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MPA901 Ethics And Governance

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MPA901 Ethics And Governance

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MPA901 Ethics And Governance

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Course Code: MPA901
University: Melbourne Polytechnic is not sponsored or endorsed by this college or university

Country: Australia

Case Study: WorldCom

Consider the following scenario, based on Cynthia Cooper’s recollections of the events that brought down the telecommunications giant WorldCom. Cooper was an internal auditor at WorldCom and eventually uncovered the fraud that would shut the company down. As she explained, it started with the Financial Controller’s alarm at unexpectedly high line rental costs that would significantly decrease expected earnings. “Line rental costs” represent the money that WorldCom pays to use the telephony infrastructure (poles, wires, maintenance etc.) that are owned by other companies. The stakes appear high: unexpectedly high costs would mean that earnings are lower than expected. This would damage WorldCom’s share price and increase the cost of future capital raising.
In the following passage, WorldCom’s Chief Financial Officer (CFO) Scott Sullivan discusses the problem with the Financial Controller David Myers before enlisting vulnerable accountants into a fraudulent scheme that would eventually bankrupt the company:
In this assignment you will be evaluating philosophies/theories, the AAA model and APES 110 to determine how they can guide or inform an ethical outcome.
Part A:
Consider the motivations and actions of David and Buddy in the case study above. From the theories (philosophies) of ethics discussed in Modules 1 & 2, select one for each of David and Buddy.

Clearly identify which theory you are using for each, and provide a brief description of the theory.
Explain the actions of David and Buddy in terms of your selected theory.
Explain why this theory was a good choice for explaining this situation. What was the theory good at describing, and what was not good at describing.

Part B:
Assume the role of Buddy. Before you agree to do what David wants, you reach into your top drawer and pull out the seven step AAA Ethical Decision-making Model. Use the model to decide what your decision should be.
To answer this part, use the seven steps as sub-headings and set out your response to each step. Some steps will require more research than others.
At the end, clearly state what your decision is, and make sure it is a logical conclusion from your seven steps.
Part C:
Assume that David is a member of CPA Australia and that he has asked you to advise him on the application of APES 110 to this situation. As a senior professional accountant, David has a responsibility to ensure that he and the accountants that work for him provide ethical advice and services.
As an expert on APES 110, advise David on the requirements of APES 110. Given the scenario that has been described above, assume that David has not yet pressured Buddy to act unethically. What are the fundamental principles that David and his staff must uphold? What threats does David face and what safeguards could he put in place to mitigate threats to the fundamental principles?


