Should Pete Rose be punished more harshly if he profited from betting on the failure of a team he managed?

Think about: what limits should there be on insider trading?  In the USA, Pete Rose was a popular baseball player, and the manager, who was punished for betting on his own team to win.  Should Pete Rose be allowed to profit from betting on the success of a team he managed?  Should Pete Rose be punished more harshly if he profited from betting on the failure of a team he managed?

  • In the Enron case, several managers sold all their Enron stock about an hour before it became public knowledge that the company was not worth as much as everyone thought. Should a manager be punished for acting prudently based on knowledge they have discovered honestly only because the general public does not have that knowledge?
  • Should managers be required to disclose private information they have that might influence the investment decisions of the public?  Also, address the question of timing about the dissemination of information: is it enough to share information on a public website or should a formal press conference be required?  

What limits should there be on insider trading? 

            According to Investopedia, there are 2 types of insider trading, legal and illegal. The illegal insider trading is basically where some insiders made a trade based on non-public information(Investopedia,2017).

In the USA, Pete Rose was a popular baseball player, and then manager, who was punished for betting on his own team to win.  Should Pete Rose be allowed to profit from betting on the success of a team he managed? 

            This is a difficult decision because as a manager Pete should do train the team to win in every match. And if Pete wants to bet on his team, this might show his confidence on his team and the job he has done on them. But then, that might not be correct thought process all the time. The team might play against a very weak team and Pete might want to make a profit on that opportunity. Or being a manager, he might get information about strengths and weaknesses players have or he might get information such as one key player is not playing that match, considering all the statement I would say he should not be allowed to bet, even if his motivation is just that he thinks he has done a good job and his team deserves to win, his prize will come as match win or tournament win and he would be retained as manager for next season.

Should Pete Rose be punished more harshly if he profited from betting on the failure of a team he managed? 

It should really depend on the situation, if Pete wants to bet against his team, because he thinks his team is not good enough to win against the opponent, and he makes this decision based on the information available to him, he should be punished. But there could be another scenario, which in my opinion would be worse, being a manager he can sabotage the team, say he does not allow a key player to play or changes strategy in a way that he knows would make his team lose, just because he wants to make big money on his bet against his team, I think in that case he deserved to be punished harshly. It is not only betting, it is cheating too.

In the Enron case, several managers sold all their Enron stock about an hour before it became public knowledge that the company was not worth as much as everyone thought. Should a manager be punished for acting prudently based on knowledge they have discovered honestly only because the general public does not have that knowledge?

            I would like to argue that if a manager sees the stock price going down and simply sales his stock because he wants to protect his capital or hard-earned retirement money, this selling should not be illegal. And if he has honestly discovered the information at work or someone, and if his life savings is in the stock, I think he is right to sell his position. He might be a father, a husband who has financial obligations. If he thinks it is not ethical to sell before everyone knows and waits till his stocks become worthless, the SEC or public will not reimburse his loss or fulfill his obligations.

But according to SEC “Corporate officers, directors, and employees who traded the corporation’s securities after learning of significant, confidential corporate developments;”. So the managers who sold their stocks before it became public knowledge that Enron’s stocks should not be as much as it was then. So they did the trade based on inside information and broke laws, so they would be punished.

But, I would like to think of another scenario, in which there was at least one manager who was not part of the scam that went on, and who invested in Enron’s stock because he believed in his employer, but then when everyone sales in large quantity in the market usually stock price falls. And the sudden fall might have triggered this manager to sell his stocks to save his capital. I do not think, this fictitious person should be punished because he happened to be the manager in Enron and an Enron stockholder.

Should managers be required to disclose private information they have that might influence the investment decisions of the public?  

If the private information is regarding the corporation and might impact the market capitalization of the corporation valuation positively or negatively then the minority shareholders or the potential minority shareholders should find the information out. So I would say, yes. Managers should be required to disclose private information they have that might influence the investment decisions of the public.

 Also, address the question of timing about the dissemination of information: is it enough to share information on a public website or should a formal press conference be required?  

First, let us revisit the benefits of having the information available on a public website and having a press conference, so we can decide what will benefit investors most. An important thing to remember (although it varies with time) in 2012 53% of Americans had some form of investment in the stock market (Merrit, n.d.).

A public website is accessible to all, as long as they have access to the internet and they have the knowledge about where to go to find the information. And a public website is like an archive, I can visit SEC and get historical information too. One more point, now we live in a more connected world, an investor from another part of the globe can access the website too. But, we have to note here that 11% of US adults do not use the internet according to Pew Research (Anderson, 2018).

Now thinking about a press conference, people can get the information on newspaper, TV, and websites, considering all media houses have their websites. But, an Investor might not always know which media house is covering the press conference and which is not covering it. Considering the information is available in one common public website along with press conference, that will be good, because I think the information will reach a larger audience, but only press conference might not work, because all companies might not be covered by all media houses, then information will remain scattered and it will be difficult for investors to follow.

References –

Investopedia staff (March,2017). What Investors Can Learn From Insider Trading. Retrieved from https://www.investopedia.com/articles/02/061202.asp           

Retrieved on 7/15/2018. Retrieved from https://www.investor.gov/additional-resources/general-resources/glossary/insider-trading

Anderson, M , Perrin, A , Jiang J. (March, 2018). 11% of Americans don’t use the internet. Who are they? Retrieved from http://www.pewresearch.org/fact-tank/2018/03/05/some-americans-dont-use-the-internet-who-are-they/

Merritt, C (n.d.). What is the Percentage of Americans who invest in the Stock Market? Retrieved from https://finance.zacks.com/percentage-Americans-invest-stock-market-6880.html

Corporate Social Responsibility

Abstract

Kirk’s firm wants to build another manufacturing plant that would not have state of the art waste management facility and that means, it is will be harmful to the environment, although it will comply with federal regulations. Kirk is not happy with that and we will see what Kirk can do given the situation where he has some responsibilities towards his employer and his employer has other priorities, we will discuss those points in the paper.

