Ethics: ArthroCare Corporation

The report portrays a case of ethical dilemma that I had to face in the workplace. In 2004, I joined the Arthrocare Corporation and started work as a management trainee. After my joining, a situation of ethical dilemma occurred within the organization. I noticed that the CEO (Michael Baker Former) and CFO (Michael Gluk former) of ArthroCare Corporation were involved in fraud of massive fraud scheme that is popular in business circles as channel stuffing. Baker and Gluk both were abusing their position of trust to enrich themselves illegally. The fraud scheme adopted by the CEO and CFO of the firm was dangerous to the employees, shareholders and investors of the firm. In this fraud scheme, at the end of each quarter, they replace millions of unnecessary medical devices with distributors in order to represent the false financial statement of ArthroCare’s (Calkins and Ratcliffe, 2014). Moreover, the distributors were also agreed to stock these extra medical devices because the company made it profitable to do so. At the same time, the company was also provided fees or generous terms to pay of distributors those were taking extra medical devices.

At the same time, ArthroCare was also provided return options to distributors at no cost term if they did not able to sell medical devices. This long-running fraud scheme and misrepresentation sales contributed into the significant growth of ArthroCare that ascended its stock price (The Federal Bureau of Investigation, 2014). Baker and Gluk also provided false information about the stock to investors and market analysts of the firm. The CEO (Baker) of the company was plowing a big hole to maintain the stocks at inflated price that may show the false financial statement of ArthroCare’s.

Moreover, in July 2008, the fraud was getting too big and it is out of control, so the corporation declared that it would repeat previous reported financial statements as an internal investigation of results. As a result, the price of shares dropped sharply that result immediately loss of more than $400 million shareholders value, but the actual total losses of more than $750 million (Calkins and Ratcliffe, 2014). This situation influenced the employees, investors, shareholders, banks and so on those were related to the firm. Moreover, it also broke the trust of the people who have a big faith in the firm. It was very shameful for me that I was working with such type of organization.

At the same time, in 2011, the FBI opened a case on both Baker and Gluk. FBI investigated thousands of paper, electronic records, and documents over the next three years to find out the actual loss of investors or shareholders. Moreover, the FBI’s San Antonio Field Office took interview of distributors, investors, and other individuals to find out the evidences. After a four-week trial, in June 2014, a federal jury convicted to Baker and Gluk. Furthermore, the Federal jury gave 20 years and 10 years prison as well as fine of $1 million and $50,000, respectively (The Federal Bureau of Investigation, 2014). I will rate ‘1’ because of I am agree and also happy with the decision of the Jury.

There are numerous ethical theories that are used in today’s business organizations to resolve the situation related to an ethical dilemma. For case, egoism, utilitarianism, and deontology are the important ethical theories that are helpful for the organizations in order to solve a situation of ethical dilemma in an effective and a more comprehensive manner. Apart from this, these ethical theories also play a major role to reduce the conflicts among the members of the firm. Moreover, these ethical theories also motivate all the people of an organization to perform all the business activities in an ethical manner. They should take care of ethics and morals to do all the business activities properly. The main theories of ethics are discussed as below:

Ethical egoism refers as a normative theory. As for a little while back illustrated, it recommends, favors, praises a specific sort of movement or motivation, and dishonors a substitute kind of motivation. It has two adjustments: individual moral selfishness and in addition all inclusive moral vanity. Pride logic depicts good and bad as far as the impacts to self. A braggart rationality would measure a moral issues or situation as far as how various types of activity or business choice would influence self-enthusiasm of the business (Reidenbach and Robin, 2013). This reasoning suggests that the business moral commitment is to make a benefit with take after the law.

Psychological egoism is as much a hypothesis about who we are as individuals as it is a hypothesis of how we should act. It is an endeavor to give one basic clarification of human inspiration and conduct. Mental Egoism is the hypothesis that each human activity is roused without anyone else interest. This hypothesis expressed that the ethically right activity is the one that creates the greatest equalization of good over malevolence for oneself (Österberg, 2012). What’s more, mental pride sees that the rationale in every one of our activities is self-interest. Moral vanity is not synonymous with narrow-mindedness or liberality.

