Hidden in the great shadow of 11 billion dollar fraud that was perpetrated by MCI WorldCom is a story of one of the company's low-level managers working in accounts receivables line of work, Walter Pavlo. Being the center of the corruption scandal at MCI, Pavlo manipulated his employer, clients, and fellow employees to abscond with about six million dollars in accounts receivables (Pavlo & Weinberg, 2007). Harold Mann initiated Walter Pavlo's participation in the scheme, and they worked together to defraud MCI, as well as its past-due Carrier Finance clients. The corruption scandal highlights how people can be involved in wrongdoings in an organization as a result of their progression via poor multiple decision streams (Pavlo & Weinberg, 2007). The scam also provided a more profound illustration of how uncertainty, complexity, as well as informational impact can result in company personnel engaging in corruption. Similarly, at Enron, the CEO, auditor, and CFO at Enron orchestrated a similar scandal, which heavily touched on unethical behavior by employees meant to defraud a company. The purpose of the current paper is to analyze two similar scandals - at MCI Carrier Finance Group and Enron and to highlight how the two corruption cases are unethical, as well as how they are identical.
Corruption at MCI by Pavlo and Mann
Pavlo worked as a subordinate in MCI but later was promoted to a group manager of MCI Carrier Finance Group. Carrier Finance was involved in the collection of bills from major resellers and 900 phone number clients. Mann, on the other hand, was the CEO and owner of an MCI 900 number customer. In accordance with their scam plan, Pavlo would threaten to cut off service to clients who were past due if they did not pay a significant portion of their bills. Mann's duty in the plan would independently approach the clients with an offer to assume their debt in return for monthly installments and a fixed fee, which is generally known as factoring arrangement. However, Mann did not intend to pay the client's bills, instead, he planned on sharing the payments made with Pavlo, who with the help of two co-conspirators would falsify the accounting books of the company to create an appearance that the clients had fulfilled their obligation to the company. Even though after Pavlo was promoted had a little sway at MCI, he abused and committed fraud with the small portion of company and customer information he had access to, mainly the accounts receivables he had power over. The negligible power he had at MCI was given to corruption, but he was once a pure family man who had become a hate-filled fraudster. For instance, Pavlo describes the source of his corrupt tendencies by articulating, "I started out hating MCI's customers. Then I hated MCI. Then I hated myself. After that, greed took over. I figured, even if MCI caught me, it would keep quiet because it was doing far worse" (Pavlo Jr. & Weinberg, 2007, p. 257). However, it can be derived that the power that Pavlo was given at the company did not ignite his corruption, instead, it was a conduit via which Pavlo expressed the corruption he had already planned to orchestrate and went ahead to justify it.
The fraud triangle can describe the process of the fraud as power alone cannot corrupt, but it merely provides a portion of one of the elements necessary for an individual to commit a fraudulent act. In order for a fraud to occur, three conditions must occur, which are rationalization by the perpetrator, pressure from possible incentives associated with committing the crime, and an opportunity to orchestrate the fraud (Kassem & Higson, 2012). These conditions, as posited by Dr. Donald Cressey, who first created the fraud triangle, must exist before fraud happens. As Kassem and Higson (2012) articulated, Cressey wrote that pressure is what typically causes an individual to commit fraud, which is often based on financial aspects. As such, the elements of the fraud triangle might sway a once trusted individual into committing a corrupt case. For instance, Cressey articulates that,
Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-sharable, are aware this problem can be secretly resolved by a violation of the position of financial trust and can apply to their conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted. (Coenen, 2008, p. 9).
Considering the fraud triangle, even though it was developed to identify possible fraud, it can also apply to general corruption, which implies that there has to be a motivating factor for corruption to occur. In addition to motivation, there should also be an opportunity, as well as a significant rationale that can be used as a justification to commit the act. In the case of Pavlo, the motivation to engage in fraud was spurred by his tire "of striving and worrying" and thus, he wanted more money as he deemed what he was earning not enough. He needed more money than what he made at MCI to provide for a better life for his two sons and wife (Pavlo Jr. & Weinberg, 2007, p.121). Motivation is complicated to stop when contemplating on whether to commit fraud, which is evident from the MCI case, which is also similar to that of Enron. The second element of a corrupt act to occur is rationalization, but this may not lead one to the right path. For instance, Pavlo poorly reasoned as he rationalized that stealing from MCI by thinking that MCI was committing more heinous crimes that he did. In fact, he believed that MCI was crooked and would not come for him as he committed a lesser crime (Pavlo & Weinberg, 2007). Additionally, another element of the fraud triangle that is necessary for a crime to occur is an opportunity. In essence, for one to commit a crime such as fraud, he not only needs a chance to undertake the fraudulent activity, he also needs an opportunity to conceal it (Coenen, 2008). Pavlo often engaged in activities tied to the accounts receivable, such as posting payments that he received from the customers and to meet corporate's bad debt expense goals (Pavlo Jr. & Weinberg, 2007). Pavlo was encouraged and awarded for lapping accounts receivable and other illegal acts to help MCI reach its projected financial numbers. As such, MCI's desire to illegally hide the bad debts gave Pavlo an opportunity to conceal the accounts receivables he was thieving with a myriad of lies that characterized the finance department at MCI.
