Ethics and Financial Services Essay Example for Free

Ethics and Financial Services EssayQuestion A1Outline the shams identified in the case and pardon the inconsistencies with proper bill treatment. Relate your answer to broad accounting concepts and accounting standards where relevant. (8 marks approximately 800 words)AnswerLivent Inc. is a theatre production corporation registered in Toronto, Canada. in that respectfore, all the accounting demeanours were subject to the General Accepted Accounting Principles (GAAP) of Canada. In a broad sense, the GAAP imposes four main bashfulnesss on the accounting behaviours of companies objectivity, materiality, accord and conservatism. In the case of Livent Inc., on that point are several behaviours that was inconsistent with the proper accounting regulations in general. Large kickback schemeAt the precise beginning of the inherent spoof by Livent, the two executives, Drabinsky and Gottlieb, fabricated transactions that did non exist at all, in order to transfer the r make upue of the company secretly to their experience pockets. They make the fake transaction on their balance sheet by colluding with their vendors. Drabinsky and Gottlieb received the m unrivaledy from vendors and asked them to fabricate evidences of charging fees. Manipulation of accounting recordsThe kickback scheme sacrificed the net proceeds of the company, and as a result, Drabinsky and Gottlieb started manipulating the records. There were evidence from later investigation that Livent was exaggerating its revenue from the box office to show that it kept good income statement with goodprofit. Also, they asked the accountants at Livent to modify the pecuniary statements to cut through the potential financial problems Livent had and to exhibit good operating execution to attract more investment. Drabinsky even used special software to manipulate the financial statements to make them as if they were the original record and hard to be detected. Keeping the hypocrite as secret to au ditorsWith the help of the special software, Livent Inc. was commensurate to keep two records of their financial performances, the phony one and the real one. And the revealside auditors did auditing of Livent based on the phony financial records Livent provided. Therefore, the Deloitte, Livents outside auditing company, could hardly hitch signs of histrion during annual auditing.Significantly, the fraud of Livent Inc. broke the accounting principle of objectivity, which is in like manner the primary standards companies should stick to. The objectivity principle basically requires that all kinds of financial statements the companies tolerate should be based on the facts. That is to say, e actually transaction and item recorded in the financial statements should be support by unbiased and objective information. beneath no circumstances are the managers, shareholders and accountants allowed to fabricate or distort any accounting reports and materials of the company. However, wh at Drabinsky and Gottlieb did at Livent went against the accounting standards. The fact that the two partners urged the internal accountants to modify the seasonal expenses and liability is definitely away from the proper nonrecreational behaviours.Livent benefited from manipulating its performance with additional investment and bank loans, which boosted competitive expanding plans of Livent. It is even intolerable that the company invented the special software, which allowed bottomless arbitrary modification of all the accounting records of the company. This made the fraud much easier and less likely to be discovered because it enabled the purpose looked as if they were the original data. Elrod and Gorhum (2010) made quantitative research on the way of detecting fraud by examine the extent to which the cash flow from operation and the earnings from continuing trading operations are correlated.Livent Inc. squeeze the accounting staff in the company to comply with the fraud be haviour without any doubt. The executives showed a matter-of-fact attitude toward the fraud. The accountants, individual auditors were not working independently and objectively as required by GAAP. On the contrary, they nonplus been coerced or instructed to make fake accounting records, and did not show cooperation with the independent outside auditors. GAAP intends to ensure auditor independence. still Messina used her front entrance at Deloitte to disturb the independency of Deloitte auditors in examining the financial performance of Livent.The objectivity principle additionally restricts unreliable reports, materials and sheets offered to the auditors for annual auditing. chthonic the current accounting principles and standards in Canada and the United State, the auditors are responsible only for ensuring the preparation of all the accounting documents of the company align with the GAAP. But the outside auditors do not have access to the detailed periodic record of the com pany. Therefore, the annual auditing is unable to prevent managerial collusion if the company provides counterfeit accounting materials. Livent was giving the fake balance sheet, income statement and former(a) reports to Deloitte, which is not allowed by the accounting standards to a broad extent. any(prenominal) companies correct their cheating behaviour when the situation improves, which makes it even harder to be detected. Nonetheless, much(prenominal) behaviours done by Livent are inconsistent with the standard lord ethics and regulations.Moreover, the aggressive developing strategy Livent had