VE ON OF ER IMPACT Proposed Audit Adjustment Case--Castle Manufacturing Inc. to $400,000 per year over the life of the Larry Plant, the CFO of Castle Manufactur- next five-year contract." ing Inc., was involved in a lengthy discus- sion with Joyce Tang of the company's auditing firm, Bennett & Sange, at the con- Question clusion of the audit fieldwork. 1. What should Joyce do? "Look Joyce, we just can't afford to show that much profit this year. If we do illustrative Solution record the $1.5 million after-tax adjust- Several approaches to ethical decision mak- ment you propose, our profit will be 20% ing are presented in the chapter: the philo- higher than we had two years ago and 5% sophical, or those to be used with an higher than we reported last year. On the assessment of the motivations, virtues, other hand, without the adjustment, we and character traits; the 5-question would be close to last year's level . We approach; the moral standards approach; are just about to enter negotiations with and the Pastin approach. In this illustrative our labor unions, and we have been com- solution, the 5-question framework will be plaining about our ability to compete. If used, with expansions, where necessary, we show that much profit improvement, drawn from other approaches. they will ask for a huge raise in rates. The 5-question approach calls for the Our company will become noncompetitive identification of the stakeholders impacted due to higher labor rates than our offshore by the decision and then poses five questions competition. Do you really want that to or challenges to assess whether these happen?" impacts are ethical. If some aspect of the "But Larry, you really earned the profit. decision considered not to be ethical, the You can't just ignore it!" "No, I'm not suggesting that, Joyce. But proposed decision/action may be altered to mitigate or remove the unethical element. virtually all of the goods making up the profit adjustment were in transit at our year In this case, the auditor has proposed that a $1.5 million adjustment be made to end-so let's just record them as next year's sales and profits." increase the profitability of the client Castle But, Larry, they were all sold FOB your Manufacturing Inc. The CFO is resisting, plant, so title passed to the buyer when they be put into the next year so as to gain a proposing instead that the impact on profit were shipped." "I know that, Joyce, but that was an bargaining advantage over the company's unusual move by our overzealous sales unions, who will use the profit figures to staff, who were trying to look good and negotiate a new five-year agreement. Joyce get a high commission on year-end num- Tang, the auditor, must decide whether the bers. Anyway, the customer hadn't proposal to shift the adjustment to the next year is ethical: if not, she must convince the inspected them yet. Just this once, Joyce, let's put it into next year. It's not really a CFO to record the adjustment or qualify significant amount for our shareholders, her audit report. It is not immediately but it will trigger a much bigger problem rial: if it was the correct action would be to apparent whether the adjustment is mate- for them if the unions get a hold of the higher profit numbers. As you know, qualify the audit report if the CFO were to hold fast to his proposal. about 40% of our shares were willed to the United Charities Appeal here in town, Identification of Stakeholders and and they could sure benefit by higher prof- Their Interests its and dividends in the future. I bet the The CFO's proposal would impact on the difference in their dividends could be up following stakeholders: STEP 4: The moral standard approached by Velasquez (GROUP 2) Unlike the 5-Q that looks at profit, this approach looks at the net benefits. It builds directly on the three fundamental interests of the stakeholders: Test the proposed decision using the three moral standards JUI: The Moral Standard Evaluate & discuss Did the decision go against the moral standard? The Moral Standard of JUSTICE (Would the proposed decision lead to a fair & just distribution of Benefit & n?) The Moral Standard of UTILITARIAN Would the decision maximize Benefits & minimize social injuries? The Moral Standard of INDIVIDUAL RIGHTS MAC-SEPT 2022 (By taking that proposed decision would the rights of all those concerned be respected & protected?) From the above evaluation, is the proposed decision ETHICAL OR NOT ETHICAL? (In order for the proposal to be ethical the action must comply with all three moral standards) VE ON OF ER IMPACT Proposed Audit Adjustment Case--Castle Manufacturing Inc. to $400,000 per year over the life of the Larry Plant, the CFO of Castle Manufactur- next five-year contract." ing Inc., was involved in a lengthy discus- sion with Joyce Tang of the company's auditing firm, Bennett & Sange, at the con- Question clusion of the audit fieldwork. 1. What should Joyce do? "Look Joyce, we just can't afford to show that much profit this year. If we do illustrative Solution record the $1.5 million after-tax adjust- Several approaches to ethical decision mak- ment you propose, our profit will be 20% ing are presented in the chapter: the philo- higher than we had two years ago and 5% sophical, or those to be used with an higher than we reported last year. On the assessment of the motivations, virtues, other hand, without the adjustment, we and character traits; the 5-question would be close to last year's level . We approach; the moral standards approach; are just about to enter negotiations with and the Pastin approach. In this illustrative our labor unions, and we have been com- solution, the 5-question framework will be plaining about our ability to compete. If used, with expansions, where necessary, we show that much profit improvement, drawn from other approaches. they will ask for a huge raise in rates. The 5-question approach calls for the Our company will become noncompetitive identification of the stakeholders impacted due to higher labor rates than our offshore by the decision and then poses five questions competition. Do you really want that to or challenges to assess whether these happen?" impacts are ethical. If some aspect of the "But Larry, you really earned the profit. decision considered not to be ethical, the You can't just ignore it!" "No, I'm not suggesting that, Joyce. But proposed decision/action may be altered to mitigate or remove the unethical element. virtually all of the goods making up the profit adjustment were in transit at our year In this case, the auditor has proposed that a $1.5 million adjustment be made to end-so let's just record them as next year's sales and profits." increase the profitability of the client Castle But, Larry, they were all sold FOB your Manufacturing Inc. The CFO is resisting, plant, so title passed to the buyer when they be put into the next year so as to gain a proposing instead that the impact on profit were shipped." "I know that, Joyce, but that was an bargaining advantage over the company's unusual move by our overzealous sales unions, who will use the profit figures to staff, who were trying to look good and negotiate a new five-year agreement. Joyce get a high commission on year-end num- Tang, the auditor, must decide whether the bers. Anyway, the customer hadn't proposal to shift the adjustment to the next year is ethical: if not, she must convince the inspected them yet. Just this once, Joyce, let's put it into next year. It's not really a CFO to record the adjustment or qualify significant amount for our shareholders, her audit report. It is not immediately but it will trigger a much bigger problem rial: if it was the correct action would be to apparent whether the adjustment is mate- for them if the unions get a hold of the higher profit numbers. As you know, qualify the audit report if the CFO were to hold fast to his proposal. about 40% of our shares were willed to the United Charities Appeal here in town, Identification of Stakeholders and and they could sure benefit by higher prof- Their Interests its and dividends in the future. I bet the The CFO's proposal would impact on the difference in their dividends could be up following stakeholders: STEP 4: The moral standard approached by Velasquez (GROUP 2) Unlike the 5-Q that looks at profit, this approach looks at the net benefits. It builds directly on the three fundamental interests of the stakeholders: Test the proposed decision using the three moral standards JUI: The Moral Standard Evaluate & discuss Did the decision go against the moral standard? The Moral Standard of JUSTICE (Would the proposed decision lead to a fair & just distribution of Benefit & n?) The Moral Standard of UTILITARIAN Would the decision maximize Benefits & minimize social injuries? The Moral Standard of INDIVIDUAL RIGHTS MAC-SEPT 2022 (By taking that proposed decision would the rights of all those concerned be respected & protected?) From the above evaluation, is the proposed decision ETHICAL OR NOT ETHICAL? (In order for the proposal to be ethical the action must comply with all three moral standards)