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The Tax Return (a GVV case) | Online Assignment Help

Brenda Sells sent the tax return that she prepared for the president of Purple Industries, Inc., Harry Kohn, to Vincent Dim, the manager of the tax department at her accounting firm. Dim asked Sells to come to his office at 9 a.m. on Friday, April 12, 2016. Sells was not sure why Dim wanted to speak to her. The only reason she could come up with was the tax return for Kohn.

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“Brenda, come in,” Vincent said.

“Thank you, Vincent,” Brenda responded.

“Do you know why I asked to see you?”

“I’m not sure. Does it have something to do with the tax return for Mr. Kohn?” asked Brenda.

“That’s right,” answered Vincent.

“Is there a problem?” Brenda asked.

“I just spoke with Kohn. I told him that you want to report his winnings from the lottery. He was incensed.”

“Why?” Brenda asked. “You and I both know that the tax law is quite clear on this matter. When a taxpayer wins money by playing the lottery, then that amount must be reported as revenue. The taxpayer can offset lottery gains with lottery losses, if those are supportable. Of course, the losses cannot be higher than the amount of the gains. In the case of Mr. Kohn, the losses exceed the gains, so there is no net tax effect. I don’t see the problem.”

“You’re missing the basic point that the deduction for losses is only available if you itemize deductions,” Vincent said. “Kohn is not doing that. He’s using the standard deduction.”

Brenda realized she had blown it by not knowing that.

Brenda didn’t know what to say. Vincent seemed to be telling her the lottery amounts shouldn’t be reported. But that was against the law. She asked, “Are you telling me to forget about the lottery amounts on Mr. Kohn’s tax return?”

“I want you to go back to your office and think carefully about the situation. Consider that this is a one-time request and we value our staff members who are willing to be flexible in such situations. And, I’ll tell you, other staff in the same situation have been loyal to the firm. Let’s meet again in my office tomorrow at 9 a.m.”

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Questions

1. Analyze the alternatives available to Brenda using Kohlberg’s six stages of moral development. Assume that Brenda has no reason to doubt Vincent’s veracity with respect to the statement that it is “a one-time request.” Should that make a difference in what Brenda decides to do? Why or why not?

2. Assume you have decided what your position will be in the meeting with Vincent but are not quite sure how to respond to the reasons and rationalizations provided by him to ignore the lottery losses. How might you counter those arguments? What would be your most powerful and persuasive responses?

3. Assume that Brenda decides to go along with Vincent and omits the lottery losses and gains. Next year a similar situation arises with winnings from a local poker tournament. Kohn now trusts Brenda and shared with her that he won $4,950 from that event. He tells you to not report it because it was below the $5,000 threshold for the payer to issue a form W-2G. If you were Brenda, and Vincent asked you to do the same thing you did last year regarding omitting the lottery losses and gains, what would you do this second year and why?

Case 2-6 LinkedIn and Shut Out

The facts of this case are fictional. Any resemblance to real persons, living or dead, is purely coincidental.

Kenny is always looking to make contacts in the business world and enhance his networking experiences. He knows how important it is to drive customers to his sports memorabilia business. He’s just a small seller in the Mall of America in Bloomington, Minnesota.

Kenny decided to go on LinkedIn. Within the first few weeks, he received a number of requests that said, “I’d like to add you to my professional network.” At first almost all of such requests came from friends and associates he knew quite well. After a while, however, he started to receive similar requests from people he didn’t know. He would click on the “view profile” button, but that didn’t provide much useful information so he no longer looked at profiles for every request. He simply clicked the “accept” button and the “You are now connected” message appeared.

One day Kenny received the following message with a request to “connect”:

“I plan to come to your sports memorabilia store in the future so I thought I’d introduce myself first. I am a financial planner and have helped small business owners like yourself to develop financial plans that provide returns on their investments three times the average rate received for conventional investments. I’m confident I can do the same for you. As a qualified professional, you can trust my services.”

Kenny didn’t think much about it. It certainly sounded legitimate. Besides, he would meet the financial planner soon and could judge the type of person he was. So, Kenny linked with the planner.

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A week later, the financial planner dropped by Kenny’s store and provided lots of data to show that he had successfully increased returns for dozens of people. He even had testimonials with him. Kenny agreed to meet with him in his St. Paul office later that week to discuss financial planning.

The meeting took place and Kenny gave the financial planner a check for $30,000, which was most of Kenny’s liquid assets. At first the returns looked amazing. Each of the first two quarterly statements he received from the planner indicated that he had already earned $5,000; a total of $10,000 in six months. Three months later Kenny did not receive a statement. He called the planner and the phone had been disconnected. He sent e-mails but they were returned as not valid. No luck with text messages.

Kenny started to worry whether he ever would see his money—at least the $30,000. He was at a loss what to do. A friend suggested he contact LinkedIn and see if it could help. His online contact led to the following response in an e-mail:

As per our agreement with you, we are not liable to you or others for any indirect, incidental, special, consequential, or punitive damages, or any loss of data, opportunities, reputation, profits or revenues, related to the services of LinkedIn. In no event shall the liability of LinkedIn exceed, in the aggregate for all claims against us, an amount that is the lesser of (a) five times the most recent monthly or yearly fee that you paid for a premium service, if any, or (b) $1,000. This limitation of liability is part of the basis of the bargain between you and LinkedIn and shall apply to all claims of liability (e.g., warranty, tort, negligence, contract, law) and even if LinkedIn has been told of the possibility of any such damage, and even if these remedies fail their essential purpose. If disputes arise relating to this Agreement and/or the Services, both parties agree that all of these claims can only be litigated in the federal or state courts of Santa Clara County, California, USA, and we each agree to personal jurisdiction in those courts.