Keywords: ethics

Relevant Facts –        Following are the facts we get from the information available to us –

Kirk is an assistant controller for one year and he is being groomed for a midsized manufacturing firm. Kirk accumulated financial data which is used by the firm to make decisions.

Chemical engineer John mentioned that the current waste facilities were not adequate to handle the waste products to meet current industry standards. Although it would meet federal standards.

Kirk’s boss Henry mentioned the cost per unit will go up if the waste treatment facilities were upgraded to meet the current industry standard. The president, Bob mentioned, that the closest competitor does not have the waste management facilities that they have, so he was not ready to upgrade from their current waste treatment facilities.

Current industry standards for waste treatment are stringent than federal requirements, but environmentalists are pushing for stronger laws at the federal level. So, Kirk’s firm is not breaking any federal law right now, but in future in federal requirements change, then the firm might need to upgrade their system.

Kirk did not pay attention to rest of the meeting and kept thinking about what he heard, seemed like Kirk is very serious about the environment.

Ethical Issues –

            Kirk seemed like a person who cares about the environment and wants to work for a firm that has the same values and ethics as he does. The ethical issue, in this case, is mainly, president of the Firm declared that they are not going to install the best possible waste treatment facilities, just because their competitor does not have any better waste treatment facilities, and the other reason is, they will meet federal requirements with whatever they have at the moment. But, Bob was not ready to spend more money to do whatever best was possible to protect the environment. And Kirk has an issue with the mindset or approach his firm was going to take.

Stakeholders –

One vital point is the environment in danger because manufacturing firms do not want to install better waste treatment plants. The direct stakeholders are of course Kirks employer, the manufacturing firm, their competitors, federal government – since they can make the stricter regulations to force these corporations to upgrade the waste treatment plants, the environmentalists, because there is the group who are trying to push federal government to bring in stricter regulations and since these waste treatment plants are environmental threats, so anyone who is living nearby are stakeholders, along with the customers and shareholder and leadership of this corporation ( kirk’s employer and their competitions).

Possible Alternatives –

            Kirk has few options here-

Kirk can find out exactly how much it would cost to build a state of art waste management facility that could be industry standard, better than any competitor and federal requirements. He can present that information to Henry, his manager and try to explain how it will improve the brand. And with all the real numbers, the corporation can actually understand how much it will impact the input cost.

Kirk can find out, when Federal requirements go up, what environmentalists are pushing for, what it would cost the corporation to upgrade, most probably the downtime and scrap the current waste management facility would cost them more. He should highlight that.

Kirk always has the option to walk away from the situation doing nothing, but that will solve any problem, so it is not ethical.

Kirk can decide the environmentalist group after quitting the job and tries to stop the firm from building the plant or pushes the federal government to bring in tighter regulations. But there is no evidence that if one more person joins the environmentalist group it will succeed.

Ethics of the Alternatives –

If Kirk joins the environmentalists after quitting his job and pushes Feds for new regulations of waste management that may or may not work. But, that would be an ethical option for Kirk. But, that might not be a practical option for Kirk, because currently, he has a good career which he can continue and explore other ways to stop his firm from destroying the environment.

            If Kirk just ignores or quits his job that will not change anything until federal regulations make the manufacturing companies have better waste management facilities. So, this is not an ethical option for Kirk.

            Kirk should take the “utilitarian” perspective and show the cost and benefits. Kirk needs to find out the cost if the federal regulations change as expected, how it will impact the firm, he can present to the management, how installing best waste management facility will help them. They will be able to set an example, avoid future downtime and expenses.

Every stakeholder, in this case, has a right to pollution free environment, and the firm should absolutely take every possible measure and try not to harm the environment. Moreover, if the firm violets the future regulations it might be fined by the government, but having a better than expected waste management facility will ensure that they do not violet any environmental laws. For example, in the last 3 years, the Chinese government has punished 33 multinational companies for not complying with environmental regulations (Worldwatch Institute, n.d.).

Practical Constraints

            Kirk might care for the environment but Bob cares for more profit and the rest of the people in meeting agrees with him. So, it is not going to be easy. First of all, they are already complying with federal regulations, and Bob and the management would know with a change in the president, environmental deregulations might take place to boost business, regardless of what environmentalists want. One example would be, the current administration has loosened regulations to make it easier for sectors to do business, and the idea behind this is to boost jobs. According to the New York Times, the US administrations have sought to reverse more than 0 environmental laws (Popovich, 2018).

And the next constraint is the additional fund required to build the waste management facility, Kirk does not know if the firm has the capital or if they will have to borrow and how much.

3rd point would, if they install the waste facility, then the input cost will be increased for the product and that will make the firm less competitive, Kirk will need to figure out if there is any way to keep their product still competitively priced.

