This paper talks about business crime and what history has shown over the years with respect to this topic. It focuses on the Enron scandal in particular. The paper presents different scenarios which talk about business crime, these being real-life experiences of businesses that faced court battles and lawsuits because of their unethical and illegal activities. The paper then moves forward, gathering examples to show what happens when these companies get caught, who suffers most, and its result. The victims of such business crimes include stockholders, who face the responsibility of paying for resultant liability charges.
Business Crime
Business crime is a term referred to as an offense and felony committed by an organization. Relating this definition to a corporation, this is a crime committed by a and this becoming accountable for its actions in court. Business crime could involve bankruptcy, missing records, incomplete information, amendments to financial records, disguising assets, transfer pricing, and transference of assets without any visible representation or record in financial books, trickery with respect to creditors, theft, and also tax evasion practices.
The Enron Scandal
Enron in the territory of business crime cases has now become a popular name. Enron scandal, as it famously came to be known, was a financial scandal revolving around Arthur Anderson, Enron’s accounting firm and one of the largest accounting firms in the world.
Arthur Anderson audited the records for earnings for Enron incorrectly, which eventually led to the scandal. The court held Arthur Anderson liable for changing the records before investigators arrived at the records related to Enron that were to be shown to investors. This also resulted in eventually Enron’s investors paying a huge fee amounting to around $60 billion in the end. The Time Magazine article “Called to Account” stated that the share prices had already dropped as soon as the scandal was known to the public, from $90 per share to even less than 50 cents per share. Another decline in investor confidence took place when they found out that the stock market itself was crashing alongside almost the entire America’s markets. Enron, along with its top employees, inclusive of their ex-CEO, chairperson, and ex-Chief Finance Officer, were the ones who were then made liable for the charges.
In 2001, Enron faced immense trouble after months of losses and a bad investor-state as Enron’s credit rating fell to almost minimal standing due to the disconnection of a proposed acquisition. The corporation was left with very little finance and money to carry on with its functioning. It had no way of managing its huge debts, and its stocks were trading at the price of $0.61 exactly. Enron eventually filed for bankruptcy at the end of the month, and 4000 employees were laid off. This is considered the biggest bankruptcy case in entire America.
Even though the jury claimed that the entire company was to be blamed and therefore to be held liable for it, it was certain that the accountancy firm was one entity at the base of this fiasco. The Times article mentions that Arthur Anderson’s motive behind these changes was to scam the Security and Exchange Commission (SEC) through the depiction of worse profitability figures by overstating losses by $1 billion, thus evading taxes. This resulted in the entire corporation being taken to court eventually due to involvement in business-related crimes and fraudulent activities. The court proved that Arthur Anderson had re-stated in the accounts that this $1 billion was a loss that had not occurred; in other words, it wasn’t mentioned in the books to get away from scrutinization from the SEC; however, little did the company know that this would be caught and taken to court with the entire company following after it as payment to the liability. The CAO, after the trial, was found out to be guilty of fraudulent activity with respect to securities. Arthur Anderson was also found guilty of shredding information in its auditing firm in relation to Enron.
Even though Arthur Anderson appealed in the court and finished off its auditing for limited companies business, it was certain that this was something that would not stop the company from not going anywhere further up or ahead from there. (Thomas 1).
What do we learn from the Enron Scandal?
In today’s America, we see that the political environment has been imposing intense pressure and burden on the entire American economy. There are regulations and laws that are passed off on companies; however, rarely is the case when these are breached. However, when this happens, it is called fraudulent on the part of the company who is indulging in such breaking of regulations even if this breach is not implicit. There are currently around one hundred civil suits that are filed against the auditing firm of Enron. Now, this firm has only two hundred employees left out of the twenty-eight thousand that it had earlier. No matter how cleverly financial facts are hidden from regulatory bodies like SEC, the fact remains that eventual scrutiny does reveal these scams, which then calls for huge trouble for the entire company.
Lessons in History
History has shown us over the years that there have been a lot of fraud cases on companies and organization’s parts, irrespective of these being big or small. Usually, it is also the interplay between the accounts misrepresentation and simple cash management that is devoid of efficiency and prone to major fraudulent management and control. However, most such cases have occurred in small firms. In the case of large companies, there has been the issue of reputation at stake in a much larger proportion. (Johnson & Rudolph 37-44).
Also, the relationship between executives at the top in companies and the financial departments involved in misreporting in the stock options especially is said to be advantageous to the value of the share for a stockholder. Hence, many times aggressive policies are adopted to increase these stock valuations. Many times henceforth, the top management tries to gain private benefits that are much greater than the earnings actually reported in the statements. (Burns & Kedia 5-7).
Discussion
This entire financial crisis currently in America is somewhat the result of fraudulent and greed-ridden practices, which have made America’s economy stand where it is today. And this crisis has just grown from there. The Economist reported that the overvaluation of mortgage lending with an intention to do so is against legal activities pertaining to a company’s legal as well as an ethical code. Investigators that involve the government basically are yet to show up with clear proof o the case. Otherwise, that of the fraudulent perspective and hence the entire scenario, especially when talking about money lending, is just purely unethical also.
Insider trading is a phenomenon that has been receiving a really bad name for a long time now. However, recently it could be seen that it was a prominent part of the leading cause t the financial crises in America. (McGee 205-217).
Risky borrowing and lending have made losses larger and larger for companies. Records say that U.S. employers have faced losses owing to $994 billion and even above. There is around 24% of America that is out of employment or under-employed. The most disturbing part of this scenario is that almost all these cases have been the result of intense scrutinization being led by systematic fraud by the company/ companies. Studies say that out of all these fraud makers, most of them are older than the middle-aged, and there is a higher probability of them being a male rather than a female. And usually, the two departments most closely related when there are fraudulent activities discovered are the top management and the accounting/ finance department.
