Running head: ETHICS VIOLATION AT MONSANTO

ETHICS VIOLATION AT MONSANTO

ELISABETH J PAGE

SOUTHERN NEW HAMPSHIRE UNIVERSITY

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I. Background

The subject of this case is Monsanto, a multi-national producer of chemical and other

products used by farmers around the world. According to its website, Monsanto is, “an

agricultural company, helping farmers large and small grow food more sustainably” (Monsanto:

A modern agriculture company). One could argue that Monsanto, an agricultural giant, has done

more to take advantage of small farmers than it has to help. According to an article from The

Futurist, Monsanto developed, “soybean plants that are genetically engineered to not produce

seeds beyond the first generation, so farmers could not save patented seeds to use in future

plantings” (Whipple 1999). Regardless of its carefully machinated public relations campaigns,

Monsanto is a formidable player on the agricultural world stage and has been embroiled in

controversy for its use of genetically modified organisms (GMOs).

Monsanto became its own company in 2002, “after it was divested from Pharmacia

Corporation” (Monsanto: Monsanto History). While Monsanto has been the target of dissent for

genetic engineering, it has succeeded in developing high yielding seeds and its contribution to

global agriculture. In recent years, the Company has turned its focus from agrochemical products

to technology-based solutions for its customers. In 2005, Monsanto became the center of an

investigation by the SEC for purportedly violating the Foreign Corrupt Practices Act (FCPA).

The charges alleged that, “a senior Monsanto manager, based in the United States, authorized

and directed an Indonesian consulting firm to make an illegal payment totaling $50,000 to a

senior Indonesian Ministry of Environment official” (Litigation Release No. 19023).

The focus of this case will center on these violations of the FCPA and the subsequent

covering up of the bribes. Monsanto’s violations of the Foreign Corrupt Practices Act provide a

unique perspective into an ethics violation that is somewhat different from the scandals that took
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place at companies like Enron and WorldCom. Monsanto violated GAAP and SOX in an effort

to prevent unfavorable regulatory action as opposed to committing traditional “earnings

management”. This case is also unique in that the criminal activity took place overseas.

II. Ethical Violations

Although Charles Martin, a senior Monsanto manager, was the key perpetrator in Monsanto’s

ethics violation, he never, “ admitted nor denied the accusations in agreeing to settle the SEC's

civil lawsuit, which was filed at U.S. District Court in Washington, the SEC said” (Former

executive of Monsanto fined for bribing Indonesian official 2017). Although Martin’s primary

obligation was to the public, many Monsanto employees were affected by his decision to violate

the Foreign Corrupt Practices Act. The controversy negatively impacted the public’s perception

of Monsanto, which affected its performance on the New York Stock Exchange (NYSE). Any

employees who received compensation in the form of share-based payments were then punished

for Martin’s poor choices through losses on their awards or investment in the company.

Charles Martin owed his allegiance to the public as a professional accountant; the agency

theory mandates that an agent act in the best interest of the stakeholder and Martin failed to live

up to this standard. Not only were shareholders (Monsanto employees as well as outside

investors) hurt by Martin’s misconduct, but Martin failed on behalf of those Indonesians that

could have been impacted if the intent of the bribe was fulfilled. The Indonesian government

insisted that Monsanto, “assess environmental impact before planting genetically modified

cottonseed” (Former executive of Monsanto fined for bribing Indonesian official 2017); Martin’s

attempt to bribe the Indonesian government is an affront to the country’s concerted effort to

protect the environment, a public best interest.

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Martin violated the public interest, integrity, and scope and nature of services principles

of the AICPA Codes of Professional Conduct when he authorized improper payments to the

Indonesian environmental official. First and foremost, the duty of a professional accountant is to

the public. The AICPA Code of Professional Conduct defines the public as “clients, credit

grantors, governments, employers, investors, the business and financial community, and others

who rely on the objectivity and integrity of members to maintain the orderly functioning of

commerce” (Mintz 2014). According to the AICPA, accounting professionals should maintain

objectivity and be free of conflicts of interest in discharging professional responsibilities. As

previously discussed, there were a number of stakeholders affected by Martin’s conflict of

interest.

Martin did not act with integrity, which represents another departure from the AICPA

Code of Conduct. According to the AICPA, accounting professionals are required to perform all

professional responsibilities with the highest sense of integrity. One facet of the integrity

principle reflects on an auditor’s ability to navigate “grey areas”. According to the AICPA, “in

the absence of specific rules, standards, or guidance or in the face of conflicting opinions, a

member should test decisions and deeds by asking: ‘Am I doing what a person of integrity would

do? Have I retained my integrity?’” (Mintz 2014). Unfortunately, there already were specific

rules/ standards and guidance that should have steered Martin in the right direction. In that sense,

the integrity principle was violated. As a final note, although loosely related, the scope and

nature of services principle was violated because Martin acted beyond his responsibilities as a

professional accountant.