Specific Action –

Kirk should try to get the necessary numbers to find out how much an ideal waste management facility would cost and in case the firm goes with the current waste management facility and federal regulation comes in later, how much that would cost the firm. Once he does the calculation, he needs to figure out how to offset the increased input cost and how to keep their product competitive. One way to keep product competitive would sell their product in special or premium product segment and stores such as Whole foods. Kirk’s employer is a for-profit corporation and it has responsibilities and accountabilities towards its shareholders, employees and customers to mention the least, so not going ahead with the project or making a loss on the project/product is not practical and desirable. Kirk needs a plan that will make the project viable and keep the product profitable, so this would be my suggestions to Kirk.

References

Popovich, N , Albeck, L. Pierre, K(July,2018). 76 Environmental Rules on the Way Out Under Trump. Retrieved from https://www.nytimes.com/interactive/2017/10/05/climate/trump-environment-rules-reversed.html

WORLDWATCH Institute (n,d). Multinational Corporations Violating China’s Environmental Laws and Regulations. Retrieved from http://worldwatch.org/node/4764

Is there an ethical duty of DDT manufactures related to their export of DDT to countries that do not ban its use as the USA does

  • Corporations often “vote with their feet” in terms of doing business where expenses are lowest and revenues are highest. Buying low and selling high is a basic economic formula for success that has motivated international trade in many ways over the centuries.  This is popularly discussed when governments consider tax policies and is also applicable when they also consider the less obvious factor of environmental protections laws. If Mexico has no ban on DDT (a pesticide used in agriculture) and the USA has banned the use (but not the manufacture) of DDT, should a corporation buy land in Mexico, import DDT from the USA, grow larger crops, and export them to the USA?
  • What ethical duties does the corporation have to the workers in Mexico, the neighboring landowners, and the USA consumers about the potential dangers of using DDT?
  • Is there an ethical duty of DDT manufactures related to their export of DDT to countries that do not ban its use as the USA does

Hi all,

I want to show (as much as possible) both sides of the coin here. I do not want to claim that usage of DDT is justified, but the point I will try to make is why corporation usage DDT on the first place. So, if you think corporations should not use harmful chemicals, please know I am on your side.

DDT or dichloro-diphenyl-trichloroethane was developed as synthetic insecticides in the 1940s. It was initially used to combat malaria, typhus, and for insect control in crop and livestock production (EPA, n.d.).

Around the planet more than 3 billion people are in risk on malaria.in 2010 malaria caused .7 million deaths, mostly in Africa. DDT is used to control malaria in Africa, it is not expensive and works for long time (Dasgupta, 2012). 

All over the world, DDT is used on 300 agricultural crops to keep the pest away (Kapoor,2010).

So to play devil’s advocate, we can see how DDT is used to prevent malaria or grow more food to feed hungry people. We can argue that there must be organic alternative to DDT, I am sure there is, but those are not as cheap as DDT is and there countries those use DDT do not have resource to afford those alternative.

Before I answer the actual question, I will quickly summarize why DDT was banned on the first place. DDT is very persistent in the environment, and even after stopping the usage, DDT still exist. DDT accumulate in fatty tissues and has found to cause tumors in some animals. And for the same reason DDT is classified to be human carcinogen. PA banned use of DDT in 1972 for these reasons (EPA,n.d.).

The USA has banned the use (but not the manufacture) of DDT, should a corporation buy land in Mexico, import DDT from the USA, grow larger crops, and export them to the USA?

Now that we understand the adverse effects DDT has on humankind or animals, no corporation should use it anywhere on this planet. Buying a land and using DDT there will expose Mexican people to DDT and American people who will consume the grains or whatever is grain using DDT will be exposed to DDT too.

EPA banned DDT in the USA for its effects on environment, people and animals, and if a Corporation buys a land in Mexico, usage DDT there to grow crops and export it back to USA, it is unethical, since they would knowingly affect environment and people in both the USA and Mexico.

What ethical duties does the corporation have to the workers in Mexico, the neighboring landowners, and the USA consumers about the potential dangers of using DDT?

The main ethical duty would be not use anything harmful that is harmful to environment, people and animal. In order to make more profit they might cause cancer among the workers in Mexico, the neighboring land owners, their livestock, the Mexican people who consume the food and the people in the USA who eat the food from those lands. Just to give another perspective, in today’s world of social media, people from all around the world are united on platforms like Facebook, twitter and other social platforms. And if the corporation choose to use DDT in Mexico, there is a fair amount of chance that customers in the USA will find out about that and as a result there will be a irreparable damage to the corporations reputation.

As an ethical corporation, they should educate workers in Mexico, the neighboring landowners and the customers in USA about harms of DDT. And now educating people does not take lot of resources, it is as easy as making some videos and upload those on YouTube or Facebook, or putting some boards near the farmlands.  

In the USA there is a clear trend among customers to choose to eat organic, so if the corporation does not use DDT and use Organic method to grow food instead, there is a higher probability that the corporation will do better in Mexico and in the USA.

Is there an ethical duty of DDT manufactures related to their export of DDT to countries that do not ban its use as the USA does?

If the corporation is ethical then they should not manufacture DDT on the first place, knowing their product is putting the whole planet, the humankind and animals at risk. But the counter argument from the corporation would be, there are countries those allow using DDT, and if we do not sell them they will get it from somewhere else anyway. In this scenario, the corporation (DDT manufacturer) should be ethical enough to educate the countries and customers about harmful effects of DDT. Now, there is a possibility the countries already know about those effects, and still choose to use DDT. This DDT manufacturing corporation should divert there resources to produce some alternative to DDT which won’t be harmful and not costly, so they can offer a viable alternative and yet do not lose business and customers.

Given the fact that since 1996. EPA is trying to ban usage of harmful chemicals such as DDT around the world, it will be only wise to divert resources to research and develop alternative to DDT those are not bad as it is.

