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Chapter 1, Problem 1.1EI

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Horngren's Accounting (12th Editio...

12th Edition
Tracie L. Miller-Nobles + 2 others
ISBN: 9780134486444

Solutions

Chapter
Section
BuyFindarrow_forward

Horngren's Accounting (12th Editio...

12th Edition
Tracie L. Miller-Nobles + 2 others
ISBN: 9780134486444
To determine

1)

Ethical Dilemmas in Accounting

Ethical Dilemmas in accounting refer to scenarios where one must put the interest of the stakeholders of the financial statements over one’s own personal interest.

Example of such a scenario is understating of expenses and overstatement of revenues to present a healthier set of financial statements.

It can be difficult to do so but for the sake of the trust placed by the stakeholders in those charged with governance, personal interest must be placed second as compared to the professional responsibility

Ethical Issue and course of action to be undertaken to disclose the settlement payments.

Answer

Solution:

The Ethical Issue in this case is whether or not to disclose the settlement payments in the annual reports and financial statements.

The Ethical course of action is to disclose fully the settlement payments as well as the clear nature of why those payments were made in the annual reports and financial statements.

Explanation

• Tobacco companies manufacture harmful products that can cause illness and death in individuals. These products are extremely addictive and life threating.

• It is the responsibility of the companies to provide sufficient disclaimers and educate the consumers that the products are dangerous to consume.

• Due to the negligence of the companies, millions continue to suffer and as a result the tobacco companies have paid over $3,000,000,000 in settlement payments.

• The ethical issue for the Chief Financial Officer whether or not to disclose the settlement payments in the annual reports and financial statements, as a settlement payment for tobacco related illnesses, as such a disclosure can invoke massive backlash from the stakeholders of the financial statements for both financial and ethical reasons.

• Principles of fiduciary responsibility state that those charged with governance must take actions keeping the interests of the stakeholders of the entity, such as shareholders, employees and Creditors.

• Hence the ethical course of action is to disclose the payments in the financial statements and annual reports appropriately and explain the nature of payments.

• The companies must also take more educational initiatives to educate consumers about the harmful effects of their products.

Conclusion

Hence it can be seen that the ethical dilemma concerning settlement payments is disclosure in the financial statements and annual reports and the ethical course of action to take is full and appropriate disclosure of such settlement payments in the financial statements and annual reports.

To determine

2):

Ethical Dilemmas in Accounting

Ethical Dilemmas in accounting refer to scenarios where one must put the interest of the stakeholders of the financial statements over one’s own personal interest. Example of such a scenario is understating of expenses and overstatement of revenues to present a healthier set of financial statements.

It can be difficult to do so but for the sake of the trust placed by the stakeholders in those charged with governance, personal interest must be placed second as compared to the professional responsibility

Negative consequences for Phillip Morris for telling the truth and for not telling the truth.

Answer

Solution:

Negative consequences for Phillip Morris for telling the truth:

a) Loss of Market Share

b) Backlash from Public related to Unethical Behavior.

c) Tarnished Reputation

Negative consequences for Phillip Morris for not telling the truth:

a) Fraudulent Financial Reporting

b) Breach of Fiduciary Responsibility

c) Possible legal consequences

Explanation

Following are the Negative consequences for Phillip Morris for telling the truth:

a) Loss of Market Share

• Since it is one of the biggest tobacco companies in the world, the market share will be adversely impacted by the disclosure of such a huge amount being paid towards settlements.

• This can also lead to decreased investor confidence in the company as the amount is very material in context to the overall financial results.

b) Backlash from Public related to Unethical Behavior.

• It is the responsibility of the companies to provide sufficient disclaimers and educate the consumers that the products are dangerous to consume.

• Due to the negligence of the companies, millions continue to suffer and disclosure of such settlement payments will make cause a backlash from the general public as the activity of selling such harmful substances is unethical.

c) Tarnished Reputation

• Being one of the most popular companies, the disclosure of these settlement payments will have an adverse effect on the reputation and image of the company.

• Since it is also associated with other companies, such other companies might threaten to sever ties with Philip Morris and end their association.

Following are the Negative consequences for Phillip Morris for not telling the truth:

a) Fraudulent Financial Reporting

• If the settlement payments are not disclosed as such, the financial statements will reflect inaccurate and wrong information.

• This can mislead the various stakeholders of the Financial Statements such as shareholders, employees and Creditors.

b) Breach of Fiduciary Responsibility

• Principles of fiduciary responsibility state that those charged with governance must take actions keeping the interests of the stakeholders of the entity, such as shareholders, employees and Creditors.

• However not disclosing the settlement payments will result in a breach of Fiduciary Responsibility as it will lead to the stakeholders relying on inaccurate information.

c) Possible legal consequences

• Preparation of Fraudulent Financial Statements is a crime and not disclosing the settlement payments is misrepresentation of financial statements.

• This constitutes noncompliance of applicable legal and regulatory reporting framework and is a legal offence punishable with a fine and jail time for those who were responsible for preparation and presentation of the financial statements.

Conclusion

Hence the Negative consequences for Phillip Morris for telling the truth and for not telling the truth are enumerated.

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