The Midnight Journal Entry Case

In Partial Fulfillment of
the Requirements for
Strategic Management

Submitted by
Libertad, Lyka

Submitted to
Mr. John Mark Pestaño

06/21/2022
I. Introduction

 The first problem concerns the removal of $977, 000 in accumulated liabilities associated
with the estimated cost of retirement and severance benefits for firm personnel in Japan,
Korea, and Taiwan. These incurred liabilities have a positive impact on net income,
allowing the corporation to record earnings of $0.001 per share. For the quarter ending
August 31, 2002, it is clearly apparent that the company's IPO increased rather than
decreased. It is owing to the reduction of those employees' retirement allowances in
Japan, Korea, and Taiwan.

The employee is being bullied in the second concern. In order to cover up his dirty
activities, the CEO bullied the employee and threatened him. For example, the CEO may
have forced Okumoto to disregard the situation, and then Okumoto may have received
the anonymous message. Furthermore, the other employee who was involved in the
matter was afraid to speak up. They knew something was wrong and wanted to say
anything, but something stopped them.

The third concern is that the CEO has breached his fiduciary obligation. It is because he
changed the financial report amount, which is not in his job description. He had no
authority to alter the financial amount. He just has the authority to examine the financial
figures. As a result, he has already breached his fiduciary duties in this case.

The corporation had violated GAAP by removing part of the information in the financial
statement in order to convert the financial statement loss figure to the profit figure. As a
result, they were deceiving the user of the financial statement.

II. Background

 Electro Scientific Industries' CEO, Jim Dooley, recognizes that the company's net sales
had reached an all-time low in 2002. He decides to conceal this knowledge, which is
reflected in the accrued liabilities for the two quarters ending May 31. (2002). He then
chooses to discontinue the company's benefits package for employees living in Japan,
Korea, and Taiwan without properly alerting them. Electro Scientific Industries' CFO,
Richard Okumoto, discovers that several entries were made at midnight on September 12
(2002) that considerably boosted the company's performance for the quarter ending
August 31. (2002). Okumoto subsequently learned that the accounting entries were
unlawful since the Asian workers' benefits were taken away without their consent, a
decision made without legal consultation. A sub-issue presented by this case is a hostile
working environment in which it is disclosed during a meeting that some workers were
too scared or intimidated to speak up. This is attributable to CEO Jim Dooley's Power-
Coercive management style (Nickols, F. (n.d.)). A forceful technique may be helpful
when the boss is morally sound, but in this instance, he is forbidding others from voicing
their ethical ideas. Another concern raised by this instance is that other top executives
 appear to be ignoring it. At several points during the case, Okumoto asks people to recall
the night of September 12, 2002, and each time the responder raises red flags that
something is awry, they are ignored. This might be due to what we call "the good ole
boys club" in the business world, which indicates that because Dooley has been with the
firm for a long time, he is most likely buddies with other senior executives. As a result, if
other executives notice a red flag, they are no longer reporting the wrongdoing of a
coworker, but of a long-time buddy.

III. Evaluation of the Case

 The midnight journal entry was a financial statement modification done late at night. The
midnight journal entry was unethical since they were distorting the financial figures and
also taking away the employees' perks when they offered to work for the firm in Japan.
They eliminated a $977,000 accumulated debt related to the projected cost of retirement
and severance benefits for firm employees in Japan. The primary element of business
ethics recognizes the notion of rights as one of the key concepts in the five-item ethical
viewpoints that are deemed vital in the comprehension of moral business operations. The
rights theory is based on positions of justice and rights that consider moral leadership as
that which entails just treatment and respect for individual rights. The rights theory of
business ethics is based on the idea that all individuals have the right to life and thus
should be treated with the utmost respect and dignity. Assumes that because humans can
hardly predict the consequences of their activities, moral judgment should require the
right application of moral principles rather than the contingency of results. Individual
morals are important, and individuals should utilize their ethical actions to achieve their
goals without harming others. According to rights philosophy, any individual or
corporation should not subject other humans to any type of cruelty. This stance is based
on ethical business principles, which state that employees should be treated with the
utmost respect, dignity, and protection from any type of physical, emotional, or
psychological harm caused by their occupations. Organizations and their executives must
thus respect the needed business ethical standards that include human rights as part of
their basic business concept. Individuals have four major rights under the rights
philosophy: privileges, claims, powers, and immunities. Individual autonomy and
diplomacy in dealing with activities against oneself are entailed by privileges. Claims
concern people' right to be protected from any sort of damage or paternalism. For
example, an employee should not be subjected to exploitation or corporal punishment in
relation to his or her compensation. Powers in rights are defined as "the power to change
one's or another's normative condition within the asset of rules." Immunity is the right to
prevail above an individual's normative condition.