References –

Retrieved on 7/7/2018. Retrieved from https://www.epa.gov/ingredients-used-pesticide-products/ddt-brief-history-and-status

Dasgupta, S (October, 2012). Health Costs and Benefits of DDT Use in Malaria Control and Prevention. Retrieved from http://blogs.worldbank.org/developmenttalk/health-costs-and-benefits-of-ddt-use-in-malaria-control-and-prevention

Kapoor, C(April,2010). Benefits of DDT. Retrieved from http://benefitof.net/benefits-of-ddt/

Conflicting Clients

Abstract

We are going to explore the relevant facts from the case study, find the ethical issues, find choices for Jenifer, constraints, and then finally we will recommend what Jenifer should do.

Keywords: ethics

 Relevant Facts – ‘Fantastic Developments’ a private company is a potential client of Coshocton National Bank (CNB). Jennifer Grace, who is working on current year audit for CNB came to know that ‘Fantastic Development’, which had a bad financials, had applied for a loan to CNB with and excellent unaudited financial statement.  Jenifer did an audit on Fantastic Development in the last financial year and found out about the companies struggling financial condition.

            When Jenifer tried calling CFO of ‘Fantastic Developments’ she got to know that the company is doing well, as a result, the unaudited financial statement and more interestingly, she got to know that Fantastic Developments has engaged a new CPA firm for its accounting and auditing needs. That made Jenifer wonder, if ‘Fantastic Developments’ had anything to hide, in other words – if the unaudited financial statement she found during auditing CNB, might not be correct.

The fact of the matter is, Jenifer did not have a way to confirm her suspicion since her firm was not going to audit ‘Fantastic’ anymore, and there was no direct way to validate it. And Fantastic Development is a private company, so they are not going to make their finances public either, so there is no way to go to SEC and validate their financials.

Ethical Issues – In this situation, the ethical problem or dilemma, Jenifer knew about bad financials of the ‘Fantastic Development’ company (her former client) and wanted to share her suspicion with CNB (her current client), to warn them, but she did not have any proof to back her suspicion. Just based on suspicion going to CNB would not have been professional either. But then, there is another point we have to consider, ‘Fantastic Development’ was a former client, which is a private company, so probably it was not ethical for Jenifer to disclose their information to CNB ( her current client) without Fantastic’ s consent.

Jenifer, as an auditor of CNB, had the responsibility to find out problems and alert her client about them. And she found one potential problem. So here is another ethical dilemma. To fulfill her current responsibility ethically, she had to break the confidentiality of former client, and that too, based on a knowledge which is not current, and from last financial year, and there was no way she could substantiate her suspicions.

            In case Fantastic Development is really trying cheat CNB with a fake financial statement, then informing CNB about that, and saving CNB from a potential loss making a deal is Jenifer’s obligations towards, CNB’s management, customer, shareholders.

            On the other hand, if Fantastic Development’s financials are still bad like Jenifer suspects, and if they do not get the loan from CNB, then they can go bankrupt ( at worst case) and employees can lose jobs, management can lose their business and money.

Identifying Stakeholders – In this particular case, there are 3 parties involved, CNB, ‘Fantastic Development’ and Jenifer’s Audit firm. Stakeholders are shareholders, customers, employees, managers of all 3 companies. If anything bad or good happens these stakeholders feel the direct impact. So what Jenifer does right or wrong or what Tom Ward the CFO of Fantastic Development does right or wrong, impacts all stakeholders mentioned above.

Possible Alternatives – In the given situation Jenifer had few alternatives –

  1. Do nothing, complete audit with provided information, do not inform CNB
  2. Or she could inform the whole incident to CNB management and take it forward
  3. The last option was quitting CNB, in that way should have escaped the whole situation.

If Jenifer decides to let it go and not to inform CNB, that might result in a loss for CNB. Assuming Jenifer would still be the auditor, she won’t be able to do anything, even if she decides to tell the CNB management about her prior knowledge. So, letting it go is not ethical as it might result in a loss for CNB and ‘Fantastic Development’ would get away with the financial crime.

      2nd option is to inform CNB about what Jenifer knows with the disclaimer that she was the auditor and she knew that the company had bad financials, and she suspects that the financial statements ‘Fantastic Development; has provided is fake. As long as doing this does not violet Jenifer’s company policy, there is no problem doing this, in case it does violet a policy she should seek her management’s consent first. Trying to help current client seems to be ethical, fulfilling her professional responsibilities and obligations. But this is not legal, AICPA Code of Professional Conduct includes a new Confidential Client Information Rule under Section 1.700.001, which expands the guidance on maintaining the confidentiality of client information (Blatch, 2015).Per this law she cannot divulge one client’s information to anyone else. Although, it might appear that since she is not going to work form ‘Fantastic Developer’ anymore, she does not have a professional obligation to serve their interest. Moreover, as a client, CNB has a right to know about any potential fraudulent financial statement. As long as Jenifer does not violet ay code of conduct, it is only justified that she tries to fulfill her professional obligation by providing the information she has to CNB and make them aware of the situation.

      Trying to leave the situation is not going to professional, although she might avoid any obligation, this option is neither ethical nor responsible.

Practical Constraints – Jenifer might face few practical constraints, even if she wants to let NBC know about what she knew about “Fantastic Developer’s” financials. The first constraint might be her own company policy that might stop her from disclosing client’s financial information to another client. And Jenifer needs to talk to her management and compliance team to get an exception. If Jenifer violets, some laws or company policy, that might end up badly for her.