To say Kenny was distraught is an understatement. He felt like he had been shut out. While he did he not understand all the legalese, he knew enough that he would have to hire an attorney if he wanted to pursue the matter.

Questions

1. How would you characterize Kenny’s thought process in the way he responded to requests to connect on LinkedIn?

2. Who is to blame for what happened to Kenny and why?

3. What would you do at this point if you were in Kenny’s position and why?

Case 2-7 Milton Manufacturing Company

Milton Manufacturing Company produces a variety of textiles for distribution to wholesale manufacturers of clothing products. The company’s primary operations are located in Long Island City, New York, with branch factories and warehouses in several surrounding cities. Milton Manufacturing is a closely held company, and Irv Milton is the president. He started the business in 2005, and it grew in revenue from $500,000 to $5 million in 10 years. However, the revenues declined to $4.5 million in 2015. Net cash flows from all activities also were declining. The company was concerned because it planned to borrow $20 million from the credit markets in the fourth quarter of 2016.

Irv Milton met with Ann Plotkin, the chief accounting officer (CAO), on January 15, 2016, to discuss a proposal by Plotkin to control cash outflows. He was not overly concerned about the recent decline in net cash flows from operating activities because these amounts were expected to increase in 2016 as a result of projected higher levels of revenue and cash collections. However, that was not Plotkin’s view.

Plotkin knew that if overall negative capital expenditures continued to increase at the rate of 40 percent per year, Milton Manufacturing probably would not be able to borrow the $20 million. Therefore, she suggested establishing a new policy to be instituted on a temporary basis. Each plant’s capital expenditures for 2016 for investing activities would be limited to the level of those capital expenditures in 2013, the last year of an overall positive cash flow. Operating activity cash flows had no such restrictions. Irv Milton pointedly asked Plotkin about the possible negative effects of such a policy, but in the end, he was convinced that it was necessary to initiate the policy immediately to stem the tide of increases in capital expenditures. A summary of cash flows appears in Exhibit 1.

EXHIBIT 1 Milton Manufacturing Company

http://textflow.mheducation.com/figures/1259730131/exh2_1a.jpg

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Sammie Markowicz is the plant manager at the headquarters in Long Island City. He was informed of the new capital expenditure policy by Ira Sugofsky, the vice president for operations. Markowicz told Sugofsky that the new policy could negatively affect plant operations because certain machinery and equipment, essential to the production process, had been breaking down more frequently during the past two years. The problem was primarily with the motors. New and better models with more efficient motors had been developed by an overseas supplier. These were expected to be available by April 2016. Markowicz planned to order 1,000 of these new motors for the Long Island City operation, and he expected that other plant managers would do the same. Sugofsky told Markowicz to delay the acquisition of new motors for one year, after which time the restrictive capital expenditure policy would be lifted. Markowicz reluctantly agreed.

Milton Manufacturing operated profitably during the first six months of 2016. Net cash inflows from operating activities exceeded outflows by $1,250,000 during this time period. It was the first time in two years that there was a positive cash flow from operating activities. Production operations accelerated during the third quarter as a result of increased demand for Milton’s textiles. An aggressive advertising campaign initiated in late 2015 seemed to bear fruit for the company. Unfortunately, the increased level of production put pressure on the machines, and the degree of breakdown was increasing. A big problem was that the motors wore out prematurely.

Markowicz was concerned about the machine breakdown and increasing delays in meeting customer demands for the shipment of the textile products. He met with the other branch plant managers, who complained bitterly to him about not being able to spend the money to acquire new motors. Markowicz was very sensitive to their needs. He informed them that the company’s regular supplier had recently announced a 25 percent price increase for the motors. Other suppliers followed suit, and Markowicz saw no choice but to buy the motors from the overseas supplier. That supplier’s price was lower, and the quality of the motors would significantly enhance the machines’ operating efficiency. However, the company’s restrictions on capital expenditures stood in the way of making the purchase.

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Markowicz approached Sugofsky and told him about the machine breakdowns and the concerns of other plant managers. Sugofsky seemed indifferent but reminded Markowicz of the capital expenditure restrictions in place and that the Long Island City plant was committed to keeping expenditures at the same level as it had in 2014. Markowicz argued that he was faced with an unusual situation and he had to act now. Sugofsky hurriedly left, but not before he said to Markowicz, “You and I may not agree with it, but a policy is a policy.”

Markowicz reflected on his obligations to Milton Manufacturing. He was conflicted because he viewed his primary responsibility and that of the other plant managers to ensure that the production process operated smoothly. The last thing the workers needed right now was a stoppage of production because of machine failure.

At this time, Markowicz learned of a 30-day promotional price offered by the overseas supplier to gain new customers by lowering the price for all motors by 25 percent. Coupled with the 25 percent increase in price by the company’s supplier, Markowicz knew he could save the company $1,500, or 50 percent of cost, on each motor purchased from the overseas supplier.

