California Micro Devices Company: Ethical Dilemma

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Table of Contents

Introduction
Analysis of the Ethical Dilemma
Effects and Consequences of the Ethical Act
Outcome of the Case
Best Practices in Such a Scenario
Recommendations to Prevent Similar Occurrences
Conclusion
References

Introduction

The success of a given business firm depends on various functions such as accounting, leadership, marketing, financial management, and planning. Each of these tasks must be undertaken by ethical and competent professionals who understand the importance of promoting positive business practices. Failure to engage in acceptable practices can result in numerous challenges and affect a company’s profitability.

Different firms have engaged in specific malpractices that have led to significant problems. A good example is the ethical dilemma that faced California Micro Devices Corporation in the early 1990s. This company was a leading producer and marketer of mixed signal and analog semiconductors for different devices such as mobile phones and consumer electronics. The firm had expanded its production line to include “high brightness light emitting diodes (HBLEDs) and mixed signal integrated circuits (ICs) for mobile displays” (Clikeman, 2013, p. 45).

This research digs deeper into the accounting malpractices that were orchestrated by the firm’s topmost leaders. The ethical dilemma arises from the use of deceitful financial reporting and accounting practices, thereby amounting to fraud at California Micro Devices.

Analysis of the Ethical Dilemma

The ethical predicament facing California Micro Devices began towards the end of the 1980s. In 1989, Price Waterhouse, the firm’s chief auditor, observed that the company was engaging in questionable accounting practices and business dealings. The auditing company asked the corporation to reaffirm its financial records to expose the loss of three million dollars (Clikeman, 2013). The occurrence compelled the topmost managers at California Micro Devices to switch its auditor. This led to a new agreement with Coopers and Lybrand (which would later become PriceWaterhouseCoopers). This auditing company walked out in the year 1994.

This development led to the appointment of Ernst and Young as the new auditor. The corporation wanted to determine if it was engaging in any form of financial malpractices. The auditing firm exposed numerous irregularities and accounting malpractices that had been committed over the years. This led to the firm’s restatement of a profit of $5.1 million to a loss of over $15 million (Clikeman, 2013).

These observations forced the Securities and Exchange Commission (SEC) to investigate the corporations accounting procedures and business malpractices. This was something necessary because it was quite clear that it was engaging in illegal practices. In 1995, the company was delisted for failing to comply with the procedures for filing financial documents and statements. Ron Romito, the company’s accounting officer, would later plead guilty to various business malpractices.

This analysis indicates that the Board of Directors decided to identify a third auditor in an attempt to unearth the sophisticated schemes and fraudulent activities witnessed in the company. It was later discovered that the leaders at the firm had engaged in inappropriate financial schemes. They had altered financial documents by creating imaginary shipping inventories and fictitious sales. The third auditor, Ernst and Young, reported that California Micro Devices was engaging in numerous business malpractices. For example, the company reported or replicated sales made in a different financial period. Sales were reported immediately after the products had been packed for delivery or shipping (Clikeman, 2013).

The auditor exposed the company’s misconducts whereby false invoices and lading bills were created (Clikeman, 2013). The accountants at California Micro Devices were also observed to inflate profits. This was achieved through the misclassification of various non-products sales as completed deliveries or product sales. With the fiscal year of 1994 unaudited, it was evident that the company was engaging in numerous misbehaviors that could threaten the future and profitability of its stakeholders.

Effects and Consequences of the Ethical Act

The unethical practices undertaken by different players at California Micro devices had great ramifications on the company. For instance, the firm was forced to engage in certain processes that made it impossible for the targeted customers to receive shipments in a timely manner. Most of the players involved in a wide range of functions such as shipping and procurement had to be compromised (Clikeman, 2013). Such developments were considered in order to maintain the targeted financial outcomes. Some chips and products could be held in private homes and be released towards the end of a given financial period.

