Welcome back to the final lesson and In this lesson, we're going to look at a case to help exemplify approaches to ethical issues, we're first going to look at a case facts and then move into using both a principles based approach and a prescriptive approach to this ethical situation to compare and contrast the two approaches. So without further ado, allow me to introduce you to our case, the independent spouse Incorporated. Now, presented here we have the founder who is Suzy space, and up until five or six years ago, she was a stay at home mom with two children. But then she divorced her husband after he squandered all their savings with a gambling addiction. She promised herself after that, never again Never again was she going to be dependent on anyone else. And so determined was she that she started up her own business, the independent spouse, and this business was to help women And ensure their own personal financial security by providing education coaching and escrow depository accounts aka getaway funds for her clients.

Now, she started this business six years ago with no employees. She set up a website and marketed herself to women in bad relationships. She wrote a book on her experience and it immediately resonated with women worldwide. She suddenly found herself being booked for radio interviews and talk shows and her business went parabolic when she made an appearance on The Ellen DeGeneres Show. Now, five years later, since that epic appearance, her business has grown significantly, and she's leveraged her business model by recruiting and training other women to provide these services. Now, from the beginning, Susie's personal life has been symbiotic with that of her company.

Her life is embedded in the company and its mission to help women become financially independent in any circumstance. In fact, her eldest daughter Sarah, who Now just 21 has been working in the business since last summer. Suzy named Sarah, the Vice President of customer relationships, which at the moment entail spending a significant portion of her day posting selfies on Instagram. Suzy is somewhat blind to her daughter's lack of interest in Android competency. But no one seems to mind and the team sort of accepts Sarah and has learned to work around her to get things done. Now Susie owns all of the equity of her company, the independent spouse, and the sales have exploded in recent years, growing from $650,000 five years ago, up to $4.1 million in the past 12 months.

Now a dozen people have been hired to support the growth in the corporate offices were opened earlier this year in a swanky downtown office building. Suzy has been very successful of staying ahead of this growth curve by continuously expanding capacity. She's done this in part leveraging a 1.2 million dollar credit facility from the charter Bank of America. Now in this case you are Megan shock the new controller at the independent spouse and he came to the company about three weeks ago. Now while you are a professional account you are returning to the workforce after being a stay at home mom yourself for the past six years. It took you seven months to eventually land this job when the previous controller quit without giving any notice.

Now you wish you admit Susie years ago because you two are recently divorced. It's been very stressful as your ex husband now refuses to pay you child support, and you're spending thousands of dollars in legal fees trying to get him to honor his obligation. In the meantime, you still have to rent the utilities and all the expenses for your children to pay from your income. So you really need this job to make ends meet until the lawyer sought out the child support payments. You have just finished meeting with Suzy and she's not happy with the profits you are showing on The draft financial statements, those financial statements only show $100,000 of net income last year, and she's worried that this is going to impact the renewal of the credit facility. In your meeting Suzy actively challenges you on your accounting, but you feel confident you have checked and cross checked the math behind all of the numbers.

Earlier today, Susie tells you that she's met with her sister, who is a significant contractor to the business, and her sister has agreed to reduce her invoices by $300,000 for last year. Suzy has asked you to process the bill back and reissue the financial statements for her to take with her to meet with the bank tomorrow. At this point, what will you do? As you sit back at your desk you reflect on the information you've been able to gather in your first three weeks on the job. To begin with you recall a conversation with Suzy on your very first day. When she discussed what it would be like to work at the independent spouse, you could remember Susie's voice vividly saying, I foster a very entrepreneurial culture with my employees, I empower them to make the best decisions for the business.

But in the end, I'm the boss and I call the shots, mistakes are going to be made. But I look at each one of these as learning opportunities for us to be stronger. I tell my employees that if you work for this company, then we are family. We're all advocates for financially independent women around the world. And as a result, I have a very flat organization with very few job titles. Everyone pitches in when and where needed.

It makes it a fun place to work and a great career challenge for my staff. You also reflect on the conversations you've had with the other employees in recent weeks. And some of the comments that come to mind include the independent spouse is a good workplace environment. It's chaotic for short and Susie can be pretty tough sometimes, but most people are supportive of each other. It's all about getting the job done so many products and channels, everyone just pitches in as needed to deliver a quality product for our clients. Not everything we do makes money, but it gets done and happy clients refer us more clients.

So we make money the next time we do something similar. Suzy always does things first class. It's part of her image, but it's expensive hiring the specialist consultants including her sister's web design firm and video photographers, Susie's personal life and business life. Those are indistinguishable. her youngest daughter Ellie, who is now 12 years old, has been like a mascot for this company over the years. All the employees bring their children to the office from time to time as crises arise in their personal lives.

