Vinal Barbaros's Options - Essay Example

In order to assess the options of Barbaros, the ethical decision-making framework must be laid out; in this case, it is the utilitarian principle where the decision is weighed based on the effects on the various interest groups of the organisation, or its stakeholders. Option 1: Report the necessary adjustments in the costs by recommending that the cost estimate be increased by at least $1 million. One of the major stakeholders of the company are its shareholders or the company's passive owner. The decline in profitability is already a major issue with regard to the shareholder value of the passive owner; when the costs are reported accurately, the owner will know the real state of the company's operations. At least the owner will be able to think of ways to address its declining value, such as hiring a more competent management team or influencing the policies of the organisation. As for the company's employees, the report will enable the key managers to look at the real issue behind the company's declining profitability, and may choose to do something. However, when the issues are revealed, conflicts may arise from agency interests, as the uncertainty in the company's future due to its failing operations may threaten the status quo, especially when it comes to cost-cutting activities such as downsizing in order to address the problem on profitability. One of the key stakeholders in this case is the company's major investor, the creditor National Bank of Australia. If the company reports the true amount of the cost estimates, the bank will have to protect its position with regard to its investment in the company. This can be done by downgrading the company's credit rating and increasing the interest payments due to default, or look for a second way out when it comes to getting the amount that is due. Option 2: Follow Wolman's order, create the necessary adjustments by understating the costs in December 31, 2009 as the company will make its adjustments in the first quarter of 2010. In this case, the owner or the major shareholder is deprived of knowing the true performance of the company. Because he does not know, he cannot do something in order to preserve his wealth or shareholder value. As for the company's employees, they will not be informed of the company's shortcomings with regard to dealing with its efficiency and operations productivity. As for the company's major investor, its creditor the National Bank of Australia, it will be able to grant a renewal on the company's loan by assuming that nothing is wrong in the company's operations, which puts its financial position in the company at risk because of misleading information. If the company continues to fail during its subsequent operations, the bank will have to suffer and absorb the losses with regard to the company's failure to pay on time. If the company has been able to recoup its losses, the bank has still been misled by the company because of the act; when it is found out, the bank can resort to proper means in order to compensate it for the possible losses from such act. By looking at the key advantages and disadvantages of each option to the company's stakeholders, it is apparent that Barbaros should consider option 1 if he is to look for the long-term welfare of the company. The major consequence may be borrowing at a higher finance cost, but that is just a consequence to its managers' failure to address its operations problems. If Barbados resort to option 2, the major consequence may range from the loss that arises from the company's reputation in the form of less trust by customers and investors, to risk of legal action by its major stakeholder, its creditor the National Bank of Australia if the fraud gets to be revealed. If the act has been found out, either through its external auditors or an investigation by the National Bank of Australia, the passive owner maybe compelled to act as well, which could result in firing and changing the management team in order to repair the company name and establish trust again with the rest of the company's stakeholders in order to ensure creation of shareholder value. I. Assuming that Barbaros rejects the 5% inducement and does not agree to understate the cost estimates. What maybe his justification for doing so under the teleological perspective as opposed to deontological perspective? From a deontological perspective, his act to reject the 5% inducement can be traced from the concept of good will according to Immanuel Kant, where good will means “acting with the right intentions, in accordance with the correct maxims, doing one's duty for duty's sake (Kay 1997).” The nature of the act, from the point of view of Barbaros can be judged from his duty that arises from his tasks as the company's controller, which includes “planning for control, reporting and interpreting, as well as evaluating and consulting (The Financial Executives Institute via Horngren, Sundem, Stratton 1996, 17).” If he accepts the 5% inducement and agrees to understate the cost estimates, the act becomes self-contradictory – Barbaros becomes a controller who cannot exercise the internal control he has planned for the company; he reports and interprets not the company's true performance but something which is asked of him by the President, which defeats the purpose of the tasks. From the teleological perspective, an act cannot be judged as right or wrong based only on the nature of the act, but the basis is more on the consequences of the act, of the ends itself (Hooker 1996). Barbaros, as the company's controller may have considered the consequences of the act, of understating the costs which is being found out by the company's external auditors. As external auditors, anything that they