Next constraint is, Jenifer does not have any proof that Tom Ward did not tell her the truth. The company might have really turned around. Since the company is private, they won’t disclose their finances to the public or to SEC. And the financial they have provided to CNB are unaudited, so they can claim later that there were some mistakes.

With so many changing parts, it will be hard for Jenifer to go to CNB management and make a compelling point. Since she is auditing them for the first time, she does not have a great relationship either ( I am making an assumption here). So, in case Jenifer’s suspicion turns out not to be true, she will lose credibility. And the CNB might think, Jenifer is not an Auditor they can trust their information with, because in future she can go to another client of CNB and disclose their information to them. So, Jenifer might get fired.

Specific Action – Jenifer should talk to her leadership team and compliance team first, to find out what she should do in this situation. Most probably, she cannot legally disclose one client (previous or current) information to another client. But, if her superiors or compliance team or the organization policy stops her from disclosing information to CNB, she can always do her professional duty in another way. She can highlight to CNB that “Fantastic Developer’ is a private company and their financials are not available to SEC, so they should ask for audited financial reports. The PCAOB’s rules require auditors to provide “reasonable assurance” that the financial statements they’ve reviewed “are free of material misstatement whether caused by error or fraud (Johnson, 2010).” If possible she should recommend getting prior financial reports too, just to make sure they have a consistent cash flow to repay the loan they intend to take. But, before making these recommendations, she should check with superiors, just to make sure this is the acceptable approach to address the issue.

References

Blatch, M ( March, 2015). AICPA’s revised confidentiality rule and Sec. 7216. Retrieved from https://www.journalofaccountancy.com/issues/2015/mar/aicpa-confidentiality-rule.html

Johnson, S (April, 2010). What Is the Auditor’s Role in Finding Fraud?. Retrieved from http://ww2.cfo.com/accounting-tax/2010/04/what-is-the-auditors-role-in-finding-fraud/

Explore how Enron and Arthur Andersen might have been encouraged to act ethically other than direct legal pressures.  

Oversimplifying the case of Enron and Arthur Andersen, Enron was using some accounting practices that were questionable. Because Arthur Andersen was an independent auditor, they were responsible for reporting any questionable accounting practices might be risky to the shareholders of Enron. The Security and Exchange Commission was responsible for requiring and publishing accurate information about Enron’s accounting information. In the end, a few Enron employees went to jail, and Arthur Andersen stopped doing business under that name.

Identify what you consider any conflicts of interest in the case of Enron and Arthur Andersen.

  • What could have been done to avoid the conflicts of interest you identified?
  • How would you change the laws to correct the problems that came up in the Enron and Arthur Andersen case?
  • Explore how Enron and Arthur Andersen might have been encouraged to act ethically other than direct legal pressures.  

Enron was Andersen’s one of biggest clients and the firm was generating $1 million in audit fees along with other fees to Andersen’s consulting firm, Accenture. Since Enron was a client, Andersen managed 80% of Oil and gas industry companies to sign up as clients.

In 1998 when Andersen implemented their “2X” strategy to double there revenue, Andersen started doing more than one a year external audit and  they hired 40  of Enron’s entire internal audit team, added their own and open a office in Enron’s headquarters. Andersen used to attend Enron meetings and helped shape new businesses while doing audit of their books. This was clear case if conflicts of interest.

What could have been done to avoid the conflicts of interest you identified?

Arthur Andersen should not have become a partner of Enron. From another aspect, they turned in to internet audit team. A report by Enron’s law firm, who were investigating an employee’s allegations of improper accounting, concluded that Andersen auditors reviewed and approved of transactions by Enron-related partnerships that contributed to the company’s collapse (Eichenwald, Oppel, 2002). These transactions and partnership deals helped Enron inflate the stock price. While the Enron audits were handled in the accounting firm’s Houston office, the report also makes clear the involvement of Andersen executives at the firm’s Chicago headquarters (Eichenwald, Oppel, 2002). That essentially means that although Andersen was a decentralized corporation, but the work they did for Enron was known to the Andersen’s headquarters.

Enron should not have consented Andersen to hire it’s 40 internal auditors and, open an office and start the whole onsite operation that they did, and Andersen should have done just once a year auditing like what they were supposed to do, to check Enron’s books to find issues and fix them. Instead of finding problems in auditing Andersen became partner in crime with Enron.

But then Andersen should not have pursued the opportunity either, or should have maintained their professional integrity and do what they were expected to do by the SEC and the investors of Enron. But, we can see how it worked out, the partner had pressure to double the revenue from the account, and Andersen made a deal with Enron to help them with their accounting to boost revenue. While doing that they helped Enron with the transactions and partnerships that caused Enron to finally go bankrupt.

How would you change the laws to correct the problems that came up in the Enron and Arthur Andersen case?

            The laws should have held Enron management responsible and accountable for all deals and transactions they do, and they should have disclosed all the details of transactions and partnership information to their external auditors for accounting purposes. The management should have skin in the game too, they should not be allowed to sell your stocks before company went bankrupt, or even if they sell, by law the money should be recovered from them, if the company does not go bankrupt for legitimate reasons.

            Law should have prohibited Andersen to participate in Enron’s meetings, transactions etc. Andersen being auditors should have been an external watchdog. And auditors should be liable for verifying information they get from management of client and then doing the accounting and reporting numbers. Any mistake should cause heavy fines and sanctions.

