Corporate Scandals

 RUNNING HEADER: Corporate Irresponsibility in the last half decade

CORPORATE IRRESPONSIBILITY IN THE LAST HALF DECADE

by

Thakar, Om 300362999

ADM 1101 M

Business and Society: Winter 2024

University of Ottawa, Ottawa Ontario

Date: March 25, 2024

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1. Introduction: Learning Objectives

In the wake of corporate irresponsibility scandals that have rocked the business world over the past five years, this report delves into the repercussions experienced by four corporations and their responses from both the corporate area and the public domain. By examining the economic ramifications of these scandals, this analysis aims to shed light on the far-reaching consequences of corporate misconduct. The unethical activities involved fraud and theft, these acts not only compromise ethical standards but also inflict substantial damage on economies and societies. The embezzlement of funds and financial mismanagement undermines economic stability by draining resources from the market but also jeopardizes employment opportunities, potentially leading to the closure of affected companies. Such practices impair developmental progress on multiple fronts, exerting adverse effects on both the economic and social landscapes while disrupting the financial stability of households. Beyond the immediate financial fallout, the issue of corporate accountability is vital, as companies may resort to unethical tactics to safeguard their interests, including silencing allegations through monetary incentives or by threatening libel. Corporate involvement in the media underscores the critical imperative for heightened awareness among stakeholders, including organizations, governments, and the general populace, regarding the gravity of corporate scandals. Through a comprehensive examination of these scandals and their multifaceted impacts, this report endeavours to foster a deeper understanding of the importance of ethical conduct and accountability in corporate governance.

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2. Corporate Irresponsibility: The Scandals

This report examines the conduct of four corporations, Wirecard, Luckin Coffee, FinCEN and Embark Trucking. All companies have scandals and ethical controversies. The managers and the leaders of the companies demonstrate a lack of understanding of their obligation to act in the best interest of the stakeholders. All previously mentioned companies were up and coming in their respective fields and were making the way for new ideas and technology. All companies have faced public condemnation for their misconduct and lapses in moral judgment. Wirecard was engulfed in a financial scandal that revealed systematic fraud and deception on a surprising scale (Bartelt & Hommel, 2020). This report will analyze and summarize all cases. This report aims to focus on the ethical reasoning and implication of the actions as well as looking at economic and developmental side effects, while also advocating for greater transparency, regulatory oversight, and ethical stewardship within the corporate sector.

Wirecard is held in high regard by Germany's financial technology sector, started up with big aspirations and a promising trajectory. This carved a niche for itself in the competitive landscape of German fintech. Over time the company expanded into the Asian market, like Singapore and India. The overseas ventures become the backbone of propelling Wirecard to greater heights, fueling its reputation for being an industry leader (Mollers, 2024). The success began to crack as allegations of financial misconduct surfaced. Missing funds and irregularities in the company's financial statements cast a shadow over the company. These allegations prompted intense scrutiny from regulatory authorities and investors alike,

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triggering a dramatic downfall for the once-prominent fintech giant. As the truth behind the allegations slowly unravelled, Wirecard's meteoric rise gave way to a precipitous fall, marking one of the most notorious corporate scandals in Germany's recent history. Wirecard fell to short-selling attacks exacerbated by its failure to provide accurate financial information for the accounting entities. Subsequent investigations launched by the company revealed irregularities within the record. Following the launch of an internal inquiry by Wirecard, it was discovered that numerous accounting entries lacked verification and were plain wrong. Subsequently, on June 18th, 2020, it was discovered by Ey that Wirecard had 2 billion missing in Asian banks, the money remained unaccounted for throughout the investigative process. Consequently, Wirecard succumbed to insolvency and ceased operation. In the aftermath, investors have begun scrutiny towards EY and the auditing process to recoup the losses. However, EY does not want to pursue legal ramifications for a liquefied entity. (Mollers, 2024).

The coverage of the Wirecard scandal by certain financial news outlets such as Reuters, Financial Times, and The New Yorker stood in contrast to the relatively limited attention it received from mainstream media sources such as CNN and MSNBC. Despite allegations of libel or media manipulation by Wirecard, the reporting remained objective.

