Public trust in corporations has been severely compromised even though over 90 percent of Fortune 500 companies have ethical codes of conduct reminding their employees and stakeholders of their shared beliefs and values, and indicating the responsibilities and behaviors expected of them by their respective employers.11 Widespread declaration of codes of conduct by corporations imply that corporate managers are aware of appropriate ethical behavior and societal expectations. Even though trust is an essential element of business transactions, ethical breach of trust is a commonplace phenomenon, seen worldwide. Failure on the part of corporate executives to meet their responsibilities to stakeholders suggests a lack of understanding of the gravity of the situation. As stated by Dhir, "It is imperative that executives in industry and corporations—senior executives in particular—take to heart the lessons learned from recent corporate scandals of unprecedented scale and audacity. On these executives lies greater responsibility today than ever before to meet societal expectations of ethical conduct."12 Corporate greed and managerial self-interest have manifested in major scandals, bringing highly regarded companies to disrepute. A few cases are described to provide a sense of the audacity and scale of these scandals.

Enron, a global company in the business of trading and marketing natural gas and electric power, disguised debts from failed projects through accounting loopholes and questionable reporting. Their purpose was to mislead investors and unethically project the company as one that held great promise. Through the 1990s, Enron stock price increased by 311 percent to give the company a market capitalization of $63.4 billion, six times its book value!13 However, a whistleblower, Sherron S. Watkins, Enron's vice president for corporate development, exposed Enron's corporate culture of fraud, and the house of cards came crumbling down.14 Investors lost nearly $90 billion when Enron stock prices dropped from about $90 per share to about $1 per share through 2001.15 Ultimately, Enron declared bankruptcy and ceased to exist.

The scandal raised questions about the role played by Enron's audit and accounting partner, the erstwhile highly reputable Arthur Andersen. The colossal failure of Arthur Andersen's auditors to appropriately report on Enron destroyed its reputation and led to its dissolution. Arthur Andersen was charged with and found guilty of obstruction of justice for destroying records after investigations into Enron had begun.16 The scandal also raised questions about the appropriateness of allowing auditors to also serve as consultants to their audit clients. Calls were made for the regulation of large accounting firms. It was argued that Arthur Andersen was at best lax in auditing Enron because "it got larger fees from consulting for Enron than auditing the company's books."17

Enron's bankruptcy was the largest corporate bankruptcy in U.S. history, until WorldCom broke the record the following year. The WorldCom scandal was also rooted in accounting irregularities. The company's growth had been sustained through mergers and acquisitions. When WorldCom merged with MCI Communications in 1998, the $37 billion merger was the largest ever in the United States. In 2000, when the telecommunications industry experienced a downturn, WorldCom CEO Bernard Ebbers was under pressure to cover margin calls on his WorldCom stock that he had used to finance other businesses. He took loans in excess of $400 million from WorldCom to cover the calls, putting the company under further pressure. Under the direction of Ebbers and other officers, the company deployed fraudulent accounting practices to underreport costs and inflate revenues, thereby hiding declining earnings and projecting a false picture of growth and profitability. Subsequent investigation revealed that the value of WorldCom's total assets had been inflated by around $11 billion.18 In 2005, Ebbers was sentenced to 25 years in prison for "securities fraud, conspiracy and filing false documents with regulators."19 In his 2012 State of the Union address, President Barack Obama called on the U.S. Congress to "toughen the laws against securities fraud and to strengthen the ability of the Securities and Exchange Commission to punish Wall Street firms that repeatedly violate antifraud statutes."20

Examples of large-scale corporate scandals are not isolated to the United States. Based in Switzerland, Asea Brown Broveri (ABB) describes itself as "a global leader in power and automation technologies that enable utility and industry customers to improve their performance while lowering environmental impact."21 It was created through a giant merger of companies in the Swiss-German and Swedish heavy industry sectors in 1988. Its market capitalization soared eightfold and was valued at $25 billion by February 2000. However, the company turned out not to be the earnings juggernaut it was made out to be. Just a year later, it was discovered that about 28 percent of reported net income between 1998 and 2000 was actually from nonoperating sources such as property and business disposals. This was not an isolated incident. It came to light in 2002 that the erstwhile CEO, Percy Barnevik, had been paid an undisclosed severance package of $78 million without the knowledge of ABB's board of directors.22 In 2007, ABB admitted to have violated the U.S. Foreign Corrupt Practices Act's (FCPA) antibribery law "with questionable payments in Asia, South America, and Europe (with a particular focus on Italy)."23