After carefully considering the implications of his intended action, Markowicz contacted the other plant managers and informed them that while they were not obligated to follow his lead because of the capital expenditure policy, he planned to purchase 1,000 motors from the overseas supplier for the headquarters plant in Long Island City.

Markowicz made the purchase at the beginning of the fourth quarter of 2016 without informing Sugofsky. He convinced the plant accountant to record the $1.5 million expenditure as an operating (not capital) expenditure because he knew that the higher level of operating cash inflows resulting from increased revenues would mask the effect of his expenditure. In fact, Markowicz was proud that he had “saved” the company $1.5 million, and he did what was necessary to ensure that the Long Island City plant continued to operate.

The acquisitions by Markowicz and the other plant managers enabled the company to keep up with the growing demand for textiles, and the company finished the year with record high levels of profit and net cash inflows from all activities. Markowicz was lauded by his team for his leadership. The company successfully executed a loan agreement with Second Bankers Hours & Trust Co. The $20 million borrowed was received on October 3, 2016.

During the course of an internal audit of the 2016 financial statements, Beverly Wald, the chief internal auditor (and also a CPA), discovered that there was an unusually high number of motors in inventory. A complete check of the inventory determined that $1 million worth of motors remained on hand.

Wald reported her findings to Ann Plotkin, and together they went to see Irv Milton. After being informed of the situation, Milton called in Sugofsky. When Wald told him about her findings, Sugofsky’s face turned beet red. He told Wald that he had instructed Markowicz not to make the purchase. He also inquired about the accounting since Wald had said it was wrong.

Wald explained to Sugofsky that the $1 million should be accounted for as inventory, not as an operating cash outflow: “What we do in this case is transfer the motors out of inventory and into the machinery account once they are placed into operation because, according to the documentation, the motors added significant value to the asset.”

Sugofsky had a perplexed look on his face. Finally, Irv Milton took control of the accounting lesson by asking, “What’s the difference? Isn’t the main issue that Markowicz did not follow company policy?” The three officers in the room nodded their heads simultaneously, perhaps in gratitude for being saved the additional lecturing. Milton then said he wanted the three of them to brainstorm some alternatives on how best to deal with the Markowicz situation and present the choices to him in one week.

Questions

Use the Integrated Ethical Decision-Making Process discussed in the chapter to help you assess the following:

1. Identify the ethical and professional issues of concern to Beverly Wald as the chief internal auditor and a CPA.

2. Who are the stakeholders in this case and what are their interests?

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3. Identify alternative courses of action for Wald, Plotkin, and Sugofsky to present in their meeting with Milton. How might these alternatives affect the stakeholder interests?

4. If you were in Milton’s place, which of the alternatives would you choose and why?

Chapter 3 Cases

Case 3-1 The Parable of the Sadhu

Bowen H. McCoy

Reprinted with permission from “The Parable of the Sadhu,” by Bowen H. McCoy, Harvard Business Review. Copyright © Harvard Business Publishing.

Last year, as the first participant in the new six-month sabbatical program that Morgan Stanley has adopted, I enjoyed a rare opportunity to collect my thoughts as well as do some traveling. I spent the first three months in Nepal, walking 600 miles through 200 villages in the Himalayas and climbing some 120,000 vertical feet. My sole Western companion on the trip was an anthropologist who shed light on the cultural patterns of the villages that we passed through.

During the Nepal hike, something occurred that has had a powerful impact on my thinking about corporate ethics. Although some might argue that the experience has no relevance to business, it was a situation in which a basic ethical dilemma suddenly intruded into the lives of a group of individuals. How the group responded holds a lesson for all organizations, no matter how defined.

The Sadhu

The Nepal experience was more rugged than I had anticipated. Most commercial treks last two or three weeks and cover a quarter of the distance we traveled.

My friend Stephen, the anthropologist, and I were halfway through the 60-day Himalayan part of the trip when we reached the high point, an 18,000-foot pass over a crest that we’d have to traverse to reach the village of Muklinath, an ancient holy place for pilgrims.

Six years earlier, I had suffered pulmonary edema, an acute form of altitude sickness, at 16,500 feet in the vicinity of Everest base camp—so we were understandably concerned about what would happen at 18,000 feet. Moreover, the Himalayas were having their wettest spring in 20 years; hip-deep powder and ice had already driven us off one ridge. If we failed to cross the pass, I feared that the last half of our once-in-a-lifetime trip would be ruined.

The night before we would try the pass, we camped in a hut at 14,500 feet. In the photos taken at that camp, my face appears wan. The last village we’d passed through was a sturdy two-day walk below us, and I was tired.

During the late afternoon, four backpackers from New Zealand joined us, and we spent most of the night awake, anticipating the climb. Below, we could see the fires of two other parties, which turned out to be two Swiss couples and a Japanese hiking club.

To get over the steep part of the climb before the sun melted the steps cut in the ice, we departed at 3.30 a.m. The New Zealanders left first, followed by Stephen and myself, our porters and Sherpas, and then the Swiss. The Japanese lingered in their camp. The sky was clear, and we were confident that no spring storm would erupt that day to close the pass.

