Introduction
Even with modern approaches to doing business, theoretical models of ethics contribute to the success and prosperity of organizations. The accounting fraud case of Network Infrastructure Company’s executives is an illustrative example of the violation of ethical models and negligent application of accounting standards. According to the charges, Michael Palleschi and David Lethem ignored the moral aspect of the situation and resorted to seeking benefits for selfish purposes. In this work, the presented fraud scheme was analyzed from the point of view of theoretical models of ethics and their most successful application. The assessment of emerging technologies, regulatory activities, and international accounting standards regarding the ethical models’ impact was also provided.
Theoretical Models
The key ethical model that was violated in this case is deontological ethics. Its concept is based on the nature and motive of the action itself in order to determine its ethnic correctness or incorrectness (Benlahcene et al., 2018). This theory assumes that people should rely on their duties and obligations to society while making decisions. Considering this model by the example of doing business, people in senior positions are primarily required to correlate work activities with the prosperity of the company, which corresponds to the ethical ideas about leadership. In the context of Palleschi and Lethem, who hold the positions of CEO and CFO, it can be stated that their main duty to society was to comply with the law. According to the theory, compliance with those obligations is a basic factor in decision-making, and former leaders ignored this aspect when conducting financial activities. They failed to fulfill their obligations primarily to the state and the state constitution, violating the law through a multi-year fraud scheme that directly affected the theory of deontological ethics.
It can also be established that the actions of the CEO and the CFO violated the ethical theory of utilitarianism. The concept of the theory is to use the greatest good for the greatest number of people, taking into account the consequences to which the chosen decisions will lead. The case indicates that the fraud scheme was designed to “misappropriate approximately $5.4 million from FTE for personal use” (Securities and Exchange Commission, 2021), which directly affects the interests of the ruling minority. Resorting to accounting frauds, the CEO and the CFO did not consider the interests of the company, the interests of subordinate employees, or even charitable interests. These actions can be considered as an abuse of a higher position, which the accused took advantage of, and an intentional crime of the law, which reflects their awareness of the negative outcome. As a result, the consequences of fraudulent actions were highly specialized, with a clear financial benefit exclusively for a minority, which does not correspond to utilitarianism.
The ethical models under consideration could be examined for making better decisions that contribute to the company’s prosperity, improving employees’ standard of living, and making a greater contribution to the development of the economy. Using the example of the same model of utilitarianism, people in leadership positions had to make decisions based on the possible positive consequences. With the presented approach, utilitarianism is the easiest way to analyze and predict economic efficiency (Marseille & Kahn, 2019). Reviewing the submitted complaint, it becomes obvious that the minimum that was required from the company’s representatives when considering the consequences was the coordination of activities with the law. As a maximum, following this ethical model would lead to a profitable distribution of funds for the needs of the company, expanding ties and strengthening influence in the market.
The deontological ethical model, also called the model of rights and obligations, could have been used to revise the position of employees in the company. In this case, the violation was connected with a constitutional crime, which suppresses the basic duties of a person to agree with the law. In a broader context, a deontological ethical model could revise the policy of paid leave or parental leave in favor of workers so that they would feel the acceptance of the company regarding their rights. Theoretically, this could create a positive opinion about the company in the market and attract new, more efficient and dedicated employees, which would help increase the company’s profitability. Following their own responsibilities on the part of management and expanding the rights of employees in lower positions would obviously improve internal policy, contributing to the efficiency of employees already in positions as well.
The model of virtue focused on respect and former personal merits that built a reputation was not explicitly violated in this case. The CEO and the CFO have remained in their positions, and their good names have not been tarnished long enough to steal fabulous sums. Despite this, the ethics of virtue could be used with the greatest number of advantages. Unlike the two previous ethical models, mainly applied to senior positions, lower-level employees could also resort to this model. It would assume a friendly, healthy, and competitive internal structure, where each employee is valued based on usefulness, compassion, fairness, and other positive qualities. According to the virtue model, people live a full life to the extent that they function properly (Tsoukas, 2018), and in this system, they would show their best sides. Following this ethical model would improve personal relationships, create a non-conflict environment, and keep employees’ emotional well-being at a high level, which would lead to improved overall results.
