ETHICAL PRINCIPLES AND REASONING

Copyright ©2016 John Wiley & Sons, Inc. Klein, Ethics in Accounting, 1/e (For Instructor Use Only) 2-1

Chapter 2

ETHICAL PRINCIPLES AND REASONING

Exercises

Legality Versus Ethicality

1. Determine whether the following are legal, ethical, both, or neither:

• After graduating from college, you now have the opportunity to work as an

unpaid assistant to a famous Hollywood director during the production of his new film. You are excited to accept this opportunity because you will gain invaluable experience and connections in the movie industry. A friend, however, recently questioned whether your unpaid endeavor will violate minimum wage or other labor laws.

• A bank headquartered in Dallas, Texas recently hired three new

employees from across the country to join its Real Estate Credit Analysis Department. At the time that the bank hired these employees, it knew that it would retain only one of these employees after “trying them out” for one month. The bank also knew that, under Texas law, employment contracts are terminable at will by an employer. The employees moved to Dallas and signed one-year apartment leases in the expectation that their jobs would be ongoing.

• When new consumer electronic devices are introduced for sale, an

investment fund buys one at the earliest possible moment and then has engineers break it open. These engineers then advise the investment fund about the names of the suppliers who provide the component parts. The investment bank uses this information to increase its investments in these supplier companies in anticipation of them reporting greater sales.

• You use a prescription asthma inhaler when asthma attacks impair your

breathing. It is against the law for you to share prescription items with others because only doctors can prescribe medicines and direct the use of medical devices. Nonetheless, when a companion recently suffered an asthma attack, you shared your inhaler with her.

• Metered parking spaces in the entertainment district of a Colorado ski

resort town have posted signs that only permit “Two hour parking per day”.The purpose of these signs is to give all tourists a reasonable opportunity to dine in the entertainment district, where parking spaces are scarce during the peak ski season. During the past summer, you wanted to eat while watching a soccer match at a sports bar in this district. Because the Ethics in Accounting A Decision-Making Approach 1st Edition Klein Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Copyright ©2016 John Wiley & Sons, Inc. Klein, Ethics in Accounting, 1/e (For Instructor Use Only) 2-2

soccer match was expected to last over two hours, you parked in one space for two hours and then drove your car to park in an adjacent metered parking space for the remainder of the game.

SOLUTION for Exercise 2-1:

• This arrangement is illegal, but ethical. All employees must be paid the

minimum wage. Narrow exceptions exist for students who perform internships as part of an education program, but that exception does not apply to this college graduate. This arrangement, however, is ethical because the worker will gain invaluable experience and is not being exploited, while the director will get valuable assistance from a dedicated worker.

• This arrangement is legal, but unethical. Employers may hire and fire

employees at any time, under most circumstances, without notice.However, it is unethical to induce people to move across the country and sign long-term leases without informing them that they are likely to retain their positions for an extremely short duration.

• This is legal and ethical. When a person buys property, they have the right

to destroy it if they wish. This investment firm engaged in clever form of research and it is entitled to retain the rewards gained from lawfully obtaining superior information.

• This is illegal but ethical. Enabling someone to breathe in an emergency

situation justified violating the law against sharing prescription items.

• This is illegal but ethical. The law was designed to protect tourist access

during peak times. However, the policy underlying the law melts away, like the snow, during summer when the town is empty. By violating the law, a win-win-win resulted in which the customer was able to enjoy the entire game, the restaurant generated additional bar and food revenue, and the city got extra parking meter fees.

• A CPA firm wants to gain a competitive recruiting advantage over its peers.

Its lead recruiter has started giving $2,000 signing bonuses to brilliant 18- year-old high school graduates who plan to major in accounting during their upcoming college years. In return for these bonuses, students must agree that, if they decide to join the accounting profession upon graduation, they must accept employment with this CPA firm. This CPA is highly reputable and social media sites confirm that it pays its employees “top dollar.” If bonus recipients attend information sessions for other CPA firms or interviews with other firms while in college, their offer of guaranteed employment with this firm terminates. Is this CPA firm’s policy legal? Or ethical?

