Answers to Questions on Auditing and Corporate Ethics
The auditor did an excellent job in detecting the falsification of data. By conducting a thorough investigation, he was able to discover that there were two sets of data, the first being the findings of the original studies that revealed that the drug failed every single FDA test, while the second was a doctored version which showed that the drug passed every required test. From this startling discovery, the auditor was faced with two options.
The first was to report directly to the FDA. This would have provoked a strong reaction from the FDA which would most likely have sent a team to examine all the drugs produced by the company. In the process, it might have been possible that there were more such instances in the past which went undetected. At any rate, the FDA might have at the very least fined the company or at its most severe, shut it down. This would have been catastrophic for the company's employees and shareholders.
Instead, the auditor chose the second option, which was the more 'face saving' and procedural. The auditor followed the company's whistle blowing policy and reported his findings to the next highest authority. This was followed by a meeting with the board of directors which offered the auditor a 'deal'. This was a promise to provide the auditor with the necessary resources to get the drug approved by the FDA, but the drug would withdrawn and not sold to consumers. The auditor duly accepted the deal.
Was this a good 'deal'? In my opinion, it was not. Since the drug clearly was unsuitable to be sold, it would have been pointless and a waste of resources to go through the motions and have it approved by the FDA. Perhaps the desire to have it approved was a marketing ploy to deter competitors, but at any rate, the company was not going to sell the drug so it was an utter waste of time. It would have been better to have the tests withdrawn and have more research done to make sure the drug is improved and suitable to be sold. That way, the money spent on research and development on the drug would not be wasted.
The moral and ethical dilemma is should the auditor have accepted the 'deal'? In my opinion, the auditor may have been faced with little choice. Even though the meeting with the board of directors went well, demanding more might have caused him to be threatened with job termination and worse. The auditor might have trusted the board to stay true to their word and not thought the matter through. A better option would have been to accept the deal but insist on improvements made to the company's processes to prevent unethical breaches by researchers. This would have had a long term positive impact on the company.
Question B
In the short term, it appears that nobody was hurt by the deal. True, the project director resigned, but he was accountable for the unethical data manipulation and should have been fired if he chose to stay on. The auditor was not hurt by the deal. The company too escaped unscathed with its reputation intact, as the scandal was swept under the carpet nobody else knew what happened. Since the drug was not sold, no customer suffered any harm from consuming it. To quote Voltaire's Candide, it appears that, "All is for the best in the best of all possible worlds".
Yet like Candide, we find that this is not true. The short term consequence of the deal was that nothing bad happened and nobody was hurt. But the long term effects are quite disturbing. Immediately after the debacle, the company reviewed its corporate policy. The auditor was no longer given access to company records, making it harder to detect fraud. The company also prepared itself for FDA audits by having mock audits at random so that it will always be ready. To make matters worse, all audits have to be prearranged and not held at random, and the department was vested with the power to stop any ongoing audit and reschedule it whenever it wanted. The department was also allowed to review the audit report before being submitted to the FDA so that any discrepancies can be ironed out.
All these contribute to an even murkier corporation with corporate governance and transparency given a back seat. Instead of taking the opportunity to improve corporate governance and minimize future instances of fraud, the company went in the opposite direction. The reason why no major instances of fraud have been uncovered in the 10 years since the incident is because it is ever so much harder to uncover them. At every step, the company has created a barrier to uncovering and reporting fraud.
Therefore, the long term impact of the deal is severe. A pharmaceutical company should maintain the highest level of ethics because it manufactures products that are supposed to cure people or to relieve their suffering. Like all food producers, it should ensure that its products have undergone stringent tests, are approved by the FDA and are safe for consumption. By manipulating test results to gain FDA approval, the company sells products that may be harmful to the health of consumers. This is not only unethical and immoral but illegal as well.
The company has been lucky that there has been no major incident of harm caused by its questionable drugs. However, if customers fall ill or die after consuming the company's drugs, a class action lawsuit will most likely take place and when it does the company is likely to lose everything. Perhaps this is the best punishment for a corporation that allows greed and lies to take precedence over the safety and well being of its customers.