Employees who, in order to be “honest” to the firm, play a huge unethical, dishonest role actually. It could even be said that such a practice/ such practices need to be dealt with fast and efficiently because there is a high probability that these practices continue and get worse. In a climate like this of intense financial crises and people running after monetary profits/ gains lasting only for the short term, selfishness prevails, resulting in what had happened to many companies- bankruptcy and lawsuit charges, among other losses. (Byrnes 16).
Cases
AIG’s Fannie Mae is another example of this, along with the American International Group (AIG) and Lehman Brothers, who in the run for short-term profits stand today in bad shape. They, because of excessive shot money lending and naked short selling, have gone completely bankrupt. This is a lesson huge enough to be learned by other such companies who are like these three to understand that short-term profits do companies no good. There was here a huge ethical issue raised because of the fact that these companies d been making huge profits, and the people at the top of the top executives’ incomes were quadruple of what they should in actual be. For instance, Lehman Brother’s CEO had been earning billions as his personal income over the years while also calling for an indirect income disparity raising ethical issues pertaining to the utilitarian perspective.
The boss of Enron, Ken Lay, was also hence made liable to the charges that the entire case against Enron faced because he then knew that the company was in huge trouble. It is clear that fraud, presented and represented in any form, is deception for which the fraud maker or indulger needs to pay some fine/ charges to pay for its actions. This is because, in purely legal terms, there is intent to deceive involved in such cases.
Forensic Accounting Cases
There has also been an increasing demand for forensic accounting henceforth, as studies and history tells us. Investigations, where cases of fraud are concerned are those where there is always, in most cases, bankruptcy also. This covers scandals like the WorldCom scandal and Enron, and with these, the culture of auditing and misrepresentation even after dire consequences lives on. Financial misconduct has been prepared and implemented, but it still follows. (Levin D7).
UnitedHealth Group
As far as investing goes, UNH (UnitedHealth Group) also indulged in fraud by changing its stock options. It hoped or renewal of prices by re stating them on the word of the top executives and the leaders in the management at the top. After re-stating its stock options value, it was informed that it had to pay charges of $286 million as was also previously predicted. The company also stated that its financial statements and books for the past years are pending “restatements”. This also caused the company to do the changes with its accounts because it knew that it would be liable to SEC. this case is quite closely linked with that of the Enron scandal because both misrepresented data on the financial statements.
The chief executive at UNH had announced that options were being suspended and then reinstated; the latter taking place in mid 2000. Hence, this decision decreased the value for the stock options, and $190 billion were lost. However, this was the new CEO at work. What had previously happened was the resetting of stock options prices by William McGuire, which were basically backdated.
This options backdating scandal has many similar cases involving a total of 120 companies. Out of these companies, restatement took place and hence followed the compensatory expenses and taxes being mishandled. This made it illegal and fraudulent again. (Ryst 11).
Adams and Reese Case
This example is of a case that involved Adams and Reese. The fraud involved money laundering, stolen funds, false tax returns, and tax evasion, to name a few. James Perdiago filed the lawsuit. He worked as the lawyer to the companies in Louisiana’s gambling industry while doing work for Adams and Reese. This case is also related to the WorldCom scandal because it involved William Jefferson, as the scheme according to the lawsuit was to bribe him. Adams and Reese denied Perdiago’s wrongdoing allegations and said that the trial needs to be taken so that justice is ensured. The New Orleans City Business Staff reported that this scandal attracted a lot of attention and was particularly relevant when taking the holistic view that fraud was taking place to make sure that clients of the company land somewhere else rather than the at the company itself.
Scrushy Jury Case
The Washington Post reported a business crime case against Richard Scrushy. Scrushy faced 48 charges pertaining to criminal accounts because of having false statements and fraudulent practices and money laundering of $2.7 billion off the hospital company that he founded. He violated the Sarbanes-Oxley Act also which when happens, is indicative of the fact that there might have been a breach of ethics with respect to misrepresentation of information in the financial statements.
The article mentioned this case also came to be popularly known as the HealthSouth case and is another example of how the founder himself has to pay for charges that apply to the company. The stockholders hence get affected because they move out their further investments to make sure that they do not invest here any longer. However, they due to the sufferance of immense laws, got into business crimes which eventually made them pay huge losses.
Works Cited
Byrnes, N. “BTW” The Business Week; 2008 Issue 4103, p16-16.
Burns, N.; Kedia, S. “Executive Option Exercises and Financial Misreporting” Business Source Premier. 2008. CFA Digest; Vol. 38 Issue 4, p 5-7.
City Business Staff Report. “Former Adams and Reese Lawyer sues firm” Regional Business News. New Orleans City Business (LA).
Johnson, L.; Rudolph, R. “Hunting for scalps” Journal of Corporate Accounting & Finance. 2008. Journal of Corporate Accounting & Finance (Wiley); Vol. 20 Issue 1, p37-44.
Levin, L. “Fiscal misdeeds fuel demand for investigators”. Wall Street Journal, 2008. Wall Street Journal – Eastern Edition; Vol. 252 Issue 65, pD7
McGee, R. “Applying ethics to insider trading” Journal of Business Ethics, 2008. Journal of Business Ethics; Vol. 77 Issue 2, p205-217.
Newspaper Source. “Scrushy still uncertain” Washington Post (2005). The Washington Post.
The Economist. “The pressure for convictions is great but prosecutors have their work cut out” Economist (2008).
Thomas, C. “Called to Account”. Time. (2002). Web.
Ryst, S. “Options just got messier” Business Source Premier. 2008. Business Week Online; p 11-11.