Ethics: A Case Study on Earnings Management and Unethical Practices at Computer Associates

This case study discusses the unethical practices of earnings management at Computer Associates, including backdating contracts and inflating accounting figures. It explores the crime committed, ethical issues involved, and current evidence on earnings management. The article also provides insights on what one should do when faced with a similar situation. Course code, course name, and college/university are not mentioned.

Running Head: Ethics
Ethics
A Case Study

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Table of Content
Question 1: What was the crime? Explain in detail what the Computer Associates were doing?...2
Question 2: Would their action be criminal in Australia?................................................................................2
Question 3: Do you think Richards was unethical? Explain the unethical issues involved in the
case........................................................................................................................................................................................ 3
Question 4: What would you have done faced with the same situation? Why?......................................3
Question 5: What is the current evidence on earnings management and what ethical issues are
involved?............................................................................................................................................................................. 4
References.......................................................................................................................................................................... 6

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Question 1: What was the crime? Explain in detail what the Computer Associates
were doing?
A lot was going wrong at Computer Associates which lead Stephan Richards to go
behind the bar and serve for his wrong doing in the business organization. The crime
which was going at the CA was:
 The crime against Stephan Richards was pertaining to fraud, obstruction of
justice and perjury.
 Stephan Richards was accused of manipulating the earnings of the organization
by backdating the contracts and make them appear as if the contracts belonged
to the previous quarter.
 Fraud was being done in the organization to push up the quarterly revenues of
the firm. The practice of “35 day month” was common in the organization.
 Usage of aggressive accounting practices to boast the revenue of the
organization.
Thus, the crime at Computer associates was related to backdating of the contracts to
push the earnings of the quarter. This also resulted in a lot of criticism for the
organization, as it was unable to meet the forecasts as set in the sales plan. All this was
done to save them from scolding of the top management. All this wrong doing were the
primary reason for Stephan to go behind the bar.
Question 2: Would their action be criminal in Australia?
The crime committed by Stephan Richards falls definitely under the purview of the
criminal activity. In accordance to the Criminal code amendment (Theft, Fraud, Bribery
& Related offenses) 2000 Act, According to the division 135 of general dishonesty (Gans,
2016). According to the act, it is a case of General dishonesty; in this a person is
considered to be guilty if he does anything with the intention of dishonestly obtaining a
gain from other person. For instance, in this case Richards wanted to obtain the gain
from the management by inflating the figures and creating contracts which however
were not fake, but fraudulent in nature (Boister, 2018).

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Question 3: Do you think Richards was unethical? Explain the unethical issues
involved in the case
Considering the case study, and the act done by Stephan Richards, there are no two
doubts on the unethical nature of the act done by Richards. By all means, inflating the
accounting books and creating contracts to boast the earning is an unethical practice. It
has been mentioned that Richards has slowly but quickly become the blue eyed ball at
CA, which pushed him to sustain his performance, which lead him to unethical practice.
The unethical issue in the case here is; Committing securities fraud and obstruction of
justice and perjury. The biggest unethical issue was setting a wrong picture in the minds
of the top management, and cheating the stakeholders by inflating the accounting
figures (Tian & Peterson, 2016).
Question 4: What would you have done faced with the same situation? Why?
It is very difficult to imagine oneself into the shoes of person and imagine what Richard
might be feeling when he decided to take an unethical step. Had I been in the situation
of Richards, I would have acted differently. Firstly, I would have not taken the decision
of inflating the account books because I always think of possible ramification my
decision can have on the stakeholders of the organization. Based on which, I would have
not inflated the accounting figures. I would have surely taken a high road approach and
speak with the management regarding the figures which shows the company in poor
light. This would be accompanied by a strategy to make good to the organization in
terms of resources, in the form of development plan (Dugan & Taylor, 2016).

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Question 5: What is the current evidence on earnings management and what
ethical issues are involved?
It is a known assumption that accounting academics have different perception of
earning management in comparison to the practitioners and regulators. The
practitioners and regulators often see earning management as a problem, and they want
to take action to eliminate the problem. However, it is essential for the managers to
meet the forecasts, this helps in maintaining the accountability and responsibility of the
numbers projected. Managers, like in the case of Stephan Richards often engage in
practices which for the time being shows a wrong but a nice picture to the management,
but in actuality, the projections and the numbers achieved have a lot of variance
involved. Thus, it is highly advised to always take the ethical route and not indulge into
the wrong practice of earning management by creating backdated contracts (Ordonez &
Welsh, 2015).
No business can function without earnings/revenues/ or funds, as funds are required
not only to work towards future expansion plans, but also for the daily orations of the
organization. Some of the reasons which make it extremely important to the
stakeholders are:
 It helps in creating plans for the future. The forecast of the organization is based
on the reported earnings of the last financial year. Thus, stakeholders get an idea
of the numbers to be reached based on the present figures.
 Revenue/earnings are required to keep a health working capital in the
organization.
 Earnings/Revenue is also utilized for building up revenue pool for future
investment or with the view of ploughing back the profits back into the
organization.
 Healthy revenue/earning also increase the faith of the shareholders in the
organisation. Shareholders are more likely to have business with the
organization which shows health and consistent revenue figures.
Earning management which is also defined as the managerial use of discretion to
influence the reported earning is a widespread practice in organizations. The company
CA due to its practice of inflating the accounting numbers was also being called as

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Creativity accounting, due to its dubious practices. However, the company transformed
from managing the company to become an earning management company owing to the
increasing competition and the growing proliferation of software into different
industries (McManus, 2018). This lead the employee of CA to work on the tightly
gripped sales target and show strong profits in the organization. The organization
valued the high performing sales employees and rewarded them with handsome
bonuses, this lead the company to transform into earning management.
The learning from the case study here is that, there will be loads of instances where the
organization would pressure on an individual or the senior managers to perform
exceptionally and at times reach the nearly impossible targets. It is these testing waters,
when the real strength of the employees is ascertained. One should ideally take a
decision after thinking of the possible ramification of the decision on the stakeholders.
Considering the ramification of the decision will help the person to make the right
ethical call in the decision.

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References
Boister, N., 2018. An introduction to transnational criminal law. Oxford University Press.
Dugan, M.T. and Taylor, G., 2016. Ethical Issues Related to Earnings Management: An
Instructional Case. Journal of the International Academy for Case Studies, 22(3), p.84.
Gans, J., 2016. Modern criminal law of Australia. Cambridge University Press.
McManus, J., 2018. Hubris and unethical decision making: The tragedy of the
uncommon. Journal of Business Ethics, 149(1), pp.169-185.
Ordóñez, L.D. and Welsh, D.T., 2015. Immoral goals: how goal setting may lead to
unethical behavior. Current Opinion in Psychology, 6, pp.93-96.
Tian, Q. and Peterson, D.K., 2016. The effects of ethical pressure and power distance
orientation on unethical pro organizational behavior: the case of earnings‐
management. Business Ethics: A European Review, 25(2), pp.159-171.