II.

Simple Case Analysis

1. David Lawyer sets up a small loan company specializing in loans to business executives and small
companies. David does not spend much time in the business because he spends full time with his law
practice. No employees of David Law firm are involved in the small loan company.

Identify and discuss the ethical implications of David’s act.

It is unethical for David not to spend enough time to run his small loan company. He is serving two
masters at the same time, it is very difficult to run two companies, but it should be balanced to track.
The possibility of mismanagement of loan business and mismanagement clients’ loan portfolio are
evident. This may displease clients, David and the business reputation will be affected so as his
performance. His personal assets are at risk and his business may end up at loss and so as David. The
business is useless because of David's actions, he spent his resources in creating the credit company
without committing himself. David needs a sufficient dedication and time to run and supervise his loan
business and to pursue his trade in order for him to have a small loan company and a law firm. He
reveals he doesn't do what a leader is supposed to do.

2. Frank Doran, a senior audit manager for Cruz and Santos, CPAs, has recently been informed that the
firm plans to promote him to partner within the next year or two if he continues to perform at the same
high-quality level as in the past. Frank excels at dealing effectively with all people, including client
personnel, professional staff, partners, and potential clients. He has recently built a bigger home for
entertaining and has joined the city’s most prestigious golf and tennis club. He is excited about his future
with the firm.

Frank has recently been assigned to the audit of Machine International, a large wholesale company that
ships goods throughout the world. It is one of Bright and Lorren’s most prestigious clients. During the
audit, Frank determines that Machine International uses a method of revenue recognition called “bill
and hold” that has recently been questioned by the SEC. After considerate research, Frank concludes
that the method of revenue recognition is not appropriate for Machine International.

In discussing the matter with the engagement partner, she concludes that the accounting method has
been used for more than 10 years by the client and is appropriate, especially considering that the client
does not file with the SEC. The partner is certain the firm would lose the client if the revenue recognition
method is found inappropriate. Frank argues that the revenue recognition method was appropriate in
prior years, but the new SEC ruling makes it appropriate in the current year.

Frank recognized the partner’s responsibility to make the final decision, but he feels strongly enough to
state that he plans to follow the requirements and include a statement in the working papers that he
disagrees with the partner’s decision. The partner informs Frank that she is unwilling to permit such a
statement because of the potential legal implications. However, she is willing to write a letter to Frank
stating that she takes full responsibility for making the final decision if a legal dispute ever arises. She
concludes by saying, “Frank, partners must act like partners, not like loose cannons trying to make life
difficult for their partners. You have some growing up to do before I would feel comfortable with you as
a partner.”

Required:

Use the six-step approach to resolve the ethical dilemma.

1. Obtain relevant facts.

Frank Doran, a senior audit manager for Cruz and Santos, CPAs, has recently been informed that the firm
plans to promote him to partner within the next year or two if he continues to perform at the same
high-quality level as in the past. Machine International, has recently been assigned to Frank Doran. In
the audit, Frank decides that Machine International uses a device known as a method of revenue
recognition which the Security and Exchange Commission has recently questioned. Frank concludes,
after careful study, that Machine International isn't suitable for recognizing sales.

Frank respects the partner's responsibility to take the final decisions but is very certain that he plans to
meet the requirements and includes in the Working Papers a resolution which conflicts with the
partner's decisions. The partner informs Frank that she is unwilling to permit such statement because of
the potential legal consequences. However, she is able to write a letter to Frank that she takes complete
responsibility for making the ultimate decision if a legal dispute ever happens.

2. Identify the ethical issues from the facts.

Does Frank allow his partner to make the final decision ethically even though he understands that the
inference can lead to a legal involvement in the new judgment of the SEC?

3. Determine who is affected by the outcome of the dilemma and how each person or group is affected.

1. Frank Doran

• It will impair its achievement and promotion

• If he follows ahead on his view, he can lose a customer.