In this case, Michael Baker former CEO and Michael Gluk former CFO of ArthroCare Corporation were sentenced to 20 years as well as 10 years in prison, respectively for  crime related to massive fraud scheme that cost $750 million losses of shareholders. ArthroCare Corporation both former top executives were declared criminal or fraud person in behalf of they was included in wire fraud and securities fraud that impacted on the shareholders money (Düwell, 2013).  

So, on the basis of this case summary and psychological Egoism theory application, ethical dilemma is identified, due to the unethical behavior of the CEO and CFO of Arthrocare Corporation. Moreover, Baker and Gluk both was only the responsible person of this ethical dilemma, so the jury of the court punished both of them for this corporate fraud (Smith, 2008). In Psychological Egoism, both top executives were misused its title or position and has not provided correct financial information of the investors, so it is unethical behavior of the business aspects.

According to Psychological Egoism theory, not only the CEO and CFO of the company, but also the internal and external auditors were responsible for corporate fraud and losses of investors. In the case of internal and external auditors has been performed their roles and duties in ethically and effectively then the CEO and CFO were not able to do fraud with stakeholders (Broad, 2014). If the internal and external auditors has been performed their roles and duties in proper way then they would have protected the investors from the CEO and CFO fraud through identify this fraud and misstatement of financial data or information. Moreover, it indicated the shortfall on internal or external auditors in this case that contributed into the corporate fraud and misleading of investors by executives Baker and GluK.

Utilitarianism is an ethical system or a moral theory. In addition to this, the main objective of utilitarianism is to generate the greatest amount of delight to the highest amount of people (Dion, 2012). Moreover, it believes that the most ethical thing to carry out is to maximize the happiness within a society. Utilitarians accept that activities have measurable results and that moral decisions have conclusions which prompt the most joy to the most parts of a society. On the other hand, Utilitarianism is frequently considered a “consequentialist” philosophical standpoint on the grounds that it both accepts that conclusions can be anticipated and on the grounds that it judges activities focused around their results. For this reason, utilitarianism is frequently connected with the expression ‘the ends justify the means’ (Ismail, 2012).

At the same time, during the investigation and trial, it is found that this fraud scheme of ArthroCare’s deep-reaching and irreparable harm to thousands of victims. The FBI’s San Antonio Field Office mentioned in this investigation report that thousands of victims will never recover their money those they loosed due to the misleading or misinformed of Baker and Gluk. Special agent Tom Hetrick, of the San Antonio Division that worked in investigation also mentioned that the CEO and CFO would not behave ethically, legally, and misused its title or position that harm many victims, so this kinds of corporate fraud is not acceptable at any situation (Reinstein and Leibowitz, 2014).

So, on the basis of Utilitarianism theory, ethical dilemma is identified, due to the unethical behavior of the CEO and CFO of Arthrocare Corporation. Moreover, Baker and Gluk both was only the responsible person of this ethical dilemma, so the jury of the court punished both of them for this corporate fraud (Goza, 2013). In addition, both top executives were misused its title or position and has not provided correct financial information of the investors, so it is unethical behavior of the business aspects.

According to utilitarianism theory, investigators and the court jury also found that the CEO and CFO did not behaved legally, ethically, as well as misused its title or position, so they were responsible for this corporate fraud, so that the jury punished both of them. Moreover, the CEO and CFO did not provided correct information or mislead with investors and market analysts as well as they have not faced any guilty of their unethical behavior that indicates the ethical dilemma situation in this case (Knipe and Bitter, 2011). Baker and Gluk have not properly or ethically fulfilled their responsibilities and duties that represent the ethical dilemma situation. 

Deontology:

Deontology is an ethical system that generally ascribed to the idealistic custom of Kant.  For instance, the utilitarianism ethical theory concentrates on ends of activities, deontology describe that the activities, or means should be moral. Along with this, Deontologists contend that there are inspirational moral standards as well as truths that are generally appropriate to individuals (Dunn, 2015). Deontology describes that a few activities are indecent paying little heed to their conclusions; these activities aren’t right all by themselves.