According to the AICPA, accounting professionals should be independent in fact and

appearance when providing auditing and other attestation services. Independence means
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everything in an audit; without it, an auditor cannot be expected to render an objective opinion.

The “raison d’être” of accountants is to preserve the public’s faith in the profession. For this

reason, actual independence means nothing if the auditor is not independent in appearance. As

evidenced by his decision to bribe the government of Indonesia, Martin did not have professional

integrity.

From a legal perspective, Martin’s violation of the Foreign Corrupt Practices Act presents

a challenge to regulators who strive to limit the public’s exposure to market volatility. If

accounting professionals do not follow GAAP, GAAS, or any other set of professional standards,

they may be deemed ineffective in the fight against fraud and ethics violations. The profession as

a whole is at risk when auditors and other accounting professionals shirk their duty to adhere to a

professional code of conduct. The profession is at risk on a social platform as well; if the public

loses respect for the accounting profession, a lower premium will be placed on its assurance

services. It is in the best interest of the profession, as well as the public, to ensure that all

accounting professionals act in accordance with the professional standards set forth by the

AICPA. The economic repercussions of ethics violations pose one of the greatest threats to

accountants because with each scandal comes consequences to the stakeholders whose best

interest the accountant was supposed to uphold. If accounting professionals do not work to

regain the trust of the public they were meant to defend, the future of accountancy is bleak.

III. Theoretical Models

Charles Martin violated both Rest’s Four Component Model and the Integrated Ethical

Decision-Making Process when he made the decision to bribe an Indonesian government official.

Ethical sensitivity, the first of Rest’s four components, determines awareness of ethical matters.

Martin either did not have ethical sensitivity or recognized the ethical dilemma and ignored it;
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however, evidence that Martin approved false invoices suggests that he did in fact understand the

ethical implications of his actions. He attempted to hide his wrongdoing by, “devis[ing] a scheme

whereby false invoices were submitted to Monsanto and the senior Monsanto manager approved

the invoices for payment” (Litigation Release No. 19023). Martin had ethical sensitivity;

however, his moral judgement, Rest’s second component, left much to be desired. Martin chose

to bribe the Indonesian official even though he knew or was reckless in not knowing that this

was a violation of the Foreign Corrupt Practices Act. Moral motivation, Rest’s third component,

“reflects an individual’s willingness to place ethical values (e.g., honesty, integrity,

trustworthiness, caring, and empathy) ahead of nonethical values (e.g., wealth, power, and

fame)” (Mintz 2017). More than likely, Martin knew that bribery was unacceptable, but was not

ready to allow the needs of the majority to supersede his own and those of Monsanto. This is

because Martin was a man of weak moral character. Moral character allows an individual to stay

the course in his or her decision to act ethically; the absence of moral character leads to actions

like those of Charles Martin: deliberately circumventing international laws and blatantly

covering up the malfeasance by falsifying accounting records.

Similarly to Rest’s Four Component Model, the Integrated Ethical Decision-Making Process

begins with the recognition of an ethical crossroads. As previously discussed, a reasonable

accounting professional would understand that bribing a foreign official is a serious ethical

violation. To apply the Integrated Ethical Decision-Making Process to this case, Martin should

next identify all possible courses of action and, theoretically, make a decision in the best interest

of Monsanto’s stakeholders. Moral intensity should impact Martin’s reasoning and influence him

to make the appropriate decision; however, Martin violated the Integrated Ethical Decision-

Making Process by seeking to bribe the official in exchange for the repeal of a statute that would
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adversely affect Monsanto. This blatantly unethical conduct is the product of misapplication or

complete absence of ethical reasoning models.

The Integrated Ethical Decision-Making Process and Kidder’s Ethical Checkpoints are

ethical models that, if applied correctly, may have produced better outcomes in the case of

Charles Martin. As previously discussed, the Integrated Ethical Decision-Making Process failed

because Martin ignored the moral intensity of the situation. Had Martin accepted the implications

of bribing a foreign official, he may have engaged himself in a more intense internal dialogue on

the matter. Critical thinking and asking questions, such as, ‘‘What legal issues exist?’ and ‘What

can and cannot be done in resolving the conflict under professional standards?’”(Mintz 2017)

could have raised Martin’s awareness of the seriousness of the situation and empowered him to

refrain from violating the FCPA. The Integrated Ethical Decision-Making Process roadmaps the

appropriate responses and questions that professional accountants should have and ask

themselves when confronting an ethical dilemma. Key decision makers should thoroughly

understand the process as they are more likely to confront problems that require ethical

reasoning.

