A study reports that 29% of employees in finance and accountingwitnessed the falsifying or manipulating of accounting informationin the past year. This includes nondisclosure of some long-termliabilities. What risks does a business face for not disclosingsome of its long-term liabilities? What could the business possiblybenefit by not disclosing some of its long-term liabilities?

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Hubert KochLv2

18 Nov 2018

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Niobrara Pesticide Company's new president has learned that, forthe past four years, the company has been dumping its industrialwaste into the local river and falsifying reports to authoritiesabout the levels of suspected carcinogens in that waste. The plantmanager says that there is no proof that the waste causes cancerand that only a few fishing villages are within 100 milesdownriver. If the company must treat the substance to neutralizeits potentially injurious effects and then transport it to a legaldisposal site, the company's variablr and fixed costs would rise toa level that might make the firm uncompetitive. If the companyloses its competitive advantage, 10,000 local employees couldbecome unemployed and the town's economy could collapse.

A. What specific variable and fixed costs can you identify thatwould increase (or decrease) if the waste were treated rather thandumped? How would these costs affect product contributionmargin?

B. What ethical conflicts does the president face?

C. What rationalizations can you detect that plant employeeshave devised?

D. What options and suggestions can you offer the president?

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In the current year, Dickinson, Inc., reports an effective taxrate of 36%, and Badger, Inc., reports an effective tax rate of21%. Both companies are domes- tic and operate in the sameindustry. Your initial examination of the financial statements ofthe two companies indicates that Badger apparently is doing abetter job with its tax planning, explaining the difference ineffective tax rates. Consequently, all else being equal, you decideto invest in Badger. In a subsequent year, it comes to light thatBadger had used some very aggres- sive tax planning techniques toreduce its reported tax expense. After an examina- tion by the IRS,Badger loses the tax benefits and reports a very large tax expensein that year. Over this multiple-year period, it turns out thatDickinson had the lower effective tax rate after all. Do youbelieve Badger was ethical in not fully disclosing theaggressiveness of its tax positions in its current financialstatements? How does ASC 740-10 (FIN 48) affect Badgerâs disclosurerequirement? Does ASC 740-10 (FIN 48) still leave room for ethi-cal decision making by management in determining how to reportuncertain tax positions? Explain.

Kasey Hartman is the controller for Wholemart Company, which hasnumerous long-term investments in debt securities. Wholemartâsinvestments are mainly five-year bonds. Hartman is preparing itsyear-end financial statements. In accounting for the long-term debtsecurities, she knows that each long-term, investment must bedesigned as a held-to-maturity or available-for-sale security.Interest rates rose sharply this past year causing the portfolioâsfair value to substantially decline. The company does not intend tohold the bonds for the entire five years. Hartman also earns abonus each year, which is computed as a percentage of net income.Discuss if Hartmanâs bonus will increase based on theclassification of the debt securities and explain the reasons why.For this discussion, also evaluate the criteria Hartman would useto classify the securities as held-to-maturity oravailable-for-sale, if it is likely there might be a companyoversight of a classification choice, and determine the ethicalchallenge of her decision.

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