ubmission Instructions:
Submission type: Written Essay 1000 words (minimum requirement)
Format: Times New Roman size 12 body, headings/sub headings size 14. Line spacing 1.5 lines.
Referencing: APA 7th Edition
Text Book Chapter references – Chapter 2
Individual submission
After reading through the material below, discuss the “grey” areas involved with ethics. Provide some examples from your own experiences at school, work, or sports (if you do not have your own example from school, work or sports you may use an external business example with appropriate reference). Are there other ways that the “grey” areas can be eliminated? Be specific from your own examples.
Enron, Tyco, Arthur Andersen, and Computer Associates were all guilty of unethical practices during a period of economic prosperity. Why? Historically, misconduct and bad judgment often have coincided with periods of great prosperity. When attitudes are characterized by “anything goes,” and the market is typified by expanding profits and stocks at full throttle, the economy is at peak danger—greed and prosperity blur the line between right and wrong.
The greatest equivalent of today’s ethical lapses is the Roaring Twenties and the stock market crash of 1929. This period was made notorious by, among other people, Ivar Kreuger. Kreuger founded an international conglomerate in wooden matches by lending money to foreign governments in return for nationwide match monopolies—the money from such loans came from the sale of stock. Later, an audit of his books revealed that $250 million in assets never really existed. Eventually, all this activity led to the creation of the Securities and Exchange Commission (SEC).
Today, the possibilities to create spectacular financial debacles have increased due to more complex financial vehicles that take advantage of the “grey” areas in accounting. The following list explains five ways investors are demanding more information from companies to ensure that corporate accounting is not finagling the financials.
Bring hidden liabilities back onto the balance sheet. It was the disclosure of billions of dollars in off-balance-sheet debt tucked away in special-purpose entities, or SPEs (entities created to hide potential losses or debt from public view), that brought Enron’s problems to the forefront. Though they are legitimate, SPEs have been controversial for nearly 30 years. Current practices allow removal of an SPE from the balance sheet if an investor is willing to contribute just 3 percent of its capital.
Highlight the things that matter. Anything less than 5 or 10 percent of earnings or assets generally was considered immaterial to overall performance and allowed to be left off the statements. Now the SEC and the Financial Accounting Standards Board are evaluating the qualitative factors in addition to the quantitative factors.
List the risks and assumptions built into the numbers. Corporate “guesstimations” can play a large role in corporate earnings; from future demand of a product line to discounted rates due to risk factors, investors are demanding to know the assumptions.
Standardize operating income. Standard & Poor’s has made a proposal for what should be included and excluded from pro forma operating earnings. Currently, there is no uniformity to detail what companies add and subtract from the net income to generate their pro formas.
Provide aid in figuring free cash flow. Analysts currently calculate free cash flow themselves by utilizing past results. Investors are, therefore, left to guess what information should be used.
Sources: Heesun Wee, “The Dirt a Bull Market Leaves Behind,” BusinessWeek Online, June 13, 2002, http://www.businessweek.com/bwdaily/dnflash/jun2002/nf20020613_1338.htmLinks to an external site. (accessed April 10, 2008); and Nanette Byrnes, “Commentary: Five Ways to Avoid More Enrons,” BusinessWeek Online, February 18, 2002, http://www.businessweek.com/magazine/content/02_07/b3770056.htmLinks to an external site.(accessed April 10, 2008).