The current study is about the analysis of given case study of Worldcom using ethical philosophies, APES 10 and AAA model. Application of such theories and model has been done so that an ethical outcome can be guided to the organization. Worldcom was the largest telecommunication giant that was filed with case of largest bankruptcy by erosion of its profit and creating illusionary earnings. The fear of shutdown of company resulting from decreased unexpected earnings had made senior management to engage in continuing series of improper accounting manipulations in order to make financial reports appealing to investors (Ailon, 2015). The line rental costs o organization was unexpectedly high and for meeting earning guidance, financial officer instructed financial controller to misrepresent the line cost expenses. Improvement in earning pictures of company by way of fraudulent methods depicts case of ethics and governance matters. This is so because it was on part of financial controller (David) and accounting director (Buddy) to act ethically under the purview of ethical decision making.
Part A:
Identification of theory and its brief description:
The action and motivation of David and Buddy would be influenced by culture of ethical practices and principles. David and Buddy are extremely uncomfortable with the request of Scott that would require them to make adjustments in hundreds of millions of dollars without any hope of correction of problem. They are under pressure of making accounting manipulations as the company has to release its earnings and moreover not following the orders would mean losing job (Askary, 2017). The described situation is explained with the help of ethical theories that helps in explaining and answering how people can live together in a social and productive way.
David and buddy are motivated to manipulate accounts that would increase the expected earnings by pressuring into actions that are suspected to be illegal and unethical. In the absence of any rigorous ethical environment, they modified the assumptions of several accounts.
The action of David and Buddy is guided by the Utilitarianism theory of ethics where choosing one action over other bases the locus of right or wrong on outcomes. This particular theory takes into account interest of other by moving beyond the scope of interest of own. Action according to this theory is considered better if it produces happiness amongst people impacted by such actions (Stein et al., 2017). However, this principle of utilitarianism is controversial because the morality of action is decided by motive behind it. While evaluation of act using this theory requires individual to conclude that more of good rather than bad will be produced (Anderson et al., 2018).
Explanation of actions of David and Buddy in terms of theory:
In terms of Utilitarianism theory, the act of David and Buddy to not misreport the figures of expected earnings would produce good outcome for investors as they would have not suckered by inflated profits. The bad outcome on other hand would be on part of displeasure of Scott who ordered cover up for higher rental costs and losing of jobs for co workers. In the absence of supported ethical culture and no formal ethics program limited the options available to professionals regarding what decision to be taken. In face of such scandals, a new emphasis on integrity and ethics would help in trusting financial numbers due to accurate presentation of financial records to investors. The utility of executives is far outweighed by the good done to society by ensuring integrity and trust in the business (Thompson & McCoy, 2017).
Justification of theory selected:
The survey on the situation of case of Worldcom brings about different conclusions that are consistent with the Utilitarianism theory. The main idea behind the utilitarianism theory is that action of an individual is considered right when the most possible utility is produced by it with such utility being happiness or pleasure (Li, 2015). In the given case, the decision of David and Buddy is creating happiness for Scott along with them as nit following the orders would create job insecurity.
Part B:
Application of AAA Ethical decision model in the decision of David and Buddy:
This particular section depicts the application of seven step AAA ethical decision making model that helps in developing systematic approach to make ethical decisions. Such model helps in proving moral perspectives by understanding the consequences of each alternative outcome. This model would assist individual in arriving at decision when they are faced with ethical dilemma.
Step 1: Facts of the case:
In the first step, the facts about ethical dilemma of the given case are learned as much as possible. In depth learning about the dilemma is essential for avoiding overlooking of the issue. The case presented here is about Worldcom and its involvement in accounting scandal by manipulation of profits. Chief financial officer of Worldcom has instructed financial controller to make alterations in the figures of expected earnings by reducing rental expenses. People who are involved in such actions are accounting directors, financial controller and Troy and Betty. The fear of damaging share price and increasing cost of raising capital has led to financial officer make alterations in cost figures and thereby inflating profits. Therefore, they are required to make adjustments in millions of dollars so as to meet the earning expectations.
Step 2: Identification of ethical issues in the given case:
For the identification of ethical issues, primary stakeholders of company are listed. Employees, shareholders, investors, customers, auditors, creditors and debtors are some of the stakeholders of Worldcom.
The ethical issue that has been identified in the given case is to make manipulations or adjustment in figures of line cost expenses so that earning guidance’s are met by company. Misrepresenting financial reports by using fraudulent methods such as early recognition of revenue, changes in financial estimates, reserves alterations and long term assets capitalization comes under the ethical issues. This is so because it is done to dupe investors by making changes in accounting system.
Such ethical issue would impact the shareholders and investors of organization to a significant extent. In addition to this, senior management of Worldcom would be charged with case of fraud as chief financial officer and chief financial controller are directly responsible for the financial statements accuracy.  Now, concerning its relationship to the auditor or audit firms, any further additional services would not be provided by audit firms as it would hamper their independence of decision making. Therefore, the ethical issue of manipulating financial figures would have considerable impact on wide range of stakeholders of company.
Step 3: Principles, norms and values related to the case:
This step is expanded to include corporate requirements and legal rules and the norms, values and principles indicative of the fiduciary duty of management towards their stakeholders for ensuring that organization is providing true and fair view of its financial position and have impeccable integrity. The act of morally good and acceptable conduct is guided by identification of principles, norms and values. In accounting practices, poor ethics are the factors leading to many negative consequences. Organizations involved in violating legal standards and codes would face several legal repercussions. For innumerable reasons, ethical behavior and proper ethics are extremely important. It is suggested by the accounting principles that financial reports of organization should reflect true financial condition. The rule of conduct and ethical guidelines is applicable to financial professionals and members along with stressing responsibility to clients, creditors, debtors, governments, shareholders and employers as a whole (Uyar & Güngörmü?, 2017). Therefore, the orders of Scott to misrepresent the financial figures of line cost expenses would not be consistent with the identified principles, norms and practices.