report will be given more weight by external investors, such as creditors like the bank. The consequences of losing the bank loan, from the point of view of Barbaros are less severe than the consequences of being found out, which can range from losing the company's reputation due to fraud that it will not be able to attract future investors, to some legal actions that investors like the National Bank of Australia may take if the event of fraud has been revealed. II. Assuming that Sharon chose to accept the $10,000 in salary increase and modified the report, what fundamental principles in APES 110 Code of Ethics for Professional Accountants would she breach in this case and why? Integrity. If Sharon chooses to accept the increase in salary and modifies the report, she breaches the fundamental principle of integrity as mentioned in Section 110.2 in the APES 110 Code of Ethics. The part of the section that she has breached includes Section 110.2, where she associates herself with “other information where [she] believes that the information omits or obscures information required to be included where such omission or obscurity would be misleading (APESB 2008, 9).” She has the information as she has discovered the understatement of the cost estimates as well as her doubt with regard to the company's eligibility for a renewal of its bank loan. If she follows what Jimmy orders her, she omits this information. The omission of this information can be considered misleading from the point of view of the other stakeholders of the company such as the company's creditor, the National Bank of Australia. Objectivity. The acceptance of the increase in salary in order to modify the report does not only make Sharon breach one fundamental principle in APES 110 Code which is integrity, but also objectivity. According to Section 120.1, “the principle of objectivity imposes an obligation on all Members not to compromise their professional or business judgement because of bias, conflict of interest or the undue influence of others (APESB 2008, 10).” If Sharon accepts the increase in salary in order to modify the report, it is clear that there is undue influence from Jimmy, her supervisor which has made Sharon compromise her professional judgement. She acts on the reward in order for her to lose her objectivity. III. Assuming that Sharon chose not to accept the $10,00 in salary increase, justify the reasons why she would not accept the bribe at each of the six stages of Cognitive and Moral Development as outlined I the Kohlberg framework. Which Stage of the Kohlberg framework do Sharon (if she chose not to modify the report) and Jimmy each appear to be at and why? Stage 1: Obedience and Punishment. There is a governing rule for accountants like Sharon which includes fundamental principles that are needed to be observed when conducting their activities with regard to the profession. At Stage 1 of Moral Development, Sharon will see accepting the bribe as disobeying the rule, which is fixed and absolute, with regard to fear of punishment. In Sharon's case, if she disobeys the rules that is set by a governing body for accountants, she risks her career as she risks the revocation of her license due to committing fraud. Stage 2: Individualism and Exchange. The second stage of Kohlberg's framework is about the pursuit of self-interest when it comes to coming up with a decision. In Sharon's case, her interests lies on her career which starts as a young audit assistant. If she weighs her decision between the increase in salary and her future prospects of career as determined by her reputation for having what it takes to be a qualified auditor, she will choose the latter. Because it involves her reputation and future career prospect, Sharon will not accept the bribe. Stage 3: Interpersonal Relationships. When it comes to the practice of accounting, accountants have certain social roles and expectations to fulfil. Some of these expectations include acting on good faith as well as complying to some rules and regulations. In order to conform to these expectations, Sharon has to reject the increase of salary, with regard to what other people may think of her is she chooses to accept the bribe. Because accepting a bribe is seen as something negative in the society, Sharon will not risk looking bad by involving in the act. Stage 4: Maintaining Social Order. There are laws when it comes to fraud, and in the Stage 4 of Kohlberg's model, adhering to these laws are more than just accepting them as fixed or absolute, or only due to the fear of the punishment associated with not complying with the law. Accepting the law is due to the notion of maintaining social order in the society. From the point of view of Sharon, if she commits to fraud and disobeys the law, more people may just want to cheat and violate the law. Therefore, there will be chaos in the society when one violates the law. In order to help in preserving this, Sharon will have to reject the offer. Stage 5: Social Contract and Individual Rights. The fifth stage in Kohlberg's model is about maintaining peace and order in the society, but with regard to the benefits of these laws to the greater number of people in the society. Therefore, in making her choice over the decision to accept or reject the increase in salary, she has to think of the welfare of a greater number of people involved in the decision. This includes the bigger picture – the reputation of all accountants as a whole, which she represents through her actions, the effect on the bank, the client, the client's shareholders as well as the client's employees. Because the decision is also detrimental to the client and its major stakeholders, as explained in Question 1 as regards the consequences, she has to reject the decision. Stage 