Decision Making

Decision-making is a crucial part of good business and especially important for management and leadership. People's decisions are what cause the unethical behaviors in corporate scandals (Zhong). When the scandals involved with Freddie Mac and Worldcom were revealed, it was clear that the people in charge were not making good decisions. The Freddie Mac scandal consisted of manipulated earnings occurred by incorrectly accounting for various derivative instruments of the firm as well as manipulating the accounting for loan origination costs and reserves for losses (Ketz). There were four top executives who conceived and executed this fraud who were clearly not taught how to make the right decisions to run a company. The reason the company claimed they understated their net income by 5 billion dollars is because they has over stated it one other year, so they were just trying to even things out. Smoothing out earnings would give the appearance of more stability, but it is still illegal and inhibits investor's ability to value the company (Ketz).

There are many negative impacts that can come from bad decision-making in a company such as the ones made at Freddie Mac. First, the economy suffers a misallocation of resources (Ketz). Second, the managers who are partaking in the fraud know that the earnings stream is actually higher and can profit from this knowledge illegally (Ketz). Finally, the corporate managers were portraying a picture of a steady, reliable company that was ever growing in resources and income when really that picture was phony inasmuch as the true income stream is far more volatile than the reported earnings would indicate (Ketz). Good decision-making requires a mixture of skills: creative development and identification of options, clarity of judgment, firmness of decision, and effective implementation (Carlson). These managers and top executives in charge of making the decisions for Freddie Mac obviously did not possess these characteristics. Financial misrepresentation is also shown to have a negative effect on the operating performance, and how misrepresentations can reduce a company's legitimacy, or how other companies judge it (Harris).

The scandal at Worldcom was slightly different than the one concerning Freddie Mac. Unlike those at Freddie Mac who understated net income, Worldcom overstated earnings by 3.8 billion dollars. The accounting maneuver responsible for the overstatement, classifying payments for using other companies' communications networks as capital expenditures, was characterized by the press as scandalous (Hancock). Their revenues had fallen short of expectations, while the debt they took on to finance expansion remained high, and as the stock market value of these firms had plunged, corporate management had a powerful incentive to engage in accounting practices that conceal bad news (Hancock). Corporate management took it into their own hands to conceal this bad news because