The Corporate World with Governance, Ethics and Internal Control

“Not intended for publication. For classroom instruction purposes only”.

The Corporate World with Governance, Ethics and Internal Control

Name: Elton John O. Demetita

Class Schedule: TTH 10:00 -11:30

Directions: Read and analyze the case problem presented below. Use the six-step
approach to resolve the ethical dilemma. Submit your work in the pigeon boxes which
are provided in your department/college, or to google class on or before the date as
reflected in your study schedule. See Rubric in the appendix. You may access the rubric
in the classwork section in the google classroom.

Case 1

Before releasing financial statements to the public, Exotic Corporation's board of

directors meets to discuss the previous year's results. This exchange is included in the
discussion:

"Well, this has not been a good year!" says company president Mark Reyes. Revenue is
down, while expenses are way up. We'll report a loss for the third year in a row if we
don't do some fancy stepping. I can temporarily transfer some land I own into the name
of the company, which will help our balance sheet. Garry, can you shave P500,000 from
expense? Then we can probably get the bank loan that we need.”

"Mark, you're asking too much," says Garry Santos, the company's chief accountant.
Accounting principles are designed to prevent this from happening:

Required:

a. What is the fundamental ethical issue in this situation?

 The ethical issues in this situation are unethical accounting which they want to
appear more profitable that they actually are and also abuse of leadership
authority because the president ask for inappropriate favor to meet unreasonable
goals.

b. Discuss how the company president’s proposal violate accounting principles?

 The President of Exotic Corporation Mark Reyes propose several things to cover
up the loses of the company’s financial statement which he wants to transfer
some of his land that he owns personally in the name of the company which is
wrong because business account is separated from the personal account and
also asking his chief accountant for inappropriate favor which is very unethical.
Even if they were not able to make it for the previous year’s result, the company
should provide the correct depiction of the financial situation of a business

Case 2

Encino Bank has a long-standing agreement with Neighborhood Chest, a charitable

organization in Davao City. When donations are running low, the agreement allows

“Not intended for publication. For classroom instruction purposes only”.

The Corporate World with Governance, Ethics and Internal Control

Neighborhood Chest to overdraw its cash balance at the bank. Neighborhood Chest
used to manage funds wisely and rarely used this privilege. Greg Alas recently took over
as president of Neighborhood Chest. Alas is acquiring office equipment and spending
large sums on fundraising in order to expand operations. During his presidency,
Neighborhood Chest has kept a negative bank balance of about P1,000.

Required:

What is the ethical issue in this situation? State why you approve or disapprove of Ala’s
management of Neighborhood Chest funds.

 This situation does not have any ethical issue because Greg Alas, who is
president of Neighborhood Chest, purchased the equipment for the office by
using the cash and bank overdraft to expand the operations.

Alas's management of Better Days Ahead funds is disapproved because it is not

a personal fund of Henson, and he is irresponsible towards his work.

Case 3

The Boeing Company, manufacturer of jet aircraft, is the defendant in numerous lawsuits
claiming unfair trade practices. Boeing has strong incentives not to disclose these
contingent liabilities. However, financial accounting standards require that companies
report their contingent liabilities.

Required:

a. Why would a company prefer not to disclose its contingent liabilities?

 A company would prefer not to reveal its contingent liabilities since they cast a
shadow on the business and make a negative impression. Also, they uncover
conceivable future problems that seem negatively affect the company’s financial
position and obstruct the company’s capacity to attract investors or borrow
money. In addition, disclosure about a lawsuit can some of the time jeopardize
the result of a lawsuit. In case the offended party or the jury sees this data, they
may interpret it to cruel the defendant is admitting fault for the circumstance and
anticipates to lose the lawsuit.

b. Describe how a bank could be harmed if a company seeking a loan did not
disclose its contingent liabilities.

 A contingent liability makes risk for a company. In case the contingent obligation
isn't reported, the bank may see the company as low-risk. This may lead the
bank to loan cash at low interest rates and with easy payment terms. With
knowledge of the contingent liability, the bank might not have made the advance
at all. Or the bank might have required a higher interest rate or more stringent

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 The Corporate World with Governance, Ethics and Internal Control

payment terms. Within the most extreme case, a bank may be harmed in case
the company cannot reimburse its loan a credit that had been allowed on the
basis of incomplete or misleading data.

c. What is the ethical tightrope that each company must walk when it reports its
contingent liabilities?

