An Investigation of How the Nature of Financial Management and Ethical Behavior Affects Business Performance

INTRODUCTION

In 2001, Enron Corporation an Energy company in Houston, Texas was rocked by a case of poor financial management and unethical practice which subsequently led to the bankruptcy of the firm (Hollywood Archive, 2015). The Enron scandal should have become a lesson for business managers with the way the company. Organisations are regularly engaging in unethical accounting and finance practices while ignoring that they could be the next Enron (Fassin, 2005). Unethical practice, especially in financial management, exposes businesses to various risks that even lead to the collapse of businesses and loss of shareholder wealth.

Managers are regularly tempted to engage in unethical practice (Tota and Shehu, 2012). The competitive nature of the contemporary trading environment can at times forces managers to put ethics aside to fulfil commercial interests. Managers argue that the constant pressure from shareholders to always improve the company's performance as a significant cause of financial malpractice. Most managers focus on results rather than the relationships they have with their stakeholders.

Tota and Shehu (2012) in their article, The Dilemma of Business Ethics investigate the factors that influence businesses to act unethically. Business ethics focuses on the right and wrong or the good and bad behaviour within a business context. More concepts of right and wrong are being introduced to fit the business environment with terms such as equity, justice and fairness. This approach has created a problem whereby ethics become a relative issue. Ethical dilemmas exist in situations where committing a wrong is done to improve the business position.

Business managers encounter ethical dilemmas in the day to day activities, and this can affect an organisation's financial management. Ethical dilemmas occur in cases where the business managers have a conflict of interest between their personal and work duties (Tota, Shehu, 2012). Conflicts of interest increase management risks as managers may adopt procedures that give them an advantage over the business they serve. The workplace environment or organisational culture that is built by business executives can be conducive for business risks. Cases of mismanagement of financial crisis have been on the rise. Tax evasion has also become a new financial fraud committed by business managers to raise their revenue. Such behaviour usually passes through an ethical dilemma test whereby employees are aware of what is morally acceptable and what is unacceptable in an ethical work environment.

Rao, Hamilton (1993) The Effect of Published Reports of Unethical Conduct on Stock Prices, investigate the causal link between a business’s ethical or unethical practice. Businesses can no longer afford to practice ethics if they are to remain highly profitable, competitive and attain a high stock value. Businesses only have to appear ethical just to succeed. Those who disobey or bend the rules are at an advantage in the business world. Despite this presumption, most business practitioners believe that ethical behaviour promotes financial success for organizations (Rao, Hamilton, 1993).

Rao and Hamilton (1993) state that government regulations and the law can reward ethical practices and punish unethical behaviour in the business place. This is supported by Tota and Shehu (2012) who believe that although managers are caught in ethical dilemmas, they are aware that laws and regulations are against the unethical practice. Rao and Hamilton state that the discovery of unethical practices in business hurts the stock value due to the ill perception of the business. External controls are adopted by financial markets to investigate whether companies engage in malpractice or any fraud. Although this assists the shareholders of a company in discovering what management was doing, it usually leads to a decline in shareholder value for an appreciable period.

Yves Fassin in his article The Reasons behind Non-ethical Behaviour in Business and Entrepreneurship states that financial management scandals have continued to appear despite the recent rise in interest in corporate governance. Fassin highlights that almost every country has had a similar case to the Enron scandal between 2002 and 2005 (Fassin, 2005). Financial mismanagement has been a critical contributor to business failure. This has been witnessed in the increased rate of bankruptcy cases, financial losses for investors and high levels of unethical behaviours by entrepreneurs and managers. Fassin (2005) and Lin and Wei (2006) believe that there is a direct relationship between business ethics and the high rate of business scandals. Top managers and employees do not observe the laws and regulations that they are required to adhere to. Business costs increase due to unethical practice in the workplace. Employee turnover, employee cynicism and low employee morale are usually overlooked in business ethics, but they are the product of unethical practices (Lin, Wei, 2006). They increase business costs either directly or indirectly and affect the profitability or position of a firm.

