are healthy and growing. Corporate fraud, also known as shareholder fraud, occurs when, to maintain this front, corporations deliberately conceal or skew information. In the case of Enron (see appendix) they projected high profits but in reality they were making high losses. This was being done through partnership with other companies and was concealed from shareholders. A few partnerships that allowed Enron to conceal the debt were:

RADR a group of entities secretly funded by Enron that purchased electricitygenerating windmills from Enron, then later sold them back with some of the profits going to key Enron officials and their families.

Chewco a company formed by executives of Enron in order to buy out the shares of California Public Employees Retirement System (CalPERS) in a joint venture investment partnership known as JEDI. Chewco bought out CalPERS interest in order to retain JEDIs off-balance-sheet status. However, Chewco did not meet the requirements for accounting rules and claimed profits that it was not 3

entitled to. In addition, when Enron bought out Chewcos interest, Chewcos price was driven up, reaping huge benefits for the original investors (Enron execs).

Southampton Enron bought the shares of National Westminster Bank (NatWest) in a limited partnership with Credit Suisse First Boston. Enron paid $20 million, but only $1 million went to NatWest. The remainder of the money went to several executives and their families, as well as to three NatWest employees who were in on the deal.

Another case would be Tyco (see appendix) where the CEO Dennis Kozlowski and CFO Michael Swartz face criminal charges for taking private loans from Tyco in excess of 170 million dollars. The loans, many of which were interest free or fully forgiven, were not revealed to shareholders. Mark Belnick, Tyco's former General Counsel, has also been charged for receiving fourteen million dollars in loans for houses he purchased in New York and Utah. According to consequentialism which notes that we ought to do whatever maximizes good consequences. It doesn't in itself matter what kind of thing we do. What matters is that we maximize good results. We can apply utilitarianism directly by first estimating the likely consequences of each option and then picking the option with the best consequences or indirectly by applying a "rule of thumb" about what kinds of action tend to have good or bad results. Many utilitarians reject rules. They think that any rule should be broken when it has better consequences to do so. So they see moral rules only as loose "rules of thumb." Enron projected that the company is making a profit regardless of how it happens not thinking about the shareholders and stakeholders that are being deceived along but only about being able to persuade investors.

What happens to the Investors? Businesses around the world need to be able to attract funding from investors in order to expand and grow. Before investors decide to invest their funds in a particular business. They will want to be sure that the business is financially sound and will continue to be so in the foreseeable future. Therefore they need to have confidence that the business is being well managed and will continue to be profitable. One look around the Enron board room in 2000 would have instill confidence in any investor who could be assured that the company was in the hands of legal, ethical, political, and economic leaders. Surely they would be sufficient gatekeepers. In addition to Kenneth Lay and Jeffrey Skilling, there were 15 external directors whose resumes were impeccable. These were people with a combined total of several hundred years worth of board oversight. This was proven wrong. In the case of Parmalat, (see appendix) the company projected assets to investors that they didnt owned. An example is the uncompleted sale of a subsidiary, Finmatica Real Estate. The subsidiary sale was reported in Finmatica's 2002 accounts, but is still under negotiation, the Rome daily La Repubblica reported Wednesday. False accounting was discovered at the Parma-based food conglomerate that could push its debt to 10 billion. Under the theory of utilitarianism Parmalat that by projecting un-owned assets they were doing a good in order to keep the company sustainable and encourage investors but the consequentialism view contradicts this theory where Kantian emphasizes that you have a duty to do what is right.

What is the Corporate Social Responsibility of the Firm? The term corporate social responsibility is operating a business in a manner that meets or exceeds the ethical, legal, commercial and public expectations that society has of business. Social Responsibility is a guiding principle for every decision made and in every area of a business. The famous sign on Harry Trumans desk said the buck stops here. This statement means that whatever takes place in the organisation he is to be held accountable for because there is no one above him. Therefore the corporate social responsibility should start with the top executives, where they decide what is right or wrong, good or bad. With the case of Martha Stewart where she had insider information on stock trading and used this information to her benefit by selling off her share in the company Imclone a wee k before the company new drug was rejected and the stocks plummeted. World Com (see appendix) is an example of this where evidence showed that the accounting fraud was discovered as early as June 2001, when several former employees gave statements alleging instances of hiding bad debt, understating costs, and backdating contracts. However, WorldCom's board of directors did not investigate these claims. The board of directors can take a non cognitive stand point and state that they neither knew what is right from wrong because they have no knowledge of what was happening but the cognitive view states that you know what is right from wrong therefore the Kantian theory is a duty to perform the right action.

What problems do the employees encounter? In the case of Enron where employees who have worked and dedicated over fifteen and twenty years of their lives to the company they ended up loosing everything. Their pensions, share bonuses, current wages, even their standard of living. These employees will go through mental, emotional, psychological, etc types of traumas. Carnegie had two principles in his theory of corporate social responsibility, where his view were the charity principle that is requiring more fortunate individuals to assist less fortunate members of society and the second stewardship principle which states that businesses are required to see themselves as stewards or caretakers, holding their property in trust for the benefit of society as a whole. The opposite took place in Enron, where the wealthy seek to make themselves richer. With the theory of justice according to Aristotle, he said a just or morally upright person is one who always does what is morally right and obeys the law, the directors of Enron had no morality to perform their duty of the morally right action and obey the law.

Recommendation In essence, corporate collapses affect us all. Why have such collapses occurred? The answer to this question is linked to corporate governance: a lack of effective corporate governance meant that such collapses could occur; good corporate governance can help prevent such collapses happening again and restore investor confidence. The Enron or World Com, Parmalat and many other cases has sent shock waves through stock markets around the world. To prevent corporate fraud, President Bush instated a Ten-Point Plan to Improve Corporate Responsibility and Protect Americas Shareholders. See Appendix. Corporate governance is an area that has grown very rapidly in the last decade particularly since the collapse of Enron in 2001 and the subsequent financial problems at other companies in various countries. Emerging financial scandals will continue to ensure that there is a sharp focus on corporate governance issues, especially relating to transparency and disclosure, control and accountability, and to the most appropriate form of board structure that may be capable of preventing such scandals occurring in future. Not surprisingly there has been a significant interest shown by governments in trying to ensure that such collapses do not happen again as these lead to a lack of confidence in financial markets.

Conclusion There have been a number of high profile corporate collapses which have arisen despite the fact that the annual report and accounts seemed fine. These corporate collapses have had an adverse effect on many people: Shareholders who have seen their financial investment reduced to nothing, Employees who have lost their jobs and in many cases the security of the company pension which has also evaporated overnight, Suppliers of goods or services to the failed companies, The economic impact on the local and international communities in which the failed companies operated. From a business ethical point of view Accounting and Corporate fraud is ethically and morally wrong and in the process only causes hurt and damages to all parties involve.