At 15,500 feet, it looked to me as if Stephen was shuffling and staggering a bit, which are symptoms of altitude sickness. (The initial stage of altitude sickness brings a headache and nausea. As the condition worsens, a climber may encounter difficult breathing, disorientation, aphasia, and paralysis.) I felt strong—my adrenaline was flowing—but I was very concerned about my ultimate ability to get across. A couple of our porters were also suffering from the height, and Pasang, our Sherpa sirdar (leader), was worried.

Just after daybreak, while we rested at 15,500 feet, one of the New Zealanders, who had gone ahead, came staggering down toward us with a body slung across his shoulders. He dumped the almost naked, barefoot body of an Indian holy man—a sadhu—–at my feet. He had found the pilgrim lying on the ice, shivering and suffering from hypothermia. I cradled the sadhu’s head and laid him out on the rocks. The New Zealander was angry. He wanted to get across the pass before the bright sun melted the snow. He said, “Look, I’ve done what I can. You have porters and Sherpa guides. You care for him. We’re going on!” He turned and went back up the mountain to join his friends.

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I took a carotid pulse and found that the sadhu was still alive. We figured he had probably visited the holy shrines at Muklinath and was on his way home. It was fruitless to question why he had chosen this desperately high route instead of the safe, heavily traveled caravan route through the Kali Gandaki gorge. Or why he was shoeless and almost naked, or how long he had been lying in the pass. The answers weren’t going to solve our problem.

Stephen and the four Swiss began stripping off their outer clothing and opening their packs. The sadhu was soon clothed from head to foot. He was not able to walk, but he was very much alive. I looked down the mountain and spotted the Japanese climbers, marching up with a horse.

Without a great deal of thought, I told Stephen and Pasang that I was concerned about withstanding the heights to come and wanted to get over the pass. I took off after several of our porters who had gone ahead.

On the steep part of the ascent where, if the ice steps had given way, I would have slid down about 3,000 feet, I felt vertigo. I stopped for a breather, allowing the Swiss to catch up with me. I inquired about the sadhu and Stephen. They said that the sadhu was fine and that Stephen was just behind them. I set off again for the summit.

Stephen arrived at the summit an hour after I did. Still exhilarated by victory, I ran down the slope to congratulate him. He was suffering from altitude sickness—walking 15 steps, then stopping, walking 15 steps, then stopping. Pasang accompanied him all the way up. When I reached them, Stephen glared at me and said, “How do you feel about contributing to the death of a fellow man?”

I did not completely comprehend what he meant. “Is the sadhu dead?” I inquired.

“No,” replied Stephen, “but he surely will be!”

After I had gone, followed not long after by the Swiss, Stephen had remained with the sadhu. When the Japanese had arrived, Stephen had asked to use their horse to transport the sadhu down to the hut. They had refused. He had then asked Pasang to have a group of our porters carry the sadhu. Pasang had resisted the idea, saying that the porters would have to exert all their energy to get themselves over the pass. He believed they could not carry a man down 1,000 feet to the hut, reclimb the slope, and get across safely before the snow melted. Pasang had pressed Stephen not to delay any longer.

The Sherpas had carried the sadhu down to a rock in the sun at about 15,000 feet and pointed out the hut another 500 feet below. The Japanese had given him food and drink. When they had last seen him, he was listlessly throwing rocks at the Japanese party’s dog, which had frightened him.

We do not know if the sadhu lived or died.

For many of the following days and evenings, Stephen and I discussed and debated our behavior toward the sadhu. Stephen is a committed Quaker with deep moral vision. He said, “I feel that what happened with the sadhu is a good example of the breakdown between the individual ethic and the corporate ethic. No one person was willing to assume ultimate responsibility for the sadhu. Each was willing to do his bit just so long as it was not too inconvenient. When it got to be a bother, everyone just passed the buck to someone else and took off. Jesus was relevant to a more individualistic stage of society, but how do we interpret his teaching today in a world filled with large, impersonal organizations and groups?”

I defended the larger group, saying, “Look, we all cared. We all gave aid and comfort. Everyone did his bit. The New Zealander carried him down below the snow line. I took his pulse and suggested we treat him for hypothermia. You and the Swiss gave him clothing and got him warmed up. The Japanese gave him food and water. The Sherpas carried him down to the sun and pointed out the easy trail toward the hut. He was well enough to throw rocks at a dog. What more could we do?”

“You have just described the typical affluent Westerner’s response to a problem. Throwing money—in this case, food and sweaters—at it, but not solving the fundamentals!” Stephen retorted.

“What would satisfy you?” I said. “Here we are, a group of New Zealanders, Swiss, Americans, and Japanese who have never met before and who are at the apex of one of the most powerful experiences of our lives. Some years the pass is so bad no one gets over it. What right does an almost naked pilgrim who chooses the wrong trail have to disrupt our lives? Even the Sherpas had no interest in risking the trip to help him beyond a certain point.”

Stephen calmly rebutted, “I wonder what the Sherpas would have done if the sadhu had been a well-dressed Nepali, or what the Japanese would have done if the sadhu had been a well-dressed Asian, or what you would have done, Buzz, if the sadhu had been a well-dressed Western woman?”

