Role of Ethics in Determining Responsibilities (Essay Sample)

The Role of Ethics in Determining Responsibilities Juan Pablo Munoz, Ethics in Business Northcentral University Date of Submission Table of Content 1.0 Introduction....................................................................................................3 2.0 Background Information: Facts of the Case.................................................4 3.0 The Role of Ethics in Determining Responsibilities and Decisions 3.1 Impact on Stakeholder..........................................................................7 3.2 Outcome................................................................................................8 3.3 Fairness of Punishment..........................................................................10 3.4 The Role of Auditors at the HealthSouth..............................................13 4.0 Conclusion ......................................................................................................15 References ............................................................................................................17 Introduction Corporate governance as a management concept is a broadly refers to how a certain business organization is organized and run (Clarke, 2004). It covers a broad spectrum ranging from the organizational structure within the company as well as the relationship between the business entity and the stakeholders. The major principle that forms the backbone of corporate governance is the principle of accountability and transparency (Bowen, 2004). Transparency forbid corporate executives from misrepresent their dealings with each other when dealing among themselves and when communicating material information to the outsiders. Directors as well as the executives of a business organization also ought to act in good faith (Claessens, Djankov, & Lang, 2000). Under this principle, they are required to maintain a good working relationship based on giving truthful information (Matulich & Currie, 2008). As such, where a business is seeking to sell its security it must issue correct information concerning that particular intended sale. The issue of accountability is not limited only to matters of accounts or sell securities. The concept is quite broad and may include being conscious of any environmental degradation that may be caused by the business activities of that particular firm (Bowen, 2004). Under the doctrine of accountability, firm executives are normally entitled to give account to the shareholders as well as the customers and to the business itself (Clarke, 2004). If executives carry out an activity that benefits them but not the company then such an act constitutes a poor corporate governance practise. Accountability also encompasses fairness and honesty: the decision by any business management must always in the fair and honest intention to improve the business and not for personal gain (Bowen, 2004). Above are a few ethical requirements that are demanded by good and ethical corporate governance. Unethical practises normally bring about very dire consequences. Such consequences might even include criminal prosecution. Violation of ethical practises also open doors for corrupt practises. This if not controlled shall lead to tarnished image of the company. A tarnished image is normally not good for business entities. For this reason companies are required to maintain a high standard of ethics. This paper examines the role of ethics in corporate governance with reference to fraudulent dealings of the HealthSouth Corporation that was said to have been engineered by the corporations CEO, Richard M. Scrushy. 2.0 Background Information: Facts of the Case In the 1990s, Richard M. Scrushy, who was the former CEO of the Health South Corporation, successfully engineered many acquisitions of the rehabilitation clinics, the outpatient surgical care operators, the nursing homes as well as other health care companies. As the CEO of the Health South, Mr. Scrushy was said to be responsible. In company law, the directors of a company always have a responsibility to carry out their duty with due diligence. Due diligence meant disclosing any material facts that they were supposed to. Mr. Scrushy is said to have orchestrated and certified some statements, which he knew were not true. In the year 2003, Securities and Exchange Commission (SEC) came with accusations against the company as well as Scrushy. The accusations were that the Company and Mr. Scrushy were guilty of inflating the company’s earnings to about 1.4 million US dollars. While on trial, the jury of a federal court indicted Mr. Scrushy of eighty-five charges. Among these charges were securities frauds, money laundering as well as conspiracy. In addition, other charges involved the former CEO overstating the Company’s earnings by around 3.0 billion dollars. From what the federal says, investigations found out that the company had actually overstated its earning. The company had done this through hiding this scheme from the auditors of the company. There were doubts and questions arose as to whether there was some omission of material disclosure from the auditors or the auditors were also part of the fraud (Matulich & Currie, 2008). Among other offences, Scrushy is said to have certified that the statements were actually true. This was so despite the fact that he knew that the financial statements had actually overstated the value of the figures involved. The certification that Mr.Scrushy made was provided for in Form 10-K. The certification is normally made under oath and it is therefore correct to state that the former CEO had actually lied under oath. Even if he said that he was unaware that the statements were false then he would have failed his duty as the CEO. As the CEO he has access to the finance records and statements. He is supposed to verify before he certifies any document. Failure to do this amounts to professional negligence. In order to show that he was never guilty of any professional negligence he is supposed to show that he had carried out necessary steps to confirm whether the statements were actual or falsified. Central to the investigation of this company was the issue of whether Mr. Scrushy had a role or what role he actually played in the manipulation of the figures in the books of account in order to come up with an overestimated figure in terms of returns that they had. While he was the senior most executive officer in that company, there were also other senior executives. They too were being investigated to establish whether they were part of the scheme. As part of the investigation process there were some questions that emerged. During the process of investigation and trials, many other issues unfolded. First, there emerged questions regarding the role of the auditors in the manipulation of figures. Here, the investigation dwelt on what role the auditor was supposed to play in the preparation of the financial statements. The auditors are supposed to be independent and impartial in order to reveal any discrepancies that are present between the figures in the statements and the figures that are actually present. Another one was the question as to what would be the effect of the conflict of interest that existed between the accountants and the consulting arm on auditing. One of the most important characters of the auditor is impartiality. They need to favour not the company, but to carry out their duties independently. They too have a duty to act in good faith. This means that they are supposed to reveal any anomaly that existed between the books of accounts. Questions as to how comes they failed to discover any irregularity were raised. Finally, questions emerged regarding how the relationship of the investment bank and the company affected the quality of that bank’s research reports concerning the company. A number of allegations arose against the company. These can be summarised into the following main categories: The company directly and indirectly employed several devices, schemes as well as artifices with the intention and for the purposes of defrauding the purchasers of the securities. The company directly and indirectly got money and property through making some statements, which they certified while knowing that they were untrue. As a company, they had a duty to deliver and disclose only truthful information to the public as well as the intending purchasers. The making of a wrongful statement or omission of any material disclosure for creating a misleading effect was wrong. The company engaged in a course of business that intended to operate as a fraud. The business course intended to deceive the prospective purchasers of the securities. The allegations here were that the company artificially manipulated the figures with the intention of luring the potential purchasers of these securities to buy the same. The issues surrounding the Health South Corporation were perceived not only to be accounting issues but also ethical violations. As the CEO, Mr. Scrushy had a responsibility towards the company as well as to wards the potential purchasers of the securities. In connection to this, the CEO is expected to act in good faith. One of the elements of good faith is disclosing any material information that is connected to business. 3.0 The Role of Ethics in Determining Responsibilities and Decisions 3.1 Impact on Stakeholder A number of stakeholders had an interest in good corporate governance HealthSouth and were therefore affected, either directly or indirectly, by the unethical governance of the company. To appreciate this, it may be useful to have an overview of the company. HealthSouth is one of the largest providers of diagnostic imaging, outpatient surgery, as well as rehabilitation services in the United States. HealthSouth as a multinational conglomerate is an operator of more than 1,700 rehabilita...