Richards adopts a teleological-parochialism position 1 to justify that his actions are ethical, 2 even though they are illegal (Baugher & Weisbord, 2009). 3 Richards argues that his actions are ethical as they resulted in desirable consequences, in the form of better sales/performance figures, which met analyst forecasts and positively affected shareholder value (Radtke, 2004; Fernando, Dharmage, & Almeida, 2008). 4 He acted in the interests of his ‘in-group’ (other executives/managers), maximising their performance-based compensation, 5 at the expense of others (Barnett, Bass, & Brown, 1994). 6 Richards also claims that his actions were not serious, as recognising revenues earlier was simply a timing issue, 7 and was common practice in the software industry. 8 Furthermore, his actions are not as serious as other well-publicised corporate scandals. 9 Richards did not adopt a deontological position, as he was not concerned about following rules (Baugher & Weisbord, 2009). 10
A person who adopts a teleological position examines the expected consequences of actions to determine whether the actions are ethical, irrespective of the process by which the result is achieved (Baugher & Weisbord, 2009). Within this teleological position is ethical parochialism, where behaviour is deemed ethical if it protects the interests of the individuals ‘in-group’ (Henderson, Peirson, & Herbohn, 2011). 2 Richards’ actions included facilitating the extension of the fiscal quarter, allowing subordinates to obtain contracts after the quarter end, and failing to alert the finance and accounting departments about contracts that may have been backdated, thus misreporting affected revenues and earnings, amounting to misconduct. It may be argued that his positive act of facilitating the extension of the fiscal quarter, is more serious than his inaction, in failing to alert the finance and accounting departments about contracts that may have been backdated. 3 Criminal charges were brought against Richards, and he was sentenced to imprisonment. 4 These consequences are desirable as Computer Associates (‘CA’) has a sales-driven culture, where managers exerted immense pressure on sales associates to meet sales targets, which were set by executives and influenced by the analyst community. Non-performance was not accepted. Moreover, Richards did not care about the fact that the process, by which the result was achieved, was illegal. 5 Executives/managers also held stock options in CA, which would benefit from inflated results, as share prices would increase. 6 Richards does not seem to care that the misreported figures would mislead institutional investors as to the financial performance and position of CA. 7 Richards argues that keeping the books open for a few days longer so that revenue could be recognised a quarter earlier is not serious, as revenues were only recognised two or three days earlier, the contracts were valid, the revenues and cash flows associated with these contracts were genuine, and eventually the products were delivered and the cash received. There is no accusation of reporting nonexistent deals or hiding major business flaws. 8 Firms in the software industry frequently use the gray areas in accounting, to make their figures look more favourable. 9 Richards argues that CA, unlike WorldCom, Enron and Adelphia, had no shell companies where liabilities were hidden or where liabilities were converted into assets. 10 A deontological position determines the wrongness or rightness of acts based on rules, independent of the outcome. ACCT3102 External Reporting Issues Case Study – Letter from Prison Page 1 of 19
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However, Richards’ position is weak, as his justifications are rebuttable. His actions are very serious as investors would be misled by inaccurate statements, 11 and CA drew on future earnings to deliver earnings/revenue growth....