Case Study:
Case 1: "The Moonlighting Accountant"
Text: You are an accountant working for a major accounting firm. Over the years, some family members and friends have asked you to fill out their taxes. At first, they just gave you a six-pack for your trouble, but over time, you began to do taxes for in-laws, family friends, friends of friends, and so on. In most cases, the forms were simple to fill out. However, as your circle of "customers" grew, some of them had more complex financial situations: A couple of them were self-employed, several had complicated investments, and a few even had small businesses. As this circle grew, you found it necessary to charge for your time, especially for the more complex cases and for those who were not close family members or personal friends. By now, you spend quite a few of your weekends during tax season working on other people's taxes, and you end up making enough money to fund a nice family vacation during the ensuing summer.
Questions
1. Question: Have you slid into a conflict of interest? (If your answer is that "it depends," then what does it depend on?)
2. If a conflict of interest exists, then at what point did it begin?
Case 3: "A Tip for a Raise"
Text: You go in to ask your boss for a raise. She tells you that she is sorry that she cannot give you more money. But she tells you that she can give you a hot stock tip. She's pretty sure that Company Z is about to be taken over by a larger company. When this happens, the stock price will rise.
Questions
1. Should you go buy some stock in Company Z? Why or why not? (If your answer is "it depends," then what does it depend on?)
2. Suppose that we change the scenario just a bit. This time your boss tells you that the company that you work for is about to acquire Company Z, and when this news gets out, the stock price will go up dramatically. Does this change your decision? Why or why not?
Case 4: "Family Temptation"
Text: Your father has invested heavily in the company for which you work. The profits from these investments are meant to help your sick aunt pay for her medical care, and to help pay for your sister (who is a very talented judo expert) to go to study with an instructor who is sure to turn her into an Olympic athlete. Over dinner, your father asks how his favorite company is doing. You know that the 4th quarter profits (which are due to be released next week) are going to be rather dismal, especially when compared to the Wall Street forecasts.
Questions
1. What, if anything, should you tell your father?
2. What steps should you have taken to avoid having this situation arise in the first place?
Case 5: "A Meeting with the Investors"
Text: You are vice president of a small company that has been chartered by a group of about a dozen main investors. (It's incorporated, but not publicly held.) The company does software development for other small businesses. Your boss, the president and CEO of the company, thinks that the company needs to expand and hire more software designers. (She thinks that there is a good opportunity to get qualified people since so many talented software engineers have been put out of work with the bursting of the "dot-com bubble.") In addition, she thinks it would be a good idea to rent some more office space to house the new people, and to upgrade the company's main computer system. These strike you as good ideas for growing the business, but there is one problem-the company has neither enough current profits or remaining investment capital to take on these new projects. Fortunately (well, maybe it is fortunate, maybe it is not), there is a meeting of the investors scheduled for next week. You are already in charge of making a presentation at this meeting in which you will discuss the previous quarter profits. Your boss now wants you to add to this presentation a discussion of why they ought to "fork over" (as she puts it) some more investment capital for the new expansion projects. You reply that this is likely to be tough sell, given that the profits this quarter have not been as good as had been hoped. Your boss looks over the profit report you have been preparing for the meeting of the investors. She notices what she says is a mistake. The contract with Econo-Tec that your company just signed includes not only some new software, but also an ongoing service contract for upgrades and debugging. Econo-Tec is paying $50,000 for the software. The service contract, which is to last for the next five years, is to be paid for on an annual basis-- $5000 a year. The income statement that you were going to show the investors records the income from the initial sale of the software in this past quarter's profits. Accordingly, you have added this year's payment to the quarterly profit report, for a total income from the Econo-Tech account of $55,000. Your boss tells you that this is a mistake. "Look, the contract was signed last quarter, and it includes a full five years of the service contract. That service contract is worth 5000 a year, for five years, for a total of 25,000. We signed the contract this quarter, so we earned that money this quarter. So for the Econo-Tech income, you should be reporting $75,000 to the investors. Geez, if you reported all of the service contracts this way, then it's no wonder our profit report for last quarter looks so gloomy. Go back and change them before the meeting."