Kidder’s Ethical Checkpoints provide similar guidelines to ethical decision making.

Specifically, testing for “right-versus-wrong issues” may have significantly altered Martin’s

decision in this case. According to Mintz, “if lawbreaking is involved (i.e., fraudulent financial

statements), then the problem becomes a legal matter, not a moral one” (Mintz 2017). Awareness

of the illegality of bribery alone should have swayed a reasonable person to refrain from bribing

the Indonesian official; Martin, however, chose to engage in corrupt practices even though he

knew to do so was illegal. Kidder’s last checkpoint implores the individual to return to the issue

and reflect on the decision; according to the text, Kidder’s Ethical Checkpoints, “[seem] to cover
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all the bases, beginning with defining the issue all the way through to learning from the situation

in the aftermath of the decision” (Mintz 2017). Given the level of deception in this case, it is

unlikely that Martin took any time to seriously reflect on his actions; however, for future

generations of accounting professionals, Kidder’s Ethical Checkpoints may be the most

comprehensive theoretical approach to ethical decision making of them all.

IV. External Influences and International Accounting Standards

Regulatory Activities

The Foreign Corrupt Practices Act is central to the Monsanto scandal. The harsh

consequences resulting from violation of the FCPA should be enough to deter would-be culprits.

In addition, the Justice Department is cracking down on corruption and hopes to send a message

to prospective criminals; according to Mark Mendelsohn, a former Department of Justice

official, “the number of individual prosecutions has risen - and that's not an accident. That is

quite intentional on the part of the Department. It is our view that to have a credible deterrent

effect, people have to go to jail. People have to be prosecuted where appropriate. This is a federal

crime. This is not fun and games” (Fox 2010).

According to the Department of Justice’s website, “the FCPA [requires] companies whose

securities are listed in the United States to meet its accounting provisions… these accounting

provisions, which were designed to operate in tandem with the anti-bribery provisions of the

FCPA, require corporations covered by the provisions to (a) make and keep books and records

that accurately and fairly reflect the transactions of the corporation and (b) devise and maintain

an adequate system of internal accounting controls” (Foreign Corrupt Practices Act). Monsanto

failed to adhere to the FCPA on both counts; not only was Martin able to falsify invoices to

cover illegal payments to the Indonesian government official, but Monsanto did not have
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adequate internal controls in place to prevent the bad behavior. Were it not for the Foreign

Corrupt Practices Act, it is unlikely that Martin’s decision to bribe an Indonesian government

official would have received any attention in the accounting community. Regulatory activity is

the focal point in this case.

International Accounting Standards

While international accounting standards have little to do with Martin’s decision to make

illegal payments to an Indonesian government official, the ethical implications of these standards

deserve discussion. International accounting standards leave more matters to professional

judgement and require greater resources and analysis to truly report the substance of a

transaction. Critics of the International Financial Reporting Standards argue that “principles-

based” accounting standards provide management with greater latitude to engage in earnings

management; however, the same can be said of US GAAP’s hard and fast rules, which have been

abused by management in the past to avoid having to disclose undesirable results. While

vehement supporters exist on both sides, research shows that, “voluntary IFRS adoption

decreases earnings management and increases timely loss recognition” (Krismiaji 2016).

Evidence suggests that international reporting standards could do more to deter unethical

behavior than to facilitate it; however, in light of the greater burden of judgment placed on

management under international standards, it is imperative that accountants adhering to IFRS

exercise professional judgement and caution when making reporting decisions. It is true that

IFRS give accountants more leeway in deciding how to disclose information; therefore, those

accountants must be especially sensitive to ethical matters arising over the course of the

accounting cycle. With that in mind, competence takes a front seat under IFRS accounting;

without adequate knowledge and understand of complex accounting issues, how can
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management be expected to make appropriate decisions about reporting? For these reasons,

international accounting standards could increase faithful reporting, but only if the ethical

implications are properly understood.

Emerging Technologies

Emerging technologies and regulatory activities go hand in hand in the Monsanto case.

