Case 1-6 Capitalization versus Expensing Et
Case 1-6 Capitalization versus Expensing
Ethical obligations of a controller when pressured by the CFO to capitalize costs that should be expensed.
Gloria Hernandez is the controller of a public company. She just completed a meeting with her superior, John Harrison, who is the CFO of the company. Harrison tried to convince Hernandez to go along with his proposal to combine 12 expenditures for repair and maintenance of a plant asset into one amount ($1 million). Each of the expenditures is less than $100,000, the cutoff point for capitalizing expenditures as an asset and depreciating it over the useful life. Hernandez asked for time to think about the matter. As the controller and chief accounting officer of the company, Hernandez knows it’s her responsibility to decide how to record the expenditures. She knows that the $1 million amount is material to earnings and the rules in accounting require expensing of each individual item, not capitalization. However, she is under a great deal of pressure to go along with capitalization to boost earnings and meet financial analysts’ earnings expectations, and provide for a bonus to top management including herself. Her job may be at stake, and she doesn’t want to disappoint her boss.
Questions
Assume both Hernandez and Harrison hold the CPA and CMA designations.
- What are the loyalty obligations of both parties in this case?
- Assume that you were in Gloria Hernandez’s position. What would motivate you to speak up and act or to stay silent? Would it make a difference if Harrison promised this was a one-time request?
- What would you do and why?
Read the case and write 5-7 page executive summary on the case, including answers to the following questions.
- Describe the legal and ethical issues surrounding the case.
- What are the loyalty obligations of both parties in this case?
- Assume that you were in Gloria Hernandez's position. What would motivate you to speak up and act, or keep silent? Would it make a difference if Harrison promised this was a one-time request?
- What would you do and why?
Case study write-ups follow proper APA formatting and integrate Chapter 1: Ethical Reasoning: Implications for Accounting (attached). Well written, proper grammar, and follow APA guidelines including references and in-text citations when needed.
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Ethical Reasoning: Implications for
Accounting Chapter 1
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Ethical Reasoning
• Ethical dilemma: Penn State, a culture of indifference
• Ethical blind spots refers to the gap between who you want to be and who you actually are
• Organizational goals, rewards, compliance systems, and informal pressures all contribute to ethical fading
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Integrity The Basis for Ethics in Accounting
• Integrity: • Meaning on principle • Traces back to Socrates, Plato and Aristotle • Is the foundational virtue of the ancient Greek
philosophy of virtue • Helps withstand pressures to subordinate
judgment • Is a “must have” for accountants
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Religious and Philosophical Foundations of Ethics
• A version of the Golden Rule appears in each of the world’s religions
• Ethics can be traced back to ancient Greek philosophy
• “What is the best sort of life for human beings to live?”
• Greeks believed the ultimate goal of happiness was to attain some objectively good status: the life of excellence
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What is Ethics?
• Accepted standards of behavior • Practices of those in a profession • Laws • Expectations of society
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Ethics, Morals, Values
• Ethics, derived from the Greek word ethikos (character), deals with the concepts of right and wrong; standards of how people ought to act.
• Morals, derived from the Latin word moralis, deals with manners, morals, character.
• Values are basic and fundamental beliefs that guide or motivate attitudes or actions.
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Ethics: Norms, Values, and Law
• Norms: • Ethical decision-making entails following certain well established norms of
behavior • Does not describe the way people do act (descriptive) • Deals with the way people should act (prescriptive/normative)
• Values: • Basic beliefs that guide or motivate attitudes or actions • Values of a profession (i.e. Accounting) are embedded in its codes of ethics • “Golden Rule” prescribes that we should treat others the way we want to
be treated
• The Law: • Being ethical is not the same as following the law • Existence of specific laws prohibiting certain behaviors will not stop a
person who is unethical from violating those laws • Laws create a minimum set of standards that ethical people usually go
beyond
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Norms, Values and the Law: The Gray Area
• When facts are unclear and legal issues are uncertain, consider the following:
• Established standards of ethical behavior. • Moral philosophies.
• Gray Area/Unclear Rules • Willingness to take action not in ones own self-
interest. • Look beyond self-interest and consider all perspectives
involved. • Process followed to decide on a course of action is more
important than achieving the end goal
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Ethical Relativism
• If correct, there can be no common framework to resolve any moral disputes between different societies
• Theory is rejected by most ethicists • Societies may differ in their application of
fundamental moral principles but agree on the principles.