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“Where, in your opinion,” I asked, “is the limit of our responsibility in a situation like this? We had our own well-being to worry about. Our Sherpa guides were unwilling to jeopardize us or the porters for the sadhu. No one else on the mountain was willing to commit himself beyond certain self-imposed limits.”

Stephen said, “As individual Christians or people with a Western ethical tradition, we can fulfill our obligations in such a situation only if one, the sadhu dies in our care; two, the sadhu demonstrates to us that he can undertake the two-day walk down to the village; or three, we carry the sadhu for two days down to the village and persuade someone there to care for him.”

“Leaving the sadhu in the sun with food and clothing—where he demonstrated hand-eye coordination by throwing a rock at a dog—comes close to fulfilling items one and two,” I answered. “And it wouldn’t have made sense to take him to the village where the people appeared to be far less caring than the Sherpas, so the third condition is impractical. Are you really saying that, no matter what the implications, we should, at the drop of a hat, have changed our entire plan?”

The Individual versus the Group Ethic

Despite my arguments, I felt and continue to feel guilt about the sadhu. I had literally walked through a classic moral dilemma without fully thinking through the consequences. My excuses for my actions include a high adrenaline flow, a superordinate goal, and a once-in-a-lifetime opportunity—common factors in corporate situations, especially stressful ones.

Real moral dilemmas are ambiguous, and many of us hike right through them, unaware that they exist. When, usually after the fact, someone makes an issue of one, we tend to resent his or her bringing it up. Often, when the full import of what we have done (or not done) hits us, we dig into a defensive position from which it is very difficult to emerge. In rare circumstances, we may contemplate what we have done from inside a prison.

Had we mountaineers been free of stress caused by the effort and the high altitude, we might have treated the sadhu differently. Yet isn’t stress the real test of personal and corporate values? The instant decisions that executives make under pressure reveal the most about personal and corporate character.

Among the many questions that occur to me when I ponder my experience with the sadhu are: What are the practical limits of moral imagination and vision? Is there a collective or institutional ethic that differs from the ethics of the individual? At what level of effort or commitment can one discharge one’s ethical responsibilities?

Not every ethical dilemma has a right solution. Reasonable people often disagree; otherwise there would be no dilemma. In a business context, however, it is essential that managers agree on a process for dealing with dilemmas.

Our experience with the sadhu offers an interesting parallel to business situations. An immediate response was mandatory. Failure to act was a decision in itself. Up on the mountain, we could not resign and submit our résumés to a headhunter. In contrast to philosophy, business involves action and implementation—getting things done. Managers must come up with answers based on what they see and what they allow to influence their decision-making processes. On the mountain, none of us but Stephen realized the true dimensions of the situation we were facing.

One of our problems was that, as a group, we had no process for developing a consensus. We had no sense of purpose or plan. The difficulties of dealing with the sadhu were so complex that no one person could handle them. Because the group did not have a set of preconditions that could guide its action to an acceptable resolution, we reacted instinctively as individuals. The cross-cultural nature of the group added a further layer of complexity. We had no leader with whom we could all identify and in whose purpose we believed. Only Stephen was willing to take charge, but he could not gain adequate support from the group to care for the sadhu.

Some organizations do have values that transcend the personal values of their managers. Such values, which go beyond profitability, are usually revealed when the organization is under stress. People throughout the organization generally accept its values, which, because they are not presented as a rigid list of commandments, may be somewhat ambiguous. The stories people tell, rather than printed materials, transmit the organization’s conceptions of what is proper behavior.

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For 20 years, I have been exposed at senior levels to a variety of corporations and organizations. It is amazing how quickly an outsider can sense the tone and style of an organization and, with that, the degree of tolerated openness and freedom to challenge management.

Organizations that do not have a heritage of mutually accepted, shared values tend to become unhinged during stress, with each individual bailing out for himself or herself. In the great takeover battles we have witnessed during past years, companies that had strong cultures drew the wagons around them and fought it out, while other companies saw executives—supported by golden parachutes—bail out of the struggles.

Because corporations and their members are interdependent, for the corporation to be strong, the members need to share a preconceived notion of correct behavior, a “business ethic,” and think of it as a positive force, not a constraint.

As an investment banker, I am continually warned by well-meaning lawyers, clients, and associates to be wary of conflicts of interest. Yet if I were to run away from every difficult situation, I wouldn’t be an effective investment banker. I have to feel my way through conflicts. An effective manager can’t run from risk either; he or she has to confront risk. To feel “safe” in doing that, managers need the guidelines of an agreed-upon process and set of values within the organization.

After my three months in Nepal, I spent three months as an executive-in-residence at both the Stanford Business School and the University of California at Berkeley’s Center for Ethics and Social Policy of the Graduate Theological Union. Those six months away from my job gave me time to assimilate 20 years of business experience. My thoughts turned often to the meaning of the leadership role in any large organization. Students at the seminary thought of themselves as antibusiness. But when I questioned them, they agreed that they distrusted all large organizations, including the church. They perceived all large organizations as impersonal and opposed to individual values and needs. Yet we all know of organizations in which people’s values and beliefs are respected and their expressions encouraged. What makes the difference? Can we identify the difference and, as a result, manage more effectively?