In India, the Satyam Computer Services scandal became public in January 2009 when Satyam's chairman, Ramalinga Raju, admitted that the corporate accounts had been falsified. With that admission, $2 billion of wealth belonging to 300,000 shareholders was eroded in a single week. The scandal also marked a failure of Price Waterhouse Coopers's auditors as a number of financial irregularities were discovered. For instance, Satyam's actual number of employees was found to be around 40,000, not the previously reported figure of 53,000. Mr. Raju was allegedly withdrawing 200 million Indian rupees (approximately $4 million) every month to pay the 13,000 nonexistent employees.24 Satyam came to be known as India's own "Enron scandal."

The scale of some of the scandals is difficult to fathom. The 2008 bankruptcy filing of Lehman Brothers was the largest ever in the United States. At the time, Lehman Brothers held $613 billion in assets, and when it failed, the whole world stopped lending money. In December 2010, Ernst & Young was charged with assisting Lehman Brothers commit massive accounting fraud.25 To put the numbers in context, in 2010, the total value of exports of U.S. goods to Europe amounted to about $240 billion. With the value of corresponding imports of $319 billion, the United States recorded a deficit in trade with Europe of only about $80 billion.26

Wal-Mart is the United States' largest corporation, employing about 1.3 million employees. Nobel Laureate Paul Krugman noted in 2006 that on average, Wal-Mart's nonsupervisory employees were paid a meager $18,000 per annum. In contrast, its chairman, H. Lee Scott, was paid a salary of almost $23 million. Krugman observed that the past decade or so has seen a massive transfer of wealth from the middle class to the wealthi-est.27 Admittedly, debate continues on whether disparities resulting from the dynamics of the marketplace should be regarded as scandalous. Unfortunately, however, unethical practices have contributed significantly to the transfer of wealth lamented by Krugman. The cases described above barely scratch the surface of the scandals of our times. The actual list of scandals of the past decade or so is astonishingly long. Some of the more notable cases include those of

• AIG—improperly bolstered reserves and allegedly violated insurance accounting rules

• American Airlines—deferred maintenance of aircrafts

• AOL Time Warner—fraudulently inflated revenues by more than $1

billion between 2000 and 2002

• BAE Systems (United Kingdom)—caught in bribery scandal pertaining to contracts in Saudi Arabia

• Bristol-Myers—accounting irregularities

• Clearstream—involved in financial scandal in Luxembourg

• Deutsche Bank (Germany)—caught in spying scandal

• Exxon—overreporting oil reserves

• General Electric—charged with inflating earnings in 2002 and 2003 to beat expectations and mislead investors

• Goldman Sachs—charged with fraud in April 2010 for marketing subprime mortgages, admitting to offering complex debt to clients while betting against their ability to repay

• Halliburton—overcharged for government contracts

• Lockheed—charged with bribery in Germany, Japan, and the Netherlands

• Parmalat (Italy)—cited in Europe for accounting and mutual fund fraud

• Phar-Mor—allegedly lied to the shareholders

• Royal Dutch Shell (the Netherlands)—overstated oil reserves

• Saab Aerospace (Sweden)—charged in 2011 with bribing South African officials over sale of jet fighters for which it blamed its collaborator, BAE28

• Siemens (Germany)—engaged in corruption and bribery of Greek government officials during the 2004 Athens Summer Olympics

• Société Générale (France)—derivatives trading that caused multibillion euro losses

• Tyco International—executive theft

• Union Carbide—endangered the community and caused deaths and injuries in Bhopal, India

• Xerox—accounting irregularities, which also brought its auditor, KPMG, under scrutiny

It is evident that corporate scandals have not been limited to any specific region of the world. As noted by Sweden's anticorruption chief, Christer van der Kwast, "You hear people say that corruption is something they have in Africa, in South America, in Asia, but corruption takes two sides to happen."29 These scandals attest to the continued and widespread lack of top management commitment to ethical practices across the globe. It is thus important to understand how the ethical behavior of key officers in corporations can be managed. Why do corporate scandals occur, and why are they so widespread? To answer this question, one must first comprehend the complexity of a modern corporation.

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