However, Wirecard endeavoured to influence the narrative in its favour through press releases during the investigation process (Taub, 2023). Throughout the various investigations, Wirecard's CEO resorted to deception and falsehoods attempted to mislead investigators and shareholders. Braun enlisted Asian actors to portray bankers and other professionals, thereby deceiving investigators into believing the funds were secure when in reality they were untraceable. Furthermore, the scandal engendered a climate of heightened vigilance within

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corporate circles, as the practice of wearing wiretaps and recording conversations gained traction, instilling a sense of paranoia among CEOs and their associates (Taub, 2023).

The potential for mitigating damages to sustain Wirecard’s position as a leading entity in German financial technology came to a halt by the CEO’s engagement in unethical conduct. Spanning several years, the scandal persisted with neither management or the CEO trying to ethically alleviate the harm. The CEO’s actions included embezzlement, breach of shareholder trust, and perjury. Economically this scandal inflicted harm upon Germany and the braches in other nations. Wirecard has been a source of revenue in Asian countries. However, the company’s insolvency has cost the economy and a loss of employment opportunities. Sustainable economic growth, particularly in developing nations rests upon ethical business practices that foster consistent inflows. Wirecard’s actions not only involved theft but also impeded the prospects of national and communal development. While Wirecard ultimately assumed corporate responsibility and ceased its operation, the enduring harm of its actions remain unaddressed.

Luckin Coffee, a Chinese-based coffee enterprise, faced allegations of defrauding investors through misrepresentation of its business scale. Investors were misled into believing the company experienced rapid growth and increased profitability, a claim unsubstantiated by reality. The company resorted to fabricating coupon sales to artificially inflate revenue and pursue aggressive expansion strategies, referred to as "blitz scaling." Coupons formed the primary mode of transaction, the others being WeChat Pay and Alipay. However, revenue from coupon sales was manipulated to create a misconception of heightened financial performance. In 2019, Luckin employees produced a scheme involving the creation and redemption of counterfeit coupons to inflate the company's sales figures. Afterward, another

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scheme emerged, where coupons were sold to invented corporate entities, predominantly owned by individuals affiliated with Luckin Coffee employees, further distorting revenue records. A third scheme entailed selling coupons to shell companies, which in turn resold them to consumers, amplifying revenue figures. In 2021, Luckin disclosed unedited financial statements revealing revenue inflation rates of 83%, 63%, and 43% from Q2 to Q3 in 2019, verifying suspicions of financial impropriety (Chung, 2021).

Despite initial controversies, Luckin Coffee continued operations. Media coverage of the company shifted between competitive analysis, portraying Luckin as a rival to Starbucks in mainland China, and financial scrutiny, highlighting the impact of investigations on the company's stock value and shareholder interests. Also, media discourse accentuated the risks inherent in investing in overseas businesses lacking strong regulatory frameworks, emphasizing the absence of safeguards for investor capital.

Luckin Coffee denied the allegations and reaffirmed its commitment to its business model in a statement issued in February 2020. Later, the company terminated its COO, Jenny Qian, and six other implicated individuals between May and June 2020. Despite the ethical lapses, Luckin Coffee remains operational, with a current share price of $24.

The mishandling of the scandal highlights managerial deficiencies at the upper levels, with a failure to foster transparent communication. The company's misconduct, driven by greed and internal performance pressures, stopped its potential to surpass Starbucks' dominance in mainland China. The fallout from Luckin's scandal resonated throughout the Chinese economy, reshaping market dynamics and eroding trust in Chinese-based enterprises. The incident exacerbated apprehensions among businesses and entrepreneurs regarding conducting operations in China, perpetuating misconceptions regarding regulatory efficacy

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and stifling developmental prospects for China and its international partners. While investigators and auditors enforced accountability, the lingering spectre of future transgressions underscores the imperative for sustained vigilance (SEC, 2020).

The third instance of corporate irresponsibility examined in this report pertains to the Suspicious Activity Reports (SARs) at the Financial Crimes Enforcement Network (FinCEN). SARs revealed at FinCEN unveiled a concerning trend where numerous financial entities were potentially facilitating money laundering and aiding criminal enterprises. Over a span of almost two decades, from 1999 to 2017, transactions totalling two trillion dollars were flagged as suspicious. Financial institutions were mandated to report suspicious activity within 60 days of detection, yet such disclosures often occurred tardily, following the completion of transactions and after intervals (Welle, 2020).