The word ethics turns off many and confuses more. Yet the notions of shared values and an agreed-upon process for dealing with adversity and change—what many people mean when they talk about corporate culture—seem to be at the heart of the ethical issue. People who are in touch with their own core beliefs and the beliefs of others and who are sustained by them can be more comfortable living on the cutting edge. At times, taking a tough line or a decisive stand in a muddle of ambiguity is the only ethical thing to do. If a manager is indecisive about a problem and spends time trying to figure out the “good” thing to do, the enterprise may be lost.

Business ethics, then, has to do with the authenticity and integrity of the enterprise. To be ethical is to follow the business as well as the cultural goals of the corporation, its owners, its employees, and its customers. Those who cannot serve the corporate vision are not authentic businesspeople and, therefore, are not ethical in the business sense.

At this stage of my own business experience, I have a strong interest in organizational behavior. Sociologists are keenly studying what they call corporate stories, legends, and heroes as a way organizations have of transmitting value systems. Corporations such as Arco have even hired consultants to perform an audit of their corporate culture. In a company, a leader is a person who understands, interprets, and manages the corporate value system. Effective managers, therefore, are action-oriented people who resolve conflict, are tolerant of ambiguity, stress, and change, and have a strong sense of purpose for themselves and their organizations.

If all this is true, I wonder about the role of the professional manager who moves from company to company. How can he or she quickly absorb the values and culture of different organizations? Or is there, indeed, an art of management that is totally transportable? Assuming that such fungible managers do exist, is it proper for them to manipulate the values of others?

What would have happened had Stephen and I carried the sadhu for two days back to the village and become involved with the villagers in his care? In four trips to Nepal, my most interesting experience occurred in 1975, when I lived in a Sherpa home in the Khumbu for five days while recovering from altitude sickness. The high point of Stephen’s trip was an invitation to participate in a family funeral ceremony in Manang. Neither experience had to do with climbing the high passes of the Himalayas. Why were we so reluctant to try the lower path, the ambiguous trail? Perhaps because we did not have a leader who could reveal the greater purpose of the trip to us.

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Why didn’t Stephen, with his moral vision, opt to take the sadhu under his personal care? The answer is partly because Stephen was hard-stressed physically himself and partly because, without some support system that encompassed our involuntary and episodic community on the mountain, it was beyond his individual capacity to do so.

I see the current interest in corporate culture and corporate value systems as a positive response to pessimism such as Stephen’s about the decline of the role of the individual in large organizations. Individuals who operate from a thoughtful set of personal values provide the foundation for a corporate culture. A corporate tradition that encourages freedom of inquiry, supports personal values, and reinforces a focused sense of direction can fulfill the need to combine individuality with the prosperity and success of the group. Without such corporate support, the individual is lost.

That is the lesson of the sadhu. In a complex corporate situation, the individual requires and deserves the support of the group. When people cannot find such support in their organizations, they don’t know how to act. If such support is forthcoming, a person has a stake in the success of the group and can add much to the process of establishing and maintaining a corporate culture. Management’s challenge is to be sensitive to individual needs, to shape them, and to direct and focus them for the benefit of the group as a whole.

For each of us, the sadhu lives. Should we stop what we are doing and comfort him, or should we keep trudging up toward the high pass? Should I pause to help the derelict I pass on the street each night as I walk by the Yale Club en route to Grand Central Station? Am I his brother? What is the nature of our responsibility if we consider ourselves to be ethical persons? Perhaps it is to change the values of the group so that it can, with all its resources, take the other road.

Questions

1. Throughout The Parable of the Sadhu, Bowen McCoy refers to the breakdown between the individual and corporate ethic. Explain what he meant by that and how, if we view the hikers on the trek up the mountain in Nepal as an organization, the ethical person-organization fit applied to the decisions made on the climb.

2. Using the various ethical discussions in the first three chapters as your guide, evaluate the actions of McCoy, Stephen, and the rest of the group from an ethical perspective.

3. What role did leadership and culture play in this case?

4. What is the moral of the story of the sadhu from your perspective?

Case 3-2 Rite Aid Inventory Surplus Fraud

Occupational fraud comes in many shapes and sizes. The fraud at Rite Aid is one such case. On February 10, 2015, the U.S. Attorney’s Office for the Middle District of Pennsylvania announced that a former Rite Aid vice president, Jay Findling, pleaded guilty to charges in connection with a $29.1 million dollar surplus inventory sales/kickback scheme. Another former vice president, Timothy P. Foster, pleaded guilty to the same charges and making false statements to the authorities. Both charges are punishable by up to five years’ imprisonment and a $250,000 fine.

The charges relate to a nine-year conspiracy to defraud Rite Aid by lying to the company about the sale of surplus inventory to a company owned by Findling when it was sold to third parties for greater amounts. Findling would then kick back a portion of his profits to Foster.

Findling admitted he established a bank account under the name “Rite Aid Salvage Liquidation” and used it to collect the payments from the real buyers of the surplus Rite Aid inventory. After the payments were received, Findling would send lesser amounts dictated by Foster to Rite Aid for the goods, thus inducing Rite Aid to believe the inventory had been purchased by J. Finn Industries, not the real buyers. The government alleged Findling received at least $127.7 million from the real buyers of the surplus inventory but, with Foster’s help, only provided $98.6 million of that amount to Rite Aid, leaving Findling approximately $29.1 million in profits from the scheme. The government also alleged that Findling kicked back approximately $5.7 million of the $29.1 million to Foster.