IV. Proposed Solution/Changes

 He understands that if he maintains silent, he will keep his position and receive monetary
bonuses. He may also be able to use this to get additional money because he can now
blackmail individuals who were part in the cover-up. This might cause Okumoto to be
plagued with guilt, and his action would contradict the ideals and morals he stands for
(which he learnt from his mother). Furthermore, because governmental organizations
must analyze financial reports, he may be in legal jeopardy, and he recalls resigning from
a former firm in a similar scenario. Remaining silent when you know you should disclose
an ethical issue, on the other hand, might lead to long-term melancholy. Because Dooley
has more allies on the board and in senior management, Okumoto may be better off
leaving the firm. On the one hand, it was repeatedly stated in the case that every
individual he spoke with simply brushed it under the rug, so who is to say it wouldn't
happen again? He avoids the "what if" aspect by going outside the organization, and he
knows there will be a reaction. On the other side, if he is incorrect, he may be fired, and
other firms may see him as unemployable due to his morals and ideals. This is the
solution we have chosen. Okumoto might alert the board of directors about the dubious
actions that have been going on. If he does this, he may lose his job (he just signed a
contract to buy a new house). He would, however, know he did the right thing and
remained loyal to his ideals and values. This is the solution we have chosen.
 Okumoto should go to the board of directors and inform them of the situation. The option
offers the following advantages: He will remain committed to his parents' ideals and
principles. Another advantage is that Okumoto has long known a few members of the
board of directors, so he still has a possibility of succeeding and moving individuals away
from Dooley's sphere of influence. The flaws in this decision are as follows: Okumoto
may lose his job because he continues to bring up a problem that everyone tells him to
overlook. Another issue would be that if he lost his job, he would be unable to purchase
the new house he is purchasing, which would be a loss of value because his parents
always taught him the worth of money. The advantages of this decision are that because
Okumoto is acting lawfully, he will not be held accountable by governmental bodies, and
ESI will be recognized as a morally sound organization. Another possibility is that
Dooley will be dismissed as a result of this. If the board agrees with Okumoto, Dooley
will be held accountable, which will very certainly end in his departure from the business.
This would fix one of the sub-issues while decreasing the likelihood of the major ethical
issue recurring. Okumoto is concerned about his personal safety since he has received
questionable phone calls in the past that he associates with the corporation. Another risk
is that the income loss adjustment may cause layoffs in other areas, hurting rather than
helping people. Because of the personal damages that Okumoto would suffer if he did not
speak to the board, the strengths and opportunities exceed the dangers and weaknesses in
this scenario. In this situation, the most he may lose is money, but he keeps his freedom,
ideals, and the possibility of a better future.
 In an article, Okumoto stated, "Within the first 30 days of my work, I discovered
accounting fraud." We handled the issues quickly and effectively by working carefully
with the Board of Directors and other authorities. My evidence before the Grand Jury
resulted in criminal indictments, which formed the basis for the CEO and Controller's
guilty pleas" (Okumoto). Essentially, he made the decision to no longer work for the
corporation.
V. Recommendations

 Okumoto chose a different option than what we thought would be ideal. One significant
advantage of keeping the matter as internal as feasible is that ESI's public reputation
would be less jeopardized. Okumoto should collaborate with Jack Isselmann to acquire as
much information about the issue as possible in order to present a compelling argument
to the audit committee. This should be highlighted by Morrison Foerster's study, which
states that canceling employee retirement benefits without the individual's agreement is
prohibited. This presentation should be accompanied by a recommendation that Dooley
be fired as CEO. If the committee approves Okumoto's presentation, the September 12th
entries will be overturned. Furthermore, throughout Dooley's stay as CEO, ESI should
hire a third-party agency to audit all end-of-quarter and year-end financial reports.
Finally, we urge that the firm issue a public statement outlining the situation and the steps
taken to address it.

 Given the number of employees forced to participate in ESI's illicit conduct, we believe
the audit committee will accept Okumoto's suggestion. Obviously, when the company's
report for the quarter ending August 31st is revised, the financial results will reflect a loss
rather than the $0.01 per share earnings previously declared. We anticipate some
reputational damage when this study and public statement are made, which will be
reflected in a large decline in stock value, at least momentarily. When Dooley is fired, it
is probable that American and/or Japanese authorities would prosecute him for his acts as
CEO. It is also conceivable that a third party would press charges against Dooley, as was
done in a similar case of "material misrepresentation" filed against Enron for misleading
reporting (Zinkewicz).

 Many employees are counting on Okumoto's proposal's success. Several parts of the
company's image need to be repaired. The finance department will require a plan to
recover from the loss. Furthermore, the company's public image will take considerable
time to recover from the negative publicity around the lost advantages. This ethical issue
will be effectively managed once employee benefits have been restored, the company's
financial accounts have been updated, and new corporate executives have been
appointed. The company's final hurdle will be to devise a mechanism to avoid a similar
problem from occurring in the future.

References:

Nickols, F. (n.d.). Four Change Management Strategies. Retrieved October 13, 2014.

Okumoto, R. (2012). The Midnight Journal Entry (p. 10).

Zinkewicz, P. (2002). D&O: Hard and getting harder. Rough Notes, 145(9), 71-72+.