Hess and Cottrell (2015) article, Fraud Risk Management: A small business perspective, state that companies lose an average of 5% of their income to fraud annually and fraud is a key reason for small enterprise failure. The total cost of fraud alone does not only involve monetary or financial loss. This is because other risks such as legal risks, business risks, liquidity risks and reputational risks arise due to fraud. Fraud causes an emotional toll on the victims especially the shareholders and reduces worker morale and productivity (Hess, Cottrell, 2015). Small businesses can protect themselves from financial fraud by employing business leaders who are explicit with the importance of ethics (Hess, Cottrell, 2015). Every activity in an organization should be done through an ethical procedure. The ethical code of conduct should be introduced in organizations and align them with the institution's mission and values. Projecting the importance of ethics enhances employee sensitivity to ethical issues and encourages the workers to speak up when they see unethical behaviour or certain problems. Business risks can be prevented when organizations come up with fraud risk management plan.

QUANTITATIVE RESEARCH PROPOSAL

Research Question: Does unethical practice by managers and employees in organisations have serious consequences?

A quantitative research proposal will assist in quantifying the underlying investigation. An impact of unethical behaviour will have to be determined. The impact will be assessed by trying to investigate an organisations financial management and the way unethical behaviour in financial management impacts an organisation’s financial performance and position. Quantitative research will increase the data that will be provided to help find a solution and an understanding as to why unethical practices exist. It will also shed light on all the possible implications unethical practice has in an organisation. Many organisations have failed due to mismanagement of the company's finances arising from unethical management.

Quantitative research will leverage on the importance of utilising more data sources in research. There needs to be a better understanding of the role of management in ethical practice and the implication of their actions in a quantitative manner. Many organisations fail due to poor ethics and the failure results in a loss of investments, and this can be measured. Numerical data will need to be collected to measure the effect of unethical practice. Organisations such as Enron and the Lehman Brothers led to the loss of millions of dollars as shareholders did not receive their investments.

A quantitative analysis will also measure the impact of unethical practice in terms of employment loss and effect on employees and their families’ income. Most organisations engage in unethical practice for financial gain. The research will investigate the companies that have engaged in unethical practice for financial gain or performance and the money the company posted either through unethical accounting practice or unethical business practice. The measure will involve analysing the actual financial performance and compare it with the reported financial performance in cases why there is an unethical practice.

The paper will also look at the stock market price of a company engaged in unethical practice. The hypothesis is that companies that fraudulently report financial statements and performance to dupe existing shareholders and potential investors have a high stock price and their stock is in demand. The demand for the stock and the price will be evaluated from a certain period up to the period the unethical practice or fraud is discovered. There is existing data, forensic investigations, and records that show that companies that are engaged in unethical practice will likely report good turnovers to attract and appease investors.

Another hypothesis is that upon discovery of unethical practice or fraud in an organisation, the stock price eventually goes down and the demand level goes down. This will be done by measuring how low the stock price went after the discovery of fraud and if there were any purchases of shares of a company that was just reported for fraud. The aim or objective is to link unethical practice and stock price decline. The market price of a stock is determined by its demand and unethical practice by management will lead to the decline of demand and eventually stock price.

The research will also investigate how the stock markets also feel the effect of unethical practice by management in large organisations. The research will investigate the amount of money the economy and the stock market suffered due to the revelation of unethical practice. Any time there is a considerable decline in the stock price and demand of key shares in the market the stock index and stock exchange performance declines leading to a loss of money in the economy. The effect of unethical practice in the general stock market and the economy needs to be investigated so that unethical managers and employees who fail to observe ethical and professional guidelines can realize the effects of their actions.

The data collection method will be interviewed. Interviews help in collecting firsthand information from financial management professionals. Managers who had been involved in organisations that had unethical practice will provide information that is important for the research. Stock market brokers will also be interviewed to give information about the effects of unethical practice on the stock price before and after discovery. Stockbrokers who had dealt with the shares of Enron or the Lehmann Brothers will be interviewed to provide this information. They will also provide historical numerical data about how the two unethical scandals had on the stock market, shareholders and economy. The shareholders of companies that collapsed will be interviewed to give an account of the financial loss they suffered due to the unethical practice. They will provide information about the behaviour of the stock price before and after the discovery of unethical practice. The interviews will also be done on the employees of companies that engaged in unethical practice. They will provide the number of people who lost jobs due to unethical practice and the effect on their income. This research aims to investigate the critical forces behind the unethical practice and the overall quantifiable impact in terms of gains and loss suffered due to such practice in the business environment.