And finally, you reflect upon some of the other information you've come across as you finish preparing the year and financial statements. The company spent almost a million dollars in third party consultant fees for various production and marketing costs, much of which was paid to Suzy sister. You really don't like Sarah, or her spending habits, but it's a touchy subject with Suzy. Sarah submits expense reports for some outrageous things that you question whether they are valid business expenses, and you've tried to talk to Sarah about it, but she just laughs at you and tells you to talk to her mother if you're not happy with her. You feel as though sometimes Suzy treats the corporation as her own personal bank account, which is fine, it's her company. But you worry that a number of the other managers treat it the same way based on some of the expenses you've seen in the accounts.

Included in meals and entertainment and office costs appear to be a lot of Susie's own grocery bills and home expenses. When you question Suzy about it a few weeks ago, she assured that all these expenses were business related, as she works out of the home frequently. You also noted that included Susie's travel costs were costs related to bringing her new boyfriend to speaking events. Her boyfriend is also her executive coach. So that's a business expense. Right.

You also recall giggling The first time you saw the pet food expense, which includes the cost of purchasing and maintaining to York Shire terriers. Susie said that's definitely expense because the dogs are on the company premises all the time. Suzy has noted that the dogs are great for office morale and employees are allowed to, quote borrow, unquote the dogs as employee perk to give their children the pet experience without having to own one themselves. You also review the bank's credit agreement and note that the company's maximum line of credit is based on three times the amount of net income reported by the company. With those case facts out of the way. Let's now use a principles based approach to evaluate this situation by processing the bill back as Suzy has requested, are the principles of ethical intelligence met?

Well, let's first ask ourselves, will it avoid causing any harm? How can you be sure that there's no cider range? With their sister to recoup the money in a later period, you could be jeopardizing the bank's position by having a hand in preparing misleading financial statements. If that is the case. And if the bank withdraws his support from the credit renewal, then harm to employees and clients could also ensue. How about the principle of making things better?

Processing the bill back does improve the optics of the financial position of the company? If it's true, by stripping out the non business related costs, however, profitability could also be improved. You might think about preparing an analysis of the expenses that could be challenged as legitimate business expenses, for instance, the groceries and the boyfriend's travel and the pet expenses and perhaps use those as a basis for adjusting net income. Thirdly, is it respectful? There are more issues of respect here at stake than just the bank because we have employees who are working around Round Sarah, who's acting in an executive capacity? Susie's tone implies that she's tolerant of impairment but only to the extent that it supports her own beliefs.

She doesn't appear to like to be told when she is wrong, and thus may not respect the advice that you provide to her on some of the potentially aggressive business expenses that have been charged to the company. And how about whether processing the bill back is actually fair. The spending habits of Sarah and possibly other managers is indicative of the fairness issues, which are encouraged by the behavior of Suzy herself. Sara's executive role is not fair because she's not qualified and not pulling her own weight. When it comes to the bill back itself. Is it fair that her sister should have to discount her rates by $300,000 so that Suzy can meet her bank credit facility obligations?

And finally, we have to answer the question as to whether is a loving thing to do. now in this situation, there really isn't an an issue here. There is no mal intent with Susie's approach. In fact, she has the best of intentions for how she treats her staff and runs her business. By the time we wait each one of these five ethical principles, we recognize that we do have an ethical issue here to deal with. There are a number of ethical principles violated in the situation, processing the journal entry without further discussion with Susie and her sister could put you in a difficult situation, if it later turns out that the financial statements contained personal expenses and future obligations with respect to the bill back that you've been asked to process.

Despite needing this job, you're gonna need to summon moral courage to confront Susie, with your concerns, with data supporting your concerns. Let's flip this around now and look at the same situation using the prescriptive approach to ethical dilemmas. Using the prescriptive approach, we walk through eight steps. One of the first things we may be doing and applying this first step would be to ask Susie for more time, and perhaps indicate that we have some concerns about the spending of managers or some of the journal entries that were posted prior to your arrival. You may not name any names at this point, but you need to gather more information specifically around the general ledger analysis of all the questionable expense accounts. You may want to even refer to and gather copies of invoices, you may actually want to get representation from Susie's sister to confirm the arrangement and update the contractual obligations to ensure that adequate paperwork is in place to support the bill back.