According to Lynn Turner, former chief accountant of the Securities and Exchange Commission “Sarbanes-Oxley was legislation passed by Congress in the summer of 2002 and then signed by President Bush. In it, about half of the language deals with setting up a new regulator for the accounting profession called the Public Companies Accounting Oversight Board that oversees the audit firms. The rest of the legislation deals with some important things like ensuring that management is held accountable for the financial reports that they file with the SEC. It improves the independence of corporate boards, as well as the independence of the auditors, and it increased some of the penalties for those who shred documents or violate the security laws (Norris, 2005).”

Explore how Enron and Arthur Andersen might have been encouraged to act ethically other than direct legal pressures.  

            In a capitalistic society competition between firms is inevitable. Both Enron and Andersen wanted to grow. As we could see how their management forced employees to generate more revenue. And management team of Enron and Andersen have amazing amount of confidence that they thought they would continue what they were doing without getting caught. When the management of any corporation is corrupt it is hard to do anything to change grown men or women. But since, we are exploring what might have been encouraged Enron and Andersen to act ethically other than laws, would be organization policies built around organizational values and professional integrity.

            Both Enron and Andersen were for Profit Corporation, no one expected them to act like not for profit organizations, but they should have had policies for each employee, reminding what their corporations stand for, their vision, their mission and ode of conducts. Especially Andersen employees should have had reminded of their professional responsibilities, and the fact that how many people’s future depended on their shoulders though 401k and retirement accounts. And the policies should have had the basic point, that there is no short cut to success, of course in more professional language.

References:

Oppel, R , Eichenwald, K(Jan,2002). ENRON’S COLLAPSE: THE OVERVIEW; ARTHUR ANDERSEN FIRES AN EXECUTIVE FOR ENRON ORDERS. Retrieved from https://www.nytimes.com/2002/01/16/business/enron-s-collapse-overview-arthur-andersen-fires-executive-for-enron-orders.html

Norris , M(May,2005). Has Accounting World Changed Since Enron? Retrieved from https://www.npr.org/templates/story/story.php?storyId=4673933

Conflicts of Interests

In this paper, I am going to talk about Blackrock that had to pay $12 million in fine as SEC convicted than in conflicts of interest case. Blackrock violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 and the firm caused violations of Rule 38a-1 of the Investment Company Act of 1940 (SEC, 2015). We will look into Vanguards policies to verify what they are doing to discourage such conflicts of interests. Then we will discuss what managers can do using policies and laws to avoid such COI,

Keywords: conflicts of interests, COI

The organization 

            Blackrock is an investment firm that manages money on behalf of its investors/customers (Blackrock, n.d). One of BlackRock’s portfolio manager, Damien Rice who was managing a portfolio of energy funds, was also running a family owned oil and natural gas company name “Rice Energy” that partnered up with a coal company. As a portfolio manager of Blackrock’s energy portfolio manager Damien Rice made $1.7 billion investment in the publicly traded coal company that was also a partner of “Rice Energy” which he started investing $50 million of his own money (Lynch, 2015). According to SEC, BlackRock was aware of Damien Rice’s activities and approved of Rice’s activities, but failed to disclose the conflict to the boards of the BlackRock funds and to clients (Lynch, 2015). Blackrock’s chief of compliance during this time, Bart Battista, also paid a fine of $60,000 in connection with the case, investigators said. Neither admitted wrongdoing as a result of the agreement (Marino, 2015). According to SEC Damien Rice used Blackrock’s email address (his work email address) to conduct “Rice Energy’s” business, which was a conflict of interest and Blackrock failed to report it to investors or board (Marino, 2015).

The Law         

In the USA there is a law and Blackrock was found to be willfully violating the law, by SEC. Blackrock violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7.  The order finds that the firm caused violations of Rule 38a-1 of the Investment Company Act of 1940. Battista, the then chief compliance officer for Blackrock caused violations of Section 206(4) of the Advisers Act, Rule 206(4)-7, and Rule 38a-1 (SEC, n.d.). Per 206(2) and 206(4) of the Investment Advisers Act of 1940, Damen Rice, as a fiduciary to his customers could not invest in a business that had relations with his own business without informing that to clients (SEC,n.d.).  Rule 38a -1 requires investment company and an investment adviser registered with the Commission to implement policies and procedures designed to prevent violation of the federal securities laws, and designate a chief compliance officer (“CCO”) to administer them by October 5, 2004 ( Morrison and Forester, 2004).

The USA has a matured capital market, and this should not be a surprise that there is an existing law to discourage such conflicts of interests. Bart Battista, the then chief compliance officer, decided to look the other way and ignored the law, as the result, he had to pay $60,000 in fine (Marino, 2015).  This case is a great example of why law alone is not enough if management is not interested in implementing those laws as organizational policies. Blackrock took additional measures in form of more policies after this incident (Marino, 2015).

The Policy

In my research, I found Blackrock’s policies can be found at http://ir.blackrock.com/governance-overview and under Governance Document we need to refer to Code of Business Conduct and Ethics document. In this PDF we need to refer to section 3. Conflicts of Interest where it says “Conflicts of interest may arise when a person’s private interest interferes, or appears to interfere, with the interests of BlackRock, or where the interests of an employee or the firm are inconsistent with those of a client or potential client, resulting in the risk of damage to the interests of BlackRock or one or more of its clients. (Blackrock, 2017). This policy pertains to the conflict of the incident we discussed above. Per this policy we can see how the conflict of interests aroused when Damien Rice’s private interest interfered or appeared to interfere with the interest of the client and potential client, resulted in the risk of damage to the interests of BlackRock or one or more of its clients.  

