Ethical conduct is the foundation of a properly functioning society. All entities of society including businesses are therefore encouraged to act ethically so that the entire community can benefit. Traditionally, the issue of ethics was left to individual actors and the public and government did not express major concern for business ethics. Companies were left alone as long as they did not break the law. However, events in the past two decades most notably of which are; the Enron scandal where the company utilized money from employee pension funds to inflate its share capital and the financial meltdown of 2008 blamed on ethically unsound practices by the financial industry which precipitated the near-crash of the global economy have brought more attention to business ethics. Businesses are today scrutinized more closely and any financial fraud is penalized severely.
One company whose financial misdeeds have been identified because of this scrutiny is Diebold Inc. This paper will set out to discuss the Diebold Inc financial fraud case and provide an ethical perspective on the situation.
Overview of the Diebold Case
The case involves the company Diebold Inc which was found guilty of manipulating its reports to show higher earnings than the company enjoyed between the years 2000 and 2007. These crimes were committed with the complacency of the company’s financial management division, which engaged in the actual fraudulent behavior aimed at inflating the company’s financial performance. By misstating the profitability of the company, investors and the public were misled into thinking that Diebold Inc was making more profit than it was. This led to favorable share prices for the company’s stock and lucrative bonuses for the top management of the company. Diebold’s actions resulted in significant legal consequences being faced by the company. The company paid a penalty of $25 million for its misdeeds and civil charges were filed against some of its financial managers (Connor, 2010).
An Ethical Perspective
Ethics are a system of moral principles used to determine what is right or wrong in social conduct. Chryssides and Kaler (2000) give the business definition of ethics as “moral principles that prescribe what legitimate behavior in varied business dealings is” (p.3). Ideally, business entities are expected to operate in an ethical manner which is typified by a notable lack of deception or fraud in all dealings. The ethical nature of the actions taken by a company can be assessed by using several ethical principles.
The Utilitarian theory can be used to access the ethical nature of Diebold inc. According to this theory, the welfare of the many should have primacy over an individual’s good or rights (Thiroux & Krasemann, 2008). In this scenario, the actions of the financial management division in Diebold Inc were driven by an overemphasis on profits by the company. The net benefits of such actions were; increased profitability for the company and higher share prices. The report by Connor (2010) suggests that the top management received good bonuses for their actions.
The net consequences included; losses by the company’s competitors, damaged reputation, and losses to the public. The actions of the company, therefore, resulted in greater net consequences for the company. Instead of following the utilitarian ethical theory which advocates for the maximization of happiness for the largest number of people, the company placed profit considerations above all else. Its actions were therefore unethical from a utilitarian perspective.
An application of deontological ethics to the case suggests that the actions by Diebold Inc were wrong. Deontological ethics emphasizes the assumed duty of the actor and as such, the rules in place are of greater significance than the consequences of the actions taken. The financial managers in the company were bound by the AICPA Code of Professional Conduct which exhort accounting professionals to exhibit high levels of integrity and avoid unethical conduct (AICPA, 2012). By engaging in fraud, the managers went against the set rules. Their actions were therefore unethical from a deontological point of view.
The primary goal of all business engagements is to make a profit. While high profits are desirable, it is assumed that the company will not engage in deception to increase its profitability. Diebold Inc acted in secrecy as it set out to deceive the market and gain higher profits. Weitzner and Darroch (2009) assert that a business that knowingly deceives the public to increase its profits will have acted in an unethical manner.
By manipulating the financial reports, Diebold was able to gain great short-term benefits without taking into consideration the long-term consequences that such actions could have. Lewis (2010) reveals that such manipulations by bankers and managers were to blame for the financial meltdown in 2008. Unethical conduct will result in a great loss not only for the company but also for the society that the company serves.
It is unethical for the company to try to achieve profits that far exceed the actual performance achieved in the financial period. Diebold hoped to reap more benefits than it deserved from its real performance in the period and this pointed to the greedy nature of the company. Greed is defined by Weitzner and Darroch (2009) as a situation where “an individual seeks an economic return of greater value than what her input should reasonably earn and in so doing imposes costs upon others” (p.9). Greed results in financial benefit to the greedy company while costing the public greatly.
The company suffered from several consequences due to its ethical misconduct. The financial fraud-tainted Diebold’s reputation and the public now look at the company with mistrust. Potocan and Mulej (2007) suggest that ethical behavior results in a business gaining a good environment, which enables it to exist in an environment of trust with its competitors and the public. The loss in reputation suffered by the company translates to a loss in profitability since clients hesitate to deal with a company that has questionable moral standings.
The unethical conduct by Diebold will also hurt the company’s future ability to attract investors or hire competent staff. Thiroux and Krasemann (2008) suggest that a business that engages in fraudulent conduct will be deprived of potential future investors and the industry’s top talents will be unwilling to work for such a business since they will not want to be associated with a company that has a tainted image.
Unethical business practices have dire consequences for the business and the public. Engaging in ethical conduct is therefore beneficial for the entire community. While it would be desirable if businesses willingly engaged in ethical conduct, this is not always possible and government involvement is sometimes necessary. Crane and Matten (2007) state that the government should use legislation to create an environment where companies are forced to act ethically for the good of the entire community. The US government has made significant steps in ensuring that businesses practice ethical conduct in their dealings.
For example, the Sarbanes-Oxley legislation passed in the US has helped in dealing with unethical businesses in the country. Crane and Matten (2007) assert that this act ensures higher standards of accountability and “foster greater public confidence in corporate governance (122). By applying the Sarbanes-Oxley Act of 2002, the government was able to recover the money that the top management had gained because of the fraudulent financial reporting.
This paper set out to analyze the financial fraud carried out by Diebold Inc from an ethical point of view. The paper began by conceding that even without a standardized approach to dealing with ethical issues, it is clear that the actions by Diebold Inc were unethical since they were aimed at deceiving outsiders by misrepresenting the company’s financial performance. An application of ethical theories to the situation further on demonstrates that the company acted in an unethical manner.
The paper has shown that the economical objectives of the company are best met by engaging in ethical conduct since breaches of ethical expectations result in litigation and loss of reputation. The business will have a greater chance of achieving its primary objective of succeeding economically if the community continually perceives it as a positive force. The business can foster this positive perception by producing goods of standard quality and by avoiding antisocial practices.
AICPA (2012). ET Section 54 – Article III – Integrity. Web.
Connor, M. (2010). Diebold to Pay $25 Million to Settle Accounting Fraud Charges. Web.
Crane, A., & Matten, D. (2007). Business ethics: managing corporate citizenship and sustainability in the age of globalization. Oxford: Oxford University Press.
Lewis, V. (2010). Was the 2008 Financial Crisis Caused by a lack of Corporate Ethics? Global Journal of Business Research, 4 (2), 32-43.
Potocan, V., & Mulej, M. (2007). Ethics of a Sustained Enterprise – and the Need for it, NY: Springer Science.
Thiroux, J. & Krasemann, K. (2008). Ethics: Theory and Practice. New Jersey: Prentice Hall.
Weitzner, D., & Darroch, J. (2009). Why Moral Failures Precede Financial Crises. Critical Perspectives on International Business, 5 (2). 6-13.