Despite different records indicating that numerous sales had already been made, it was astounding for the firm to take back unsold chips amounting to over 8.3 million dollars in August 1994 (Clikeman, 2013). Throughout the process, it was discovered that California Micro Devices was partnering with unscrupulous distributors with questionable credit terms. The most disappointing truth was that the firm was always aware of such malpractices.

After the third auditor revealed most of the malpractices, the SEC initiated an investigation in an attempt to understand how the firm violated various federal securities policies or laws (Clikeman, 2013). Consequently, the ensuing discoveries forced the National Association of Securities Dealers (NASD) to delist the company. This was mainly because the company was not filing the necessary returns and statements with the SEC in a timely manner.

The revelations made in 1994 led to new insights from former executives who worked at California Micro Devices. For instance, some of the leaders indicated that they had raised questions regarding the misconducts embraced at the company. A good example was Satish Kumar who left his job reporting the malpractices supported by the Chairman (Clikeman, 2013). It was observed that the company was creating counterfeit transactions to indicate specific sales had already been made.

The chairman and Chief Executive Officer (CEO), Chan Desaigoudar, was known to instruct different executives to extend financial periods in an attempt to ensure positive sales figures would be captured. These unethical malpractices were aimed at identifying questionable ways to inflate the figures (Clikeman, 2013). The company’s workers were forced to prepare invoices for sales that had been refused by different customers. Phony slips or packages would be also created. This would then be followed by the delivery of sales invoices to the targeted customers. Most of the products would be stored in employees’ homes or sent to specific sales representatives.

This analysis shows clearly that the desire to pursue unethical accounting practices can result in numerous implications or consequences (Asare, Wright, & Zimbelman, 2015). It is agreeable that more workers were forced to engage in various malpractices while at the same time going against the wishes of the customers. Interestingly, most of the leaders at the firm were no longer concerned with the welfare of the clients or stakeholders. This means that the company was already on the wrong path.

Outcome of the Case

The discovery of the fraudulent activities and unethical practices was a turning point for California Micro Devices’ stakeholders such as its customers, employees, executives, and distributors. One of the outstanding observations from this case is that the fraud would only be uncovered after the performance and image of the corporation had already been damaged. This issue led to numerous class-action securities court proceedings against the firm (Gbegi & Adebisi, 2015). Several stakeholders were also on the frontline to sue different executives at the company as well as its former auditor.

In 1994, the company took a bold step in which all the executives were fired. This was followed by investigations in an attempt to unearth the inimitable roles played by the leaders and their respective malpractices. For instance, the chip maker fired Chan Desaigoudar, the CEO. The company’s president, Suren Gupta, was fired to create room for further investigations. The Board of Governors went a step further to request the director to resign because of the emerging allegations. Ronald A. Romito, the individual in charge of accounting practices at the firm, was also fired during the period (Clikeman, 2013).

The SEC charged some of the accountants working for Coopers & Lybrand. These individuals were sued for engaging in reckless practices and accounting deceit. The auditing firm’s top leaders were also charged in court for facilitating such malpractices (Clikeman, 2013). In the year 1998, Ronald Romito confessed that several individuals at the company had “engaged in securities fraud. He was sentenced “to three years probation” (Clikeman, 2013, p. 74). He was also required to complete around three hundred hours of community labor for engaging in or promoting insider trading.

Another unique outcome of this case at California Micro Devices was that the corporation was ordered by a federal judge to pay $13 million to settle 10 action-class lawsuits filed by shareholders. These shareholders had presented their cases in 1994 after the firm’s stock price plummeted (Clikeman, 2013). The ruling would later be revised to ensure more shareholders received extra cash for the damages arising from the ethical predicament.