Questions
1. Is there anything ethically problematic with your boss's instructions? If so, what?
2. What's the best way to handle this situation while staying out of ethically (and perhaps legally) dangerous territory?
Case 6: "Hell Oil"
Text: You know that the Hell Oil Company has just acquired drilling rights in the Almondo Flats. You have a hunch that there will be a big oil deposit there.
Questions
1. Should you go buy stock in Hell? Why or why not?
2. Let's change the scenario a bit. This time, your confidence about the oil in Almondo Flats is due to the geology class you took to fulfill one of your UP requirements. You know from the brilliant lectures of your prof. that Almondo Flats has all of the classic signs of a big oil deposit. Does this make a difference? Why or why not?
3. Let's change the scenario again. Your geology professor, Dr. Megan Edwards, was a former chief exploratory geologist for Exxaco Oil. Does this make a difference? Why or why not?
4. One more modification: This time, your confidence about the oil is due to finding out through a mutual friend that your buddy, who is chief assistant flunky to the VP of PR at Hell Oil, just doubled his holdings of Hell. Should you go buy some too? Why or why not?
Case 7: "Testing the Facilities?"
Text: You have just started working as an entry-level manager at one of the regional offices of Aleron, a medium-sized pharmaceutical company. Your first major task is to choose a location for the upcoming meeting of the sales staffs of all of the regional offices of Aleron. This meeting is an annual event, and each year it is held at the location of one of Aleron's 12 main regional offices. It is always held at a fancy hotel/conference center, and there has been an informal competition among the regional offices as to who can put on the best "show" without going over budget. This year, your regional office is going to host the meeting for the very first time. Since it is an opportunity to showcase the efficiency of your regional office, your boss has emphasized the importance of the meeting going very well. You are to find a suitable hotel/conference center for the meeting. Since the meeting will be quite large, and since your regional office is in a fairly small city, there are only four hotels that are large enough and well-enough equipped to be worth considering. So you arrange to go visit each of these four hotels. At the first one, you meet with the manager, who assures you that her hotel is the only real choice. A good sales person, she tries to get you to commit to choosing her hotel. It is certainly tempting-you tour the conference facilities, and are shown one of the rooms. When you see the room, you are quite impressed, and you mention that you have hardly ever stayed in a place this nice. You thank the manager for her time, and tell her that you will be in touch once you've seen the other hotels. She then makes the following offer, "Look, you saw the high points on our tour, but to really experience the level of service, the quality of the food, and the extent of the amenities, you really have to stay here for a night or so. Why don't you bring your spouse and stay here for a night or so on us? We'll pick up the tab for your food, and you can sample the spa, pool, any whatever other amenities that you might want to consider making available to the people at your meeting. What do you say?"
Question
1. Well, what do you say? Why?
Case 8: "An Ethical Audit?"
Text: (The idea for this case is based on "An Auditor's Dilemma," from Tom Beauchamp and Norman Bowie, Ethical Theory and Business, page 164.)
Rick Sanchez has a problem. He is new at his job as internal auditor for General Footwear, a medium sized, regional chain of mall-based shoe stores. It's been a good job so far, but lately he's been having trouble getting all the numbers to add up. The big problem is that he's been noticing that at some of the stores, the inventory records don't seem to match up with the merchandise invoices. At first, it looked as though merchandise was appearing in inventory without being paid for, and that payments were being made for merchandise that was not listed on the inventory. As he looked more closely, he noticed that these discrepancies all balanced out. Still, there was a time-lag that he could not figure out. Inventory was, in some cases, being paid for several months before it appeared in inventory. At first he suspected that the inventory records were simply not being updated properly. But General was using a state-of-the-art inventory management system (which cut down on the amount of inventory each store had to keep on hand--this was important given the expense of space at the malls where General's stores were located), and it was very unlikely that there would be any significant delay between the arrival of merchandise and its appearance in the inventory records.
Unable to solve the mystery, and not wishing to let on to his superiors that he was having difficulty, Rick confided his problem to his friend Ray Miller. Ray was the manager of one of the General Footware stores, and he and Rick had known each other since college. They often met over drinks to catch up on old times and trade stories about life at General Footware.
