Case Study 6-9

ACTN 1340-6250 Accounting/Business Ethics Submitted to: Professor Nancy Batch

Student: Rupa Guragai Satyal

Summer 2011

1) In the given case, SEC alleges that GE used improper accounting methods to increase its reported earnings or revenues and avoid reporting negative financial results. Furthermore, the SEC accused GE of inflating its earnings and revenue in 2002 and 2003 so it could beat investors' expectations, misleading investors as a result.. GE whose financial statements contained materially false statements, its common stock were continuously offered for sale, sold and purchased on NSE. After GE committed frauds by improper accounting practices, its direct effect was resulted in higher income and stock price and its shareholders. The fraud relating to the reporting of selling shares that hadn't taken place and the inflation of company profits is completely unethical business practices as it does not truly represent the valuation of the company and also tries to cheat the customers by showing the falsified financial statements. A strong set of ethical business accounting practices should be able to demonstrate a commitment to accounting integrity, and thus gain customer confidence and be trustworthy. 2) Stakeholder literally means a person, group or organization that has direct or indirect stake in an organization and can affect or be affected by the organizations action, objectives and policies. Stakeholder groups vary both in terms of their interest in the business activities and also their power to influence business decisions. The stakeholders that are affected by GEs actions are creditors, customers, directors, employees, government, shareholders of GE, suppliers, unions and the community as a whole is going to be affected. Therefore, all the individuals that surround GE are the stakeholders and virtually going to be affected by GEs actions. I believe, every companies have a duty to all of their stakeholders to provide the highest standards of integrity which GE fails to do. GE management and the board of directors fail to met their fiduciary obligations because they did not perform their duties to which they are obliged to. Every managers have an obligation to work on the mutual interest of all the parties in a stakeholders and consider the action that generates the best overall consequences for all parties involved and maximize benefit for all the stakeholders of the organization. In my opinion, managers and BOD of GE could provide better performance by resisting the fraud by launching the audit program and examining the financial statements thoroughly through other means. Every companys management has an ethical responsibility to ensure that it is guarding against the fraud and unethical business practices and this responsibility is enforced by the rules of the SEC. 3) Based on the limited facts in the GEs case, I think the management fails to make an appropriate control to reduce instances of frauds which could have been prevented or detected by enacting internal audit, surprise audit, fraud hotline, mandatory job rotation, reward for whistleblowers, audit of ICFR and audit of financial statements programs. out of these controls, some are existing in GE but are not efficient in detecting frauds like internal audit program and management view of internal controls.