From these outcomes, it is evident that a single ethical malpractice in the field of accounting can result in numerous challenges and events. The company’s business model would be affected due to the implementation of such malpractices. The firm’s reputation was affected significantly, thereby being unable to pursue its business aims. The leaders had to be sacked in an attempt to put the house in order. The penalties indicated above made it hard for the company to achieve its potential. These outcomes, therefore, became a wakeup call for many auditing firms and executives that were associated with insincere accounting practices (Mohamed & Handley-Schachelor, 2014).

Best Practices in Such a Scenario

The issues revolving around the corporation’s unethical accounting practices could have been addressed using a number of strategies. The first consideration is that the executives involved were keen to ensure ineffective practices were promoted (Gbegi & Adebisi, 2015). The ultimate goal was to show that the company was doing well in its business segment. This means that the executives interfered with the duties of different stakeholders such as auditors and accountants at the firm. The managers and executives were keen to influence various auditing and accounting practices. With such influences, it was impossible for different stakeholders to engage in whistle-blowing or avoid such malpractices.

However, competent professionals (auditors and accountants) would have played a significant role in dealing with or preventing this occurrence. The first best practice is for accountants and auditors to protect the interests of the public. They should always be keen on the issues and malpractices that might compromise their professional goals. This is a clear indication that they should maintain and exhibit high standards of practice (Doolan, 2013).

If the auditors in this case could have embraced these approaches, it would have been impossible for the dilemma to occur. Additionally, they should have acted as whistleblowers or presented adequate advice to ensure the company was not engaged in unethical practices.

Accountants who understand their mandate should be aware of competing interests or demands. In this case, the professionals would have balanced the demands of the firm’s shareholders and those of the executives. By doing so, they would have engaged in acceptable actions in an attempt to maximize or protect the interests of the public (Asare et al., 2015). The accountants would have avoided any form of pressure and concentrate on the existing regulations.

The case of California Micro Devices revolved around the need to deliver specific financial outcomes that could deceive different shareholders and customers. In such a scenario, the professionals would have ignored any form of pressure and instead comply with the existing financial and accounting rules (Doolan, 2013). Although similar pressures are evident in the world of business, the accountants and auditors involved in this case would have promoted consequential values and accounting standards.

The auditing firm involved in this case supported the malpractices. This is something that contradicts the role and obligation of every auditing organization. The company should have compelled its accountants to remain responsible and promote desirable practices. This move would have ensured that the auditors acted in accordance with the existing regulations and support the welfare of the greatest majority (Bishop, 2013).

Different theories such as utilitarianism support the roles and obligations of accountants. For instance, this theoretical concept acknowledge that actions should be pursued if only the maximize happiness for the greatest number of people. Engaging in accounting malpractices is an action that contradicts the maxims associated with this theory (Caliskan, Akbas, & Esen, 2014). The accountants and auditors involved in this ethical dilemma could have dealt with it by promoting the best actions in an attempt to maximize outcomes for the largest number of shareholders.

Deontological ethics has been embraced by many experts in the field of accounting. This model promotes fairness as an end by itself (Bishop, 2013). The theory guides accountants and auditors to prioritize fairness whenever completing their tasks. The model asserts that issues such as rights for all, fairness, and commitment to what is acceptable should be taken seriously. This is a clear indication that accountants must not engage in specific malpractices with the aim of supporting their selfish interests or gains.

The implication of these arguments is that the auditors involved in the malpractice could have been guided by the above principles of accounting and ethical notions (Caliskan et al., 2014). These strategies would have empowered them to focus on what is right for all. As a result, they would have not bowed to any form of pressure from their superior. Consequently, the company would not have faced any of the consequences outlined in this research paper.

Recommendations to Prevent Similar Occurrences

Several practices and strategies can be considered to ensure cases like the one faced by California Micro Devices are minimized. The first recommendation goes to the auditor (or auditing firm). Auditors can implement powerful measures, in accordance with Section 301 of the Sarbanes-Oxley Act, to discuss with the committee about the fraudulent activities pursued by the senior managers. This move would have made it impossible for the executives at this firm to continue pursuing their ill-thought intentions (Caliskan et al., 2014). The auditor would have become a whistleblower and prevent further damages. Additionally, the auditor would have been guided by Section 404 (of the Act) to give a report about the CEO’s involvement in various business operations.

