The following is an excerpt from a memo written by the head of a governmental department:
“Neither stronger ethics regulations nor stronger enforcement mechanisms are necessary to ensure ethical behavior by companies doing business with this department. We already have a code of ethics that companies doing business with this department are urged to abide by, and virtually all of these companies have agreed to follow it. We also know that the code is relevant to the current business environment because it was approved within the last year, and in direct response to specific violations committed by companies with which we were then working—not in abstract anticipation of potential violations, as so many such codes are.”
Discuss how well reasoned you find this argument. In your discussion be sure to analyze the line of reasoning and the use of evidence in the argument. For example, you may need to consider what questionable assumptions underlie the thinking and what alternative explanations or counterexamples might weaken the conclusion. You can also discuss what sort of evidence would strengthen or refute the argument, what changes in the argument would make it more logically sound, and what, if anything, would help you better evaluate its conclusion.
On the surface, the argument seems plausible. The logic runs that because the code already exists and companies have agreed to follow it, that there is no need to further enact ethics regulations or impose harsher penalties. However, a closer look at the facts reveals that this is not the case
The core flaw in the argument centers on the question of whether the code has in fact been effective. If companies are willing to follow its dictates, then there is no reason to further limit their ethical behavior. However, the existence of an ethical code, no matter how sound, does not necessarily guarantee that companies will abide by it. Many codes exist, but few have any measurable impact on the behavior of corporations. A few examples will suffice. Even those codes that receive wide-spread support are enforced inconsistently. For instance, the Securities Exchange Commission (SEC) has enacted several regulations aimed at preventing financial fraud, but many of these regulations are not enforced. In 2012, the SEC charged the accounting firm Ernst & Young with an egregious violation of its code of ethics. Ernst & Young was fined $500,000 for failing to deploy effective internal controls to ensure that it was in compliance with SEC regulations. The SEC did not consider this a major infraction. Consequently, they did not take enforcement action against Ernst & Young. Whether this is due to the ambiguity of the SEC’s regulations or to the lack of enforcement is irrelevant. The fact that Ernst & Young was fined at all is a victory against ethical misconduct, as no company should have received a fine from the SEC unless they had engaged in unethical practices
Despite the fact that some codes are effective, there are good reasons for government officials to closely monitor the actions of corporations to ensure that they are adhering to them. The primary reason for this is the potential conflicts of interest that can arise when a company fails to properly manage ethical repercussions. The FTC, SEC, and the Department of Justice routinely investigate and prosecute companies that engage in fraud. These government agencies are staffed with highly trained investigators and forensic accountants. They have the tools and expertise necessary to conduct comprehensive investigations into a company’s operations. Moreover, when a company engages in fraud, the repercussions can be devastating not only to the company, but to the entire economy. Therefore, if a company knows that the government will pursue the matter vigorously, then they are more likely to ensure that their actions are ethical
When a company engages in unethical behavior, the consequences can be severe. The fines and penalties levied by the SEC have been mounting, and fines of over $1 million are not uncommon. In addition, the SEC has the power to ban a company from participating even in the most routine financial transactions with the government. This can have devastating consequences for a company. A company that engages in fraudulent practices, or that fails to comply with SEC regulations, is less likely to receive government contracts, including contracts to provide goods and services to the government. This means that the government cannot rely on their company to provide the necessary goods and services. Moreover, any company that does receive government contracts is less likely to receive them in the future. Therefore, companies can be barred from doing business with the government for years after engaging in unethical conduct. The damage to a company’s reputation can be irreparable. Consequently, companies that knowingly engage in unethical behavior have a vested interest in ensuring that they do not commit the same or a similar infraction in the future
The conclusion that companies will not adhere to ethics regulations or impose onerous penalties if companies are already following the code seems to ignore these potentially disastrous consequences. Moreover, these consequences are not theoretical. In 2013, two subsidiaries of Siemens, a German multinational conglomerate, were fined $2.75 billion by the SEC for engaging in a variety of unethical practices. Siemens allegedly inflated its earnings by $1.5 billion, which allowed them to submit inflated bids to government contractors. In addition, Siemens paid bribes to government officials around the world in exchange for favorable treatment. Although the SEC was investigating Siemens as early as 2005, they announced their investigation in 2011, and the company was not barred from government contracts until 2013. The loss of government contracts had a profound impact on Siemens, and they were not able to recover from their losses. Furthermore, the SEC barred the company from bidding on government contracts for three years. This effectively prevented the company from participating in any government contracts for three years, and since these contracts accounted for approximately 70% of Siemens’ business, the company suffered a catastrophic loss of revenue. Despite the huge fines, the SEC was unable to effectively prevent Siemens from engaging in unethical behavior. Therefore, it is unjustifiable to assume that companies will not engage in unethical behavior as long as companies know the consequences.