Step 4: Evaluating the alternative courses of actions:
In this particular step, specification of alternatives is done that is what should be done. This step requires decision maker to consider some course of actions that might require some form of compromise and may not be desirable. Option for such alternative would offer a principled and ethical solution and if such option is not sought, it would require compromising on ethics and principles.  Therefore, David and Buddy have the option of either following the orders of Scott as refusing his orders would mean losing their job. The other option is to overlook or ignore the request of Scott and take decision appropriately would be in the interest of shareholders and investors of company (Martinov & Mladenovic, 2015). Hence, for complying with ethical principles and practices, the activity of potentially misstating the line cost expenses would be deemed illegal and is violating the fiduciary responsibility of management.
Step 5: Identification of best course of actions consistent with principles, norms and values:
The requirement of this particular step is to compare the alternatives and to see whether the decision is clear (Woodbine et al., 2014). The course of action taken by David and Buddy should be consistent with the norms, principles and values and the action consistent with principles identified in Step 3 would be refuse to fulfill the request of Scott. David and Buddy should report the matters to upper management so that appropriate actions should be taken.
The best course of actions taken by David and Buddy would be taken in support of ethical culture. One course of action would be to avoid misstating the financial figures by not letting themselves to be pressurized into actions that are suspected to be illegal and unethical (Siedel, 2017). Therefore, the best course of action consistent with the principles and norms is not to follow the instruction of Scott as it is violating the principles of true and fair representation of financial statements of organization.
Step 6: Consequences of each possible course of actions:
Under the option of following the order of Scott to reduce the line cost expense for meeting the earning guidance would help them in securing their job and presumably an improvement in living standard due to increase in wealth ( 2018).  However, choosing this option would expose Buddy and David to the risk of being in both legal and professional trouble if such misrepresentation is uncovered.
Step 7: Decision making:
Making decision is the final step as per the AAA model and therefore the final decision should be to overlook the request of Scott and not misrepresenting the figures of line rental costs (Rhame et al., 2016). Such decision would demonstrate transparency, accountability and proper practice of corporate governance.
Part C:
Advising David on requirements of APES 110:
The APES (Accounting professional and ethical standards) code is based on the code of ethics that are issued by IESBA (International ethics standard board for accountants). It is required by professional accountants to act responsibly in the public interest. Furthermore, accountants are required to act with integrity, maintain confidentiality, due care and professional competence and objectivity. Any issues in the accounting practice should be considered based on fundamental principles. The conceptual framework offered by the code can be applied in different circumstances and rather than relying on specific rules, it relies on professional judgment (Ng et al., 2015). It is required by the conceptual framework to use their professional judgment for evaluating the significance of identified threats, threat identification to comply with the fundamental principles and eliminating or reducing such threat to an acceptable level by the application of safeguards.
Fundamental principles to be upheld by David and his staffs:
The requirement of APES 110 requires David to act with integrity that is to be honest and straightforward in all business and professional relationships. The principle of objectivity requires David to not allow any conflict of interest, bias or any undue influence that would override business or professional judgment. He should act with due care and professional competence that helps in maintaining skill and professional knowledge at the level that is required for ensuring that employer is receiving competent professional services (Bhasin, 2016). Such services are based on current developments in legislations and practices and act diligently according to the professional and technical standards. He should behave professionally that is decision should be consistent with relevant regulations and laws. In addition to this, any confidential information that is acquired from professional or business relationship should be respected and not using such information to their personal advantage.
Threats faced by David:
Threats can be created by a broad range of circumstances and relationship and threats could be compromised when it is created by circumstances or relationship. The circumstances or relationship creating threats must be avoided if they cannot be reduced or eliminated to an acceptable level because of absence of safeguard measures or because such threats are too significant. In such situation, member is required to discontinue or decline the professional services and should resign from employing organization or any such engagement. David being a member of CPA Australia has the responsibility of ensuring that accountants do his works while maintaining due care, competence and ethical services (Agrawal & Cooper, 2017).  Moreover, SD Ltd does not have any safeguard or formal ethics program which makes it difficult for him to reduce or eliminate the threats. In such situation, it is required by him to either resign from employer’s organization or resign from such engagement. Nevertheless, David faces some threats and they are as follows:
Self interest threat- It is the threat that the judgment or behavior of member will be inappropriately influenced by financial or other interest (Vyas et al., 2015). In the given case of Worldcom, David being a member of CPA Australia is facing self interest threat as his behavior tends to influenced by interest of chief financial officer of SD Ltd. 
Intimidation threat- Member under this threat is deterred to act objectively because of perceived or actual pressure from any other member in organization. Such pressures might include any attempts to exercise any undue influence over other member. In the given case of SD Ltd, David is pressurized under the influence of Scott to misrepresent the line cost expenses for increasing the expected earning of company. This in turn is creating pressure on accounting director of SD ltd to make adjustments in hundreds of millions of dollar of company which creates intimidation threat on part of employees (Bobek et al., 2016).
Advocacy threat- It is the threat where the position of employer or client will be promoted by the member to the extent that there objectivity is compromised. In the given case, making adjustments in the accounting system of company involves altering the values of several accounts that would help in increasing the expected earnings of company. It would help in releasing the earnings to public that will help in promoting the position of employer (Kumari et al., 2017). Therefore, David is also faced with advocacy threat.
Safeguarding principles to mitigate the threats to fundamental principles:
Safeguard can be defined as measures and actions that is undertaken to reduce to an acceptable level or to eliminate them completely. There is variation in safeguard measures depending upon the circumstances and there are two categories of safeguard comprising of safeguard in work environment and safeguard that is created by legislation, profession and regulation (Melé et al., 2017). Some of the safeguards measures that can be considered by David and Buddy are listed below:

