#ReadAccounting Headline 9.14and consider the implications (externalities) associated with the promotion of tobacco use by cigarette companies. If the allegations made against the tobacco companies were true, what would be the implications for these companies' reported results if: (a) conventional financial accounting practices were employed (b) some form of 'full cost' accounting, which took account of externalities, was adopted?

Acc headline 9.14

Tobacco industry deliberately misled smokers on health risks, court told

In late 2004, The United States government took action in court against the large tobacco companies British American Tobacco, Liggett, Brown & Williamson, Lorillard, RJ Reynolds and Philip Morris under the anti-organised crime Rico Act (Racketeer-Influenced and Corrupt Organizations (Rico) Act1970).

The government's argument, presented by lawyers from the Justice Department, was that the tobacco companies had perpetrated a half-century fraud on smokers, intentionally misleading them and the general public with their stated position that smoking was a safe activity and would have no adverse effects on health. In fact, the companies knew the opposite was the case.

Government lawyers presented evidence in court in the form of company documents to show that the tobacco companies knew their product was harmful but they still engaged in activities like marketing to the young, funding studies to refute claims that smoking was the cause of diseases like lung cancer, and altering cigarette nicotine levels. One lawyer, Frank Marine, detailed what he said was the beginning of 'one of the most elaborate public relations schemes in history'; a 1953 meeting of members of the companies' top echelon. Their real purpose (not revealed to the government) was the formation of a coordinated industry approach to hide the risks associated with smoking.

In response the tobacco industry refuted the fraud claims, Pointing to the fact that from 1966 cigarette packs were required to have printed warnings. (In 1964, the Surgeon-General concluded that smoking caused lung cancer.) Therefore, they argued, they could not have been involved in deception. Their marketing practices were different from those criticised by the government, they claimed.

The penalty sought by the government was that the companies should forfeit a massive sum

from profits made over the years: US$280 billion. In an appeal, the companies argued the government had no legal authority to ask for the penalty.

At the same time the tobacco industry disputed additional marketing restrictions the government wished to place on it, saying the 1998 Master Settlement Agreement with 50 States placed the same restrictions on its activities, and the industry had already paid US$264 billion to settle State claims.