Auditor, CEO, and CFO Corruption at Enron
As such, Pavlo and Mann at MCI created financial irregularities and falsified the accounting books. A similar strategy was utilized by the auditor, CEO, and CFO at Enron. The anomalies that were present in the financials included overstated revenues, which created an impression of high growth and innovation, even though the firm was not adopting what significant competitors did, such as mergers and acquisitions. The CEO endorsed revenues instead of profits as the primary measure of performance to promote Enron as the global leader and used overstating revenues to win contracts. Also, the equity and profit margins were the lowest ranked among the largest companies (Dharan & Bufkins, 2008) despite having a 65% annual growth. This provided an opportunity for orchestrating the fraud. Also, as pointed earlier, it used mark-to-market accounting principles, which inflated the revenues and shifted assets and liabilities off-balance sheet. In addition, the stock price and price-to-earnings multiples were huge even though the profits were negligible. As such, there was evidence that the high revenues and stock prices did not correlate to the low profits, hence corroborating a fraudulent activity. On the other hand, MCI utilized lies in the financial department, which just as in Enron scandal falsified the accounting books. In both cases, it was unethical for them to forge company information. Therefore, both schemes employed at Enron and MCI were unethical as they violated the code of ethics, as well as its clients' property rights and the corporation's investor's right to free consent (Chakrabarty & Bass, 2015; Grant, Arjoon, & McGhee, 2017; Bowie, 2017). Additionally, the schemes were illegal in that Pavlo and Mann at MCI, as well as Jefferey Skilling and Fastow, which prompted them to be prisoned after their fraudulent behavior was exposed.
The company personnel at Enron orchestrated a similar unethical scandal to MCI. However, the scandal was further fuelled by adverse market conditions. It was evident that the CEO, CFO, and Arthur Andersen, the consulting firm of Enron were adamant in orchestrating the fraud. In essence, they never verified the truthfulness of the financial statements where they overstated the revenues. As such, they did not follow due diligence in making financial reporting. Besides, the scandal met the elements of a crime, as well as the fraud triangle. For instance, the CEO and CFO sold their share prior to the collapse. In addition, the CFO advocated the Mark-to-Market accounting practices that could easily be manipulated in favor of the fraudsters.
In essence, since the crime was orchestrated by the CEO, CFO, and Arthur Andersen, it shows that they were up to cover the accounting practices that enabled them to create an opportunity to commit fraud. The CFO must have learned that the mark-to-market accounting practices could be manipulated to commit the fraud. Together with the accomplices, they knew that they could get away by inflating the revenues, and therefore, misrepresent the information to the public. As such, avoiding such crime, from the theory, demands that they should be separated, and thus, hiring new a new CFO, CEO, as well as an audit firm would prevent further fraud. The CFO, CEO, and Arthur Andersen presented false financials, and thus, violated the company regulations, where they misrepresented the financial information. Also, Arthur Andersen violated the ethical codes which require the auditor to gather and use information on the financial statements to identify risks due to fraud. As such, the three parties were complacent in committing fraud. In effect, they stand legal ramifications and should be presented in a court of law. After their guiltiness was proved, just like Pavlo in MCI, they were subject to legal procedures and fine.
Based on ethical theories, the fraud at MCI and Enron was unethical. Both cases highlight the need for transparency, as well as thorough auditing within companies. Deontological ethics hold that people should take an ethical position that judges an action's morality based on rules and obligations (Chakrabarty & Bass, 2015; Grant et al., 2017). It was the obligation of Mann and Pavlo at MCI, as well as the CFO, CEO, and auditor at Enron to be truthful to what they were doing, but instead, they took upon themselves to steal. Even though the company was also using unethical business acts, they should not have followed suit. In most instances, companies have a code of conduct, and from a legal perspective, corruption and fraud are unacceptable. These are the basic rules and obligations for all individuals working with financial issues in a company. Besides, all the parties involved in both corruption cases had a commitment to be truthful to clients and investors. They did not meet these basic requirements, and thus, based on deontology, they were unethical as they were not transparent to the stakeholders they served. The duty corresponds to positional rights of serving the best interests of the company ethically and in a transparent manner, which they did not meet (Chakrabarty & Bass, 2015; Grant et al., 2017). Also, based on Kant's categorical imperative, it is immoral...
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