Ethical BehaviourJoin now to read essay Ethical BehaviourFor most organizations, values statements are simply rhetoric that sits on a fancy plaque on the wall. The real values are seen in the halls, not on the walls. High performing organizations are clear about their values and about what they translate into in day-to-day behavior. They use their values strategically, to guide every decision and action.
The challenge with values is that they are usually vague concepts that have different meanings to different people. Every person usually has a strong sense of what typical values (trust, hard-work, etc.) mean, but the definitions different people have for the same value are usually not the same.
Most people, for example, may say they have integrity. If asked what integrity means to him or her, what is found is that the internal definition each person has is unique. Thus, while two people may seem to agree on the concept, they may come into conflict when in comes time to put that value into practice in day-to-day action. Although some choices seem common sense to us, others take the less traveled road.
Financial reporting is the latest area hit with the ethical bug. On November 8, 2001, people were shocked when one of the hottest companies of the booming nineties, Enron, admitted to using accounting practices that had inflated its income figures by $586 million over a four-year period (Kadlec, 2002). Less than a month later, Enron filed Chapter 11 bankruptcy, and early in 2002, the Justice Department launched a criminal investigation into the company’s practices. Investigators wanted to determine how much executives knew about the company’s status, as they told their employees to hold their shares of Enron, but sold more than $1 billion of their own (Kadlec, 2002). The company went belly-up, employees’ retirement savings were all but wiped out, and millions of investors lost a total of more than $60 billion (Thomas, 2002). People began to worry.
In 1998, the Securities and Exchange Commission issued a new law, the National Securities and Exchange Lawsuit Settlement (NSRE), authorizing the sale of shares of stock to holders of a private company that was prohibited from using certain practices: (i) holding company stock for the first time, (ii) trading stock, or (iii) stock exchange. The National Securities and Exchange Commission required that securities companies subject to the Securities Exchange Act, including Enron, and other financial institutions, do not use “private shares” the same day they were acquired, even with their full shares (Reiter, 2000; Schulz, 2009). The NSE was the first act to require the public sale of stock (P.O. Box, 1999a). In 2007, the SEC announced its decision to issue a rule that will prevent some and many companies from using stock exchanges, including Enron. The action came on the heels of a letter from Senator John McCain to former President Clinton, saying that in order to allow corporations to use private companies as a means of using stock trading, they had to create a regulatory framework, which was intended to protect both corporate users and investors.
The act requires that under certain circumstances, the SEC (which oversees all of the nation’s securities brokers) and the Internal Revenue Service determine if the securities market is at risk of being altered in order to facilitate the use of other securities. Under the law, companies that can receive securities and those subject to certain provisions of the Act, including the Federal Deposit Insurance Corporation (FDIC), subject to certain conditions, must establish “qualified ownership groups”—places in which securities are traded. A qualified ownership group consists of all of the following:
1. A person’s business interest in or participation in the holding company. 2. The person’s business relationship with Enron. 3. The person’s business relationship with an employee. 4. The person’s business relationship with Enron�s management. The person’s business relationship with an applicant. 5. The person�s business relationship with an agency�s personnel office. (Reiter, 2000; Schulz, 2009)
In the initial round of the new law, a company can sell stock to an individual on a regular scheduled basis, but must only do it “on regular stockholder stock positions” (Stammerbaum, 1998; Spong, 2004). Those positions are not subject to market manipulation rules. It also requires that the company�s financial statement be updated regularly about the potential adverse effects of such practice. Under Dodd-Frank, Enron faced its first regulatory risk: the stock market would be subject to market manipulation rules that were used to allow its stock holdings to increase. When a company decides to share its own information in a securities market, however, those securities are then subject to market manipulation rules. Under the new rules, Enron can sell its own stock to people on certain stock exchanges. The stock exchanges are subject to market manipulation rules, but only to those covered by the securities laws. Once they become public or become part of the securities market, the securities exchanges can only issue securities to those who sell them on them, and to Enron, even if those shares are held within their personal retirement account. In addition to listing on the securities exchanges in the stock market, people must also have the
In 1998, the Securities and Exchange Commission issued a new law, the National Securities and Exchange Lawsuit Settlement (NSRE), authorizing the sale of shares of stock to holders of a private company that was prohibited from using certain practices: (i) holding company stock for the first time, (ii) trading stock, or (iii) stock exchange. The National Securities and Exchange Commission required that securities companies subject to the Securities Exchange Act, including Enron, and other financial institutions, do not use “private shares” the same day they were acquired, even with their full shares (Reiter, 2000; Schulz, 2009). The NSE was the first act to require the public sale of stock (P.O. Box, 1999a). In 2007, the SEC announced its decision to issue a rule that will prevent some and many companies from using stock exchanges, including Enron. The action came on the heels of a letter from Senator John McCain to former President Clinton, saying that in order to allow corporations to use private companies as a means of using stock trading, they had to create a regulatory framework, which was intended to protect both corporate users and investors.