Another recommendation is for accountants to act in accordance with the provided laws and principles of the profession. For instance, the accountants at the company would have protested any form of pressure in an attempt to support the interests of the public (Seda & Kramer, 2014). Such a best practice can prevent similar fraudulent activities from taking place in a given corporation and minimize losses.

Auditors are empowered by the law to expose any form of negligent performance in an organization. This means that the auditing process must be completed in accordance with the existing regulations. Auditors should be keen “to analyze and respond to the reports of previous accountants or auditors” (Caliskan et al., 2014, p. 246). This is something that was not considered at this corporation. This explains why the audit report for 1994 is missing.

The absence of internal controls in this company played a critical role towards catalyzing this kind of problem. Companies can implement powerful control measures to ensure different records, sales practices, and operations are monitored effectively. This strategy would make it easier for the corporation to identify any form of theft or fraud before it is hidden in financial documents (Mohamed & Handley-Schachelor, 2014). Effective and timely documentations should be pursued by every company. This process should also be associated with frequent monitoring procedures. This strategy will ensure invoices, purchase orders, and checks are tracked and numbered effectively.

Professionals who cannot engage in unethical practices should be hired by corporations. Certified accountants with positive track records can be identified in order to minimize similar ethical dilemmas. A positive organizational culture characterized by empowered, rewarded, and motivated workers will result in desirable outcomes (Asare et al., 2015). Senior-most leaders must be accountable and monitored by a neutral board.

Conclusion

Ethical dilemmas will always occur in for-profit organizations. In the field of accounting, such predicaments arise from inappropriate auditing or bookkeeping procedures (Seda & Kramer, 2014). When these issues emerge, it becomes impossible for companies to pursue their objectives or support the needs of their respective shareholders. The consequences of ethical malpractices can be disastrous for firms, stakeholders, accountants, and auditors.

This case study is, therefore, an evidence-based scenario that should compel business entities to consider appropriate practices and hire ethical professionals in order to avoid similar occurrences. By doing so, it will be easier for firms to avoid similar dilemmas and support the changing demands of every stakeholder. Companies that avoid similar misbehaviors in accounting will be in a position to achieve their objectives and remain profitable in their respective market segments.

References

Asare, S. K., Wright, A., & Zimbelman, M. F. (2015). Challenges facing auditors in detecting financial statement fraud: Insights from fraud investigations. Journal of Forensic & Investigative Accounting, 7(2), 63-122. Web.

Bishop, L. (2013). The value of moral theory for addressing ethical questions when reusing qualitative data. Methodological Innovations Online, 8(2), 36-51. Web.

Caliskan, A. O., Akbas, H. E., & Esen, E. (2014). Ethical dilemmas and decision making in accounting. Corporate Governance, 1(1), 241-252. Web.

Clikeman, P. M. (2013). Called to account: Financial frauds that shaped the accounting profession (2nd ed.). New York, NY: Routledge.

Doolan, A. L. (2013). Ethical issues in accounting: A teaching guide. American Journal of Business Education, 6(1), 129-140. Web.

Gbegi, D. O., & Adebisi, J. F. (2015). Analysis of fraud detection and prevention strategies in the Nigerian public sector. Journal of Good Governance and Sustainable Development in Africa, 2(4), 109-128. Web.

Mohamed, N., & Handley-Schachelor, M. (2014). Financial statement fraud risk mechanisms and strategies: The case studies of Malaysian commercial companies. Procedia – Social and Behavioral Sciences, 145, 321-329. Web.

Seda, M., & Kramer, B. K. (2014). An examination of the availability and composition of forensic accounting education in the United States and other countries. Journal of Forensic & Investigative Accounting, 6(1), 1-46. Web.

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