Leaks provided to the media outlet BuzzFeed News shed light on instances of money laundering and the complicity of banks in providing financial support to criminal networks. BuzzFeed News has provided ongoing updates on the ramifications of these revelations on the banking sector and the broader implications of the FinCEN files. Meanwhile, other news coverage has looked into FinCEN's role and FinCEN involvement in foreign interventions. Despite efforts by BuzzFeed to solicit responses from implicated banks such as American Express, Bank of America, First Republic Bank, and Bank of China, no official statements were released (BuzzFeed News, 2020).

In response to the leaks, FinCEN issued a public statement condemning the disclosure and citing national security concerns. Moreover, FinCEN asserted that the leaked information predates 2016 and emphasized subsequent reforms at enhancing vigilance against money laundering activities (BBC, 2020). The disclosure prompted FinCEN to intensify efforts to

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combat money laundering and expand its operational capacity. Senators Elizabeth Warren and Bernie Sanders vocally criticized the implicated banks and advocated punitive measures (Garrison, 2020).

The overarching objective of FinCEN is to monitor and address financial crimes perpetrated by financial entities. However, primary culpability rests with the banks, as their failure to promptly report suspicious transactions within the stipulated timeframe enabled the continued processing of potentially illicit transactions, thus potentially facilitating criminal activities.

The final case of corporate misconduct pertains to Embark Trucking, a developer of autonomous truck software and self-driving vehicles. Allegations surfaced that Embark had exaggerated the current technological capabilities of its products to entice shareholders into providing additional capital. These claims were initially brought to light in a report by The Bear Cave, which outlined the company's lack of economic value and accentuated the uncorroborated nature of its claims, which were characterized as puffery rather than substantive claims. The report further highlighted the absence of patents and the reliance on prototype vehicles within Embark's operations. Subsequent investigations ensued, topping in indications that the company was hovering on the brink of closure (Contreras, 2023).

Mainstream media outlets such as CNN, BBC, and MSNBC largely refrained from reporting on the Embark scandal, while specialized transport, technology, and finance news sources such as Reuters and The New Yorker extensively covered the unfolding events, noting the company's impending wind-down in the wake of the allegations. Despite once holding a leading position in the autonomous software domain, Embark proved incapable of enduring the fallout and laid off 70% of its workforce as part of its efforts to wind down operations

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(Embark Investor Alert: Kaplan Fox Investigates Potential Securities Fraud at Embark Technology, Inc, 2022).

Embark's response to the allegations entailed drastic measures, including significant workforce reductions and operational cessation. After these developments and ensuing litigation, Embark's viability was significantly undermined. Accurately valuing the company is paramount to maintaining shareholder confidence and avoiding breaches of trust. The proliferation of lawsuits stemming from the overvaluation of capabilities underscores management's failure to conduct a thorough assessment of the company's true standing (Korosec, 2023).

The setback experienced by Embark Trucking carries broader ramifications for the economy, as widespread job losses curtail consumer spending, thereby diminishing economic activity. Additionally, the impasse in the development of self-driving vehicles engendered by Embark's downfall further compounds the economic impact, inhibiting progress in a burgeoning technological field.

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3. Corporate Irresponsibility: Analysis

Some notable stakeholders influenced by these scandals include all employees, consumers, suppliers, creditors, and other groups affiliated with the companies. Employees were affected by the Wirecard and Embark Trucking scandal because all employees lost their jobs when the company was shut down. Embark fired 70 percent of the staff before the company shut down as well. Consumers in all businesses are affected because when corporate scandals happen, consumers do not want to do business with unethical companies or companies that might steal their money. Wirecard and Embark shut down, so all the consumers who relied on both companies are at a loss now. Suppliers cannot supply goods and services for the companies and therefore have lost a consumer and therefore lost money. Groups like religious groups that might be affiliated with the companies also do not want to do business with unethical characters.