6: Universal Principles. The sixth stage in Kohlberg's model is about universal ethical principles which are based on abstract principles, such as the notion of true justice. In Sharon's case, she must reject the increase in salary in order to modify the report as she gets to think of the notion of justice from the point of view of the stakeholder with the largest interest in the client – its creditor, the bank. She puts herself in the shoes of the bank and how the banks' stakeholders would feel if they know they are misled, she has to reject the increase because the act will not result in fair and just dealings. Jimmy, Sharon's supervisor is in the third stage of moral development: he wants to conform to the expectations of his seniors in maintaining the engagement with the client. As for Sharon, her concerns over the company's declining profitability as well as its ability to renew the bank loan reflects her concern over the stakeholders of the company. Sharon must be in the fifth stage of moral development, as she accounts for the people who may be involved in the company's decision. References Accounting Professional and Ethical Standards Board. 2008. “Compiled APES 100 Code of Ethics for Professional Accountants.” APESB.org. Accessed on May 4, 2010 from http://www.apesb.org.au/Document/Issued_Standards/Compiled%20APES%20110-%20July%2007.pdf Crain, W. C. 1985. “Theories of Development.” PTLS.edu. Accessed on May 4, 2010 from http://faculty.plts.edu/gpence/html/kohlberg.htm Hooker, Richard. 1996. “Notes on Deontology.” WSU.edu. Accessed on May 4, 2010 from http://www.wsu.edu:8080/~dee/GLOSSARY/TELE.HTMs Kay, Charles. 1997. “Notes on Deontology.” Wofford.edu. Accessed on May 4, 2010 from http://webs.wofford.edu/kaycd/ethics/deon.htm I. What are Vinal Barbaros's options in this case? Evaluate the ethics of each option and its effects on the stakeholders. What should Barbaros do? Barbaros's first option in the case is to accept the 5% inducement and agree to understate the cost estimates. The stakeholders of the company include the key managers, the owner, the creditor which is the National Bank of Australia, its employees, and other interest groups outside the company. As for the key managers, the understatement is favourable to them as it will not be able to reflect their incompetence and carelessness when it comes to planning, implementing and controlling the project. With regard to the owner, he has not been able to do anything to protect its shareholder value because he has been deprived of information that will have made him act to correct the issues on governance, in the event where the company fails to recoup its investment in the project and provides negative value. As for the company's employees, they will not know that there is something wrong and something has to be improved in the operations, therefore, this makes them less productive in the process. With regard to its key stakeholder, the creditor, National Bank of Australia, it will not be able to protect its position and may incur losses. If this happens, this key stakeholder of the company may exercise measures ranging from bad publicity, terminating the contact before the contract date on grounds of deception and fraud, appropriating Smith's assets through costly litigations, that could further make the company sink into bankruptcy. His second option is to reject the 5% inducement while he reports the true cost estimates. In order to analyse the ethics of this option, the effects on the stakeholders of the company have to be regarded. The stakeholders of the company include the key managers, the owner, the creditor which is the National Bank of Australia, its employees, and other interest groups outside the company. As for the key managers, the understatement is not favourable to them as it will reflect their incompetence and carelessness when it comes to planning, implementing and controlling the project. Because the true cost is reflected, the shareholder can act and do something in order to correct this issue, such as hiring new management or delving more into their policies that could create value to his company. This endangers the position of the management. Aside from this, because the management is pressured to cut down on costs to ensure profitability, the company will be in a state of tension as issues of laying people off become apparent. As for the National Bank of Australia, it can act in order to protect its position either by stop granting a renewal of the loans of the company and appropriate the security that are made as collateral, or revise the terms in order to compensate the bank for the higher risks on continuing on investing on the company. Barbaros must choose the second option and report the true cost estimates after considering the extent of consequences to the stakeholders. Since business is all about trust and maintaining relationships with its stakeholders, if he understates the costs which results in undermining the trust of one of these stakeholders, the company will have a harder time pursuing its operations due to having 'a bad name.' This is with regard to the company's reputation which is one of the requisites for it to be able to secure future financing, as well as the sustainability of its operations. When investors analyse a prospective borrower, its capacity to pay and credit-worthiness are not the only factors that are regarded. These include the character of the people who manage the company, with reference to the company's reputation and corporate brand name. If a company is known for fraud, or even due to a small corporate scandal such as that, which could leak to the external business community, the company will be perceived riskier. Smith will have to pay higher in interest expenses then in