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Project Deliverables: Milestone 1: Background and Ethical Violations

Teisha N, Blonvia

Southern New Hampshire University

Author Note

Teisha N. Blonvia, Accounting Student, Southern New Hampshire University.

Correspondence concerning this document should be addressed to Teisha N. Blonvia, Accounting

Student, Southern New Hampshire University, E-mail: [email protected]. 2

Background

In December of 2019 Robert Karmann, Joseph Bayliss, and Ronald Roach were charged

by the Securities Exchange Commission for their roles in a scheme that robbed shareholders of

approximately 900 million dollars. [ CITATION Sec19 \l 1033 ] The CFO, Robert Karmann was

accused of shifting money to create revenue and providing reporting to internal and external

users with falsified information. [ CITATION Sec19 \l 1033 ] Joseph Bayliss was accused of

knowingly providing certifications of inspection for generators that were either non-existent or

never inspected. [ CITATION Sec19 \l 1033 ] Ronald Roach was accused of providing financial

statements and reporting that falsely reported large amounts of revenue earned from false leases.

[ CITATION Sec19 \l 1033 ] The SEC ultimately charged Robert Karmann with “violating the

antifraud provisions of Section 17(a)(1) and (3) of the Securities Act of 1933 and Section 10(b)

of the Securities Exchange Act of 1934, as well as Rules 10b-5(a) and (c) thereunder, and seeks

injunctive relief, disgorgement, and civil penalties”. [ CITATION Sec19 \l 1033 ] The SEC found

Joseph Bayliss and Ronal d Roach guilty of the same crime as well and rendered the same

punishments for now as far as injunctions and monetary remuneration. [ CITATION Sec19 \l

1033 ] However, the SEC is continuing to investigate this case and the actions of the individuals

charged. [ CITATION Sec19 \l 1033 ]

Some several codes and guidelines come to mind when I think about this case that was not

followed by the three defendants in this case, but I think the most notable would be the AICPA

Code of Professional Conduct. This code consists of two parts; the articles and the rules to the

articles and although this was created with the intent to be for Accountants and professionals in

that field; it has a very strong ethical tone that I think can be applied to any profession.

[ CITATION AIC14 \l 1033 ] There are six articles and they are Scope and Nature of Services, 3

Due Care, Objectivity ad Independence, Integrity, The Public Interest, and Responsibilities. The

rules guide how to execute the articles and this is where there would be some specification that is

just for the Accounting profession but on general, things such as responsibilities, due care,

integrity, objectivity, and the public interest can be very applicable to the general ethics of other

professions. [ CITATION AIC14 \l 1033 ]

Ethical Violations: Responsibilities (Internal)

Article I of the AICPA code states, “In carrying out their responsibilities as professionals,

members should exercise sensitive professional and moral judgments in all their activities”.

[ CITATION AIC14 \l 1033 ] This means that professionals have the obligation to do their job

objectively and to the best of their ability. In this case, the accounting professionals that acted

unethically were Robert Karmann CFO and Ronald Roach CPA. [ CITATION Sec19 \l 1033 ]

They both have a responsibility to provide financial statements and reports that presented a fair

representation of the company's financial position. In this cas e, that means that they had a duty to

provide reporting that reported revenue that was earned. The internal effect of reporting false

income caused an overstatement of the company's revenue, which caused other issues such as

improper taxes being paid and false s.

Ethical Violations: Responsibilities (External

Externally the unethical behavior by Ronald Roach and Robert Karmann had lasting

effects on the shareholders. The most prevalent effect was the monetary loss suffered by

shareholders for over 900 million dollars over several years. [ CITATION Sec19 \l 1033 ] This 4

monetary loss more than likely caused a domino effect of losses in the shareholder business

affairs in addition to their personal lives. This behavior caused related tax issues for the

shareholders as well because they were expecting huge tax breaks and did not receive them.

[ CITATION Sec19 \l 1033 ]

Ethical Violations: AICPA Codes (Independence)

Article number IV of the AICPA Code of Professional Conduct references objectivity and

independence. [ CITATION AIC14 \l 1033 ] As it relates t independence the code says that the

professional should remain independent in fact and appearance. [ CITATION AIC14 \l 1033 ]

This goes hand in hand with objectivity because the professional should always view things

objectively and base opinions on facts only. It is important to maintain independence in

appearance because the credibility of accounting professionals could be easily challenged if it

appeared that the professional was not independent of th e client. The appearance of

independence is often hard to maintain so maintaining the objectivity while providing the

services makes up for this. The Accounting professional must be scrupulous in their application

of generally accepted accounting principles and candid in all their dealings. [ CITATION

AIC14 \l 1033 ] For an Accounting professional to be independent in facts ensures that the

information properly reviewed and tested. This is important because when providing audit

services or any other attestation services the professional is signing off that they verified the

information they were furnished. [ CITATION Wol15 \l 1033 ] In this case, Robert Karmann and

R onald Roach did not remain objective cause they did not consider the outcomes and effects of

their actions before taking them. They did not even consider this during the unethical behavior

because the scheme took place over several years. They were able to maintain the appearance of 5

independence but were not independent in fact. Here publishing of false revenue numbers as

sifting of fund proves that no one verified any actual information that was given to them. This is

also supported by the fact that Robert Karmann w charges with the moving of funds to create the

appearance of revenue. [ CITATION Sec19 \l 1033 ] If they are making up the numbers, then

they're not reviewing any numbers.