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Foster admitted his role during the guilty plea stage of the trial. He voluntarily surrendered $2.9 million in cash he had received from Findling over the life of the conspiracy. Foster had stored the cash in three 5-gallon paint containers in his Phoenix, Arizona, garage.

Assume you are the director of internal auditing at Rite Aid and discover the surplus inventory scheme. You know that Rite Aid has a comprehensive corporate governance system that complies with the requirements of Sarbanes-Oxley and the company has a strong ethics foundation. Moreover, the internal controls are consistent with the COSO framework. Explain the steps you would take to determine whether you would blow the whistle on the scheme applying the requirements of AICPA Interpretation 102-4 that are depicted in Exhibit 3.13. In that regard, answer the following questions.

Questions

1. What steps must you take to be eligible to blow the whistle to the SEC under the Dodd-Frank Financial Reform Act?

2. Would you inform the external auditors about the fraud? Explain.

3. Assume you met all the requirements to blow the whistle under Dodd-Frank. Would you do so? Why or why not?

Case 3-5 Walmart Inventory Shrinkage (a GVV Case)

The facts of this case are from the Walmart shrinkage fraud discussed in an article in The Nation on June 11, 2014.  “Literary license” has been exercised for the purpose of emphasizing important issues related to organizational ethics at Walmart. Any resemblance to actual people and events is coincidental.1

Shane O’Hara always tried to do the right thing. He was in touch with his values and always tried to act in accordance with them, even when the going got tough. But, nothing prepared him for the ordeal he would face as a Walmart veteran and the new store manager in Atomic City, Idaho.

In 2013, Shane was contacted by Jeffrey Cook, the regional manager, and told he was being transferred to the Atomic City store in order to reduce the troubled store’s high rate of “shrinkage”—defined as the value of goods that are stolen or otherwise lost—to levels deemed acceptable by the company’s senior managers for the region. As a result of fierce competition, profit margins in retail can be razor thin, making shrinkage a potent—sometimes critical—factor in profitability. Historically, Walmart had a relatively low rate of about 0.8 percent of sales. The industry average was 1 percent.

Prior to his arrival at the Atomic City store, Shane had heard the store had shrinkage losses as high as $2 million or more—a sizable hit to its bottom line. There had even been talk of closing the store altogether. He knew the pressure was on to keep the store open, save the jobs of 40 people, and cut losses so that the regional manager could earn a bonus. It didn’t hurt that he would qualify for a bonus as well, so long as the shrinkage rate was cut by more than two-thirds.

Shane did what he could to tighten systems and controls. He managed to convince Cook to hire an “asset-protection manager” for the store. The asset-protection program handles shrink, safety, and security at each of its stores. The program worked. Not only did shrinkage decline but other forms of loss, including changing price tags on items of clothing, were significantly reduced.

However, it didn’t seem to be enough to satisfy Cook and top management. During the last days of August 2013, Shane’s annual inventory audit showed a massive reduction in the store’s shrinkage rate that surprised even him: down to less than $80,000 from roughly $800,000 the previous year. He had no explanation for it, but was sure the numbers had been doctored in some way.

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During the remainder of 2013, a number of high-level managers departed from the company. Cindy Rondel, the head of Walmart’s Idaho operations, retired; so did her superior, Larry Brooks. Walmart’s regional asset-protection manager for Idaho, who was intimately involved with inventory tracking in the state, was fired as well. Shane wondered if he was next.

Shane decided to contact Cook to discuss his concerns. Cook explained why the shrinkage rate had shrunk so much by passing it off as improper accounting at the Atomic City store that had been corrected. He told Shane that an investigation would begin immediately and he was suspended with pay until it was completed. Shane was in shock. He knew the allegations weren’t true. He sensed he might become the fall guy for the fraud.

Shane managed to discretely talk about his situation with another store manager in the Atomic City area. That manager said she had been the target of a similar investigation the year before. In her case, she had discovered how the fraud was carried out and the numbers were doctored, but she had told no one—until now.

She explained to Shane that the fraud involved simply declaring that missing items were not in fact missing. She went on to say you could count clothing items in the store and if the on-hand count was off—as in, you were supposed to have 12 but you only had 10—you could explain that the other 2 were in a bin where clothing had been tried on by customers, not bought, and left in the dressing room often with creases that had to be cleaned before re-tagging the clothing for sale. So, even though some items may have been stolen, they were still counted as part of inventory. There was little or no shrinkage to account for.

At this point Shane did not know what his next step should be. He needed to protect his good name and reputation. But what steps should he take? That was the question.

Questions

Assume you are in Shane O’Hara’s position. Answer the following questions.

1. Who are the stakeholders in this case and what are the ethical issues?

2. What would you do next and why? Consider the following in crafting your response.

. How should the organizational culture at Walmart influence your actions?

. What do you need to say, to whom, and in what sequence?

. What are the reasons and rationalizations you are likely to hear from those who would try to detract you from your goal?

. How can you counteract those pressures? What is your most powerful and persuasive response to these arguments? To whom should you make them? When and in what context?

Chapter 4 Cases

Case 4-3 Family Games, Inc.