David and concerned accountants should withdraw from engagement team
Terminating the business or financial relationship and thereby giving rise to threat
Discussing the issue with the personnel’s involved in practice of governance and audit committee.
Discussing the issue within the firm with higher level of management
Other measure that can be undertaken by David and Buddy is to involve an additional professional accountant who did not take part in assurance engagement that helps in reviewing the work done and accordingly taking the action (, 2018).
Refuse to perform the assurance engagement
The magnitude of relationship should be reduced to the extent that the financial interest is immaterial and the relationship is clearly insignificant.

The above report is prepared to analyze the accounting scandal of Worldcom using ethical models and different ethical theories. It has been ascertained that the Utilitarianism theory of ethics applies to the case of Worldcom. In addition to this, it is depicted from the AAA ethical decision making model that the actions of David and Biddy should be consistent with ethical principles and practices. A conceptual framework outlined by APES 110 requires professional accountants to adopt fundamental principles and practices in their judgment and behavior. When faced with such situation or circumstances, accountants are faced with different threats for which there are specific safeguards measures available as per CPA Australia.
Agrawal, A., & Cooper, T. (2017). Corporate governance consequences of accounting scandals: Evidence from top management, CFO and auditor turnover. Quarterly Journal of Finance, 7(01), 1650014.
Ailon, G. (2015). From superstars to devils: The ethical discourse on managerial figures involved in a corporate scandal. Organization, 22(1), 78-99.
Anderson, A., Bian, J., & Çal?yurt, K. T. (2018). Accounting scandals, 70 Analysis of variance, 88–90. Regulations and Applications of Ethics in Business Practice, 219, 306. (2018).  Retrieved 7 August 2018, from
Askary, S. (2017). Can Accounting Regimes Protect the Public Interests?. Middle East Review of Public Administration (MERPA), 3(3), 2756.
Bhasin, M. L. (2016). Communion of Corporate Governance and Forensic Accounting: A Study of an Asian Country. British Journal of Research, 3(1), 14-40.
Bobek, D. D., Dalton, D. W., Daugherty, B. E., Hageman, A. M., & Radtke, R. R. (2016). An Investigation of Ethical Environments of CPAs: Public Accounting versus Industry. Behavioral Research in Accounting, 29(1), 43-56.
Bobek, D. D., Hageman, A. M., & Radtke, R. R. (2015). The effects of professional role, decision context, and gender on the ethical decision making of public accounting professionals. Behavioral Research in Accounting, 27(1), 55-78. (2018).  Retrieved 7 August 2018, from
Kumari Tiwari, R., & Debnath, J. (2017). Forensic accounting: a blend of knowledge. Journal of Financial Regulation and Compliance, 25(1), 73-85.
Li, V. (2015). Do false financial statements distort peer firms’ decisions?. The Accounting Review, 91(1), 251-278.
Martinov-Bennie, N., & Mladenovic, R. (2015). Investigation of the impact of an ethical framework and an integrated ethics education on accounting students’ ethical sensitivity and judgment. Journal of Business Ethics, 127(1), 189-203.
Melé, D., Rosanas, J. M., & Fontrodona, J. (2017). Ethics in finance and accounting: Editorial introduction. Journal of Business Ethics, 140(4), 609-613.
Ng, A. W., Mertins, L., & Martin, C. L. (2015). Winstar Communications: corporate fraud and auditing procedures. The CASE Journal, 11(2), 147-153.
Rhame, S., Mulig, L., Prachyl, C., & Walsh, R. (2016). Using Codes of Conduct to Integrate Ethics Education in the Accounting Curriculum. Teaching Ethics Across the Management Curriculum, Volume III: Contributing to a Global Paradigm Shift.
Siedel, G. J. (2017). Business School Learning Goals: The Legal and Regulatory Context of Organizations in a Global Economy. Journal of Legal Studies Education, 34(2), 325-339.
Stein, M. J., Salterio, S. E., & Shearer, T. (2017). “Transparency” in Accounting and Corporate Governance: Making Sense of Multiple Meanings. Accounting and the Public Interest, 17(1), 31-59.
Uyar, A., & Güngörmü?, A. H. (2017). Investigation of internal and external factors causing unethical behavior of accounting professionals. In Sustainability and Management (pp. 97-108). Routledge.
Vyas, A. H., Ambadkar, R., & Bhargava?, J. (2015). True And Fair View-A Fact Or Illusion In The World Of Creative Accounting. International Journal of Multidisciplinary and Current Research, 3(3), 572-575.
Woodbine, G., Fan, Y. H., & See, H. (2014). The Moral Business Tone of Organizations and Its Impact on The Ethical Decision Making of Employees. Academy of Taiwan Business Management Review, 10(3), 7-19.

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