Resolving Ethical Dilemmas of Taylor Johnson

INTRODUCTION

During the course of employment, an employee may not avoid from facing an ethical problem. These problems often arise when an employee is ethically required to take an action that may conflict with one’s self-interests or undue influence by others. In fact, in Taylor Johnson’s case, where there is an ethical dilemma arising as it is required Taylor whether to act morally and ethically against his manager or to advocate for his job security. Therefore, the report will outline 6 steps in ethical conducts to assist Taylor in resolving the ethical dilemma by pursuing an optimal solution that is in compliance with the Code of Ethics for Professional Accountants (APES 110).

DISCUSSION

Step 1: Obtain the relevant facts.

·         Taylor Johnson is a new employee of Australian Whitegoods (AW), and he is responsible to prepare and reconcile monthly management accounts

·         AW is owned by World Whitegoods Limited (WW)

·         AW has made good profits for the past 3 years; however, it has dropped in profit margin for the last 6 months

·         AW’s net margin is below the WW’s benchmark. Rumours of selling/closing bad subsidiaries, like AW

·         Taylor’s reports are reviewed by Geraldine; then Taylor sends the reports to WW with the attachment of Geraldine’s comments

·         AW’s manager, Geraldine instructed Taylor to:

Ø  Recognise $1m sales in July for June

Ø  Extend depreciation of conveyor belt from 10 to 15 years, to reduce depreciation charge

·         WW has set accounting policies, Taylor cannot make adjustments without informing WW

·         If Taylor did not follow Geraldine’s instruction, he would be fired.

Step 2: Identify ethical issues from the facts.

Taylor has been instructed by his manager – Geraldine, to make two unreasonable adjustments regarding of the conveyor belts’ depreciations, and future sales in July. If he did not follow the instructions, he would lose his new job. What should Taylor do to solve this ethical dilemma?

 If Taylor follows Geraldine’s instruction, he will breach the code of ethical conducts, such as APES 110-110 Integrity, 110-120 Objectives and 110-150 Professional behaviour.

Integrity: Members must be straightforward and honest, and practise fair dealings in their professional relationships. In Taylor’s case, he believes that it is reasonable to inform WW before making any adjustments, which are not compliable with the WW’s accounting policies. Therefore, if Taylor follows Geraldine’s instruction to bring forward the revenue from July to June, and reduce the depreciation rate of the conveyor belt, without informing the WW; he will fail to comply with the APES 110-110.

Objectivity:  All members have an obligation of not to compromise their professional or business judgment due to bias, conflict of interest or the undue influence of others. Taylor has been threatened by Geraldine regarding of his job security, and forced to follow Geraldine’s instruction. If Taylor adheres to Geraldine, he will secure the job as a result. Nevertheless, it is a violation of the objectivity of the code of ethical conducts (APES 110-120) as Taylor is making a profession judgment because of the undue influence of Geraldine.

Professional Behaviour: Members are required to be compliant with relevant laws and regulations and avoid any actions or omissions that may bring discredit to the profession. This comprises actions or omissions which a reasonable and informed third party, having knowledge of all relevant information, would conclude negatively affect the good reputation of the profession. In this scenario, if Taylor agreed to make the required adjustments of the conveyor belts’ depreciation and the unearned revenue without informing the WW, he would lose creditability in his profession and even ruin his professional career if the WW revealed the adjustments. Therefore, Taylor will fail to comply with the APES110-150 Professional Behaviour, if he agrees on Geraldine’s favour.

Step 3: Determine who is affected by the outcome of the dilemma.

Taylor Johnson:

·         Adjustments made: This will breach the code of ethics, but secure his job for a short-term until the problems are revealed eventually. Then, he will lose creditability in his profession, and even his job.

·         Adjustments not made: He may lose the job, but he has ethically and morally acted as a profession in compliance with the code of ethics.

Geraldine:

Geraldine would face a risk of losing his position as a manager in AW as if the matter was revealed by the WW. As a consequence, this will ruin his career development.

Australian Whitegoods Pty Limited:

AW would continue its operation if the WW did not find the adjustments. Nevertheless, the WW would eventually find out the unreasonable adjustments, and it would sell off or close down the under-performing subsidiary – AW. Even if the adjustments are not made, the AW also has to face a risk of being closed down or sold off as it has performed badly for the last 6 months

World Whitegoods Limited:

·         Adjustments made: if the matters were revealed, this would negatively impact on WW’s image as WW did not have a good internal control to monitor its subsidiaries’ performance.

·         Adjustments not made: the WW is able to review the AW’s actual performance. AW’s losses may decrease the total profit margin of the WW, and its overall performance.

50 full time employees and casual salespersons:

·         Adjustments made: AW will still show its positive profit margin, however, it is likely that the WW will unveil the problem, and evaluate the AW’s performance below the WW’s benchmark for its subsidiaries. As the result, AW will be put in a risk of being closed down or sold off, and all 50 full-time staff, and some other casual employees will be laid off as a consequence.

·         Adjustment not made: WW will discover the problem by reviewing AW’s financial reports. As a result, WW may lay off all the employees of AW, or all the staff could secure their jobs if AW was sold off.

Step 4 & 5: Identify the alternatives available and likely consequences of each alternative.