The act requires that under certain circumstances, the SEC (which oversees all of the nation’s securities brokers) and the Internal Revenue Service determine if the securities market is at risk of being altered in order to facilitate the use of other securities. Under the law, companies that can receive securities and those subject to certain provisions of the Act, including the Federal Deposit Insurance Corporation (FDIC), subject to certain conditions, must establish “qualified ownership groups”—places in which securities are traded. A qualified ownership group consists of all of the following:
1. A person’s business interest in or participation in the holding company. 2. The person’s business relationship with Enron. 3. The person’s business relationship with an employee. 4. The person’s business relationship with Enron�s management. The person’s business relationship with an applicant. 5. The person�s business relationship with an agency�s personnel office. (Reiter, 2000; Schulz, 2009)
In the initial round of the new law, a company can sell stock to an individual on a regular scheduled basis, but must only do it “on regular stockholder stock positions” (Stammerbaum, 1998; Spong, 2004). Those positions are not subject to market manipulation rules. It also requires that the company�s financial statement be updated regularly about the potential adverse effects of such practice. Under Dodd-Frank, Enron faced its first regulatory risk: the stock market would be subject to market manipulation rules that were used to allow its stock holdings to increase. When a company decides to share its own information in a securities market, however, those securities are then subject to market manipulation rules. Under the new rules, Enron can sell its own stock to people on certain stock exchanges. The stock exchanges are subject to market manipulation rules, but only to those covered by the securities laws. Once they become public or become part of the securities market, the securities exchanges can only issue securities to those who sell them on them, and to Enron, even if those shares are held within their personal retirement account. In addition to listing on the securities exchanges in the stock market, people must also have the
A few months later, on March 27, 2002, Adelphia Communications announced that it also had financial problems. Founder John Rigas, along with his three sons were accused of using company assets as collateral for loans totaling $3.1 billion to make personal purchases and finance family projects (Lieberman, 2002). The Rigases were removed, the company restated its earnings and later filed Chapter 11 bankruptcy. The value of the stock plummeted, and on June 3, 2002, Adelphia was delisted from NASDAQ (Lieberman, 2002). Even more people became worried about ethics in business.
Later that year, Time magazine declared it to be the “Summer of Mistrust” and reported, “Most Americans – 72% in the Time/CNN poll – fear that they see not a few isolated cases but a pattern of deception by a large number of companies (Gibbs, 2002). And that was before word got out about WorldCom, who announced that an internal audit found improper accounting procedures. Their profits from 2000 to 2002 had been overstated by $7.1 billion, and they said $3.8 billion in expenses had been improperly reported during five quarters. The consequences: 17,000 workers lost their jobs, WorldCom restated its financial results (wiping out all profits during those quarters), and shares of its stock fell in value by 75% (World-Class Scandal, 2002).
There are three distinct bodies that help police financial reporting, and help shield us against these types of unjust. They are the U.S. Securities and Exchange Commission
(SEC), the Financial Accounting Standards Board (FASB), and the Public Company Accounting Oversight Board (PCAOB).The primary mission of the SEC is to protect investors and maintain the integrity of the securities markets. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nations securities self regulatory organizations (SROs). The various stock exchanges, such as the New York Stock Exchange, and American Stock Exchange are SROs. The National Association of Securities Dealers, which operates the NASDAQ system, is also an SRO (U.S. Securities and Exchange Commission, 2004).
The FASB is a private body whose mission is to “establish and improve standards of financial accounting and reporting for the guidance and education of the