SHAC 3073-01

BUSINESS ETHICS
Title:

Harvard Business School Case Study:

The midnight journal entry
Prepared for:
DR. MAISARAH BINTI MOHD SAAT
Prepared by:

1. Who are the actors?

The actor is Rechard Okumoto, who is the Chief Financial Officer (CFO) of Electro
Scientific Industries, Inc. (ESI). He intently studied a set of hard copy accounting
document call adjusting journal entries.

2. Is there any ethical issues?

Yes, there are several ethical issues arise from the accounting documents studied by
Richard Okumoto.

Elimination of retirement and severance allowance

The first issue is about the elimination of accrued liabilities of $977, 000 associate with
the anticipated cost of the retirement and severance benefits to company employees in
Japan, Korea and Taiwan. Those accrued liabilities influence favorable net incomes
which permit the company to report earnings of $0.001 per shares. For the quarter ending
August 31, 2002, it is obviously shown the increases of companys IPO rather than a loss.
It is due to the elimination of retirement allowance of those employees in Japan, Korea
and Taiwan.

Bullying employee
The second issue is about bullying the employee. The CEO had bullying the employee by
threatened the employee in order to cover up his dirt work. For example, the CEO has
forcing Okumoto to ignore the problem and after that Okumoto had receive the
anonymous massage.

Besides that, the other employee that involve in the problem also could not be spoke up
as they were scared. They actually know something was wrong and they want to try
saying something but something held them back.

Violated fiduciary duty

The third issue is the CEO has been violated the fiduciary duty. I is because, he had
changes the financial report figure as it is actually not in his job description. He did not
have any right to change the financial figure. He only has the right to check the financial
figure. Thus, in this case he already violates his fiduciary duty.

Violate the General Accepted Accounting Principles (GAAP)

The company had violated the GAAP as they change the financial statement loss figure to
the profit figure by erasing some of the information in the financial statement. Thus, they
were lying to the user of financial statement.

3. What should Okumoto do?

The CFO, Richard Okumoto should whistleblowing the issue arise to the external auditor,
Board of Director of ESI with the evidence of the overstated net income and the
elimination retirement allowance in a set of revised work rules (terms of employment) for
the ESI Japanese employees. Besides that, Okumoto and Mike Tetsui, the Japanese
manager to disclose the retirement benefit that had been terminated to the employee.

4. Identify risk in his action?

The risk from Richard Okumotos action can be categories into 3 categories which are:
Richard Okumotos personal life; company; and stakeholder.
Okumotos personal life
The action by Okumoto definitely would affect his personal life. He will lose his job and
luxury salaries as a CFO of Electro Scientific Industries if he trying to disclosed the issue.
He also put his personal safety in a bad situation even when he tries to investigate deeply
in that issue. Besides that, he also received anonymous massage on his home answering
machine. He is actually could take care of himself to avoid those traits as he already
faced the worse experience before.

Besides that, Okumoto also might face difficulty in searching a new job if he being fired
as the other company might be afraid or avoid accepting him to become their employee
as he made the disclosure.

The company i.e. Electro Scientific Industries

For the companys risk, Okumotos action will definitely ruined the company image as
the disclosure will cause the companys profit turns to loss figure. The company also
would face litigation action due to the elimination of benefit allowance of Japanese
employees. Other than that, the current employees trust towards the company would be
lost and might cause high employees turnover later on.

Stakeholder
The action that Okumoto do either to disclosed the issue or not would be affecting the
internal and external stakeholder. The internal stakeholder include shareholder and
employee would be affected. If Okumoto did not disclose the problem, it will harm the
employee as they did not receive the benefit allowance. Besides that, the shareholder
would also being affected as they could not rise up their wealth as the company did not
perform well (loss).

In addition, the external stakeholder especially the public (i.e. potential investor) will also
be affected. Because of the wrong profit figure in the financial report, it would attract the
potential investor to invest in the company. If the public invest in the company, they
would be harm as the company actually did not perform well and they getting loss figure
in the financial statement. So, if Okumoto disclose the problem, he can avoid the public
from being harm from investing in the company.

5. What factors should motivate his action?

Past familys experience
After Okumotos father past away, Okumotos mother faced financial problem to survive
her children. Okumotos mother would write down the journal entries for money that they
spent. Besides, Okumotos family had live with cash basis and no credit card. Thus, with
this past experience, Okumoto could survive his life even though he will be fired later on
as he had faced financial problem previously.

Past personal experience

Okumoto had faced worst experience (rather than this problem) during his childhood
which he was robbed at a gunpoint. Besides, he also being stabbed in back and left for
dead. In addition, he had beaten so badly that his eyes were swollen shut. Because of he
had much past physical violence, it made him to be more strong and brave in facing any
intimidation from people.
Mothers value
Okumotos mother had taught ethical value to Okumoto since in early age. His mother
mentions that doing right is very important and thus, he needs to do the right thing in
every road that he takes. This value has been influence Okumoto in his career.

Past career experience

Okumoto had faced a slightly similar situation, where he could not spoke up. He had
been a CFO in another public company before. In the situation, he did not have enough
evident to prove the managements wrong doing as it was closely enough to be cover.
After that, he lost confidence to expose it and decided to resign. Based on this experience,
Okumoto had decided to disclose (with evident) much faster if he ever again saw
something wrong with the financial report.

Mentors influence
Okumoto has three exceptional mentors that influence him to be an ethical person. His
mentor name were Woody Spedden (the CEO of Credence Systems), Jim Hefferman (his
boss at Fairchild and later at Measurex), and Don Waite (the CFO at Measurex who later
took over that position at Seagate Technologies). These mentors had rising up the
integrity value. Okumoto had learned the ethical value during the technical training from
them and he got strong ethical grounding. Besides, they always tell Okumoto to ask
himself- what are your obligations to others? This question was always being question by
Okumoto, himself in performing his work. The ethical value that he gets from his
mentors made him to be an ethical person and influence him in his action.

6. If Okumoto decided to act, whom should he contact? What should he say?

The person who should Okumoto contact are the audit committee, Board of Director and
Labour and employment attorney.