order to compensate the risks that investors will have in lending them money; that is, if one investor will be convinced to lend even after it has proven its trustworthiness. This could extend to the company's shutting down of operations if it can no longer raise funds to finance its operations, or even a discounted buyout. These consequences to the company, which does not only affect the creditors, but also the managers and employees who will get laid off, the shareholder who will lose his wealth, etc. II. Assuming that Barbaros rejects the 5% inducement and does not agree to understate the cost estimates. What maybe his justification for doing so under the teleological perspective as opposed to deontological perspective? If Barbaros rejects the 5% inducement and does not agree to understate the cost estimates, from a teleological perspective his justification can include considering the consequences of his decisions, and the severity of the effects of these consequences when it comes to the shareholders of the company. Teleological ethics focuses more on the consequences and the that are being pursued rather than the action itself (Humboldt.edu 2010). With this regard, Barbaros decision can be traced to the consequences that may arise from understating the cost estimates. If he understates the cost estimates, there is a huge chance that the external auditors will find it out and will include it in the report; this discrepancy in the two reports will provide an unsteady ground for the company with regard to its reputation. If the National Bank of Australia solicits the independent advise and report of the external auditors of the company, and finds out about the discrepancy, not only will the company lose the trust of the bank, but it may face termination of the bank loan's contract on the grounds of fraud and distortion of information. If this leaks out in the investment community, the company will find it hard to look for other sources of finance – the investors can only bet on the company's reputation as one of the credentials for them to grant Smith Corporation the needed financing. A company that is untrustworthy will have it as part of its reputation, part of its corporate brand name. This will have an effect on the future dealings of the company, with other stakeholders such as the suppliers, customers, and other interest groups. Also, if the company is able to secure the needed financing if it cannot secure the renewal of the loan with the bank, it will have to borrow with higher finance costs due to its poor credit rating, as a result of the fraud. Deontological ethics differ from teleological ethics when it comes to the focus on which is ethical. Deontological ethics focuses more on the nature of the act, the duty behind the act, and the duty to act the duty (Alexandre & Moore 2007). In the case of Barbaros, if he chooses to reject the inducement, he may do so in accordance to the concept of fulfilling his duty to act on his duty. What are these duties? For one, he is an officer of the company, he is an agent to the principal which is the shareholder. He has a fiduciary relationship with the owner, and if he fails to do his duty of contributing to the good governance of the company, he violates this duty. Also, position-wise he is the controller of Smith Corporation. As a controller, he has a certain duty to maintain internal control measures, in order to ensure effective governance. If he does what Wolman wants him to do, he is not fulfilling his duty as a controller, as well as his obligation to the owner as an agent of the business. He does not reflect the true performance of the company if he ever understates the costs, and undermines his duties. III. Assuming that Sharon chose to accept the $10,000 in salary increase and modified the report, what fundamental principles in APES 110 Code of Ethics for Professional Accountants would she breach in this case and why? The Accounting Professionals and Ethics Standards Board has included four fundamental principles in the practice of accounting. These include integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. In order to assess Sharon's acts in line with compliance with the fundamental principles in APES 110, certain provisions must be looked at. Honesty and straightforwardness are some of the focuses of the integrity principle in the APES 110. In Sharon's case where she accepts the increase in her salary, she violates the fundamental principle of integrity with reference to Section 110.2c of the APES 110, which states “a member should not be associated with reports, returns, communications, or other information where they believe that the information: [c] omits or obscures information required to be included where such omission or obscurity would be misleading (Accounting Professionals and Ethics Standards Board 2008, p.9).” When she modifies the report, she omits or obscures information that would mislead other users of the information such as the National Bank of Australia. Although professional competence and due care, as well as confidentiality and professional behaviour as fundamental principles in APES 110 are not breached, the objectivity principle is breached in this matter. This is apparent in her relinquishing her professional judgement due to the influence of her supervisor, Jimmy. With reference to the specific provision in the APES 110, “the principle of objectivity imposes an obligation on all Members not to compromise their professional or business judgement because of bias, conflict of interest or the undue influence of others (Accounting Professionals and Ethics Standards Board 2008, p.10).” The supervisor influences Sharon by means of bribing her in order to modify the report. If the accepts the bribe to relinquish her