• He cannot say he disapproves of the partner's action.

2. Engagement Partner

• If she pushes for her view, she will lose the customer.

• can misinterpret how you complete your report due to your position with the other auditors.

• Her view can build danger for audit.

 3. Cruz and Santos, CPAs

• They may lose a big client.

• Since a partner often says or is always responsible for their audit results,
certain employees will not drive their anxiety out and would fear or not mind opening up their
views.

• Principles of transparency and integrity of the firm is affected.

• Partners may have obstacles to each other that, due to conflicting views, would trigger
misunderstandings.

4. Securities and Exchange Commission

• Rules may be violated.

5. Machine International

•May violate SEC rulings.

• Financial statements, such as receivables and profits, may lead to an exaggeration

attributable to bills and recognition of income.

• Withdrawal of partnership.

6. Users of Machine International Financial Statements

• Investors in Machine International may believe that they have a vast amount of sales that they
do not know the acknowledgement of "Bill and Hold" revenue.

• Revenue overestimation can also become an important consideration in managing the

company’s decision-making

4. Identify the alternatives available to the person who must resolve the dilemma.

• He should disagree with the dedication partner and report with adequate and sufficient
documentation, as a senior audit manager operating at high quality.

• alert Machine International that, according to the recent Security and Exchange
Commission Decision, their bill and hold revenue recognition is not necessary.

• Advice Machine International to obey SEC's ruling and amend its acknowledgment of revenue before it
can check by others that its revenues do not reflect their actual official sales.
• If there is however little evidence that the financial documents of Computer International
have been rendered unlawfully, Frank Doran should also weigh all the possibilities and listen
to the argument of the engagement partner.

5. Identify the likely consequences of each alternative.

•In a year or two, if he chooses to clash with the marriage partner, he will not be able to become a
partner.

• If Frank chooses to comply with the partners' position, he is likely to lose a large customer and will
influence the success status that will affect its promotion.

• If Machine International acknowledges that its revenue identification has been incorrect, it
will opt either for fixes or proceeds with the bill, although it is uncertain how the organization reacts to
the auditor's advice, and as Cruz and Santos, the major client, CPAs risks their major client if the
audience does not like Machine International's intention.

6. Decide the appropriate action.

• Frank Doran decides whether he supports what behavior, and what fair decision he makes
that makes it lawful. You may be unethical to anyone else personally but it is ethical to another person.
As an inspector, the code of ethics must be recognized with all its work. I think that Frank Doran is only
correct to draw up a paper with his observations and conclusions on the financial report of Machine
International. In taking his judgment he should also weigh all considerations that can impact his
business, so he and his team, as a senior audit manager, would review every single little detail to come
up with a proper conclusion, properly based on ample facts. It is better for us not to risk our dignity and
values, than to lose our clients and promotion. Nothing is more important than decent morals

What does business ethics mean?

Business ethics refers to standards of moral conduct, behaviour and judgment in business. It involves
the making moral and right decisions while engaging in such business activities as manufacturing and
selling a product and providing a service to customers. Business ethics is an area of corporate
responsibility where businesses are legally bound and socially obligated to conduct business in an ethical
manner. It is based on the personal values and standards of each person engaged in business

What is the scope of business ethics?

Business ethics covers all conduct, behaviour and judgment in business. This includes the slightest
deviation from what is right to illegal and dishonest acts that are punishable by law. It involves making
the right choices while engaging in such business activities as manufacturing and selling product or
selling and rendering a service. Generally, actions that are not forbidden by law are ethical. In some
cases, however, what is legal (not forbidden by law) may be unethical. Business ethics therefore covers
even acts that may be legal which are wrong because they violate ethical principles.

Explain how business managers could act ethically

The concepts and principles for the ethical conduct in business are relegated to managers of the
business enterprise. Thus, although the manager is expected to act in the best interest of the business,
he cannot be expected to act in a manner that is contrary to the law or to his conscience.