Ways that managers can use both policy and the existing laws 

            First of all, I believe it is possible for managers to construct policies within organization around the laws the country has or if the organization deals with customers from a different country, the policies should cover the laws of other countries too.

            Now, another factor is, manager’s responsibility does not end at constructing a code of conduct or just having a policy in an organization. The manager needs to make sure every employee is aware of those policies, understands the importance of policies and understands well the consequences of violating the policies and laws.

            Implementing policies is going to be challenging, management should make sure the existing employees are aware of the organizational policies, the laws they might have to deal with and consequences of violating them. And this process has to be implemented for every new employee who comes abroad. It is will be best if there is a refresher every year or so.

            Finally, after implanting the policies, management still needs to make sure that employees are compliant. So there should be auditors to make sure each employee are compliant with the organizational policies.

Do laws and policies help promote ethical behavior?  Do you feel that the laws, as they are currently, are sufficient and effective?

            Laws and policies promote ethical behavior to a certain extent. As long as one employee’s goals are aligned with organization’s goals, their behavior will be driven by policies and laws. But when an employee is acting on his or her own interest, it might not be aligned with the policy or law. Now, management can make sure during the recruitment that employee’s goals are aligned with employer’s goals. And implementing a policy and making sure each employee comply with those will help management make sure employees are ethical.

            We already have enough laws, but an employee who is acting upon his or her self-interest, might violet policies and laws. While laws are usually made by regulatory bodies or the government in a nation (Democracy or in a republic) so those laws are often retroactive. With so much innovation going on and disruptions happening in industries, there will always be people who will break some laws and regulators will try to bring in regulations afterward. We can observe the cryptocurrency industry. There are a lot of scams and regulators are trying to bring in regulations and laws to protect general people. So, to answer the question, we have enough laws those are in general effect, but there are new industries coming up based on technology where we need the `law.

References

Retrieved on 6/25/2018. Retrieved from https://www.blackrock.com/corporate/about-us

Lynch, S. N (April, 2015). BlackRock to pay $12 million in SEC conflict of interest case. Retrieved from https://www.reuters.com/article/us-blackrock-sec-blackrock/blackrock-to-pay-12-million-in-sec-conflict-of-interest-case-idUSKBN0NB23020150420

Marino, J (Apr, 2015). Ex-BlackRock fund manager didn’t disclose a conflict regarding the biggest holding in his biggest fund. Retrieved from http://www.businessinsider.com/blackrock-fined-by-sec-for-conflict-of-interest-2015-4

Retrieved on 6/25/2018. Retrieved from https://www.sec.gov/news/pressrelease/2015-71.html

Retrieved on 6/25/2018. No Action Letter. Retrieved from https9://www.sec.gov/divisions/investment/noaction/2007/heitman021207.pdf

SEC (Jan, 2007). Investment Advisers Act of 1940 – Section 206(4) and Rule 206(4)-3 Emanuel J. Friedman; EJF Capital LLC. Retrieved from https://www.sec.gov/divisions/investment/noaction/2007/friedman011607.pdf

Retrieved on 5/26/2018. Retrieved from http://www.mondaq.com/unitedstates/x/24113/New+Rules+38a1+and+20647+for+Investment+Companies+and+Advisers

BlackRock (April, 2017). Code of Business Conduct and Ethics. Retrieved from http://ir.blackrock.com/interactive/newlookandfeel/4048287/CodeofBusinessConductandEthics.pdf

How can effective management provide a better business environment that benefits all parties, including employees, employers, and customers?

Building on the themes discussed in the paper from this week, discuss the following issue from your own personal perspective.  Draw on your own experience and knowledge. Put yourself in the shoes of both an employer and employee.

  • How can effective management provide a better business environment that benefits all parties, including employees, employers, and customers?  How does this compare to situations in which self-employed individuals conduct business on their own without management policies

I have always worked for large consulting firms (number of employees > 10,000). I report to middle management, but being in the industry for more than 10 years now, I have fair amount of idea how the industry more or less functions, although I have no knowledge of what goes on in board meetings or among the organizational leadership. But I will try to answer the questions with the knowledge I have.

            As an employer the leadership or the executives need to consider employees, customers,, shareholders. The number of stakeholders are more in case of a bigger publicly listed company. While the leadership tries to attract the best talents, wants to provide great service to customers and in result create wealth for the shareholders, they means they choose do not always produce the results they intend.

            I started working in the year 2007, so I do not have much experience before financial crisis, but after 2008 I noticed the Organizations I worked for focused more on cost savings from every possible angle. And intense competition from competitors put a pressure on profits too. The leadership incentives the sales team based on the profits the company can make, and that has made the middle management shift the focus from product quality or customer satisfaction, and they are more focused on short term profit from projects.

            In Code of Conduct of any organization the leadership talks about putting customers first and leadership should stick to it. Incentivizing the employees per their role based contribution is a good way to go. The leadership or management team should promote a transparent environment where employees and customers can provide feedback directly to improve the work environment and the experience. Revenue and profit should not be prime focal point, businesses or organizations should focus on providing great service and as a result of that service the business would grow and generate more revenue.

            Leadership often implement internal audits to make sure best practices are being performed, there should be another filtering system to find out if customer is being manipulated or exploited by the sales team for bigger bonus, or they should change the incentive system and it should not be revenue linked. That way the management team can make sure that customer is not being exploited, over promised and employees are not being exploited or pressurized to complete 10 days’ work in 5 days to increase profit. But this might result in slower growth of business and slower wealth generation for shareholders, but the management team will have to manage expectation of everyone involved.

