Free Essay

Business Ethics

In: Business and Management

Submitted By eoverby2
Words 2789
Pages 12
Christian Garland
BUSI 472-B06
An Examination of Fraud in Business
6/2/14
Liberty University

Abstract
The paper will examine the concept of fraud in a business environment. Fraud is defined as any purposeful communication that deceives, manipulates, or conceals facts in order to create a false impression. There are many different kinds of fraud that can be committed, which include paying employees under the table, schemes, and tax irregularities. Some of these including paying employees under the table, committing schemes, and tax fraud will be examined in this paper. The consequences of these actions will also be displayed through example. This paper will consider the motivations behind why these types of fraud occur.

There are many areas in which those in business today attempt to cut corners and figure out ways to get around the system in order to make more money. These occurrences are usually illegal and considered fraud. Fraud is defined by Ferrell and Fraedrich as, any purposeful communication that deceives, manipulates, or conceals facts in order to create a false impression. Fraud is a crime and convictions may result in fines, imprisonment, or both (Ferrell, Fraedrich, 2013). There are many different kinds of fraud that can be committed, which include paying employees under the table, schemes, and tax irregularities. Some of these cases will be further examined in this paper. When examining these scenarios it is important to determine what some motivating factors are that affect individual’s decision to commit this type of fraud. When these factors can be identified it may be helpful in preventing such occurrences in the future and also could help individuals to avoid making these decisions in their personal lives. Also, it is important to note that there are consequences in place for individuals and businesses that choose to participate in this type or fraud behavior. Legal action is taken against them and often they are required to serve time, pay fines, and also pay reparations for what they owe. If an individual is ever in a situation in which they are being asked to participate in this behavior, a close examination of these issues would be incredibly helpful in determining what decision that person might make. Paying employees under the table and keeping transactions off the books are ethical issues that are becoming more and more prevalent with the passage of time in the American market. There are many social issues that surround these occurrences including the fact that most individuals paid under the table are in America illegally and will accept work for less than an American citizen is willing to earn. This practice ultimately saves the employer money, but that means the business’s saved money is coming from somewhere. This is one of the reasons that our economy has been suffering in recent years. These extremely low wages are being paid to non-citizens that American citizens are simply not able to accept and are not able to take those jobs. While this may seem to be an issue that really would not affect the country’s economy as a whole, it is in fact affected entirely. Our economy can be compared to an ecosystem. Say for instance there is an ecosystem that involves a grasshopper, a mouse, a snake, and a hawk. If the grasshopper were to be eliminated, or became extinct, not only would the mouse be affected, but so would the snake and hawk even though these animals do not interact with the grasshopper. In turn, this is how our economy functions. When jobs are eliminated for American citizens, the repercussions can be felt through out the rest of the system. The construction business is one that is commonly linked to paying employees under the table. It is easy for them to do so because their operations usually occur on job sites instead of inside an establishment. It is easy for them to pay who ever shows up to work that day in cash rather than keeping these individuals as employees of the business meaning that they are required to pay taxes, and give benefits among other things that will cost the business more money. In the past, these situations have been over looked however, in recent years more emphasis has been placed on this issue. A legal representative described the attitude that contractors have in this regard as ‘catch me if you can’ (Manufacturing Close-Up, 2013). Because of the level of frequency that this type of fraud is occurring, consequences have been increased in recent years however, as described above, it is difficult to find and prove that these individuals are committing fraudulent practices. California’s Labor Commissioner stated “We fully support state agencies that catch scam artists who cheat the system by performing unpermitted work; ripping off unsuspecting consumers; paying employees cash under the table; hiring undocumented workers; and putting workers at risk by not complying with safety regulations (Manufacturing Close-Up, 2013).” More strict consequences are coming down the line for this type of business organizer. We can see that saving money is the ultimate motivation for these businesses to operate this way, but it makes an individual question why businesses are feeling such financial pressure. Taxes are usually a confrontational topic in any platform in the United States today. Some think there are too little taxes; some find them too high, all depending on their individual motivations. There has always been great emphasis from businesses on why the government is continually increasing businesses’ share of burden of tax collection (Benninger, 1944). It is clear that as time has passed and taxes have continued to increase, individuals involved in businesses continue to be displeased. Business minded individuals see the constantly rising taxes placed on their businesses as an erosion of the free market that is entwined in American culture. Excise taxes are based specifically on the number of units, sold or produced, on an ad valorem basis measured by a percentage of the selling price. An ad valorem tax is a tax based on the value of real estate of property; this is the tax that is imposed on the time of transaction (Benninger, 1944). Originally, income taxes were meant to aid the aged and provide assistance for widows, children, and parents of individuals insured under the Title II of the Social Security Act (Benninger, 1944). However, since this time, taxes have evolved to provide for so much more and whether this is a good or a bad thing is a matter of personal opinion. When examining motivation for committing fraud it is important to acknowledge that most times it is in order to avoid paying taxes whether it is resisting to pay taxes by hiring employees under the table or also by avoiding the Excise tax by failing to document a transaction that has taken place. This may be legal in some cases, such as a trade of services; it is not an authorized action to simply sell a product off the books at a discounted rate to avoid the government excise tax. It is easy to see how tax pressure would be a motivating factor for businesses to commit this type of fraud in some shape or form. An article in the Mississippi Business Journal discusses the phenomenon of many individuals avoiding filing their tax returns with the IRS in Mississippi. The article relates that tax issues occur more frequently in a poor economy than in a flourishing economy. It is not hard to imagine why these tax issues occur more frequently in a poor