On the other hand, Kant provides a categorical imperative to do something ethically. Moreover, Kant accepts that all individuals reach moral decisions about good and bad focused around sane thought. Deontology is generally connected with the adage ‘the means must justify the ends. Along with this, deontological morals hypothesis has three imperative qualities. Initially, obligation ought to be finished for the purpose of obligation (Lin, Pizzini, Vargus and Bardhan, 2011). Second, people ought to be dealt with as substance of intrinsic good esteem; and third, an ethical guideline is an unequivocal basic that is universalizable.

On the basis of deontology theory, in this case, internal auditors were also responsible for this corporate fraud because without their approval of financial statements and financial information the company has not produced them publicly. At the same time, internal auditors have neglected or not considered massive fraud scheme as well as they has not performed properly their duties to identify the weakness or misinformation in fiscal statements that indicates shortfall of on internal auditors. According to deontology theory, external auditors also have not behaved ethically and not able to identify fraud or error in the company (Shaw, 2016). So, in this case, internal or external auditors’ shortfall or weakness identified because they was not able to identify fraud of executives or error in financial statements.

On the basis of deontology theory, in this case, mainly the investors or creditors have been impacted on the Arthrocare’s fraud. This corporate fraud mainly impacted on the stakeholders or investors as they faced losses of their money or returns due to the rapidly decline in the company’s share value as results of corporate fraud. Arthrocare’s fraud or actions caused harm to thousands of victims and these victims will never recover their financial loses. The deontology theory indicated that this corporation fraud not only impacted on their shareholders, but also impacts on other companies’ stakeholders as they loosed their trust on public companies or stock market (Hackett, 2009). The deontology theory expressed that this fraud impacted on the overall share market growth and trust of investors on market that also affected on the growth of the economy and local government taxes or revenues.

On the basis of the ethical dilemma case that is given in the part one of this paper, I come to know that there were a lot of internal weaknesses within the organization. In this case, it is clear that both CEO (Michael Baker former) and CFO (Michael Gluk former) of ArthroCare were misusing their power and position. They only want earn money and they were ready to perform illegal activities for their profits. As it is given that   Michael Baker and Michael Gluk were running a fraud scheme for the duration of 2005- 2009 and they placed unnecessary medical to represent the false financial statement. This is the major unethical activity conducted by the CEO and CFO of the firm.

Moreover, the Utilitarianism theory of ethics makes me happier with the decision I made in Part 1. The main reason behind it is that this theory focuses on the greatest amount of pleasure to the   people and this thing is essential for the overall development of an organization (MacKinnon and Fiala, 2014).  On the other hand, I also come to know that financial statement represent the overall performance as well as efficiency of an organization in from of the existing as well as potential investors of the firm. But, in this case, the false financial stamen may have a big impact on the decision of the investors of the organizations. Along with this, I also come to know that shortcuts or unethical ways to earn profits are very harmful for the health of the organizations. They may provide profits for a short duration only but not able to exist in the long term.

Apart from this, the Egoism theory of ethics makes me less happy with the decision I made in Part 1. It is because of this theory involves innocent people if an ethical dilemma occurs in the organization (Shafer-Landau, 2012). As in this case, we can see that, with the help of unethical business activities, the market price, stock price, and profitability of the firm increased very quickly. But, at last, these unethical activities become the major reason of the high losses of the business.

In addition to this, with the help of this case, I also come to know that, in starting, the unethical activities are profitable for all the people those are involved. But, at last, these unethical activities become the reason of death for the people. Moreover, if I were in that same situation again then I would make the same decision again. It is because of punishment is essential if a person performs unethical activities to earn money.  For case, due to the greedy nature, the CEO and CFO of the firm, the reputation and image of the firm dropped in a more rapid way. Also, they were obliged to pay a fine of $1 million that was more than the profits they earned. Moreover, they also got punishment by the Federal jury. The punishment of prison t may be very shameful for a person.  For that reason, I am pleased with the decision of the jury in this case. 

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