Small business owners or self-employed people can stick to ethics and value avoiding any conflict or confrontation. If I as a self-employed person want to serve my customer the best way possible, there is no one to stop me from that. I see managers try to over sell and take advantage of ignorance of customer to generate more revenue, and it happens in my profession. I think self-employed person can easily avoid such wrong doings, eventually the customer might understand and gain trust and as a result the small business or self-employed person will gain more business. Since there are less stakeholders, no shareholders or managers to report to, it is probably easier to be ethical without feeling pressured. But, I understand there will always be a pressure of generating profit to cover the bills.

            Since there won’t be any leadership or management, there will be no audit or check either. And that make it easier for the self- employed person to be unethical. But it shows how shortsighted the person might be. Who does not care about building a long term relation with the customer or may be does not care for return customers. So, any self-employed person, should be ethical but then whether or not he will be, that is totally up to him. But with current systems where customers can post reviews, such as Angie’ List or Yelp, it is better for the self-employed persons to be ethical to gain business, bad ethics will attract bad feedback and in result that will impact business negatively.

Does management, in your view, help shape the values and ethics of an organization?

Does management, in your view, help shape the values and ethics of an organization?

Management plays a very important role in shaping value and ethics. Organizations usually have code to Ethics. And it is on management to lead by example and make employees follow the values and ethics.

An organizations code of ethics usually contain follows –

  •    Code of conduct – for employee to employee or employee to customer
  •     Respect for personal believes of coworkers or customer
  •     Transparency and accountability
  •     Following best practice
  •     Conduct for leadership – no fear or intimidation tactics

These are fairly bare minimum points, but for example, the management wants to implement just these. I work for a consulting firm and in a team environment, we have to work with people from all around the world, people from different backgrounds and believes. The management treats everyone equally, regardless of the employee’s personal believes or backgrounds. And it is important that coworkers interact with each other within professional boundaries and same applies while interacting with the client. Management needs to make sure this is being followed otherwise behavioral misconduct can cause the organization some reputational damage.

Transparency and accountability is another area which is very important for teams. The team members should know their goal, and manager usually defines each member’s accountability. Everyone in a team should know who is doing what and who is accountable for what. If accountability is not clear then the employees might not be able to complete their goal.

Following best practices help reduce cost overrun, maintain the standard and compete in the marketplace. The managers need to introduce verification and audit process to make sure that the best practices are followed and to identify areas of improvement.

The leadership should not intimidate workforce, it usually won’t be fruitful. The employees can leave the organization, or they won’t be innovative, creative or as productive as they could be. Managers need to inspire and motivate using right tools such as incentives.

Is employee behavior, ethical or not, a by-product of the organization’s ethical climate?

            We read about Sears, what their management did and how it changed the employee’s behavior. Since management did not put any check on employees and incentivized bad behavior the company lost $60 million (Paine, 1994). We have another comparatively recent example of a well-known US Bank. Wells Fargo management incentivized bad salesmanship, and their employees ended up cheating customers. When a whistleblower tried to report these incidents to management, the management fired the whistleblower (Egan,2018). The management wanted to generate more revenue and offered employees incentives for selling products to customers. The management did not verify if the employees are taking any shortcuts. And that costed Wells Fargo its profit, huge dent to it’ reputation and it had to pay the whistleblower $5.4 million (Egan,2018).

            After the scandal, Wells Fargo has changed its values and spending millions on ads to repair its image in public. It has actually encouraged employees to come forward and call the “ethics hotline” to report any suspicious activities by other employees (Egan,2018). And they are getting calls from whistleblowers reporting misconducts such as altering documents and so on. So we can see, how management influences employees. Management’s attitude can set the ethical climate in an organization.

 What ideally is the manager’s role in helping to create and maintain organizational integrity?

            I will quickly share an experience I had with my immediate management team lately. In a project, to maximize the project the project management team decided to construct a team with many interns. And the interns were actually getting on the job training, so the poor kids did not have any idea of what they were supposed to do before they were deployed in a project with tight deadlines. The sales team gets their bonuses based on profits from projects. So getting the work done by interns was a great way to save money and maximize project. But in reality due to the inexperience of those interns, the quality suffered and we missed deadline multiple times. The client finally sued us and did not pay any money for obvious reasons.

            This middle-level managers I just mentioned are great examples of how the management team should not be. Our first priority should have been a happy customer that means great quality product and meeting the deadline, instead of that they made the incentive and cost-saving their primary focus. They did not have a sense of priority, integrity, leadership or sense of anticipation. And due to their incompetence whole team was demoralized and we simply gave up at a point.

            The managers should stand by organizational values and they should never focus on personal gains. Mentoring the team, being good leaders, leading by examples and anticipating problems would be a great asset in a manager. He should be fair and just too to employees. The employees might need a day off or after working for day night they might expect good performance review and the manager should be fair and just. Being a good mentor he can guide the employees, and advice on what they should improve or what they are doing good.

References – 

Egan, M (June, 2018). Wells Fargo’s ethics hotline calls are on the rise. Retrieved from: https://www.msn.com/en-us/finance/news/wells-fargos-ethics-hotline-calls-are-on-the-rise/ar-AAySU9p

Paine, L (April, 1994). Managing for Organizational Integrity. Retrieved from: https://hbr.org/1994/03/managing-for-organizational-integrity 

Retrieved on 6/23/2018. Retrieved From https://www.youtube.com/watch?v=SC-8qCzenpg