Contemporary Issues in Accounting: Caterpillar Scandal Analysis Report

This report provides a comprehensive analysis of the Caterpillar accounting scandal, focusing on the ethical issues, financial fraud, and stakeholder implications. It examines the company's tax and accounting practices, highlighting instances of misconduct and the resulting impact on the company's financial statements and stakeholders. The report applies stakeholder theory to understand the perspectives of various parties affected by the scandal, including investors, government, and employees. Furthermore, it explores the ethical considerations surrounding the scandal, including failures in corporate governance and the violation of ethical codes of conduct. The analysis also identifies potential preventative measures that could have mitigated the fraud and offers lessons learned from the case, emphasizing the importance of ethical conduct, transparency, and robust internal controls in preventing future accounting scandals. The report covers the ethical issues identified, the stakeholder analysis, and the prevention steps that should have been taken. It concludes with a discussion of the learning outcomes and a concise summary of the key findings.

Running head: CONTEMPORARY ISSUE IN ACCOUNTING
Contemporary Issue in Accounting
Name of the Student:
Name of the University:
Author’s Note:

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Executive Summary
The main purpose of the assessment is to analyse the business of Caterpillar which is
engaged in construction business from the point of view of ethical standards. The assessments
consider the tax and accounting frauds which are committed by the business and the overall
impacts which is related to the same. The assessment also shows application of stakeholder
theory in relation to the business of Caterpillar. Lastly, the assessment would also highlight
counter measures which could have prevented the fraud from happening and also a statement
showing the lesson which can be derived from different

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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................4
Ethical Issues of Caterpillar.........................................................................................................4
Prevention Steps against Accounting Scandals.........................................................................13
Learning Outcomes....................................................................................................................15
Conclusion.....................................................................................................................................15
Reference.......................................................................................................................................16

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Introduction
The main purpose of the assessment is to analyze the corporate scandals which has
affected the business. The assessment would be discussing the factors which affected the
business due to this scandal and also what was the ethical consideration which is related to the
case. The case which is selected for this assessment is Caterpillar which is engaged in
manufacturing of machinery for businesses and also sells insurance products to the customers of
the business (Caterpillar.com. 2019). The assessment also shows application of theoretical
framework for providing explanation as to why the situation took place in the first place. In
addition to this, the assessment also points out what steps the management of the company
should have taken for preventing the scandal from taking place in the first place. The assessment
would be considering the ethical standards which the businesses need to follow in order to ensure
that appropriate operations are undertaken which are fair in every respect. The assessment would
also be showing how accounting scandal affects the business and investors which are associated
with the business.
Discussion
The company which is considered for the assessment is widely renowned company which
designs, develops, engineers, manufactures, markets and sells machinery and also insurance
products to different clients. The company has its operations in USA and the company was
initially established after two companies merged to form a single company. The assessment
would be identifying any corporate scandals which is associated with the company and on the
basis of the same theories would be applied in order to properly explain the case. The analysis
would also be showing the parties which are mostly affected by such corporate scandals.

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Ethical Issues of Caterpillar
Ethics in business may be defined as the framework which is followed by professions in
order to maintain their code of conduct in the workplace. Every business has its own set of
business ethics and the employees of the business are expected to follow such ethical codes so
that appropriateness and efficiency in the workplace can be maintained. In today’s world, it is
very important for the businesses to follow an ethical code of conduct while conducting the
operations of the business. This approach allows the management to provide proper disclosures
to the investors and always be ready for accountability for the activities of the business. It has
been seen that if a business establishes proper ethical standards than there would be no chance
for misconducts and scandals. In such a situation, the management of the company would be able
to maintain fairness and honesty in the operations of the business.
The chosen company in this assignment is the Caterpillar and the ethical issue which is
identified is the Caterpillar shares fall after tax and further accounting fraud is reported. The
shares of the company fell and report is commissioned by the government for blaming the
manufacturer of tax and the accounting fraud. The business of the Caterpillar deals with the
construction equipment’s product. The warrant is focused on the on the collection of documents
and further the electronic corporations. This kind of accounting fraud will definitely create
impact on the financial statement of the company. The sudden fall in the share of the company
must be analyzed in a detailed manner. This shows that the financial statement of the company is
not showing true and fair view of the business. It is significant that the business of the company
must be free from the material misstatement. This kind of fraud will definitely create impact on
the shares of the company (Guiso, Sapienza and Zingales 2015).