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Situation Ethics
• Theory that recognizes the existence of certain principles but questions whether they should be strictly applied or used as guidelines in a particular situation
• Circumstances around ethical dilemma should influence decision making process
• Problem: it can be used to rationalize actions such as cheating
• Penn State scandal • University of North Carolina
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Social Networkers and Workplace Ethics
• Ethics Resource Center survey on employees using social networking on the job
• Discussing company information online • Active social networkers are unusually vulnerable to
risks • Witness more misconduct • Experience more retaliation as a result when reported
• Training and ongoing commitment to an ethical culture can mitigate the risks presented by social networking at work
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Cultural values
• Cultural dimensions that can explain similarities and differences in cultures worldwide, include:
• Individualism • Power distance • Uncertainty avoidance • Masculinity
• Long term orientation recently added to this list
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Six Pillars of Character
• Trustworthiness • Respect • Responsibility • Fairness • Caring • Citizenship
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Trustworthiness
• Trustworthiness: being honest, acting with integrity, being reliable, and exercising loyalty in dealing with others.
• Honesty: is the most basic ethical value and means that we should express the truth as we know it and without deception.
• Integrity: strength and courage of ones convictions. • Reliability: following through with ones
promises/commitments. • Loyalty: not violating confidence placed in us.
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A Word about Whistleblowing
• Loyalty is the one value that should NEVER take precedence over other values.
• “Dogs are loyal to their master while cats are loyal to the house.”
• Loyalty requires a commitment to do the right thing for the right people in the right way (i.e., public interest in accounting)
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Respect, Responsibility and Fairness
• Respect: treating every individual with dignity. The golden rule encompasses respect for others through notions such as civility, courtesy, decency, dignity, autonomy, tolerance and acceptance.
• Responsibility: the ability to reflect on alternative courses of action, persevere and carry out moral action diligently.
• Fairness: treating others equally, impartially, and openly. Michael Josephson points out, “fairness implies adherence to a balanced standard of justice without relevance to one’s own feelings or inclinations.”
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Caring and Citizenship
• Caring: The essence of caring is empathy. Empathy is the ability to understand, be sensitive to, and care about the feelings of others. Caring and empathy support each other and enable a person to put herself in the position of another. This is essential to ethical decision making.
• Citizenship: Josephson points out that “citizenship includes civic virtues and duties that prescribe how we ought to behave as part of a community.” An important part of good citizenship is to obey the laws, be informed of the issues, volunteer in your community, and vote in elections.
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Reputation
• Reputation: overall quality or character in the opinion of the public towards a person or group or organization. It is an important factor in many professional fields, including accounting.
• Takes a long time to build a reputation of trust but not long at all to tear it down.
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Civility, Ethics, and Workplace Behavior
• Instances of inconsiderate, “in your face” behavior
• Civility requires restraint, respect, and responsible action in both personal and professional activities
• Can be well behaved and gracious to others but motivated by non-ethical values such as greed
• Treating others bad and with disrespect shows non commitment to act in accordance with the pillars of character
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Modern Moral Philosophies
• A few of the philosophies applicable to the study of accounting ethics include:
• Teleology • Egoism • Enlightened Egoism • Utilitarianism
• Deontology • Rights Theory • Justice
• Virtue
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Egoism and Enlightened Egoism
• Consequences for individual • “Do the act that promotes the greatest good for
oneself.” • Enlightened egoists
• Allow for the well-being of others • Help achieve some ultimate goal for self • Self-interest remains paramount
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Utilitarianism
• Bentham and Mill • Consider impartially the interests of all persons
affected by an action and pick the greater benefit
• “Greatest good to greatest number” • Difficulties
• Impossible to foresee all consequences • Consequences difficult to measure
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Utilitarian Types
• Act-Utilitarian • Examines the specific action itself versus rule • Sets aside the rule only if increase in net utility to all
stakeholders
• Rule-Utilitarian • Basis behavior on rules designed to promote the
greatest utility • Maximizes intrinsic value
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Deontology
• Derived from Greek deon meaning duty • Moral norms establish basis for action • Based on rights of individuals and motivation
rather than consequences • Concerned with means rather than end result • Rights • Justice
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Rights Principles