military issuen also violated the conservatism principle that the GAAP requires. This principle asks the accountants to exclude the uncertain income or revenue, while include the feasible losses and risks in the financial statement. The conservative accounting behaviors are necessary because they can utilely prevent the shareholders and investors from potential losses. But in this ca se, Drabinsky is in such a haste to pursue aggressive development of the company, and obviously was exaggerating its revenue as hygienic as concealing its losses. Question A2 Describe the bodily good market-gardening at Livent Inc. How did this civilisation affect employee behaviour? Explain and justify your answer. (12 marks approximately 1,200 words)AnswerSeveral researches supported the demarcation that the corporate respectable culture had large influences on the behaviours of the employees and their honest thoughts. The company does not have to have a special(prenominal) enroll of ethics for the employees to constraint their ethical behaviours. The corporate environment in itself is enough for influencing the ethical behaviours inside the company. Nwachukwu and Vitell (1997)s research found that the ethical culture in corporate has certain impact on the moral conviction of the employees upon what is respectable and wrong. Fraudulent behaviour was a very significant issue in the development of companies. It was because that it had tremendous impacts on the corporate, the employees as well as the human beings. Also, the difficulties in preventing such behaviours were to define, prevent and detect it. Schwartz (2013) made research and emphasized the three key factors in maintain an ethical corporate culture in the company.They are the set of ethical beliefs or values throughout the company, establishing formal ethics program and the ethical leadership throughout the development of the company. However, in the case of Livents fraud, all the three factors were lack in the system of the company. They had no clear ethical values, as the self-regulation mechanism, set and administrated inside the company to constraint the behaviours of not only the employees, notwithstanding the senior executives as well. The wrong culture set by the top executives had not only influenced, but also forced all the staff, especially the accountants, to cooperate and to help conceal the fraud from being detected by the outsiders. This caused the company running under a set of very unethical corporate culture.It seemed to be routine to manipulate the financial records in Livent Inc. for quite a long time. As early as the year of 1990, Drabinsky, unneurotic with his best partner Gottlieb, began the kickback scheme to illegally create fake transactions to transfer money from the company to their own pockets. Then later Dranbinsky and Gottlieb had to tell even bigger lies and got more peck involved in in order to make up for the expense losses from the kickback plan. The company lacked ethical leadership from the very beginning. To make the financial performance of Livent look promising,Drabinsky and Gottlieb meddled in the daily accounting records as well as the preparation of the annual financial statements that were handed in and were examined by the auditing company, Deloitte. The executives and the senior level staff were not establishing pos itive example inside the company so as to maintain a positive ethical corporate culture.Whats even worse, they acted as the leading power in such fraudulent behaviours and arbitrarily got the other employees into the serious fraud scheme. Drabinsky and Gottlieb shouted at and coerced the staff and even the senior level managers to fulfil their ambition. They developed a specific computer software inside the companys accounting system, so that they were able to take control of the financial status of the company. They could adjust any amount and transaction records in the system to make the quarterly, semi-annually and annually report of financial performance of Livent look promising to invest in. Even worse, by applying the software, Livent was able to cheat on the accounting records as if they were the raw figures, and avoid being discovered. It had also facilitated the fraudulent behaviours and motivated the employees and the executives to fraud continuously.Another serious issue inside Livent, besides the manipulation of the accounting records and financial statements, is the overwhelming attitude of viewing fraud as a matter of fact among executives as well as the employees. Even if some of the accounting staff including Messina and Webster questioned the unethical behaviours they got involved in, they were influenced by the general environment and paid no attention to the fraudulent behaviours in Livent. They took for granted that what they did was to follow the didacticss of the executives so as not to get fired. The employees would see Drabinsky cheering and bullying the accountants and even the senior level staff in the company if they had any different opinions against him.This was in fact establishing bad example for the employees and was to warn the other staff to just accept the deviant behaviours as a matter of fact. For a long time, employees were aware of the fraud happening, but were un ordaining to avoid it. Llopis et al. (2007) argued that effective communication is essential for the ethical message to be properly assimilated. However, in Livent, the top two executives, Drabinsky and Gottlieb, were much too autocratic in the way of managing the company. Therewere barely any information