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There are other fraud which are the tax fraud of Caterpillar can further result to the higher
penalties. This kind of tax fraud will automatically decrease the value of the shares of the
company in the market. It was noticed by federal investigators after a detailed scrutiny of the
financial statements and information available regarding the company that there was serious
confusion regarding the overseas tax affairs of the company and the same on examination
revealed to be very complex in nature. As per the investigators, the company did not follow the
rules and regulations which are established in US tax laws and therefore was guilty of tax fraud
in the country. It was also the verdict of officials that the misrepresentation of the oversea tax
amounts was deliberately done by the management of the company with an intention to keep the
prices of the shares to a high level. This was done so that more investors can be attracted to the
business and the business is able to retain the existing shareholders of the business. This would
be considered as a fraud on the part of the business and the same could attract a penalty of severe
amount. As per the opinion of an official, the IRS would force the company to pay a tax of $ 2
billion and also a penalty on the profits which is generated by the business. This type of scandal
not only affects the business but also the stakeholders which are associated with the business.
The potential shareholders of the company will further not be interested in order to buy more
shares in that case. Inadequacy in the disclosure of the tax is another ethical issue of the company
which can attract more penalty on the business. The company in that case must take certain
measures in order to prevent the ethical problems of the organization (Tantalo and Priem 2016).
The ethical issues in accounting of the company is related to the good or the moral
choices of the organization in response to the preparation, presentation and disclosure of the
financial information in the system. The scandals or the issues must be taken care of the by the
upper level management system of the company. The accounting scandals are dealt with the lot

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of investigations and trials. The company must understand the glitches in the system and the
reason behind the scandals. The ethical rules and regulation must be followed by the company
and further required steps in that case must be taken in order to make the things correct. Some of
the major steps which can be taken by the management of the company for ensuring that no
accounting scandals takes place in the business by setting up appropriate internal control system
and proper supervision is also required in the business. In order to rectify the scandal, it is
important for the organizations to verify the policies and the changes in that case.
Stakeholders of Caterpillar
The key stakeholders of the company are the government, shareholders and many more.
In order to maintain the interest of the key stakeholders of the company, the management of the
company needs to take important steps to ensure that a level of ethical conduct is maintained in
the organization. Maintaining the interest of the stakeholders will automatically increase the
value of the company. The investment made by the potential stakeholders will further invest in
the business if and only if the business of the company is transparent and free from the material
misstatement. The organizational management contain certain value and morals in managing the
operation of the organization. This are further related to the social responsibility, market theory
and the social contract theory.
The suppliers are the potential stakeholders as the proportion of the revenues which may
come from the business of the company. The ethical issues of the company must be maintained
in order to enhance the interest of the stakeholders. A single decision can change the prospects of
the shareholders along with the decision to buy or sell in the market. It is significant for the
company to maintain true and fair view of the business so that the stakeholders are confident

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about the investment made (Clarke and Friedman 2016). The management of the company needs
to appropriately shows all relevant information which is related to the business so that the
stakeholders have a better idea of the financial position of the business and on the basis of the
same can take appropriate decisions. Transparency in the business will further help the company
to make more investment by the government. Improving the stakeholder’s interest will further
develop the current business status of the company. The company in that case needs to find out
the reason behind such kind of problem.
It is to be noted that the role of the management of the company is to consider the interest
of the stakeholders while undertaking any activity of the business. The ultimate interest of the
stakeholders results in the success and the failures of the business projects. The business projects
are only depended on the investment made by the government and further if lies any scandals in
the projects then it is a loss for the government in that case (Barr and McClellan 2018). Before
taking any projects, the government analyses the return from the project in that case. In this case
the government is the main stakeholders of the company and the success of the company
depends on the investment made by the company. Effective management decision in this case
will improve the overall performance of the company where the company needs to make
effective investments in that case.
In the case of the Caterpillar, the major stakeholders which can be identified are
investors, government, lenders and employees of the business. The management of the company
is dedicated towards ethical practices in a business and therefore the policies are established by
the management so that the business remains sustainable in its operations while at the same time
meeting the expectations of the stakeholders of the business. However, it is to be noted that the