While the Foreign Corrupt Practices Act prohibits bribery of foreign officials, the Indonesian law

that Martin attempted to circumvent was directly related to an emerging technology at Monsanto:

genetically modified organisms, or GMOs. According to an article from Transgenic Research, “it

has often been pointed out that one factor inhibiting the acceptance of first generation GM crops

(mainly with pest resistance and/or herbicide tolerance) is the fact that commercial farmers, seed

producers and agrochemical companies are generally seen to reap the benefits, while the

consumer takes the risk in terms of consumption of potentially ‘‘unsafe’’ food” (Morris 2011).

Stakeholders like consumers incur the risks of genetically modified organisms, while businesses

like Monsanto and producers of genetically modified organisms are far more likely to gain from

this cutting edge technology. The Indonesian law, that all GMOs be assessed for environmental

impact before planting, was put into place to protect Indonesian consumers of genetically

modified organisms; Martin deliberately tried to undermine the Indonesian government’s

attempts to protect its most vulnerable citizens.

Emerging technologies are, by nature, new and full of unknowns. According to an article

from Transgenic Research, “as [new] GMOs approach commercialisation, their safety will have

to be investigated fully, urging the need to proactively evaluate whether currently applied risk

assessment strategies remain appropriate, or whether new or complementary risk assessment

strategies should be developed” (Devos 2014). Monsanto, a pioneer in genetic modification, has
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a responsibility to the public to protect consumers from potentially harmful side effects

emanating from this technology. By bribing the Indonesian official, Martin not only violated

regulatory mandates, he breached Monsanto’s duty its stakeholders.

V. Ethical Framework

Proposal

The best way to combat ethics violations is to prevent them from happening; ethical

frameworks function as a guide and empower accounting professionals to make sound ethical

decisions. This paper proposes a three part framework to prevent ethics violations and promote

ethical practices. Like Rest’s components, the ethical framework prescribed below will only

produce ethical decision making if all components are present.

The framework begins with ethical introspection. Ethical introspection requires the

individual to take extensive personal inventory. As opposed to a first “step”, ethical introspection

serves as the foundation of the entire framework; the revelations had at this stage will inform the

decisions that are made when the two additional ethical framework components, ethical

justification and ethical support, are present. Ethical introspection encompasses elements from

well-established theoretical models such as Kohlberg’s Theory and Rest’s Four Component

Model; specifically, the first pillar in the framework addresses ethical sensitivity and ethical

blind spots. Education and environmental evaluation are at the core of heightening moral

sensitivity and reducing moral blindness. As will be discussed below, research suggests that

education can improve professionals’ ability to identify moral issues. The concept of

environmental evaluation entails an honest review of the professional’s home and work

environment, family and friends, and cultural background. Studies show that external factors,

like those mentioned above, have a bearing on ethical decision making; according to the Journal
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of Accounting Literature, “in particular, the auditors from the United States, a culture that

emphasizes individualism and low power distance, tended to rate ethically questionable acts as

more ethical than auditors from Latin American countries that typically emphasize collectivism

and high power distance” (Jones 2003). In light of these findings, accounting professionals must

evaluate their personal risk of moral failing.

Ethical justification, the second component of this framework, draws on moral intensity

and moral judgement to inform ethical decision making. While ethical introspection is influenced

internally, ethical justification requires both internal and external guidance to execute proper

judgments. The accounting professional, to build on the foundation laid during ethical

introspection, evaluates the ethical crossroads and determines the correct course of action.

Educational material, professional codes of conduct, and other resources can strengthen ethical

justification as, “auditors generally appear to define ethical dilemmas in terms of the rules of

professional conduct” and “can more easily identify dilemmas that fall within those rules” (Jones

2003). Ethical justification results in efficacy; a professional that exercises a clear understanding

of professional standards and ethical frameworks is more likely to believe he/she has a right to

voice his/her values and that those values will be taken seriously.

Ethical support, the third component of this framework, relies on external stimuli to elicit

ethical action. A strong ethical climate is essential to cultivate ethical support; without it,

professionals might never take measures to report or remediate unethical practices. In order to

act on ethical judgements, one must make the decision to act. This decision is one of Kidder’s

Ethical Checkpoints and posits that, “[accounting professionals] may be mentally exhausted from

wrestling with the problem, get caught up in analysis paralysis, or lack the necessary courage to

come to a decision” (Mintz 2017). Without sufficient backing from authority figures, the idea of
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reporting suspected ethics violations becomes an intimidating prospect for employees fearing

retaliation. Management can exhibit ethical support by making readily available information

about whistle-blowing policies and employees’ rights, such as those outlined by the

Occupational Safety and Health Administration, or OSHA. Employees that are both aware of

their rights and management’s respect of those rights are most likely to make and carry out

ethical decisions.