Ethical Violations: AICPA Codes (Integrity)

Article III of the AICPA code says that the professional should do their job with the

highest degree of integrity to maintain the public's confidence. [ CITATION AIC14 \l 1033 ] For

a person to have integrity, it shows as a part of who they are. It requires them to be honest,

trustworthy, and morally sound. [ CITATION AIC14 \l 1033 ] In this case, the defendants were

not honest with themselves or the shareholders. They were not moral in their decision making

either because they would not have betrayed the trust of the shareholders and committed these

crimes. The fact that the defendants lied to the public and stole money from the shareholders by

creating fictitious revenue and investment items proves that they were unable to make the

decision that was for the good of the shareholder in the absence of guidance. Integrity is

measured in terms of what is right in the absence of specifications on how to proceed.

[ CITATION AIC14 \l 1033 ]

Ethical Violations: AICPA Codes (Objectivity)

Article IV of the AICPA code covers objectivity and what it says is that objectivity is a

state of mind and it adds value to the services that the professional performs. [ CITATION

AIC14 \l 1033 ] In this case, the accused could have taken some steps to be objective and keep 6

the best interest of the shareholders in mind. The AICPA code lays out a four-step process that is

easy for any professional to follow. [ CITATION Bec19 \l 1033 ]

1. Detect/uncover the problem(s)

2. Evaluate the significance of the threats

3. Identify, evaluate, and apply precautions

4. Document and share with necessary parties

If the accused had taken these steps to make ethical decisions. The shareholder deceit

would not have taken place. The accused in this case lack integrity as a key component to their

character so therefore they were able to deceive shareholders with no regard for any potential

wrongdoing.

Ethical Violations: Implications (Legal)

From a business perspective, the defendants broke several state and federal laws. A

couple of big ones are a breach of contract, common law fraud and deceit, and required state of

mind. The breach of contract means that the defendants did not hold up their end of a deal made

with the shareholders. [ CITATION Cop02 \l 1033 ] The defendants broke the common law fraud

and deceit law by lying to the shareholders when shareholders asked questions about the tax

breaks that they were supposed to receive. Essentially, they told more lies to cover up the

original lies. Under the common law fraud and deceit law, "the plaintiff must show the director

or officer made false representations under circumstances that entitled him to rely on them, and

that as a result of the reliance he suffered damages". [ CITATION Cop02 \l 1033 ] The required

state of mind law says “someone is liable under Rule 10(b)-5 only if he acted with intent to 7

deceive, manipulate, or defraud”. [ CITATION Cop02 \l 1033 ] It is clear in this case that the

defendants acted with malice and an intent to defraud the shareholders.

From an Accounting standpoint, there were also several laws and/or acts violated. For

starters, there were no GAAP rules followed at all when it came to the preparation of financial

reports ad the accounting process because the revenue was fictitious, and the reports were

developed to support the false revenue. [ CITATION EY18 \l 1033 ] In addition to the SEC

charged the defendants with violating the anti-fraud provisions related to the Securities Act of

1933 and Section 10(b) of the Securities Exchange Act of 1934 as a result of their overall deceit

of the shareholders. [ CITATION Sec19 \l 1033 ]

Ethical Violations: Implications (Social)

Socially The company and the defendants have been lost the public’s trust. The public has

no reason to believe that these people or any company they are associated with can practice good

business in an integral manner. Analyst Jeff Windau of Edward Jones once said it will be a cloud

that overhangs the company until things get better. [ CITATION Mat18 \l 1033 ] Ultimately this

behavior would lead to a significant decrease in the number of stakeholders at the company and

deter new ones from choosing to have a stake in the company. [ CITATION Mat18 \l 1033 ] If a

company cannot produce revenue to exist, then it doesn't exist.

From an accounting standpoint, the results are the same. For Robert Karmann and Ronald

Roach; they will be barred from practicing Accounting of any kind. [ CITATION Cop02 \l 1033 ]

This is a common practice for this type of crime that is committed and it suitable because they

had no regard for the shareholders or the laws that protect the shareholder and the profession. 8

Ethical Violations: Implications (Economic)

As a result of these crimes from a business standpoint, the economy will suffer due to the loss of

revenue and products that flow in and out of the market and are meant to serve the greater good

of the people. Likely, the company will never recover from the hard-hit to its goodwill

(reputation). [ CITATION Jim19 \l 1033 ]

From an accounting standpoint, the economy will recover. Unfortunately, the defendants

committed such crimes but by making them pay for their action the shareholder ill be made

whole. In addition to this, we as a community learn from the mistakes of bad people and our

Accounting guidelines are constantly strengthened and reviewed improvement. The poor choices

of the "bad apples" are why we have such stringent Accounting laws to this day such as the

Sarbanes-Oxley Act of 2002. [CITATION Cla17 \l 1033 ]

Ethical Violation: Code of Ethics

This is a fairly new SEC case so at this time the companies that Robert Karmann and

Ronald Roach controlled are not being specifically mentioned but they would have been

expected to follow the AICPA Code of Professional Conduct and at the least general Code of

Ethics. A strong Code of Ethics will contain some moral values that everyone n the company can

adhere to and that will b benefit everyone and not compromise anyone. A good Code of Ethics

can very easily be a way of life at the business who employs it and it should be required by all 9

employees to live by it. Neither Ronald Roach nor Robert Karmann illustrated any type of

adherence to any Code of Ethics. They were only interested in gaining monetary wealth for

themselves.

References

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