Cases in Accounting Ethics

Part of ethics is determining when an accountant must 'blow the whistle' on his colleagues.

Many institutions teach accounting ethics through the presentation and discussion of specific cases -- hypothetically or historically detailed instances in which an accountant faces a challenging decision. The University of Waterloo, in Waterloo, Ontario, has a Center for Accounting Ethics that proceeds in this manner, and the three cases discussed here are case studies the university uses.

Legislative Testimony

One case involves a hypothetical government proposal to put new and expensive controls on the discharge of waste from the pulp and paper mills. Officials at Amalgamated Forest Products have prepared a report they call "Endangered Species: The Pulp and Paper Industry in the Upper Peninsula," arguing that the dollar impact of the effluent controls that the new bill proposes will be devastating to the industry and out of proportion to the actual harm threatened.

Frank, the company's manager of corporate reporting, contends internally that the numbers in the report "have no foundation in fact." Yet he has lost the fight internally. Not only will the company issue the report, but its president is about to testify to the same effect before a parliamentary committee. Should Frank go public as a whistle blower?

Nonprofit Heroine

Another case concerns a not-for-profit legal center. Due to the efforts of its director, Amelia Jones, the organization -- Women's Rights and Legal Services (WRLS) -- has built a reputation as "an outspoken ambassador for prison reform and rights of female offenders."

Unfortunately, Jones has recently begun to combine her own household shopping trips with those involving purchases for the organization. The organization has not lost money as a consequence, because Jones has balanced the purchasing of personal articles with WRLS money against the purchasing of items for WRLS with her own money. The two sets of transactions come out a wash.

A new treasurer for the board of directors of WRLS discovers these transactions. What happens next?

Historical Case: Livent

Livent, Inc., a Toronto-based theatrical production company, overstated its revenues in the period 1997-98. Some of its techniques were quite blatant: it simply excluded certain expenses from its books entirely. Other techniques were a little bit more sophisticated. Its independent auditor was itself (at least prima facie) one of the victims of Livent's deceptions.

Suppose some of Livent's investors want to bring a class action suit against its auditor. They might contend that the auditor allowed itself to be misled, missing certain red flags that should have alerted it to dig more deeply. What are the red flags that an auditor should notice in such a situation, and that class action plaintiffs will notice if it does not?

Red Flags

According to the American Accounting Association, which also employs the Livent case in its instructional materials, the red flags included "an extremely aggressive, growth-oriented management team; a history of prior financial reporting indiscretions ...; a constant and growing need for additional capital; and the existence of related-party transactions."

References

• University of Waterloo: The Ethical Dilemma at Northlake
• University of Waterloo: Shopping Confusion
• University of Waterloo: Livent and the Auditors
• American Accounting Association: Livent Inc.

Resources

• American Accounting Association: Fraud and Ethics Resources