Costly liability for the cleanup of a hazardous waste pool


An industrial firm is confronted with the dilemma of whether it should include - on its balance sheet - a very costly liability for the cleanup of a hazardous waste pool that has been generated over a number of years and as a direct consequence of its operations. The company is in agreement that the cost of cleaning up the hazardous waste pool is a cost of doing business. However, including this large liability on the company financial statements now will have the effect of immediately decreasing the total value of the company (note that the company's current stockholders will be harmed financially because the company will also lose much of its current value). However, if the company does not include the liability on its balance sheet, the company will very likely be viewed as dishonest, since anyone buying stock (or ownership) in the company will also unknowingly buy shares of a company that is overvalued (i.e., the balance sheet will be misleading, showing the company as being of greater value than it really is). The problem is that there are no accounting rules nor is there any clear guidance as to what the company should do. No matter what the company decides, innocent persons - i.e., existing shareholders or potential shareholders - will be hurt as a result of its decision.

Describe the utilitarian ethics in this situation. What do you think the company should do?

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Business Law and Ethics: Costly liability for the cleanup of a hazardous waste pool
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