In particular, a manager should: acknowledge that his role is to serve the business enterprise and the
community; avoid all abuse of executive power for personal gain, advantage or prestige; reveal the fact
to his superior whenever his personal business of financial interest conflict with those of the company;
be actively concerned with the difficulties and problems of subordinated, treat them fairly and by
example, lead them effectively, assuring to all the right of reasonable access and appeal to superiors;
recognize that his subordinates have a right to information on matter affecting them, and make
provision for its prompt communication unless such communication is likely to undermine the security
and efficiency of the business; fully evaluate the likely effects on employees and community of the
business plans for the future before taking a final decision and cooperate with his colleagues and not
attempt to secure personal advantage at their expense.

Give examples of how corruption can take place.

Corruption may take place in many forms or ways. Examples are:

 A company paying a bribe to win the public contract to build the local highway, despite
proposing a sub-standard offer.
 A politician redirecting investments to his hometown rather than to the region most in need.
 Public official embezzling funds for school renovation to build his private villa.
 A private company manager recruiting an ill-suited friend for a high-level position.
 Or, local officials demanding bribes from ordinary citizens to get access to a new water pipe.
 A salesman bribing the purchasing manager of a company to give preference to his products

Explain the characteristics of corruption.

Although there is a widespread perception that corruption is prevalent, it is difficult to establish how
wide and deep corruption has penetrated our economy and social life. This is because both partners in
an exchange of power for privileges keep their transaction secret.

a) Recipients and payers

Corruption is the abuse of entrusted power and elected authority for private profit. This may be
at the expense of the employee and the employer; consumer and producer; renter and tenant;
the one applying for a permit to do something, or asking exemptions from an obligation to pay
or to deliver a product or a service..
b) Extortion
 It is often alleged that those having authority in our society ask to be bribed or give us the
opportunity to bribe. This means that the question ‘who is to blame’, shifts from the person who
pays to the person who extorts and receives. ‘There’s no escaping from it, for if you don’t pay,
you are bound to fall behind’.
c) Lubricant of society
Many think that paying bribes is required to ensure smoother operation of society. If corruption
is judged purely on the basis of business economics, macroeconomically it costs money to
society which should be considered as a loss. From the micro-economic point of view, for the
bribing entrepreneurs, it is profitable. The payer of a bribe secures a desired transaction which –
if evaluated on purely commercial grounds – strictly speaking, should have been assigned to
someone else. That will harm individual entrepreneurs and transactions; it will harm the
national economy and the world economy.
d) An ethical dilemma
The mere fact that both the payer and the recipient of bribes want to keep their behavior secret
shows that such behavior is generally considered to be improper. Many consider corruption to
be an ethical problem, a behavioural problem. And refer to it as being ‘sinful’, a ‘wrongdoing’. It
is a problem to be solved by means of personal ‘reform’.
e) Poverty alleviation
The explanation that refers to individual poverty reduction is especially given by those who
have a keen eye for corruption among lower operational staff in government service, notably
police officers, teachers, bus ticket collectors, carpark attendants, garbage collectors, etc., who
on an operational level often have good opportunities to extract extra income or privileges from
decisions they might take of importance to entrepreneurs and citizens.
f) Culture
Gifts are inherent to human relations and therefore present in all cultures. You give and receive
gifts on the occasion of memorable events. When you receive a gift, it is open and visible to
everyone. A gift made in public will also impose a certain obligation upon the recipient. On a
next occasion you will show your gratitude by reciprocating the gift and you share the gift
received with your family and friend.
g) ‘Kindness among friends’
It is essential, whether you just want to be ‘thoughtful’, or whether your gift is presented with a
certain intention. Is it a sign of thoughtfulness or is it hiding a particular purpose, an expected
‘return’ in the future? Whether ‘attention’ or ‘intention’, the difference is of great importance
for the relationship. Is it a ‘friendly turn’ or is it an ‘investment’?