about the ethical culture passed to the employees, and the staff had little freedom to do their job but to listen to Drabinskys instructions. rifle but not least, Livent Inc. lacked proper self-regulation mechanism to prevent the non-ethical behaviours. More often than not, self-regulation are considered as the last prevention of bad corporate ethical culture. Schwartz (2013) pointed out that the set of ethical value of the company was critical for making ethical decisions. Real self-regulation should not be independent of the public interest. Instead, the behaviours under self-regulation should be compatible with the social values and principles. In addition, as the ethical value of the company should not be arbitrarily go underd by the executives or a hardly a(prenominal) people in the company instead the set of ethical value should gain the consent of the majority of the employees (Llopis et al. 2007).Yet, what the set of value acquiesced by the employees in Livent went against the publics interest, and thus led to the unethical corporate culture overall. Formally, inside Livent, they did not have complete ethical programs including regulations on the professional operation of from each one seat to prevent fraud. The ethical value of the company should be clearly stated in the policies and regulations, or even set incentive mechanism to encourage the employees to follow and to form good habits.In conclusion, on that point were three factors causing the unethical corporate culture inside Livent. The first is the long-standing fraudulent behaviours from the top executives, which were thence passed down to the employees of lower levels arbitrarily. Second element of the unethical culture was the attitude of taking committing fraud as a matter of fact, and thus no one in the company were willing to discourage it. Finally, the lack of internal ethical corporate regulations or values established throughout the company accelerated the forming of unethical corporate culture. Working under such environment, the employees got involved in the fraudulent behaviours willingly or unwillingly forced by their boss. Moreover, their original ethical public opinion became vague as they got used to the prevalent fraudulent working culture afterward a long time. They loss the sense of justice to judge the right and the wrong things. They might even coherentize what they haddone to be just and necessary.PART BQuestion B1Why do you think maria Messina blend complicit in the fraud(s)? Explain your answer using the fraud triplicity. (15 marks approximately 1,500 words)AnswerThe fraud originally started with the large kickback scheme by Drabinsky and Gottlieb, and finally Maria Messina, as the chief fin ancial officer of Livent, got involved and helped in the huge fraud. Messinas motivation to become complicit in the fraud can be explained by the theory of fraud triangle, which reveals much of the psychology of committing a fraud. The three key factors in the fraud triangle, considered as prerequisites of fraudulent behaviours, are the pressure, the luck and the rationalisation of doing it. military pressThe pressure of committing the fraud, according to the theory of fraud triangle, is more often than not non-shareable (Dellaportas 2013). The type of pressure may be related to financial issues, or may come from the job and working atmosphere. Dellaportas (2013) pointed out that the evil ideas can also be the source of pressure that causes fraud.People in Livent who joined in the fraud had different reasons of incentive to do illegal things as they had different kind of pressure. For example, for the two executives, Drabinsky and Gottlieb, they shared financial pressure. At first , their greed for money stimulated them to blueprint the large kickback plan to secretly transfer money from the company to their own pockets. And later, just as Brenna and McGrath (2007) described in the paper, the executives had the motivation to fraud to keep the company at good performance so that they could gain high bonus as well as keep continuous outside investment for the company.But the motivation and pressure for Messina was a little different. Although as CFO of Livent, her bonus was linked with the performance of the company, the evidences in thecase and in the trial were insufficient to decide whether her fraudulent behaviour was directly motivated by financial pressure. However, it is clear that she was forced to involve in the fraud, like many other accountants at Livent, because of the irresistible impulse of Drabinsky and Gottlieb. Messina testified that the executives including Drabinsky would shout at the accountants and force them to cooperate in work. She wor ked under the pressure of the executives in the company. Messina would be at the risk of losing her job if she did not follow the instruction of Drabinsky.The financial situation was negative long before Messina joined Livent, meaning the fraud had already started before Messina was able to stop it. Taking over the indebtedness of managing the financial performance of the company, she was faced with the situation out of her control. The environment of fraud and routine to manipulate the financial records had long been formed. The frequent use of software that enabled Drabinsky to substantially manipulate the financial records and financial statements as much as he wanted was a common behaviour in Livent, acquiesced by everyone in the company. Under the threat of Drabinsky, Messina thus had no choice but to try her best to manage the fraud from being detected, making