External Influences and International Accounting Standards
Based on the fact of fraud, it can be concluded that the regulatory actions in the case were not sufficiently thorough to prevent recurrent theft. The misappropriation of funds became possible, among other things, since the company’s financial statements did not display all the data important for its activities. Even though the main influence on the permissibility of ignoring mistakes was provoked precisely by the impact of the CEO and the CFO, following competent and fair regulatory actions could have prevented the fact of fraud. Thus, due to the study of financial statements, a violation was revealed after the departure of Palleschi and Lethem from their posts.
Such negligence led to the admission of violations of ethical models and a couple of years of impunity for financial fraudsters. Palleschi and Lethem misled the company’s in-house accountants and external auditors in order to remove obstacles to the implementation of financial fraud (Securities and Exchange Commission, 2021). Consequently, the main impact of regulatory actions on ethical models was to complicate the possibility of their violation and to keep the company’s policy profitable, legitimate, and easily traceable. The fact that the constant leakage of the company’s financial resources has become long-term only proves how important regulatory factors are in keeping the transparency of the company’s activities and its adherence to ethical standards.
Maintaining financial statements under international accounting standards simplifies the process of regulatory actions. The main purpose of such a system is to generally increase confidence in financial reporting, which will lead to the development of global trade and the attraction of investments. In the best-case scenario, such a system would improve the company’s economic efficiency throughout the market. Universal standards would also reduce the costs of reporting and regulation, which could positively affect future activities. In view of all these features, the overall influence of international standards on the ethics of the organization leads to the strengthening of the selected ethical models.
Nevertheless, transparent financial reporting has not been reflected in the company’s ethics. With regular violations based precisely on fraud with accounting, the system has become a burden on the way of implementing a fraudulent scheme. The company’s ethics suffered significantly due to non-compliance with the rules of transparency and openness. Adherence to the international accounting standard could theoretically draw attention to the common forgery of documents, convertible banknotes, and deceptive interpretation of contractual terms (Securities and Exchange Commission, 2021) a little earlier. Considering the overall impact of the standard on ethical situations, it is similar to the effects of regulatory actions. Both aspects are used as instruments of control over financial transactions. Consequently, the universal standard also helps simplify the detection of fraudulent tendencies and accelerate the suppression process.
The use of emerging technologies has an identical impact on the company’s ethics as the two previous aspects of accounting activities. Organizations use basic automated processes to simplify data analysis and reduce the time to complete them. The above case of fraud proved that authorized accounting could have prevented a theft of funds. As mentioned earlier, the CEO and the CFO acted through the persuasion and deception of accountants, who eventually indirectly contributed to the fraud. A mechanized calculation of the financial activity of the enterprise would not allow people holding managerial positions to influence employees and use human error in their own interests, going against the basic ethical models.
It is also worth noticing that the use of emerging technologies generally affects the need for workers and the preservation of jobs. With the automation of accounting for financial transactions, the work required to perform is significantly reduced. As a result, the company’s ethics are undergoing significant changes in internal policy, which leads to a reduction in staff or a reduction in salaries for employees in specific positions. This process significantly affects the built ethics of the company, forcing the management to constantly review the working policy. Consequently, emerging technologies, although having many advantages in the form of accounting automation, eliminating human error, and accelerating the workflow, can also be the cause of destabilization of familiar schemes.
Conclusion
Thus, the theoretical models of deontological and utilitarian ethics were violated in the case under consideration. Along with the theory of virtue, the construction of these ethical models in the company’s internal policy could benefit its development, including establishing a reputation, better relations between employees, and securing jobs. The role of external influences and international accounting standards showed how the violation of these factors led to the possibility of implementing fraud schemes and simplifying the long-term stabilization of this process. The analysis and critical evaluation of these factors proved the need to rely on ethics when accounting and bringing financial statements to a universal standard.
References
Benlahcene, A., Zainuddin, R. B., Syakiran, N., & Ismail, A. B. (2018). A narrative review of ethics theories: Teleological & deontological Ethics. Journal of Humanities and Social Science, 23(7), 31-38.
Marseille, E., & Kahn, J. G. (2019). Utilitarianism and the ethical foundations of cost-effectiveness analysis in resource allocation for global health. Philosophy, Ethics, and Humanities in Medicine, 14(1), 1-7.
Securities and Exchange Commission. (2021). Complaint [PDF Document]. Web.
Tsoukas, H. (2018). Strategy and virtue: Developing strategy-as-practice through virtue ethics. Strategic Organization, 16(3), 323-351.