• Hobbes and Locke • Kant • Categorical Imperative
• Motivated by sense of obligation • Universality of moral actions • People should never be treated as a means only, i.e.,
a means to an end
• Difficulties • Moral Absolutes • No clear way to resolve conflicts between moral
duties
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Justice
• John Rawls (1921-2002) • “Original Position” – behind the “veil of
ignorance” • Each permitted the maximum amount of basic
liberty compatible with others. • Social and economic inequalities are allowed
only if benefit all. • Treat equals (i.e., those with equal claims) equally
and unequals (i.e., those with differing claims) unequally
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Virtue Ethics
• Greek philosophers, Plato and Aristotle • Less emphasis on learning rules • Stress importance of developing good habits of
character • Cardinal virtues
• Wisdom • Courage • Temperance • Justice
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Virtue Ethics
• Other Important Virtues • Fortitude • Generosity • Self-respect • Good temper • Sincerity
• Bad Character Traits, also known as Vices • Cowardice • Insensitivity • Injustice • Vanity
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Virtues in Accounting Practice
• Ethical obligations to clients, employers, government, and public at large
• Perform services • Without bias • Avoid conflicts of interests • Independence • Integrity
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Acting with Integrity
• Act out of moral principle, not expediency • Never let loyalty cloud good judgment and
ethical decision-making • Have the courage to stand by your convictions in
accordance with the public service ideal of the accounting profession
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Moral Point of View
• Emphasizes practical reason and rational choice • Deliberation precedes choice of action
• Reason • Thought • Voluntary
• Ends do not justify the means • At least some times we should be willing to act
in the best interests of others and set aside self- interest and the interests of an employer or a client
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Personal Integrity
• Essential characteristic for CPA • Learn to be ethical
• By practice • Gaining wisdom • Exercising virtues • Enable you to lead a life of excellence
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Accounting and the Public Interest
• Honoring public trust • Acting with integrity in performance of
professional services • Being independent of clients • Making decisions objectively • Exercising due care in the performance of
services and professional skepticism
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AICPA Code of Conduct
• The code is divided into two sections: • Principles: are aspirational statements that form the
foundation for the Code’s enforceable Rules of Professional Conduct. Principles are expectations but are not legally binding. The principles of professional conduct include:
• Responsibilities • Public Interest • Integrity • Objectivity and Independence • Due Care • Nature and Scope of Services
• Rules: enforceable applications of the Principles
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Overriding responsibility of CPAs
• Exercise sensitive professional and moral judgments in all activities.
• Recognize the primacy of a CPA’s responsibility to the public as the way to best serve the clients’ and employers’ interest.
• Continued improvement in the level of competency and quality of services
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Aristotole’s Virtues • Trustworthiness,
benevolence, altruism • Honesty, integrity • Impartiality, open-
mindedness • Reliability, dependability,
faithfulness
Ethical Standards for CPAs • Integrity • Truthfulness, non-
deception • Objectivity, independence • Loyalty (confidentiality) • Due care (competence and
prudence)
Virtue, Character and CPA Obligations
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Institute of Management Accountants (IMA)
• Principles • Honesty
• Fairness
• Objectivity
• Responsibility
• Standards • Confidence
• Confidentiality
• Integrity
• Credibility
• Resolution of Ethical Conduct • Discuss issue with immediate supervisor or higher authority.
• Clarify ethical issues with an IMA Ethics Counselor or other impartial advisor
• Consult attorney.
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DigitPrint
• Outsourcing business for high-speed digital printing
• $2 million in venture capital • $200,000 net income for 1st year • $1 million unrecorded accrued expenses • Income becomes $800,000 loss
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DigitPrint
• IMA Standards • Integrity, inform Higgins, seek outside counsel
• Utilitarianism • Greatest benefit to the public, company, and
employees
• Rights Theory • Venture capitalist (and Higgins) have ethical right to
know
• Justice • Virtue of integrity and not subordinate judgment
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What to DO?
• Take concerns to Higgins • Whistle-blowing • Confidentiality • Right to do versus the Right thing to do
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Concluding Thought
• In accounting, integrity is its own reward because it builds trust in client relationships and helps honor the public trust that is the foundation of the accounting profession.
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Videos on Cases
• Harvard Cheating Scandal • http://www.youtube.com/watch?v=hHUJuEYw0SU • http://www.youtube.com/watch?v=1PBsVH68Iig
• NYC Subway Death • http://www.youtube.com/watch?v=3UkS8VfotU8
• Bystander Effect • http://www.youtube.com/watch?v=3UkS8VfotU8
• Other • http://www.youtube.com/watch?v=NxdbzcR4nfA • http://www.youtube.com/watch?v=Lhwhgf01Ozw
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