Consequences of Unethical Behavior

Consequences of Unethical Behavior
Over the past few years, ethical lapses have led to a number of bankruptcies. The
recent collapses of Enron and WorldCom as well as the accounting firm Arthur
Andersen dramatically illustrate how unethical behavior can lead to a firm’s rapid
decline. In all three cases, top executives came under fire because of misleading
accounting practices that led to overstated profits. Enron and WorldCom executives
were busily selling their stock at the same time they were recommending the
stock to employees and outside investors. These executives reaped millions before
the stock declined, while lower-level employees and outside investors were left
“holding the bag.” Some of these executives are now in jail, and Enron’s CEO had
a fatal heart attack while awaiting sentencing after being found guilty of conspiracy
and fraud. Moreover, Merrill Lynch and Citigroup, which were accused of
facilitating these frauds, were fined hundreds of millions of dollars.
These frauds also severely damaged other companies and even whole industries.
For example, WorldCom understated its costs by billions of dollars. It then used
those artificially low costs when it set prices for its customers. Not knowing that
WorldCom’s results were built on lies, AT&T’s CEO put pressure on his own
managers to match WorldCom’s costs and prices. AT&T cut back on important
projects, put far too much stress on its employees, acquired other companies at high
prices, and ended up ruining a successful 100-year-old company.8 A similar situation
occurred in the energy industry as a result of Enron’s cheating.
These and other improper actions caused many investors to lose faith in
American business and to turn away from the stock market, which made it difficult
for firms to raise the capital they needed to grow, create jobs, and stimulate
the economy. So unethical actions can have adverse consequences far beyond the
companies that perpetrate them.
All this raises a question: Are companies unethical, or is it just a few of their
employees? That was a central issue that came up in the case of Arthur Andersen,
the accounting firm that audited Enron, WorldCom, and several other companies
that committed accounting fraud. Evidence showed that relatively few of
Andersen’s accountants helped perpetrate the frauds. Its top managers argued
that while a few rogue employees did bad things, most of the firm’s 85,000
employees, and the firm itself, were innocent. The U.S. Justice Department disagreed,
concluding that the firm was guilty because it fostered a climate where
unethical behavior was permitted and that Andersen used an incentive systemthat made such behavior profitable to both the perpetrators and the firm. As a
result, Andersen was put out of business, its partners lost millions of dollars, and
its 85,000 employees lost their jobs. In most other cases, individuals rather than
firms were tried; and while the firms survived, they suffered damage to their
reputations, which greatly lowered their future profit potential and value.