Ethics and Financial Services Essay

Question A1Outline the tricks identified in the courting and explain the inconsistencies with proper story treatment. Relate your answer to gigantic account concepts and accountancy standards where relevant. (8 marks close to 800 words)AnswerLivent Inc. is a theatre w be corporation registered in Toronto, Canada. Therefore, both the accounting behaviours were subject to the General evaluate history Principles (GAAP) of Canada. In a broad sense, the GAAP imposes four main(pre nary(pre noneinal)inal) constraints on the accounting behaviours of companies objectivity, materiality, consistency and conservatism. In the fibre of Livent Inc., at that place argon several behaviours that was inconsistent with the proper accounting regulations in general. Large kickback intentionAt the very beginning of the entire dupery by Livent, the twain executives, Drabinsky and Gottlieb, fabricated trans pull throughs that did non exist at each(prenominal)(prenominal), in raise to t ransfer the r fifty-fiftyue of the confederacy secretly to their consume pockets. They made the cook trans proceeding on their parallelism sheet by colluding with their vendors. Drabinsky and Gottlieb received the coin from vendors and asked them to fabricate evidences of charging fees. Manipulation of accounting insertsThe kickback scheme sacrificed the net profit of the familiarity, and as a result, Drabinsky and Gottlieb started manipulating the records. There were evidence from afterwards probe that Livent was exaggerating its revenue from the knock office to show that it kept skilful income statement with goodprofit. Also, they asked the accountants at Livent to modify the financial statements to hide the emf financial problems Livent had and to exhibit good operating military operation to attract more enthronization. Drabinsky even used particular(prenominal) software to hold the financial statements to make them as if they were the victor record and hard to be respected. Keeping the lampoon as secret to auditorsWith the function of the special software, Livent Inc. was equal to keep two records of their financial performances, the phony ane and the real unmatched. And the outside auditors did auditing of Livent based on the phony financial records Livent provided. Therefore, the Deloitte, Livents outside auditing comp any(prenominal), could hardly see signs of sham during annual auditing.Signifi apprizetly, the histrion of Livent Inc. stony-broke the accounting precept of objectivity, which is withal the primary standards companies should stick to. The objectivity principle basically requires that all kinds of financial statements the companies offer should be based on the details. That is to say, every transaction and item recorded in the financial statements should be support by unbiased and objective information. downstairs no mass are the managers, shareholders and accountants allowed to fabricate or distort any accou nting breeds and materials of the troupe. However, what Drabinsky and Gottlieb did at Livent went against the accounting standards. The fact that the two participators urged the internal accountants to modify the seasonal expenses and financial obligation is definitely a elan from the proper master key behaviours.Livent benefited from manipulating its performance with additional investing and bank loans, which boosted aggressive expanding throws of Livent. It is even intoler competent that the go with invented the special software, which allowed untrammelled arbitrary modification of all the accounting records of the company. This made the faker ofttimes easier and less likely to be discovered because it enabled the manipulation bearinged as if they were the original data. Elrod and Gorhum (2010) made quantitative question on the trend of detecting fraud by examine the extent to which the cash flow from operation and the winnings from continuing operations are correlat ed.Livent Inc. forced the accounting rung in the company to comply with the fraud behaviour without any doubt. The executives showed a prosy attitude toward the fraud. The accountants, free-living auditors were non workings independently and objectively as required by GAAP. On the contrary, they defecate been coerced or instructed to make moldr accounting records, and did not show cooperation with the independent outside auditors. GAAP intends to below sign auditor independence. But Messina used her old influence at Deloitte to disconcert 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. Under the current accounting principles and standards in Canada and the join State, the auditors are responsible lone(prenominal) for ensuring the proviso of all the accounting documents of the company align with t he GAAP. But the outside auditors do not have entree to the detailed quotidian record of the company. Therefore, the annual auditing is unable to baffle managerial collusion if the company provides counterfeit accounting materials. Livent was giving the fake balance sheet, income statement and other reports to Deloitte, which is not allowed by the accounting standards to a broad extent. Some companies correct their tare behaviour when the situation improves, which makes it even harder to be detected. Nonetheless, such(prenominal) behaviours done by Livent are inconsistent with the standard professed(prenominal) ethics and regulations.Moreover, the aggressive developing strategy Livent had taken withal violate the conservatism principle that the GAAP requires. This principle asks the accountants to exclude the uncertain income or revenue, while include the possible losses and fortunes in the financial statement. The mercenary accounting behaviors are necessary because they can powerfully prevent the shareholders and investors from potential losses. But in this case, Drabinsky is in such a haste to keep abreast aggressive development of the company, and obviously was exaggerating its revenue as well as concealing its losses. Question A2 Describe the bodily honest husbandry at Livent Inc. How did this floriculture affect employee behaviour? Explain and ripeify your answer. (12 marks slightly 1,200 words)AnswerSeveral researches supported the argument that the collective estimable culture had thumping influences on the behaviours of the employees and their respectable judgements. The company does not have to have a limited code 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 shock absorber on the moral conviction of the emplo yees upon what is upright and premature. 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 public. Also, the difficulties in preventing such behaviours were to de first-rate, prevent and detect it. Schwartz (2013) made research and emphasized the ternion key reckons in husband an ethical corporate culture in the company.They are the set of ethical beliefs or values byout 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 mechanics, set and administrated inside the company to constraint the behaviours of not only if the employees, but the senior executives as well. The unethical culture set by the top executives had not only influe nced, but also forced all the supply, especially the accountants, to gather 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 assure the financial records in Livent Inc. for quite a long time. As early as the grade of 1990, Drabinsky, together with his surpass 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 good deal impressd 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 audit ing company, Deloitte. The executives and the senior take round were not establishing positive example inside the company so as to maintain a positive ethical corporate culture.Whats even worse, they