"I just can't figure this one out," admitted Rick, "and I'd really like to avoid having to admit to my boss that I can't do my job. I haven't found any discrepancies like this for your store, but I was hoping you might know how such a thing could arise."
"I sure can. In fact, I had been wondering whether I should tell you about this. The thing is, the front office is really pushing the idea of incentive-based pay for store managers. A whole lot of our pay now comes from performance bonuses--the difference between a bonus and no bonus can be almost half again a manager's base salary."
"That is a lot. So how are the bonuses figured?
"See, Rick, that's the thing. They have always had quotas that were based on a store's net income. Those quotas are set based on the previous year's performance, plus a few percent. Basically, if you meet the quota, you get the bonus, and if you don't, then you don't. There's no extra bonus for going way over the quota.
"So if you exceed your quota by like 50 percent, you get the same bonus as you would have if you'd just barely met quota?"
"Yeah, that's right. It's a really dumb system, if you ask me. And I think it is the root cause of the discrepancies you are seeing."
"How's that?"
"Well, what a lot of store managers are doing is trying to "spend down" anything in excess over their quota by pre-paying the next year's expenses. So say that at the end of the fiscal year, my net income is $50,000 over quota. That does not get me anything, and it may even get next year's quota raised. So instead, what I do is to order a bunch of merchandise, whether I need it right then or not. That way, I spend down that 50 grand until my net is just above the quota, and I use it to stock up on merchandise that I won't end up selling or even receiving until next fiscal year. Now from what I hear, a lot of our vendors are willing to "fudge" on the invoices, so they'll send you the invoice in May for orders that you aren't going to need, want, or have room for until July and August. I know one guy who has nearly a quarter of next year's inventory paid for from "extra" money from this year-money that is more than he needs to make his quota and get his bonus. This guy's gonna have no trouble at all making quota, since he gets to count all of the income from that merchandise toward the next fiscal year, and the costs for it have already been paid with the excess net revenue from this fiscal year."
"Sounds like a clever plan. Can I ask why you haven't gotten in on it?"
"Well, sometimes I kick myself for not getting in on it. Like this year, I showed a good $80,000 over quota on my net revenues. But instead of using that to get me ahead on making next year's quota, I get 'rewarded' by having my quota raised! I mean, the boss did give me a pat on the back, but I know a lot of the other managers were laughing at me behind my back. So I've been tempted to get in on 'the system'--that's what one of the other store managers calls it--this year. But I know that it is only a matter of time before the head office catches on. They're not the brightest, but I think they will eventually figure this out. Plus, the whole thing seems kind of like a scam, and I don't know if I want to be involved in something unethical."
Questions
1. Is "the system" unethical? Why or why not?
2. How does "the system" affect upper management's ability to monitor and motivate its employees? What could be the long-term effects of "the system" on the company?
3. What should Rick do with his new information?
Case 9: "Banking on a Sure Thing"
Text: "Why so many late nights at work?" Chen asked his friend Tony, an investment banker.
"I've been working on a big project at work," replied Tony. "Actually, you'd like this one: One of our main clients, Bar-None Supplies has figured out a cost-effective way to produce a self-cooling beer can. It works with compressed gas or something-I guess it's something like the fizzy things they put in Guinness cans to make all that foam. Only this one makes the beer cold somehow."
"Sounds pretty cool to me--pardon the pun. But what's that got to do with you, anyway? Honestly, I'd figure you more for a seller of a product like that than someone working on "it."
"Well, Bar-None needs to restructure some of its loans and get some additional short-term financing before they can bring this thing to market. It's a big rush deal, and they've hired a top-notch patent lawyer to get that end of it on the fast track. But everyone who's actually seen this thing is amazed."
"So you've seen it then?"
"No, I keep begging for a can of the stuff, but no one listens. But my boss did get to try it. I guess the finance people from Bar-None brought over a case of prototypes when they made their big pitch for the loans they needed to get it to market."
Later that day, Chen is checking his stock portfolio, dreaming of the boat he's going to buy. He notices that Bar-None is traded on the NYSE.