·         Just follow Geraldine’s instruction:

Taylor: He has breached the APES 110 -110,120, 150, as he did not act fairly towards his professions, and has been influenced by Geraldine; and as mentioned in step 2, he would also breach the objectivity of the code of ethics. Additionally, the misstatements may be discovered subsequently and Taylor may lose creditability in his professional relationships.

Geraldine: He would be punished by WW’s management as if the adjustments were revealed.

Australian Whitegoods Pty Limited & 50 full-time staff, and some casual: WW may sell off or close AW down, which would result in all the staff losing their jobs.

·         Refuse to make the adjustments:

If Taylor refuses Geraldine’s instruction, he will lose his current job. However, he has acted ethically and morally in accordance with the code of professional ethics.

·         Quit the job himself and send a resignation letter to ASIC

If Taylor quits, he will likely miss out some potentially valuable experiences in public accounting firms. Nonetheless, he does not breach the code of professional ethics.

·         Inform the WW’s management about Geraldine’s instruction:
Taylor: The WW’s top management will appreciate for Taylor’s attempt to act ethically, or they would think Taylor has bypassed Geraldine’s authority , and informed them without having discussed with Geraldine.

Geraldine: He might be blamed for his professional behaviours.

·         Advice G not to make the adjustments, but prepare a formal report to the WW, stating that AW has lost in its profit margin due to heaps of online competitions, not management’s faulty, and propose the best strategy to deal with the company’s difficulty.

If Geraldine agrees, Taylor will not breach the APES 110 of Integrity, Objectivity, and Professional Behaviour. The AW will not be closed down or sold off. G would not be blamed for the AW’s unprofitable operation.

If Geraldine does not agree, there will be a conflict between Taylor and G. The AW’s performance will be revealed by WW, and AW will likely be sold off or closed down.

·         Follow G’s instruction but inform WW secretly:

Taylor will be seen as acting ethically in his professional manners, as well as not trying to pass over his manager’s authority. As a result, Taylor will stabilise his position while he still complies with the code of ethics.

Geraldine: WW will blame Geraldine for not to follow the company’s accounting policies.

·         Ask for some ethical advices from a professor:

Taylor will gain some relevant knowledge from the professor, and then he can find some other alternatives to solve the dilemma.

Step 6: Decide the appropriate action.

The decisions are completely upon to Taylor, which he personally thinks they are the best course of actions he could take.

One of the best solutions he could take is to inform the WW’s management about Geraldine’s instruction. By doing so, Taylor is still in alignment with the code of ethics, and he may maintain his job. However, if Taylor could persuade Geraldine not to make the adjustments, and report the WW about what has happened to the AW for the last 6 months, Taylor would still comply with the code of ethics for professional accountants. This could also rescue the AW from being closed down/sold off, and Geraldine’s position is secured as if the company’s recovering strategy is passed. On the contrary, if Geraldine still forces Taylor to make the unethical changes without informing the WW, Taylor should quit his job and send a resignation letter to ASIC detailing the real reasons of resignation.

Last but not least, Taylor can seek helps from an independent business consulting firm or dial the Institute of Ethics’ hotline. Both of these assist in directing him to make an appropriate decision, which can maintain his integrity, objectivity, professional behaviour. Hence, it does not give rise to violation of APES110.

CONCLUSION

The six-step framework has been used to indentify ethical dilemmas and suggest the best alternatives to solve these dilemmas. In this specific case, Taylor had to find the way to solve his ethical dilemma when he was forced by his manager – Geraldine,  to make two adjustments which could result in false and misleading statements. By using the six-step framework, this report has come up with the best possible solutions. That is to report the manager, or advice the manager by suggesting the best strategy to save the AW, or seek further advices from an independent source. Although ethical dilemmas always exist in any courses of employment, following the code of ethics is a must regardless of any consequences may arise.  

Case study of United Kingdom’s financial reporting standards

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Five characteristics of the development factors that would predict low levels of transparency and disclosure in the financial statements of German listed companies

1.        Traditionally bank credit plays a major role in corporate finance.

2.         German accounting is heavily influenced by tax law.

In Germany, tax law has a strong influence on accounting and financial reporting. The reason for this link between taxation and financial reporting is historical. When corporate income taxation was introduced in Germany in 1874, the requirement for annual accounting had already been codified in the Commercial Code in 1862. It was convenient to link corporate income taxation to existing financial statements. 

3.         German accounting rules allow companies to smooth income over time by using hidden reserves.

4.        There are two main external factors that have influenced financial reporting in Germany in recent years. They are, EU Directives and the forces of globalization. The 1985 Accounting Act implemented the Fourth, Seventh, and Eighth Directives and transformed them into German Commercial Law.

Although the EU’s Fourth Directive requires companies to present a true and fair view in their financial statements, it appears that extensive note disclosures are seen as a way of achieving this without changing the tax-based, income smoothing approach to financial reporting – i.e. Germany still only allows one set of reports.

5.            The EU’s decision to adopt IFRS from January 1 2005, was in recognition of the global trends in financial reporting. Even before the EU’s decision, large German companies like Daimler-Chrysler that had their shares listed on foreign stock exchanges were already using internally acceptable accounting standards.  

Since January 2005, all German listed companies are required to use IFRS in preparing their consolidated financial statements. However, German accounting practices differ from IFRS in some important respects.

German accounting law contains no specific rules in some areas. Examples include the translation of foreign currency financial statements of foreign subsidiaries, disclosures of fair values of financial assets and liabilities, and earnings per share.