Next, we need to define the ethical aspects of the decision. And there are a number of different ethical dilemmas beyond just processing the bill back has been requested. Because you've also noticed that there's a number of personal expenses that have been treated as business expenses. And even though you didn't post these entries that was before you arrived, you're still responsible for them as you prepare the financial statements, you have the conflict of interest situation with the sister's company. And that pertains directly to the bill back entry that you've been asked to process. You've got Sarah's behavior and her lack of qualifications and an executive capacity which could expose the company to reputational harm.

We've also got indications that the employees may be abusing or have unauthorized use of company resources. All of these define the ethical aspects of the decision you need to make. Thirdly, we need to identify who are the affected parties, because it's beyond just Susie. Susie is not just hurting yourself. That's a very narrow view based on her 100% ownership. The company.

Most obviously, the bank could be hurt, particularly if the statements are manipulated and the amount of the loan is unable to be repaid to the bank. In such a situation, the bank may call the loan and in doing so jeopardize the viability of the organization in which case the employees can be hurt if the company goes under through the loss of their employment. There may also be potential issues for the clients if the company goes under. Remember that these clients have funds that are being held in escrow that could complicate their recovery. You could also have your own professional reputation tarnished. If the financial reporting irregularities are discovered which you had a hand in preparing.

Next, let's talk about identifying the consequences. And so the consequences we need to consider is what happens at the bank calls the loan if the true profitability is discovered. What happens if there's an audit That uncovers these irregularities. What happens if there's a tax audit and a reassessment resulting in a large tax liability and penalties from the government? What happens if there's a loss of business from the bad press from any associated news against the company? When we take a look at the fifth step, we need to identify the obligations.

Now, as a professional accountant, we have professional obligations that we need to bear in mind as we go about performing our work responsibilities. We also need to be aware of the tax rules and the obligations embedded within the credit facility itself with the bank. We also have a moral obligation to protect the income for the employees and the funds and trusted to the company by the clients. In number six, we need to consider the character and the integrity of the key players and then In this situation, it would be Susie herself. You need to assess whether you can trust Susie, and the representations that she's provided around this idea of the bill back that she's asked you to process with her sister. You may have hesitation, and you should have hesitation given that Susie has an apparent lack of attention to financial details.

Also, the resignation of the previous controller without explanation is another red flag. I wonder how you would assess Susie and I'll leave this as an open question. Is she a good manager or a poor manager? Is she a good leader or a poor leader? Is she just ignorant of some aspects of her own business? How about his Susie's behavior actually criminal?

Is she conducting what is called occupational fraud? Do you think Sally thinks of herself in these terms? Is there a slippery slope here, as more and more personal expenses may be finding their way into the accounts of the business? How about the actions of Sara and her management team? Are they just following her lead, as they incur expenses on behalf of the organization? There's a number of different issues that make you question the character and the integrity of Suzy, which would give you pause in this circumstance to evaluate the situation further.

In Step seven, we create multiple alternatives for how we can proceed. One approach would be to resign your position with the company. However, this would not serve you well personally as you need the income, nor would it serve Suzy well, as this would just exacerbate the issue further. Another alternative would be to approach Sally directly and ask for more time in preparing your financial statement analysis, you should raise that you have some concerns over the expenses that have been categorized as business expenses. This would buy you time to analyze expenses and properly categorize them, and research which expenses are legitimate versus personal. Another alternative is to obviously process the bill back as requested and resubmit the draft financial statements to Sally.

However, if this is to be your approach, you should ensure that the statements are marked draft for discussion only, and indicate that they have yet to be reviewed or audited to provide you with some leeway to change the numbers later on without eroding your credibility. Another approach would be to encourage Sally to meet with the bank without financial statements tomorrow, and to wait for the statements to be audited or reviewed as often required under the credit facility. There's a number of different alternatives you could have between processing the bill back as requested and resigning your position? And finally, what is your gut telling you to do in this situation? Well, given the pervasiveness of ethical issues all over the place, you need to be very careful in how you proceed in the next 24 hours. If it doesn't feel right, delay and find out more information, you should be transparent and how you communicate with Susie and others as you proceed with this situation.

It's important that most of all, you are strong and you stand up for yourself. Don't get yourself into a situation where your own reputation could be jeopardized. You certainly don't want to be associated with misleading financial statements as this would preclude you from either continuing in this job, or perhaps any future job that you seek out. So the point of this lesson is to show you that whether you are using a principles based approach For eight step prescriptive approach to working through the ethical dilemma, you recognize that there's a lot of things that you need to think about before you process that bill back that has been requested by Suzy. It would be so easy for you to process the bill back as instructed by your boss. Using a very low level means and ends rationalization of obedience.

However, in this situation, you need to take the long view and consider the full ramifications that could potentially emerge from taking this course of action.