Question
1. Would it be insider trading if Chen were to buy a few shares of Bar-None stock? Why or why not?
Case 10: "Chris Brown"
Text: The text for this case is located in the selection in the McGraw-Hill Supplementary Volume entitled "Personal Ethics Dilemmas" (page 46).
Questions
1. Do Lee's actions have the potential to harm Runner? Why or why not?
2. At the end of the case, Lee offers a moral argument to justify his claim that it is ethically legitimate for he and Chris to use the software. Evaluate this argument. Should Chris be convinced?
Case 11: "Mentor in the Wrong?"
Text: The text for this case is located in the McGraw-Hill Supplementary Volume, page 49.
Questions
2. If Mike reports what he knows to management, who is likely to be hurt?
3. If Mike does nothing about this situation, who is likely to be hurt? (Hint: Look past the obvious.)
Case 12: "Peter Green's First Day"
Text: This case is adapted and condensed from "Peter Green's First Day," written by Laura Nash, copyright 1980, Harvard Business School.
It was Peter Green's first day on the job, and he already had a problem. Fresh out of college, Peter was a new salesperson for Scott Carpets. He was assigned to a prime territory. This territory had originally belonged to John Murphy, who was now District Manager. When Murphy was promoted to that position 8 years ago, the territory passed to Harvey Katchorian. Both Katchorian and Murphy had been from the "old school" of business; neither had been to college. Murphy had started with the company's sales force right out of high school and had worked his way up to middle management "the hard way" (as he liked to say). He was openly disdainful of college sales training, and had already made a few disparaging comments about Peter, both to his face and to upper management. Katchorian was the son of an immigrant, and had worked his way into sales from the factory floor. It was Katchorian's retirement that opened the territory for Peter.
Peter's day began with a call from Murphy. "Get yourself together, this is your big day. Don't screw it up." Muphy had gotten a call from Peabody Rug, the largest carpet retailer in the area. Bob Franklin, Peabody's owner, was interested in Scott Carpet's new line of commercial carpet. Although Peabody Rug was in Peter's new territory, Murphy volunteered to go with him on the sales call. Peter wasn't sure whether Murphy was just being nice, or whether he really did think Peter would screw up the deal. Despite the tone of his earlier comment, Murphy seemed friendly on the way over to Peabody Carpet. On the way into Bob Franklin's office, he told Peter what a great guy Bob was.
The meeting went well, and a large sale was negotiated. The final papers would be signed next week. On the way out, though, Franklin said, "I assume that I'll get the usual help on the freight costs?" Before Peter could ask what he meant, Murphy said, "sure thing, Bob."
On the way back, Peter asked Murphy what this had meant. Murphy explained that since Peabody Rug was such a large and valuable customer, they regularly asked for and got an informal discount on the freight costs. Peter knew that Scott did not offer free or discounted shipping, so he was still puzzled. After a sarcastic remark about how little they taught in business school, Murphy explained the system. When the shipment arrived, Peabody Rug would claim that some of the goods were defective. Scott Carpet's policy was to offer a discount in such cases rather than paying the costs of shipping the defective carpet back and shipping out replacement goods. Bob Franklin knew how this discount was computed, and would claim that just enough of the merchandise was defective so that the discount would be equal to the freight charges on the original shipment. Of course the merchandise was not really defective, but Murphy always signed off on the paperwork so that he could offer this "freight discount" to his best and most important customers.
"But," asked Peter, "isn't this dishonest?" Infuriated, Murphy shot back, "Look, kid, I never had to explain this to Katchorian, and I shouldn't have to explain it to you. This is the way business works in the real world. Scott carpet needs this account, and that means you need this account. I'm showing you how to go out there and get it, and you have the nerve to call me a liar?"
Questions
1. Aside from violating the principle of honesty, is there anything else unethical about the arrangement Murphy was worked out? (That is, is there anything ethically problematic about it besides the fact that it is a lie. Or to put it yet another way, is there something that makes this particular kind of lie especially bad?)
2. Who (besides Peter and Murphy) at Scott Carpets could get hurt by this arrangement?