Management Involvement, Corporate Governance, and Internal Controls

As discussed above, management involvement is key to cultivating a strong ethical

climate and promoting ethical support. According to the Journal of Accounting Literature, “the

ethical climate of the firm heavily influences auditors in their ethical reasoning process… this

implies that auditors are looking outside themselves for guidance and are very likely to be

influenced by contextual factors” (Jones 2003). Management can foster this kind of environment

by promoting transparency and accountability in the workplace. Ethics violations should be dealt

with swiftly in a manner that matches the severity of the offense and management should be held

to the same standards as lower-level employees. This parity illustrates the organization’s

commitment to ethics and reinforces the notion that there are no “untouchables”.

Management should provide resources to its employees to empower them to act ethically.

Evidence suggests that education is an effective tool; according to Meditari Accountancy

Research, “accounting students did show an improvement in ethical sensitivity after exposure to

a business ethics course” and, “it is [introspection and reflection] of own practice that creates

[behavioural competence] in an ethics course that is effective in raising the ethical sensitivity of

participants” (Taylor 2013). Whistle-blower hotlines are another proven resource for deterring

unethical behavior. According to the text, “organizations with hotlines were much more likely to
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catch fraud by a tip. These organizations also experienced frauds that were 41 percent less costly,

and they detected frauds 50 percent more quickly” (Mintz 2017). The use of hotlines is not

restricted to financial statement fraud, however; hotlines can be used to expose a litany of

unethical practices. There are multitudes of evidence to support the effectiveness of whistle-

blower hotlines in detecting and remediating misconduct.

Charles Martin was a member of senior management at Monsanto and therefore had the

greatest ability to override internal controls; Martin’s authority afforded him the opportunity to

make inappropriate payments because he was easily able to cover them up by engaging in

financial statement fraud. While internal controls are designed to prevent fraud, a robust

corporate governance plan is necessary to remediate the ethical shortcomings that led Martin to

violate the FCPA. The abysmal ethical climate at Monsanto appears to be the primary factor

contributing to the ethics violation, as evidenced by the litigation release. According to the

release, “from 1997 to 2002, Monsanto inaccurately recorded, or failed to record, in its books

and records approximately $700,000 of illegal or questionable payments made to at least 140

current and former Indonesian government officials and their family members” (Litigation

Release No. 19023). In light of Monsanto’s prior frauds and violations of the FCPA, it becomes

clear that corporate culture played an integral role in Martin’s behavior.

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References

Devos, Y., Aguilera, J., Diveki, Z., Gomes, A., Liu, Y., Paoletti, C., . . . Waigmann, E. (2014).

EFSA's scientific activities and achievements on the risk assessment of genetically

modified organisms (GMOs) during its first decade of existence: Looking back and

ahead. Transgenic Research, 23(1), 1-25.

doi:http://dx.doi.org.ezproxy.snhu.edu/10.1007/s11248-013-9741-4

Foreign Corrupt Practices Act. (2017). Retrieved Jan 13, 2018, from

https://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act

Former executive of Monsanto fined for bribing Indonesian official. (2007). The New York

Times, Retrieved from https://www.nytimes.com/2007/03/07/business /

worldbusiness/07iht-monsanto.4824776.html

Fox, S. (2010). THE U.S. FOREIGN CORRUPT PRACTICES ACT: IS YOUR COMPANY

WHERE IT NEEDS TO BE IN A FAST-CHANGING WORLD? Corporate Finance

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Jones, J., Massey, D. W., & Thorne, L. (2003). AUDITORS' ETHICAL REASONING:

INSIGHTS FROM PAST RESEARCH AND IMPLICATIONS FOR THE FUTURE.

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Krismiaji, Aryani, Y. A., & Suhardjanto, D. (2016). International financial reporting standards,

board governance, and accounting quality. Asian Review of Accounting, 24(4), 474-497.
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Litigation Release No. 19023, Accounting and Auditing Enforcement Release No. 2159,

(January 6, 2005). U.S. SECURITIES AND EXCHANGE COMMISSION

Mintz, S.M., & Morris, R.E. (2017). Ethical obligations and decision making in accounting (4th

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Morris, E. J. (2011). A semi-quantitative approach to GMO risk-benefit analysis. Transgenic

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United States v. Monsanto (2005)

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Whipple, D. (1999). Seeds of controversy. The Futurist, 33(8), 10-12. Retrieved from

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