acted as the leading role in such unsound behaviours and at random got the other employees into the just 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 fare 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 forefend being discovered. It had also facilitated the fallacious behaviours an d 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 overtake attitude of viewing fraud as a subject 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 tangled in, they were influenced by the overall environment and paid no attention to the fraudulent behaviours in Livent. They took for granted that what they did was to follow the instructions of the executives so as not to get fired. The employees would see Drabinsky shouting and bullying the accountants and even the senior level staff in the company if they had any dissimilar opinions against him.This was in fact establishing gravid example for the employees and was to warn the other staff to just accept the deviant behaviours as a reckon of fact. For a long time, employees were awa re of the fraud happening, but were unwilling 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 some(prenominal) 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 think over but to comprehend to Drabinskys instructions.Last but not least, Livent Inc. lacked proper self-regulation mechanism to prevent the non-ethical behaviours. More oftentimes 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 th e social values and principles. In addition, as the ethical value of the company should not be arbitrarily decided by the executives or a few people in the company instead the set of ethical value should gain the try for 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 each position to prevent fraud. The ethical value of the company should be clearly stated in the policies and regulations, or even set inducing mechanism to encourage the employees to follow and to form good habits.In conclusion, there were three factors causing the unethical corporate culture inside Livent. The first is the long-standing fraudulent behaviours from the top executives, which were then passed down to the employees of lo wer 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 deter it. Finally, the lack of internal ethical corporate regulations or values launch 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 judgement became vague as they got used to the prevalent fraudulent working culture after a long time. They loss the sense of justice to judge the right and the wrong things. They aptitude even vindicate what they haddone to be just and necessary. break dance BQuestion B1Why do you think Maria Messina baffle 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 sc heme by Drabinsky and Gottlieb, and in the long run Maria Messina, as the chief financial 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 drag, the opportunity and the rationalisation of doing it.PressureThe pressure of committing the fraud, harmonise 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 divided financial pressure. At first, their greed for money stimulated them to design 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 chief financial officer of Livent, her bonus was linked with the performance of the company, the evidences in thecase and in the exertion 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 umteen other accountants at Livent, because of the coercion of Drabinsky and Gottlieb. Messina testified that the executives including Drabinsky would shout at the accountants and force them to cooperate in work. She worked 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 controvert long onwards Messina joined Livent, meaning the fraud had already started ahead Messina was able to stop it. Taking over the responsibility 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 easily manipulate the financial records and financial statements as much as he cute 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 share with other colleagues and she was forced by the financial pressures to involve in the fraud. She could flavor the threats from Drabinsky and the already very troublesome financial situation. And she could behold that her subordinates and other staff in Livent were suffering the bully and coercion from their executives as well.OpportunityThe factor of opportunity in the fraud triangle refers to the cogency to commit the fraud and in the situations like the one in the case, such opportunity mainly results from having specific professional skills or intimacy. 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 corporate trust that the person is able to accomplish the job in accordwith laws also contributes to the opportunity. The trust existing in the kin mingled with the supervisor and the employees may contribute to getting authorized without careful screening. The trust 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 prepare the fraudulent financial statement annually. Also, she understood the normal arrange of outside professional auditors, who were responsible for examining the financial performance of the company and avoiding inequality with the GAAP.Thus, Messina could give 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 acco unting, the opportunity for Messina to get involved also includes the trust on her 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 originally 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 save 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. systemat izationThe rationalisation is not rational, instead it is an excuse for the personwho commits the fraud to shrive the behaviour to himself. Coleman (1987) discussed this factor of fraud within the context of white dread offensive activitys, 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 emergence 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 most c ommon way of denial that people think to justify their fraudulent behaviours. People would rationalize their behaviour as they deny the responsibility, injury and victim. First, the offenders will shrink from 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 be 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 emplo yees sense of responsibility for the fraud. Messina could hardly feel guilty and never 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 behaviours. Dellaportas (2013) discovered, through case study from ten accountants committing fraud, that the opportunity of committing fraud was a much more important factor in detecting fraud and to take control of it. The motivation and rationalisation contributed less in this kind of accounting fraud cases.Question B2Comment 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 penalty for Messinas violation to the accounting standards according to the facts already known. After connexion 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 o f Livent was held.Her involving in the fraud conflicted 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 subdivision 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 ransack the financial 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 Exchange 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 di scipline in the beginning, though she yielded to Drabinskys bullying later. Also, Messina showed humble attitude in investigation and trial, and cooperated with the delegation 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, whi ch is disputable.ReferencesColeman, J W 1987, Toward an integrated theory of white-collar crime, American diary 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 constitution 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 perfume 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, .