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policies have not been implemented in the business properly which can be regarded as the main
reason for the violation of ethical code of conduct in the business.
The ethical issues in case of Caterpillar must be identified and further it is the
responsibility for the upper level management of the company in order to cooperate such ethical
problems like the tax fraud and many more (Finkler, Smith and Calabrese 2018). In that case, the
company needs to analyze the potential changes and further take corrective measures in order to
remove such kind of issues in the organization. Having ethical issues within the organization will
automatically create impact on further development in the system of the organization. That’s
why it is significant for the company in order to maintain the interest of the potential
shareholders. The business performance will automatically reflect the nature of the management
system which will further help the stakeholders in order to make decision. High priority must be
given in order to protect the interest of the stakeholders. The major accounting frauds occurred
due to exploit the stakeholders. Operating the accounting data the company try to keep the
stakeholders in vain so that it can be corporate by the company. The management of the
company needs to establish proper internal control system in order to ensure that the activities
which are initiated by the business are appropriate and meet the long-term business goals. The
business also needs to incorporate provisions for internal audits or surprise checks so that any
frauds can detected easily.
Theories discussed in the ACCT 5015
As per the stakeholder’s theory the management of a company needs to undertake all
activities of the business with an assurance that the business effectively responds to business
ethics The stakeholder’s theory states that the company should give importance above all the

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other factors that are related with the business. The company should give high priority to protect
the interest of the stakeholders (Hart and Zingales 2017). The major accounting frauds occurred
due to exploit the stakeholders. By manipulating the accounting data the company try to keep the
stakeholders in vain so that they does not get any idea of what is going to happen to them. The
stakeholders are the outsiders who does not get any idea about the accounting principles that the
company follow (Queen 2015).
The stakeholder’s theory includes the fact that the company should give emphasis on the
true and fair view of the financial statements. This force the company to adopt the policy of
unfair practices in the accounting system. The company generally to hide the manipulated data
use unfair practices that results in the occurrence of the accounting scandals. There are several
reasons that leads to the accounting scandals despite of the presence of the ethical guidelines and
standards. The scandals occurs due to the unethical behaviour of the employees of the company
and another reason of the unethical behaviour of the employees is the corporate bodies allows
there employees to adopt such methods (Goettsche, Steindl and Gietl 2016).
Every company used to work in different working culture and they train their employees
in accordance to their working employees. It depends on the company that in which manner the
company trains its employees if the company allows the employees to use unfair practices in the
accounting system then in that case more accounting scandals will evolve out and that will put
adverse effect on the economy. As the accounting, scandals will results in to the collapse of the
organisation.
Due to lack of communication among the employees and the organisation often
accounting scandals occurred. The employees for the fulfilment of their own interest give

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emphasis on adopting unfair means and that results into the manipulation of the accounting data
(Mitchell and Calabrese 2018).
Miscommunication may be another reason for the occurrence of the fraudulent activity in
the accounting practices.it is often found that certain guidelines and practices are
miscommunicated and that results into the happening of the accounting scandals. Some time it is
found that the person who is responsible for spreading the rules and guidelines misses out or
omit some information all together. The accounting scandals tend to occurs not for the deliberate
efforts of some employees or a group of employees but for the lack of knowledge of the
employees that what they are doing is not in accordance of the accounting principles (Sharma
and Grover 2015).
The lack of appropriate management in a corporate body is also major factor for the
happening of accounting scandals .irrespective of the duty of the employees the management of
the organisation should always monitor the activities of the employees. In situation where the
management fail to do that there are certain dissimilarities that occur in setting the guidelines and
actual practices which lead to the fraudulent activity (Tantalo and Priem 2016).
So there are several factors that can be responsible for the accounting scandals that have
occurred in the past and will keep occurring in the accounting world.in addition to these factors
there are also certain factors such as lack of professionalism and lack of knowledge.
The case of Lehman brother’s scandal that occurred in 2008 is a suitable evidence of the
above discussed topic. In the case of the Lehman brothers the executives of the Lehman brothers
manipulated 50 billion dollars along with its auditor. The executives of the company confiscated

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over $50 billion in loan, and disguised the loan by showing the loan amount as sales. This has
become as one of the largest accounting fraud in the whole world (Prawitz and Cohart 2016).
How to prevent accounting scandals
The stakeholder’s theory states the companies should adopt all the guidelines and
regulation to prevent the occurrence of the accounting scandals. The top ten internal controls to
prevent the accounting scandals are stated below
Use a system of checking and balances to ensure that any specific individual has control
over the financial transactions
The purchase, payroll, and disbursements to be authorised by a designated person
Separate handling functions from record keeping functions.
Different purchasing functions from payable functions.
Ensure that the same person is not entitled to sign a check.
Supervisors are required to approve employee’s time sheet before the payroll is prepared
Reconciliation of the accounting statements
The accounting records are to be reconciled on regular interval
Checking of the bank statements with the bank book of the company and appoint a special
authority to do that job (Bryce 2017).
Guidance regarding the rules and principles of the company.