herself really exhausted by the daily work.The pressure Messina faced as the chief financial officer was unable to s hare with other colleagues and she was forced by the financial pressures to involve in the fraud. She could liveliness the threats from Drabinsky and the already very troublesome financial situation. And she could perceive that her subordinates and other staff in Livent were suffering the bully and irresistible impulse from their executives as well.OpportunityThe factor of opportunity in the fraud triangle refers to the ability to commit the fraud and in the situations like the one in the case, such opportunity mainly results from having specific professional skills or knowledge. That is to say, the person was able to manipulate skilfully and knew how to avoid being discovered by his supervisors or regulations. In addition, the trust that the person is able to acquire the job in accordwith laws also contributes to the opportunity. The trust existing in the relationship between the supervisor and the employees may contribute to getting authorized without close screening. The trus t caused the space of opportunity to fraud expanded.In case of Livent, Messina was an experienced accountants as well as a Chartered Accountant, who had been promoted to partner of the Deloitte Touch, LLP in Canada. Her previous experience in the industry enabled her to have a good knowledge both in accounting and auditing. That is to say, Messina potentially knew how to manipulate the accounting records daily and machinate the fraudulent financial statement annually. Also, she understood the normal practice of outside professional auditors, who were responsible for examining the financial performance of the company and avoiding inconsistency with the GAAP.Thus, Messina could guard professional advice to Drabinsky and Gottlieb so that their manipulation of the accounting records would not be detected in the annual auditing. Besides her professional knowledge and skills in assisting in the fraud in accounting, the opportunity for Messina to get involved also includes the trust on h er and her influence in her previous company. Messina had worked at Deloitte Canada for quite a long time and had been promoted to position as partner before she left the company and became CFO of Livent Inc. She had therefore built broad relationship within Deloitte, who was the outside auditing firm for Livent at that time.As Dellaportas (2013) pointed out in the research, insufficient internal regulation and supervision upon such fraudulent behaviours prompted the fraud to keep up without being detected by others. However, in the specific case of Livent, there was no self-regulation mechanism at all, since the entire company, from the executives to the employees of the lowest-level, got involved in the fraud. Thus, it was hopeless to discover and discourage such deviant behaviours by the people inside the company. This caused the fraud of Livent to continue to expand and to be very serious.RationalisationThe rationalisation is not rational, instead it is an excuse for the person who commits the fraud to justify the behaviour to himself. Coleman (1987) discussed this factor of fraud within the context of white collar crimes, and he argued that rationalisation is not an after-the-fact excuse. In fact, people who commit the crime do not realize that their behaviours are deviant. A large number of white collar crime criminals argued that they considered the laws to be unjust or unreasonable, causing them to break the rules (Coleman 1987). The factor of rationalisation is more risky than the other two factors because the people who have violated the laws believed that they had the right reason to do so. He also mentioned other common argument of the fraudulent behaviours.They claimed that such behaviours were the only way for them to achieve the goal or to survive (Coleman 1987). Based on the research results from Dellaportas (2013), he identified the three to the highest degree common way of denial that people think to justify their fraudulent behaviours. Peop le would rationalize their behaviour as they deny the responsibility, injury and victim. First, the offenders will shirk responsibility and say someone else are supposed to be in charge of the fraud. Secondly, they justify what they have done by arguing that there is no victim in this situation. Finally, if there is victims, the offenders may consider that the victims deserve the sufferings. Thus, they are free from taking responsible or even committing their fraud is illegal.Definitely, there were rationalisation inside Messina that made her behaviour just according to her own value. After quitting the partner position at Deloitte, Messina believed it to be right or rational for her to help Drabinsky in the fraud. Or otherwise, she would lose her job and would be unable to survive. And the overall atmosphere inside the Livent, considering what they were doing as matter of fact, alleviated the employees sense of responsibility for the fraud. Messina could hardly feel guilty and neve r considered about the consequences of helping the companys fraud. She might rationalize her efforts in the fraud as under the instruction of Drabinsky, instead of out of her own willingness.The above analysis clearly dissected the reasons why Messina became complicit in the fraud from the perspective of psychology. However, as Dellaportas (2013) discussed, the influence of each factor in the fraud triangle variedfrom case to case, and was not often equally impacting the fraud behaviours. Recent