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Civility, Ethics and Workplace Behavior

What would you do? An Ethical Dilemma in Business

There is a difference between knowing what to do and doing it!

I recently became aware of an ethical dilemma of an accounting professional who was torn between doing the right thing and giving in to pressures to act otherwise. This is an interesting case because it illustrates the challenges for accounting professionals who are charged with the ethical responsibility of doing whatever it takes to ensure the financial statements are accurate and reliable regardless of the consequences to superiors and even one’s own self interests. CPAs know that the public interest is the highest ideal, but sometimes knowing what the right thing to do is and doing it are in conflict. Here are the facts of the dilemma.

Peter is a CPA and the controller and has been burning the midnight oil trying to finish the year end financial statements for Paul, Inc.  This year is an important one for the company.  The company is projected to make a profit after five years of product development and losses.  In trying to complete the year-end financials, Peter is finding that the numbers are not adding up and that the company seems to have overstated assets and income by $2.5 million. Based upon the short investigation that he has been able to do, it seems that the CEO and CFO have signed some documents which have inflated the numbers. Peter wants to approach them on this issue but is afraid he will lose his job because of the intense pressure that now exists.

Peter is pressured by time (a filing deadline of tomorrow to get the information to the printers for the shareholders’ meeting) and the following other considerations. The shareholders have been promised that an IPO of the company will be done within the next year.  The banks have been patient in providing lending during the rough patch, but will have to declare the loans in default, and demand immediate re-payment, if the numbers are not close to break-even.  The majority shareholder is the widow of the founder, who was renowned as a highly ethical person.  (Her share in the company is the basis for her retirement pension providing around the clock nursing care.)  Peter has his own personal pressures as he recently purchased a new $500,000 new house using the last of his savings as a down payment, and his wife recently has taken an unpaid leave from her job due to a difficult pregnancy requiring total bed rest and medical bills.

What should Peter do and why?

This case is a complex one so I will focus only on the broader ethical issues. Peter’s primary responsibility is to protect the investors and creditors who rely on the accuracy of the financial statements to make decisions with respect to holding on to stock or selling it, and creditors who monitor the debt and interest payable by the borrower and make future decisions about loaning money to the company. He also has a responsibility to the widow of the founder.

In advising Peter, I told him to consider how his actions and decisions could affect the stakeholders by weighing costs and benefits of alternatives. In addition, Peter needs to consider the rights of the stakeholders and his obligations to them.

Fraud in financial statements almost always involves the CEO and CFO who develop the scheme to manipulate the numbers to make it look as though the company is doing better than it really is. Peter’s role is quite common for a controller who is expected to be a team player and go along with the deception.

Using ethical reasoning, if Peter goes along with the fraud then he creates a cost to the investors and creditors; the primary benefits are to the CEO and CFO and the company as a result, and to Peter on a personal level. The benefits outweigh the costs because serving the public interest must be placed ahead of all other interests. CPAs are obligated to put aside all other interests including self-interests. The rights of investors and creditors are paramount and they outweigh all other considerations.

The important ethical point is once a person, such as Peter, goes along with financial wrongdoing, he begins the slide down the “ethical slippery slope” and it is difficult to turn around at a later date and climb back to the high ground because the tendency is to cover-up one’s actions in the future and the CEO and CFO can play “gotcha” gains with Peter.

The most important ethical trait in a situation like this is integrity – courage – to follow one’s convictions and act based on principles, and not be swayed by pressures imposed by others who have their own agendas that may not be in the best interests of the stakeholders.

Ultimately, Peter did the right thing. He felt good about what he had done. However, he was fired from his job. Peter is now considering whistleblowing options.

The moral of the story is ethics is easier said than done.

Blog posted by Steven Mintz, aka Ethics Sage, on June 26, 2014. Dr. Mintz is a professor in the Orfalea College of Business at Cal Poly, San Luis Obispo. He also blogs at: www.ethicssage. com.