Question C
The board of directors of a corporation has a number of important responsibilities. They include monitoring the strategic plan for a corporation, providing overview of the business activities of the corporation to determine if management is doing a good job and finding out the main sources of risk and making sure that there are appropriate safeguards to manage corporate risks (Dess et al, 2008). Furthermore, the board of directors is responsible for planning the succession of leaders and senior management and this includes overseeing the appropriate appointment, training and remuneration. The board is also responsible for formulating an investor's relation program for the corporation.
However, the board of director's function that is most significant to this case is monitoring and reviewing the effectiveness and integrity of the corporation's internal control systems and other information systems so that they are comply with the laws, rules, regulations and guidelines that are appropriate (Maher and Andersson, 1999). In this case, the board should have taken the ethical approach and withdrew the drug altogether from FDA approval. Making this deal might have been a form of damage control but the way it was handled puts the board in a bad light. It seemed to place saving face over integrity as the board should have made a public announcement within the company that such unethical transgressions would not be tolerated and warned all employees to maintain the highest level of honesty and integrity. This would have sent a clear signal to everybody. Through its actions, the board seemed to indirectly condone unethical practices as it did not severely punish the errant parties.
The board's subsequent actions when it changed the audit procedures were even worse. They seemed to imply that the board was more concerned with hiding irregularities and fraud rather than to highlight and punish them. The company's internal controls should have been strengthened to allow for greater transparency and oversight. There should have been a more effective whistle blowing policy and full management backing. Instead, the board made the auditing process far more opaque. Now, it is virtually impossible to detect any fraud because the company has the power to stop any audit and make changes. Even audit reports can be altered before submission to the FDA so in effect, no fraud is reported.
Some might argue that the board acted out of necessity and desperation. Pharmaceutical companies often spend years and billions of dollars researching and testing out new drugs and the rate of failure is high. Once approved, patents are awarded for a mere five to ten years so the company has to skim as much profits as possible before generic drugs are produced. These are all weak arguments as the board has a fiduciary duty to ensure that the company is in compliance with laws and regulations. Lying to the FDA is a federal offense, which comes with severe penalties. Therefore, the board acted in an irresponsible way when making the deal and even more irresponsibly subsequent to the deal.
Question D
The term "whistle blowing" has its origins in Victorian England where policemen used to blow the whistle at any alleged wrongdoing (Monks and Minow, 2001). The term has been adopted in recent years by the corporate sector. A whistle blower is variously defined as an individual who raises concern about something wrong that takes place within an organization (DeGeorge, 2006). Normally, the whistle blower is an employee for the organization and he or she can report the wrongdoing to a person with authority within the organization or to external parties. The scope of a whistle blower's complaints can range from violations of company rules and procedures such as fraud, illegal activities like embezzlement or threats to employees or the public such as health and safety violations. Whistle blowers can make their complaints internally to the management or senior management of their company or they can make it externally to regulators such as the FDA or the police.
Whistle blowing policies have existed in some form or another in many large corporations but they have been paid scant attention to until the Enron scandal in 2001 (Eichenwald and Henriques, 2002). In Enron's case, as in many other instances, the whistle blowers were harassed, threatened with job termination and suffered from the alienation of fellow employees. This is a reflection of corporate attitudes towards whistle blowing. If the company adopts a positive and proactive approach to whistle blowing, whistle blowers will be awarded due protection and support. On the other hand, in a corporation that views the activity in a negative light, whistle blowers end up being vilified and treated like people who carry tales. Hence, it is all a matter of perspective. Nevertheless, governments around the world have jumped on the corporate governance bandwagon and have enacted legislature regarding whistle blowing. In the US, whistle blowers are guaranteed protection by the Sarbanes Oxley Act 2002, while in the UK there is the Public Interest Disclosure Act 1998 (DeGeorge, 2006). Yet it has been noted that these laws only provide superficial protection and whistle blowers are routinely persecuted.
In the auditor's case, he was acting as a whistle blower. Academic literature does not discriminate to whom wrongdoings are reported by whistle blowers so it is perfectly acceptable for him to report it to the company's management, or if he wants to the FDA. It appears that the auditor was being an exemplary employee by following the company's policy regarding whistle blowing. Instead of reporting it to external parties, he followed the company's procedures by filing a complaint report to his immediate higher authority who duly brought the matter to the board of directors. Consequently, it was up to the board to determine the best course of action.