professional judgement and adhere to the request of her supervisor, she breaches the principle of objectivity. IV. Assuming that Sharon chose not to accept the $10,00 in salary increase, justify the reasons why she would not accept the bribe at each of the six stages of Cognitive and Moral Development as outlined I the Kohlberg framework. Which Stage of the Kohlberg framework do Sharon (if she chose not to modify the report) and Jimmy each appear to be at and why? If Sharon does not accept the bribe, under the first stage of Kohlberg's model, she is just obeying rules in order to get away from punishments (Kohlberg & Turiel 1971). Because there are certain rules that are set for professionals like her, these rules are seen as absolute rules, have to be abided or else the threat of punishment will be the consequences. The punishment for accountants who breach the codes of ethics may range from getting her license as an accountant terminated, or she face administrative charges with additional penalties in the form of monetary or something else. If Sharon does not accept the bribe, under the second stage of Kohlberg's model, her motive maybe to serve her individual needs (Kohlberg & Turiel 1971). Based on the punishments that may arise from modifying the report, Sharon saves herself from getting herself involved and responsible with regard to such acts. Also, because she is a young audit assistant, her needs may include looking forward to a steady career track as an auditor, which if tainted would lead her to the end of the path of her career. In order to serve these needs, she has to reject the salary increase and not modify the report. If Sharon does not accept the bribe, under the third stage of Kohlberg's model, her move can be seen as conformity to the norms and expectations of the society (Kohlberg & Turiel 1971). Such acts are perceived by the society as corrupt, and therefore negative. If she commits to that act, she will be perceived by the society as a corrupt and bad person. Especially in her profession, public accountants are expected to be ethical, as they have a fiduciary relationship with the public-at-large and different entities external to the company who may become investors of public and private companies. In order to live to the expectations of the society, she has to reject the salary increase. If Sharon does not accept the bribe, under the fourth stage of Kohlberg's model, she does it in order to comply with laws that are made in order to ensure peace and order in the society (Kohlberg & Turiel 1971). Sharon will reason out that as a responsible citizen who wants to maintain the rule of law in the land, she has to avoid doing practices that are perceived as corrupt and negative, such as what her supervisor is asking her to do. She can reason out that if she violates the law, other people may violate the law too because it has proven to have some exemption on people. Therefore, the law becomes useless and there comes anarchy. In order to prevent this, Sharon looks at the rule of law with such a high authority. If Sharon does not accept the bribe, under the fifth stage of Kohlberg's model, her decision incorporates the other people who are involved in the decision (Kohlberg & Turiel 1971). Sharon will look at the the 'greater good for the greater number' by looking at the stakeholders, and the effects of the consequences on them. By looking at these consequences to the company, its stakeholders such as the shareholder, creditor, etc. she sees that doing the act will not do these people any good, in fact it may harm some of them. With this reasoning, Sharon rejects the increase in salary. If Sharon does not accept the bribe, under the sixth stage of Kohlberg's model, she is after the notion of implementing a sense of justice based on some universal ethical principles and abstract reasoning (Kohlberg & Turiel 1971). Sharon does not only look at the potential benefits and harms of the consequences of the act to the greater number of people, she also looks at from the point of view of those who are involved; a notion which is more commonly referred to as 'putting herself on others' shoes.' If she puts herself from the point of view of the president, would the president perceive the act as fair with regard to the effect on his interests, or the interests of the bank and the other stakeholders such as the owner. Because she perceives there is a sense of injustice in the act, she rejects the notion. There is no evidence to the case that Sharon acts based on some abstract notion of justice. Since she has done it with regard to the company's failing performance and its ability to get a contract renewal with regard to the loan, her concern must be the stakeholders, and she is acting under the fifth stage of Kohlberg's model. On the contrary, her supervisor is only after his seniors' impressions; he does not only have to secure his interests but he also has to comply with the expectations of his seniors. Jimmy, her supervisor is in the third stage of moral development. References Accounting Professional and Ethical Standards Board. (2008). “Compiled APES 100 Code of Ethics for Professional Accountants.” APESB.org. Accessed on May 6, 2010 from http://www.apesb.org.au/Document/Issued_Standards/Compiled%20APES%20110-%20July%2007.pdf Kohlberg, L. & Turiel, E. (1971). “Moral development and moral education.” In G. Lesser, ed. Psychology and educational practice. Scott Foresman. Alexander, L. & Moore, M. (2007 November 21). “Deotological Ethics.” Stanford.edu. Accessed on May 6, 2010 from http://plato.stanford.edu/entries/ethics-deontological/ Humboldt State University. (2010). “Teleological Ethics.” Humboldt.edu. Accessed on May 6, 2010 from http://www.humboldt.edu/~envecon/ppt/423/unit1/sld025.htm Read More