A construction company controller's ethical dilemma regarding financial disclosure

¶ … Decisions

The two key decision options facing the new controller for this small construction company are as follows:

Decision A: Whether to attempt to persuade the CEO of the overarching need to reveal the shaky financial predicament faced by a firm that owes the construction company a major material receivable to an auditor in order to comply with relevant guiding rules and laws concerning accounting practice even though doing so might jeopardize a pending bank loan needed for the company's survival..

Decision B: Whether to conceal the shaky financial predicament of this firm from the auditor in order to increase the likelihood of receiving a bank loan needed for the company's survival for which application has already been made based on the expectation that "business will pick up" in the future.

To help determine the most ethical course of action, a stakeholder analysis of this situation is presented in Table 1 below.

Table

Stakeholder analysis of construction company

Decision

Persuade CEO to reveal shaky financial position of debtor firm

Assist CEO in concealing shaky financial position of debtor firm

Stockholders

Employees

Vendors

Customers

Community

Total Positives

4

1

Section II. Analysis of Decision Options from Ethical Standpoints

Utilitarianism. Applying a strictly pragmatic, utilitarian decision option to the foregoing decisions indicates that persuading the company's CEO to reveal the shaky financial position of debtor firm, is the optimal ethical choice.

Profit maximization. Because companies have a fundamental need to maximize their profits as part of their responsible stewardship of their corporate resources, this ethical standpoint would hold that assisting the company's CEO in concealing the shaky financial position of the debtor firm represents the most ethical decision.

Universalism. Applying the so-called "categorical imperative" to this case indicates that in order to remain compliant with relevant accounting guidelines and laws, persuading the company's CEO to reveal the shaky financial position of debtor firm is the optimal ethical choice from a universalism standpoint.

Section III. Formulated Decisions and Consistency with Ethical Perspectives

Utilitarianism. Considering the decisions to be made in terms of which one will produce the "greatest good for the greatest number" indicates that "doing the right thing" in this case by coming clean with the auditor concerning the doubtful nature of collecting this account receivable. For example, Deckop advises from a utilitarian standpoint, "The decision that results in the most total benefit compared to harm is the best decision. The utilitarian is often portrayed figuratively as holding a scale, with the benefits on one side being weighed against the harm on the other" (2).

As shown in Table 1 above, the decision to persuade the CEO to reveal the shaky financial position of the debtor firm in compliance with relevant accounting guidelines outweighs the alternative decision, assisting the company's CEO in concealing the shaky financial position of the debtor firm from the auditor four-to-one. Indeed, some researchers maintain that a utilitarian standpoint is the most appropriate decision-making approach for all types of business decisions. In this regard, Hollingsworth and Hall advise, "If decision makers rely on their own personal ethical standard, then which of the many different ethical systems should be used? One response to this question is the use of the ethical system of utilitarianism as the proper standard to be used in business decisions" (18).

This decision-making approach, though, fails to take into account the potential impact that revealing the debtor firm's shaky financial position could have on the survivability of the construction company since it will likely derail a bank loan for which application has already been made and upon which the company is depending for operating capital for the coming year based on expectations that business will improve. This aspect of utilitarianism, that "the end justifies the means," focuses solely on the long-term prospects for the construction company while ignoring the unethical nature of concealing any relevant accounting information from an auditor. As Cherry points out, "The well-known disclaimer that 'the end justifies the means' is an appeal to utilitarian reasoning, demonstrating utilitarianism's preoccupation with outcomes" (2001: 12).

Profit maximization. Because for-profit companies are obligated to their stakeholders to maximize profits, helping the company's CEO conceal the debtor firm's shaky financial position in order to secure the desperately needed bank loan would represent the most ethical course of action. For example, according to Deckop, "Profit maximization is a powerful basis for ethical decision-making because it is so simple to apply. Choose the course of action that maximizes firm profit" (3). Although there are some gray areas involved here, absent the bank loan, the construction company will likely fail but a chance exists for it to survive and even prosper in the future if this situation can be successfully weathered.

It is important to note, though, that profit maximization is only legitimately applicable to the extent that "deception and fraud" are not used (Deckop 5), a factor that would preclude the use of this decision-making approach for this situation. Moreover, the case study is silent concerning the financial health of the construction company otherwise, intimating only that the company's future depends on a single major accounts receivable. This lack of other information makes the application of the profit-maximization approach even more problematic for decision makers. For example, Walczak and Gregg emphasize that, "Modeling decision making when certain variable[s] are uncertain or partially specified is problematic" (200). What is known for certain, though, is that notwithstanding the construction company's responsibility to maximize its profits, some approaches to profit maximization, including concealing relevant accounting information from an auditor, are sufficiently unethical on their face that applying them represents a violation of stakeholder trust at a minimum and a criminal violation of controlling legislation at the worst.

Universalism. Applying the categorical imperative ("Would you get what you want if everyone did it, under similar circumstances?") to this decision indicates that any attempt to conceal relevant accounting information from an auditor would be viewed as unethical, irrespective of the potential good it might do for a majority of the company's stakeholders. In sum, Deckop advises that, "The categorical imperative implies that unless an action is morally right for others to do, then it is not morally right for you to do" (7). Clearly, this small construction company would be acting unethically if it attempted to conceal relevant accounting information from an auditor because of the potential adverse consequences to society if all similarly situated companies acted in the same fashion.