researches intend to improve the fraud triangle by considering additional factors into the model to better understand the behaviour of fraud in current times. What Messina had done assisted the fraud in Livent to continue for quite a long time after she joined Livent. Messina became the complicit in the serious fraud due to the pressure she was facing, mainly financially, the opportunity she was able to take advantage of and the rationalisation she found for herself to justify her deviant be haviours. Dellaportas (2013) discovered, through case study from ten accountants committing fraud, that the opportunity of committing fraud was a much more big factor in detecting fraud and to take control of it. The motivation and rationalisation contributed less in this kind of accounting fraud cases.Question B2 point out on the adequacy of the disciplinary action taken against Messina. (5 marks approximately 500 words)AnswerFinally, Messina was fined for $7,500 and was suspended from doing accounting practice for two years. It is adequate but not enough punishment for Messinas violation to the accounting standards according to the facts already known. After joining Livent, what Messina did in the Livents case of fraud went against the code of professional ethics, which discourages cheating and manipulations. Also, her behaviours broke the securities law in the United States, where the trial of Livent was held.Her involving in the fraud appointmented the interest of the public, especially the investors, who were unable to judge the real performance of Livent from their financial reports. Messina abused her authority in Livent and her influence on Deloitte, for the interest of her own and the executives at Livent. At the very beginning of joining Livent, Messina faced coercion and threats from Drabinsky to keep decent records by manipulation. However, she did not take positive action to resolving the conflict of interest between Drabinsky and herself. Proper ways when one faces conflict of interest is toquit the job or decline to do the fraud. Messina could have turned to a confidential counselling firm for advice so that she did not have to get involved further in the fraud.On the one hand, it is enough punishment for her involvement in the fraud. She helped the accounting department at Livent to conceal the manipulation of financial statements. Also, as former partner at Deloitte, she abused her influence on the outside independent auditors to comb the fi nancial reports of Livent before they filed to ensure the fraud undetected. What she did violated the standard professional codes for accountants and auditors, and thus she should be subject to penalty. According to the documents from Securities and throw Commission (1999), Messina was involved in discussion and approval of every manipulated records. She helped to hide these materials from the auditors so as not to be discovered the inflation in the companys revenue.On the other hand, the SEC is conservative in judgement because of lack of evidence in proving Messinas role in the fraud. First, it requires further investigation of the case to identify what she really did and her attitude in the fraud supported with evidence. Moreover, Messina, according to the case material, did show adversarial attitude toward Drabinskys fraud plan at first. It means that she still sticked to professional discipline in the beginning, though she yielded to Drabinskys bullying later. Also, Messina sh owed humble attitude in investigation and trial, and cooperated with the commission to investigate the case.It is adequate that the judges punished Messina both financially and professionally. She not only has to give back the illegal money she gained from the fraud, but also should be prevented from doing the practice until she can finally reflect on her mistakes before returning to the business as chief financial officer. However, the amount of fine is too little for Messina to realize her improper behaviours, considering the massive consequences of the fraud and the amount of money they benefited from manipulation. But the judgement should after all based on the evidences and regulations. The judge should take the good and bad things Messina had donethroughout the fraud into account to decide. Also, the punishment against Messina requires further investigation of her role in the fraud, which is disputable.ReferencesColeman, J W 1987, Toward an integrated theory of white-collar cr ime, American Journal of Sociology, vol 93, no. 2, pp. 406-439.Dellaportas, S 2013, Conversations with inmate accountants Motivation, opportunity and the fraud triangle, Accounting Forum, vol. 37, pp. 29-39.Elrod, H Gorhum, M J, Fraudulent financial reporting and cash flows, Journal of Finance and Accountancy, vol. 11, pp. 56-61.Llopis, J, Gonzalez, M R Gasco, J L 2007, Corporate governing body and organisational culture The role of ethics officers, International Journal of Disclosure and Governance, vol. 4, no. 2, pp. 96105Nwachukwu, S LS Vitell, S J 1997, The influence of corporate culture on managerial ethical judgments, Journal of Business Ethics, vol. 16, no. 8, pp. 757-776.Schwartz, M S 2013, Developing and sustaining an ethical corporate culture The core elements, Business Horizons, vol. 56, pp. 39-50.Securities and Exchange Commission, 1999, Securities and Exchange Commission versus Garth H. Drabinsky, Myron I. Gottlieb, Robert Topol, Gordon C. Eckstein, Maria M. Messina , Diane J. Winkefein, D. Grant Malcolm and Tony Fiorino, 99 CIV.0239, Litigation Release No. 16022, retrieved 15 Aug 2013, .