economy. When times are difficult, people involved in businesses are going to look for ways to save money (Mitchell, 1992). While it is unethical, many chose to try to save by skating by on their taxes. Many people do not file their tax returns because they believe they do not have the money to do so or a ‘significant event’ occurs such as a death in the family or divorce (Mitchell, 1992). Once so much time passes, many individuals also feel as though they cannot file for fear that they will need to make reparations for the periods that they have not paid, so they continue to avoid coming forward. Nationally, the number of non-filers has risen steadily over the past five years in the U.S., which is nine percent of the 114 million filers (Mitchell, 1992). While it is easy to image a small business committing tax fraud by means of paying employees under the table or keeping transactions off the books like the situation mentioned above, it seems much less likely that a corporation would also struggle with tax fraud. However, this is not the case. There is actually a daunting tax fraud issue in this area that is commonly confronted (Pollack, 1992). An article by Pollack depicts a few examples of how a corporation would find itself in the position of unlawful tax fraud, how this is regulated, and the consequences that are in store for such corporations. Consequences of these situations are often different when comparing a small business to a corporation. This difference stems from the basic difference between a corporation and a small business. A corporation is a legal and taxable entity separate and distinct from the individuals who own or manage it, whereas a small business owner is not separate from said business and is held personally liable. This means that while a small business owner will be held personally responsible and could end up sacrificing personal assets such as their cars and homes, corporation leaders are not held responsible in this way. Repercussions in this aspect will fall to the organization as a whole and will ultimately interrupt in some way their goal to make money because they will be required to use this money to pay fines. When examining the topic of tax fraud and the ethical implications, it is important to focus on the motivation that causes individuals and corporations to attempt to save money by avoiding taxes one way or another. Many Americans that are involved with the large span of the business field related their support for changing the tax code as well as their opinion on why they were currently unhappy with the current state of taxes. A quote from an article by Gouras titled Business Leaders Talk Taxes summarized this idea well by saying; “There is no question if we can reform the code it will help American competitiveness in the world.” It is clear from this article that business leaders find that if less taxes were to be imposed on them they would benefit in the national as well as the global markets. This may be something to consider in an attempt to further the American and global marketplace. There are consequences in place for those who attempt to navigate around the tax requirements. After pleading guilty, a dentist from Nevada was sentenced to six months of home detention and three years’ probation for filing a false business income tax return. He attempted to form two Nevada corporations through a man in Oregon, who then established three corporations in the West Indies. The corporation established by the dentist was arranged specifically for him to receive money for fictitious consulting services. Another example of consequences that arise from these scenarios is related in an article by Staff that describes a couple from South Florida who were charged with twenty-one counts of fraud, more specifically, keeping sales tax money they collected between May 1990 and February 1992 (Staff, 1992). The will be forced to make reparations for these penalties. While the circumstances are very overt in this situation, many similarities can be seen in simply pocketing the sales tax revenue and attempting to barter and keep transactions off the books in order for the business to profit or in an attempt at personal profit. The word ‘ethics’ comes from the Greek word ethos, meaning the character and values that determine the identity and goodness of an individual or group. This is a great way to relate the concept that we think of currently as business ethics. Coinciding with this idea is the word ‘moral’, which comes from the Latin root mores- the customs and accepted rules of a group or society (Joseph, 1997). Both of these are great descriptors to define the standards of what is right and good. It is important for the leaders of a business to display business ethics which will intern, create an environment, or culture of ethical business practices that will benefit the organization as a whole. From a Biblical perspective, it is easy to determine that these actions are not ethical. Christians know very clearly that they are commanded by the Lord not to lie, committing the types of fraud related in this paper are very clearly deceitful. 1 Peter 3:10-12 states, “For ‘Whoever desires to love life and see good days, let him keep his tongue from evil and his lips from speaking deceit; let him turn away from evil and do good; let him seek peace and pursue it. For the eyes of the Lord are on the righteous, and his ears are open to their prayer. But the face of the Lord is against those who do evil.” This is evidence that one will not prosper from being deceitful. Also, even though individuals may not agree with the laws at all times, Christians are commanded to follow what it says and if that means paying taxes, that is what they are commanded to do. Evidence of this can be seen in Romans 13:1, which says, “Let every person be subject to the governing authorities. For there is no authority except from God, and those that exist have been instituted by God.” God is the ultimate authority as Romans 13:1 says and is an individual attempts to cheat the government or whatever authority is in place, they are ultimately attempting to cheat God. In today’s fallen world, unethical business practices and decisions are committed daily. One of these unethical practices is known as fraud. Fraud can occur in many different forms; some of the main forms include, paying individuals under the table, committing schemes, and not being honest or ethical in regard to taxation. A motivating factor for these types of fraud stems from the high level of government taxation that is placed on businesses including small businesses as well as corporations. This high level of taxation causes financial pressure that these organizations attempt to alleviate through different avenues, which have been examined above. It may be something to consider after examining the evidence that these fraudulent acts are occurring because taxes are simply too high. These actions are wrong and still found to be unacceptable. There are consequences in place for committing these types of actions that have been examined above including serving time, house arrest, probation, fees and reparations. These consequences may be increased in the near future due to the amount of incidents that have been reported. It would be helpful for an individual to be aware of this information to be able to spot the motivation and know the consequences of such actions. This knowledge may help to keep them to keep from succumbing to the financial pressure themselves or help another individuals who may be in the situation.