In the absence of a corporate whistle blowing policy, the auditor has little choice but to report the fraud to the relevant authorities. Obviously, a report should be made to the FDA, but the auditor could report it to other authorities like the police or FBI. Alternatively, to protect himself against abuse and potential lawsuits, he could make a complaint to a legal firm and consult them on the best course of action.
Nevertheless, the absence of a corporate whistle blowing policy puts the whistle blower in a dangerous position. As mentioned earlier, whistle blowers are subject to persecution (Kim and Nofsinger, 2007). Generally, most countries have enacted laws that supposedly offer legal protection to whistle blowers. However, the reality is quite different. Whistle blowing employees have been routinely sacked, suspended, demoted, have their wages garnished or ill treated by their colleagues. In more severe instances, their families might be threatened. To overcome this problem, various private and non-governmental organizations in developed countries have formed support groups and funds to help whistle blowers (Dess et al, 2008). In most developing countries where whistle blowing is virtually non-existent, the employee can be severely punished and sued by the company. In the end, the wrongdoings might be swept under the proverbial carpet so the whistle blower has achieved nothing but bringing harm upon himself. Hence, the auditor has to be aware of these repercussions and decide for himself if being a whistle blower is worth the effort.
Question E
Whistle blowing policies are normally part of a corporation's code of conduct or code of ethics. These codes apply to all individuals working for the corporation, and encompass a diverse range of rules and standards that provide a framework for the corporation and the employees. However, it must be noted that corporate code of conducts are implemented on a voluntary basis (DeGeorge, 2006).
A good whistle blowing policy must be made in writing. It should be part of the company's contract for employees. A good whistle blowing policy defines whistle blowing in the context of the organization and informs employees about the main processes involved. These include the violations that must be reported, under what legislation they fall and to whom potential violations should be reported. The corporate whistle blowing policy should also emphasize the protection that is protected to assuage the fears potential whistle blowers have and inform employees about their rights. Finally, the corporate whistle blowing policy must explain the processes and procedures that will be taken to address the concerns and remedy the wrongdoings alleged by the whistle blower (Orme and Aston, 2003).
In my opinion, the company has a very ineffective whistle blowing policy. It is akin to merely paying lip service with no serious intention of uncovering wrongdoings and correcting them. No company that is serious about overcoming fraud will allow the situation to go unreported and then change the auditing procedure to make it impossible to detect fraud. The company's whistle blowing policy is a failure that harms all its stakeholders.
The company suffers from a lack of integrity and accountability. These characteristics are especially crucial in the pharmaceutical company that should have even higher standards of ethics than the average corporation because people's lives are at stake. The absence of a good whistle blow policy means that fraud goes undetected and once the rot has set in, this will begin the slow and steady decline of the corporation. Lies and deceit will become rampant and eventually, the company will stumble and all its wrongdoings will come to light.
The company's whistle blowing policy has also failed its employees. No upright, principled individual would ever want to work for such a corrupt organization. Instead of rewarding honesty and punishing unethical practices, the company not only turns a blind eye but indirectly encourages employees to act unethically all for the sake of obtaining FDA approval. The ethical tone of an organization is set at the top and the board of director's actions sends clear signals downwards that the company does not place a premium on ethics. This creates an unproductive and unethical organization that is incapable of meeting the challenges of the modern economy.
Finally, the company's whistle blowing policy has failed the public. Corporations should shed the view that their primary goal is to maximize the wealth of shareholders but also become good corporate citizens. Corporate social responsibility and focusing on the triple bottom line should be emphasized. One of the ways in which the company becomes a good corporate citizen to its stakeholders it to maintain a high level of business ethics. Honesty and integrity should be part of the corporation's DNA. By quashing the truth to avoid a scandal and by amending the company's control systems, the company has failed the public because it no longer holds the moral high ground. The public when they find out the truth will no longer be able to trust the company's products as they might not actually fulfil the minimum health and safety standards. No only that, the public in endangered by shoddy products that may harm their health and well being.
In conclusion, corporations should do more than formulate empty whistle blowing policies. They should use whistle blowing as a control system to safeguard against fraud and abuse of power. Whistle blowing should be viewed in a positive and constructive manner to make the organization better that will ultimately benefit it and its stakeholders.