Family Games, Inc., is a publicly owned company with annual sales of $50 million from a variety of wholesome electronic games that are designed for use by the entire family. However, during the past two years, the company reported a net loss due to cost-cutting measures that were necessary to compete with overseas manufacturers and distributors.

“Yeah, I know all of the details weren’t completed until January 2, 2016, but we agreed on the transaction on December 30, 2015. By my way of reasoning, it’s a continuation transaction and the $12 million revenue belongs in the results for 2015. What’s more, the goods are on the delivery truck waiting to be shipped after the New Year.”

This comment was made by Carl Land, the CFO of Family Games, to Helen Strom, the controller of Family Games, after Strom had expressed her concern that because the lawyers did not sign off on the transaction until January 2, 2016, because of the holiday, the revenue should not be recorded in 2015. Land felt that Strom was being hyper-technical. He had seen it before from Helen and didn’t like it. She needed to learn to be a team player.

“Listen, Helen, this comes from the top,” Land said. “The big boss said we need to have the $12 million recorded in the results for 2015.”

“I don’t get it,” Helen said to Land. “Why the pressure?”

“The boss wants to increase his performance bonus by increasing earnings in 2015. Apparently, he lost some money in Vegas over the Christmas weekend and left a sizable IOU at the casino,” Land responded.

Helen shook her head in disbelief. She didn’t like the idea of operating results being manipulated based on the personal needs of the CEO. She knew that the CEO had a gambling problem. This sort of thing had happened before. The difference this time was that it had the prospect of affecting the reported results, and she was being asked to do something that she knows is wrong.

“I can’t change the facts,” Helen said.

“All you have to do is backdate the sales invoice to December 30, when the final agreement was reached,” Land responded. “As I said before, just think of it as a revenue-continuation transaction that started in 2015 and, but for one minor technicality, should have been recorded in that year. Besides, you know we push the envelope around here.”

“You’re asking me to ‘cook the books,’ ” Helen said. “I won’t do it.”

“I hate to play hardball with you, Helen, but the boss authorized me to tell you he will stop reimbursing you in the future for child care costs so that your kid can have a live-in nanny 24-7 unless you go along on this issue. I promise, Helen, it will be a one-time request,” Land said.

Helen was surprised by the threat and dubious “one-time-event” explanation. She sat down and reflected on the fact that the reimbursement payments for her child care were $35,000, 35 percent of her annual salary. As a single working mother, Helen knew there was no other way that she could afford to pay for the full-time care needed by her autistic son.

Questions

1. Explain the nature of the dilemma for Helen using the AICPA Code as a guide. What steps should she take to resolve the issue?

2. What would you do if you were in Helen’s position? How would you attempt to convince Carl Land of the rightness of your position and give voice to your values?

Case 4-6 Tax Shelters 

You are a tax manager and work for CPA firm that that performs audits, advisory services, and tax planning for wealthy clients in a large Midwestern city. You just joined the tax department after five years as a tax auditor for the county government. During the first six months in tax, you found out that the firm is aggressively promoting tax shelter products to top management officials of audit clients. Basically the company developed a product and then looked for someone in management to sell it to, rather than the more conventional method whereby an officer might approach the firm asking it to identify ways to shelter income.

The way these products work is the firm would offer an opinion letter to the taxpayer to provide cover in case the IRS questioned the reasonableness of the transaction. The opinion would say that the firm “reasonably relied on a person who is qualified to know,” and that would support the contention that the opinion was not motivated out of any intention to play the audit lottery. It also would protect the taxpayer against penalties in the event the firm is not correct and does not prevail in a tax case.

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As time goes on, it becomes clear that the culture of the tax department is shifting from client service to maximization of tax revenues. It is the most lucrative type of service for all big firms and the competition in the industry is fierce in this area of practice. You become concerned, however, when you discover the firm did not register the tax shelter products, as required under the law.

One day you are approached by the tax partner you report to and asked to participate in one of the tax shelter transactions, with the end result being you would recommend to the tax partner whether he should sign off before presenting the product to the client. You feel uncomfortable with the request based on what you have learned about these products. You make an excuse about needing to complete three engagements that are winding down, and buy some time.

The first thing you do is look for completed tax shelter arrangements with clients that had been reviewed and approved by the tax quality control engagement partner. What you find makes you more suspicious about the products. Several are marked “restricted” on the cover page without any further details. You then call a friend who is a manager in the audit department and set up a time to meet and discuss your concerns.

What you learn only heightens your concerns. Your friend confided there is a culture in the tax department where business rationality sometimes displaces professional norms, a process accelerated by a conformist culture. Your friend also confided that the audit managers and partners are jealous of their tax peers because the tax managers and partners earn almost twice what the auditors earn because of the higher level of client revenues. It was clear your friend harbors ill feelings about the whole situation.

The following week the tax partner comes back and presents you with another tax shelter opportunity for the firm and all but demands that you oversee it. He implies in a roundabout way that your participation is a rite of passage to partnership in the firm. You manage to stall and put off the final decision a few days.

Custom Assignment Help

Questions

1. Evaluate the ethics of the tax shelter transactions, including your concerns about the practices.

2. Who are the stakeholders in this case, and what are your professional responsibilities?

3. What are the options available to you in this matter?

4. What would you do and why?

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