Ethics Case Problem. Please read the short case, and answer the following questions. Thank you again.

CASE AND QUESTIONS

Jeff Shady is the CEO of Shady Energy Industries which specializes in the transportation of oil and natural gas overseas. Jeff and his CFO Andy have been under enormous pressure to report strong financial results to maintain the high P/E ratio of the company's stock price. Jeff and Andy also hold well over 100,000 shares of stock options each. Therefore, they also have a personal interest in maintaining the firm's high stock price. As Andy works with his team to begin closing the books for the fourth quarter, he realizes that the operating cash flow will be severely negative. Once investors see that the operations of the business are creating an enormous drain on the company's cash, the stock price will likely plummet.

To correct this cash flow problem, Andy and Jeff propose a deal to a close friend, Karina, who is the CEO of Easy Money which is a banking and investment firm. The deal is as follows: Easy Money will purchase two oil tankers from Shady Energy for $50,000,000 each. Shady Energy has guaranteed that they will purchase the oil tankers back from Easy Money in six months. In addition, when Shady Industries purchases the tankers back from Easy Money, a service charge of $5,000,000 will also be paid. Karina agrees and follows through with this deal.

Andy explains this deal to the company's director of accounting, Amanda, and asks her to book this transaction as a sale. He wants her to debit the cash account for a total of $100,000,000 and credit the company's revenue account for the same amount. Upon hearing this from Andy, Amanda is stunned and is not sure what to say or do. Andy wants this transaction booked immediately so it is reflected in the company's year-end financial statements.

1. Do you believe the deal that Karina agreed to with Andy and Jeff is ethical? If you believe this is unethical, use at least one ethical guideline to support your answer. Note, read question 2 first before answering this question.

2. Imagine you are in Amanda's position in this case. Use the AREA framework to assess a possible course of action. For the R (regulatory) component of the framework, include the following answers to these questions:

A.The company booked this transaction as a sale into its main revenue account. Do you believe this deal is similar to most other sale transactions for this company?

B.Shady Energy is engaging in this transaction with a financial institution. Do you think this transaction is very similar to other transactions that companies typically engage in with financial institutions? What other type of transaction is very similar to this one?

C.How will this transaction impact the financial statements of the company? What section of the statement of cash flow will this transaction impact?

D.Using your knowledge of GAAP what other legal issues are involved in this deal. Is Andy's request with regards to how he wants this booked into the accounting system legal?

NOTES:

The Ethical Guidelines (Gaining an Ethical Perspective)

1. The Golden Rule: The most universal of ethical guidelines and one that is recognized by most countries and cultures around the world. Simply stated, treat other people the way you would want to be treated. Alternatively, think about switching places with the person that is going to be impacted by your decision. Remember that in order to gain an ethical perspective, you must consider how a decision will impact other people.

2. Public Disclosure Test: Requires you to assess a decision from the perspective of making your actions and intentions public. In other words, if it is unlikely that a person would want to announce to the public his or her intentions behind a decision, it is most likely an unethical decision.

3. Universalization Test: Requires you to assess a decision from the perspective if everyone in the world made the same decision. For practical purposes, it might be best to use this guideline with the parameters of everyone in a particular company, industry, market, etc. For example, if everyone in a company makes a decision that would quickly lead to the firm's bankruptcy, then the decision may not be ethical.

4. Violation of Public Trust: While this may not be widely recognized as an ethical guideline in a traditional sense, it is critical in the field of accounting and the accounting profession. During your attempt to gain an ethical perspective, you should evaluate if the outcome of a decision could violate or weaken public trust in any way. In addition to assessing decisions purely from this perspective, public trust can also be integrated with the preceding three guidelines. For example, when utilizing the golden rule you could ask, "If I was a shareholder, would this decision weaken my trust in the company and the financial information being published."

NOTES:

AREA FRAMWORK

Assess fact pattern

Identify most relevant facts relating to the accounting decision that is being evaluated or considered.

Evaluate the people presented in the facts with respect to their position, level of responsibility, and intentions behind the accounting decision.

Regulatory and legal requirements

Identify GAAP requirements that are relevant to the decision being evaluated or considered. Pay particular attention to any required disclosures.

Determine if the decision is in violation of any laws or GAAP.

Ethical dilemma framed as a question

Recognize if an ethical dilemma exists by utilizing the ethical guidelines specified in this document.

Frame the dilemma in the form of question that clarifies the action you might take and how it might impact other people and you. Construct your question as: "Should I..........knowing that........" The question should be worded in such a way that enables you to clearly identify a decision or course of action that should be evaluated.

Action plan

Determine a course of action that will help you arrive at a resolution for the dilemma.

Consider guidance provided by codes of ethics and related rules adopted by professional organizations such as the IMA, AICPA, FEI, and IIA.

Review your firm specific polices and requirements that also provide guidance when faced with an ethical dilemma. Many firms will have consultation requirements when its staff is faced with difficult situations. Often, the theme of such guidance is "Don't go it alone."

Identify as many possible options or courses of action to arrive at a potential resolution for the dilemma. The more options you identify, the more likely you will arrive at the most positive resolution or make a decision that is more right than wrong.

Recognize the role of courage when taking action in the face of an ethical dilemma. Such decisions can be mentally and emotionally taxing. Drafting a script and practicing it with someone you can confide in is one strategy you might employ to face this challenge.