 Reporting of contingent liabilities frequently depends on subjective judgment

approximately whether a result is remote, reasonably possible, or probable. A
company may have solid incentive to skew judgment in one direction or another.
The ethical tightrope comprises in acting in good faith and not intentionally
misrepresenting what are regularly complex circumstances, whereas at the same
time, exercising reasonable judgment, regularly within the face of intense
pressure to distort the realities.

Case 4

Dover Corporation owns 18% of Hassan, Inc.'s voting stock. The remaining Hassan
stock is held by a diverse group of investors with small stakes. Monica Kurtz, Dover's
president and a member of Hassan's board of directors, has a strong influence on
Hassan's policies.

Dover's net income rises as it receives dividends from Hassan under the market value
method of accounting for investments. Dover pays President Kurtz a bonus based on a
percentage of the company's net income. As a result, Kurtz can exert some control over
her personal bonus by influencing Hassan's dividends.

In 20X0, there is a recession, and corporate income is low. Kurtz wields enough power
to have Hassan, Inc. pay a large cash dividend. The action requires Hassan borrowing
so much money that he may face financial difficulties.

Required:

In getting Hassan to pay the large cash dividend, is Kurtz acting within her authority as a
member of the Hassan board of directors? Are Kurtz s actions ethical? whom can her
actions harm?

 Yes, as a member of board of directors of Hassan Inc, her primary goal is to protect the
assets of the shareholders by ensuring an organization's management acts on their
behalf and that they get a good return on their investment in the company. As a
member of board, she is responsible for making decision regarding the issue in an
organization. Through this action it can harm Hassan Inc that would cause financial
difficulty in the near future which is more beneficial on her part so there is nothing
ethical about that.

Case 5

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The Corporate World with Governance, Ethics and Internal Control

Hazel Manufacturing manufactures laser optic equipment component parts. Customers

include civilian businesses as well as the national government. In most government
contracts, Hazel is reimbursed for its manufacturing costs plus a predetermined profit.
For the majority of civilian contracts, Hazel bids a fixed price and either makes a profit or
loses money, depending on how well the company manages costs. Hazel accountants
allocate to government contracts any overhead that is not properly allocated to a specific
product.

Required:

a. Is Hazel's overhead allocation practice ethical? Give your reason.

 No, the incurrence of the cost allocated cannot be so easily traced, without such
a direct relationship to the specific product, it is open to unethical practice
through the manipulation of the costs, asset and inventory values, and can be
used to make the company's performance seem better than it actually is.

b. Who benefits and who is harmed by the Hazel practice?

 The ones benefited from Hazel practice are most of the government contract
while civilian contracts are harmed because of fixed price that either makes profit
or loses. It disrupts the normal laws of demand and supply. It gives monopolies
an edge over competitors. It's not in the best interest of consumers. They impose
higher prices on customers, reduce incentives to innovate, and raise barriers to
entry.

Case 6

David Lawyer, sets up a small loan company specializing in loans to business executives
and small companies. David does not spend much time in the business because he
spends full time with his law practice. No employees of David Law firm are involved in
the small loan company.

Required:

Identify and discuss the ethical implications of David's act.

 David having two different jobs would greatly affect both jobs in different
scenarios. Both needs complete focus and adequate amount of time to realize
the success of these businesses. Now, it’s a question of principle whether it is
ethical to spend his full time on his law firm still considering the fact that his
attention is divided with his loan company where his attention is also needed and
his employees are depending on his capabilities to run the business. Not
spending much time in his loan company would result to mismanagement, poor
supervision that may eventually lead to a loss or in worst cases, bankruptcy. With
this, it would directly affect employees who are depending their daily living on
their salaries, his assets which were invested to the company, the clients of his

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The Corporate World with Governance, Ethics and Internal Control

company whom were reliant to the services the company offers and to his
emotional and mental health. On the other hand, his practice of profession may
also be greatly affected due to the fact that his concentration is shared with his
other entanglements.

Thank you for completing the task. If you

have not completed, or have difficulty in
accomplishing the activity, please send me a
message to our google class or you may ask
clarifications through a text message or phone calls
on the contact number included in your course
guide.

And now, you are ready for another activity.

“Not intended for publication. For classroom instruction purposes only”.