Managers at all companies and all stages of management should have used value judgements and asked themselves how they intuitively feel about the goodness or rightness of actions of the company. In the case of Luckin Coffee, if any stage of management, expressed concern, this probably would not have happened. A value judgment is subjective and can be argued against. The moral standard in the industry is full financial transparency when it counts in addition to integrity towards the stakeholders. In all cases, all companies failed to use moral standards and value judgements to make the right choices. There are 5 influences to change moral and ethical standing, influences of people, corporations, or organizations, social, government and the economy. Braun had no ethical standing or consideration for the harm he was causing and can be described as a Self-interest ethical person, who only does things for themselves. Per Kohlberg’s model of moral development, Braun has advanced to level 1, the pre-cognitive level, shown by a moral framework primarily centered on self-interest. This idea is not unique to Bruan but rather can be observed across corporate entities. For

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example, in the case of Luckin, senior management orchestrated deceptive practices aimed at augmenting financial gains.

These actions were influenced by external forces, such as societal pressures and the imperative to enhance sales figures, leading to ethnically comprised decisions. Most choices can be attributed to financial constraints and avarice. Upon Marsalek’s recruitment, Braun knowingly engaged in behaviour that just dug his grave. Fear and greed serve as primary motivators of the corporate irresponsibility scandals expounded upon in this report.

Moving forward, proactive measures can be instituted to mitigate the recurrence of such scandals. Investors wield minimal sway or influence over the ethical conduct of businesses, with a limited way of effecting substantial changes in corporate practices. Enhanced accountability mechanisms and media coverage are imperative to foster public awareness and facilitate collective organization. Moreover, the general population should embrace responsible investing practices, wherein financial resources and time are allocated to companies that are transparent and have good moral and ethical backing. Additionally, the implementation of structural reforms, such as the establishment of a decentralized board of directors devoid of centralized executive authority, could serve as a preventive measure against scandals like the one outlined in the report. At Wirecard the CEO is responsible for the majority of the wrongdoing, if there was a board of directors it is very unlikely that 2 billion dollars will go missing. Every corporation should practice some form of self-regulation and ensure that the employees, which includes the CEO consistently practice self-regulation. Self-regulation is cheaper, faster and more efficient than government regulation. When self-regulation is not enough, private regulation may be the answer. When private regulatory measures fail the respective governments should step in. Governments are not omnipresent entities capable of consistently ensuring justice and integrity within the corporate world as seen with the FinCEN files. However, legislation such as the

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1999 Corruption of Foreign Public Officials Act (CFPOA) in Canada aims to hold Canadians accountable for transgressions in foreign countries, deterring them from unethical practices. Entities implicated in wrongdoing could pursue remediation agreements with government prosecutors as a proactive measure to help potential criminal charges. Implementation of the strategies mentioned could have potentially averted the effects of Wirecard and Embark, including liquidation.

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4. Reflection and Conclusion

Upon completion of this report, the realization emerged regarding the impact of individual actions within the corporate realm. Across the cases, employees found themselves adversely affected amidst corporate turmoil, with some facing termination because of the scandals. It became clear that while the closure of businesses may not affect significant macroeconomic ramifications unless the corporation holds a monopolistic position or serves as a primary provider within its sector, localized economies and communities can experience discernible effects. The disruption of cash flows resulting from employee layoffs directly impacts household economies, amplifying the socio-economic strain experienced by affected individuals and their families. Furthermore, the shutting down of operations impedes developmental prospects, as the establishment and growth of businesses play a pivotal role in fostering societal advancement and economic progress.

The closure or scandals of companies in corporate malfeasance not only halts internal developmental but also halts broader community growth. Corporate accountability emerges as a pressing concern in this context, shadowed by the capacity of corporations to mitigate allegations through financial resources, thereby evading repercussions. Corporations may resort to silencing dissent or settling claims without addressing systemic issues, perpetuating a cycle of impunity. Thus, there exists a compelling imperative for a populace educated in financial literacy and equipped with a strong ethical framework when engaging with the corporate lifestyle. By cultivating a discerning understanding of corporate practices and fostering ethical standards, individuals can contribute to the promotion of accountability and integrity within the corporate landscape, this safeguards the interests of stakeholders and the broader societal welfare.

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