Data analysis will be done by evaluating the data that is applicable and relevant to the research after data is collected from shareholders, employees, managers and financial investors such as stockbrokers it will be tested for gains or losses values that were witnessed. Various criteria will be used for each data. In terms of managers and employees, the research will analyse how many managers and employees lost their jobs in the firm, how many went to jail and how many were fined. For employees and managers again, the financial implication will also be analysed in terms of what happened to their total annual income. This is because families that had members in companies with unethical practice may have had higher revenues due to financial practice and subsequent decline in income when investigations began.

In analysing data collected from shareholders, financial investors and stockbrokers, the research will measure the losses they incurred due to unethical practice in organisations they thought were upholding integrity and professional standards. It will also check the dividends paid by the stock during the period. The research will also analyse the stock market and the effect it had on the economy. It will measure how the stock market suffered in terms of loss and profit due to the unethical practice in companies they had interest.

Qualitative Research Proposal

Research Question: Why do employees or managers engage in unethical practice despite their being measures to prevent unethical practice?

Qualitative research is necessary for trying to gain an understanding of why employees engage in the unethical practice, yet they are aware of the dire consequences they pose for an organization. It is certain that the probability of unethical practice to occur at the workplace must exist at any given time. Managers expect employees to maintain ethical behaviour and adhere to ethical guidelines while still holding the perception that without proper management unethical practice will occur. The employees, on the other hand, reflect the nature of management instituted in a company. When employees are unethical, the same should be expected of the management. Leaders lead, and the followers follow the leaders as was the case of Enron.

This research will show the link between management practice and ethical behaviour in the workplace. A correlation between the nature of management and the behaviour at the workplace must be established and evaluated in ways that can help improve management and ethical behaviour. The objective is to understand better why unethical practice exists in a firm and yet management team is qualified professionals given the authority to maintain professional and ethical behaviour at the workplace.

Sampling techniques will include identifying employees of a company that has had cases of unethical practice. The employees of the collapsed Enron will provide key data as to why unethical practice existed at Enron or why it occurs in a business and what are the consequences. Employees of a company that have been identified as an ethical company will be used in the study. Aflac insurance has been identified as one of the most ethical businesses in the world. Its employees portray the values and morals that have been nurtured by the firm.

Interviews will be used to collect data from the employees and management team of this companies. The interviews will be done either face to face or through other media. Other media will include phone calls, social media, emails and messaging. All information will be recorded and the identity and role of the participant in the company will also be recorded to give information credibility.

Questionnaires will also be used in the study to collect information as to why unethical behaviour exists in business. Questionnaires are used in qualitative data collection. They will help in collecting current opinions and motivations in the current underlying problem, about unethical behaviour in an organisation. Questionnaires will also find out how employees and managers think unethical practice in organisations can stop.

Critical Evaluation

Qualitative research does not concern itself with numerical representation but with providing a deeper understanding of a specific problem (Queiros, Faria, Almeida, 2017). The qualitative research aims to investigate why managers and employees engage in the unethical practice, yet they are measures available to prevent unethical behaviour, and they are also aware that unethical practice leads to business failure. Discovering why they are unethical practice does not require any numerical representation. Qualitative research will collect data or information from managers and employees to provide an in-depth analysis of why employees and managers engage in unethical practice. Interviews and Questionnaires will be used as qualitative data collection methodologies. In the interviews and questionnaires, the qualitative analysis will design questions in a way that enhances the quality of information retrieved. It is impossible to quantify values, motives and attitudes of employees and managers to engage in the unethical practice. That is the reason why qualitative research and analysis is suitable for identifying the reasons behind unethical practice in organisations.

The quantitative investigation will focus on the objectivity of the research. It will quantify the effect of unethical practice in organisations. Quantitative research has a more extended scope compared to qualitative research. Apart from involving employees and managers in the sampling, it will also include stockbrokers, shareholders and potential investors. This will entail looking at the financial effect of unethical practice. The data collected will be quantified since the samples are generally large and form a representation of the population. Providing figures is more convincing in research (Almeida, Faria, & Querios, 2017). The issue of unethical practice in organisations may seem like a regular ordeal; however, when people see the impact they have on organisations in terms of quantifiable losses, then they realise the effect of their actions.

The quantitative research will require more resources than qualitative research. This is because it will cover a more significant scope compared to qualitative research. It will also need more time in terms of collecting all the financial data required to assess the impact of the unethical practice. Quantitative research will also require more expertise in statistical software’s. This will help in analysing the data and producing graphs and charts to measure the impact of the unethical practice.

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