References
Construction contractors and CALPASC post statement on state labor commissioner's decision for ace cooling & heating to pay fines. (2013). Manufacturing Close - Up, Retrieved from http://search.proquest.com/docview/1282693417?accountid=12085

Deseret, M. N. (2004, Aug 12). Dentist is sentenced for business tax fraud. Deseret News Retrieved from http://search.proquest.com/docview/351312071?accountid=12085

Ferrell, O.C. Fraedrich, J. Ferrell, L. (2013). Organizational Ethics. Liberty University. 9th Edition. Pg. 78

Gouras, M. (2013, Sep 17). Business leaders talk taxes. Tulsa World Retrieved from http://search.proquest.com/docview/1433364452?accountid=12085

Joseph, E. R. (1997, Dec 17). Importance of business ethics. New Straits Times Retrieved from http://search.proquest.com/docview/269170946?accountid=12085

L. J. Benninger. Business and with holding taxes. The Accounting Review, Vol. 19, No. 3 (Jul., 1944), pp. 302-306 Published by: American Accounting Association URL: http://www.jstor.org/stable/240456

Mitchell, J. (1992). Small business avoids tax man. The Mississippi Business Journal (Pre-Aug 20, 2012), 14(35), 1. Retrieved from http://search.proquest.com/docview/206563994?accountid=12085

Pollack, S. D. (1992). Penalties for tax fraud against a corporation. The Tax Adviser, 23(7), 464. Retrieved from http://search.proquest.com/docview/194904086?accountid=12085

Staff and, w. r. (1992, Sep 24). FLORIDA SALES TAX FRAUD ALLEGED. Sun Sentinel Retrieved from http://search.proquest.com/docview/388844950?accountid=12085

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