Copyright ©2016 John Wiley & Sons, Inc. Klein, Ethics in Accounting, 1/e (For Instructor Use Only) 2-3

SOLUTION for Exercise 2-2:

This policy is legal. Adults may enter into most forms of voluntary agreements. However, this arrangement is dubious from an ethical standpoint. On one hand, the student benefits from receiving cash for college and having a well-paying future employment opportunity. On the other hand, CPAs, as members of a profession, have a responsibility to exercise sensitive judgments that respect their employees’ best interests. By foreclosing cash- starved students from even learning about career options that might be a better fit for them, the CPA firm is acting irresponsibly.

• The University of Michigan Consumer Sentiment survey is a widely watched

index that serves as a barometer of economic activity. Within seconds after this index’s monthly public release, stock markets routinely move significantly.Unknown to the general public, the University of Michigan was collecting a minimum of a million dollars annually for releasing the headline results to select investment firms before the general public announcement occurred.Was this legal or ethical?

SOLUTION for Exercise 2-3:

At the time that the University of Michigan was doing this, the practice was legal. However, the SEC and some members of Congress were outraged, so some contemplated making the practice illegal.From an ethical standpoint, the university spent substantial time and money gathering this information. If the university had been a private sector company, it indisputably would have had the ethical right to reap the benefits of its substantial effort to create important, reliable information. However, in a sense, the information was so valuable, and world capital markets so depended upon it, that many viewed the university’s actions as unethical.Aware of the government’s threats to outlaw its conduct and the harm to its reputation, the university relented and stopped this practice.

FOLLOW-UP: The information was released to the investment firms only two

seconds early! In the era of high-speed computerized trading, two seconds is an eternity.

• Under Chapter 7 bankruptcy rules, most debts are cancelled when an

insolvent individual with a modest income successfully petitions for bankruptcy. A person is entitled to obtain a discharge from debts every seven years. After debt discharge, creditors are barred from exercising their right to ever enforce outstanding debts owed by bankrupt debtors. Is filing bankruptcy ethical?

Copyright ©2016 John Wiley & Sons, Inc. Klein, Ethics in Accounting, 1/e (For Instructor Use Only) 2-4

SOLUTION for Exercise 2-4:

As a general matter, it is never ethical to violate duties imposed by an agreement, including a contract in which one party extends credit to another.However, some would say that it is unethical to impose a severe debt burden on a borrower forever, especially if the borrower suffered a severe and unexpected disaster, such as overwhelming medical bills or a disability that impairs his or her ability to earn income.The opportunity to obtain a “fresh start” in life through debt cancellation is firmly ingrained in our legal system. Our society, as expressed in its bankruptcy laws, has a longstanding principle of allowing most honorable borrowers to obtain debt discharge every seven years.

FOLLOW UP: The Bible states that “at the end of every seven years…a

creditor shall release what he has lent to his neighbor.” The US federal bankruptcy law likewise allows most honest borrowers to obtain to obtain complete debt cancellation every seven years. Should policies established in the Bible, or in any other religious document, influence the enactment of laws?

Ethical Absolutism and Relativism

• To treat chickens more humanely, Californians voted by popular referendum

to enact a law requiring minimum cage sizes for egg-laying chickens. Other large egg-producing states, such as Iowa, Nebraska, and Alabama, have not enacted such laws.

• Is the minimum size of an egg-laying hen’s cage an ethical issue?
• Supporters of this law refer to themselves as “animal rights advocates.”

Should animals have rights? Which ones?

• Is the difference in laws between California and egg-producing states

evidence of ethical relativism?

• California also enacted a law that provides that all eggs sold in California

must be laid by hens living in cages that meet or exceed California’s standards. Does California have the right to try to impose its ethical views on other states’ citizens? Was California’s motive for enacting this law solely attributable to ethical concerns?

• Because eggs are an inexpensive source of protein, an increase in the

price of eggs would primarily affect low-income consumers. Does the fact that an increase in the price of eggs might harm low-income members of society affect your viewpoint?