Ethical Issue 13-1

Note: This case is based on an actual situation.

Stan Sewell paid $50,000 for a franchise that entitled him to market software programs in the countries of the European Union. Sewell intended to sell individual franchises for the major language groups of Western Europe -- German, French, English, Spanish, and Italian. Naturally, investors consider buying a franchise from Sewell asked to see the financial statements of his business.

Believing the value of the franchise to be $500,000, Sewell sought to capitalize his own franchise at $500,000. The law firm of St. Charles & LaDue helped Sewell form a corporation chartered to issue 500,000 shares of common stock with par value of $1 per share. Attorneys suggest the following chain of transactions:

Sewell's cousin, Bob, borrows $500,000 from a bank and purchases the franchise from Sewell.

Sewell pays the corporation $500,000 to acquire all its stock.

The corporation buys the franchise from Cousin Bob.

Cousin Bob repays the $500,000 loan to the bank.

In the final analysis, Cousin bob is debt-free and out of the picture. Sewell owns all the corporation's stock, and the corporation owns the franchise. The corporation's balance sheet lists a franchise acquired at a cost of $500,000. This balance sheet is Sewell's most valuable marketing tool.

What is unethical about this situation?

Who can be harmed? How can they be harmed? What role does accounting play?