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Posted: November 16th, 2022

Hannah Company maintains

1. Hannah Company maintains two separate accounts payable computer systems. One is known to all the users, and is used to process payments to vendors. Employees enter the vendor code, or the name and address of new vendors, the amount, the account, and so on. The other system is a secret one. It is used to cross-check the vendors against an approved vendor list. If a vendor is not listed as approved, the payment process is halted. Internal audit employees seek to verify the existence of a bona fide claim by the vendor. All inquiries are made at the top management level, and very discreetly. No one but top management, the internal audit staff, and the Board of Directors of the company is even aware of the second system.
Is it ethical for a company to have a secret system like the one described? Explain.

2. Mike Stephenson, the president and CEO of Earth Systems, Inc., a waste management firm, was recently hospitalized, suffering from exhaustion and a heart ailment. Immediately prior to his hospitalization, Earth Systems had experienced a sharp decline in its stock price, and trading activity became almost nonexistent. The primary reason for this was concern expressed in the media over a new untested waste management system implemented by the company. Mr. Stephenson had been unwilling to submit the procedure to testing before implementation, but he reluctantly agreed to limited tests after the system was operational. No problems have been identified by the tests to date.

The other members of management called a meeting to determine what they should do. Roger Carlson, the marketing manager, suggested that the company purchase a large number of shares of treasury stock. In that way, investors might notice that activity had picked up, and might decide to buy some more shares. This plan would use up most of the company’s available cash, so that there will be no money available for a cash dividend. Earth Systems has paid cash dividends every quarter for over ten years.

a. Is Mr. Carlson’s suggestion ethical? Explain.
b. Is it ethical to discontinue the cash dividend? Explain.

3. Greyhound Stables, Inc. operates several dog racing tracks throughout the United States. Since most facilities are outdoor tracks only, most of the cash receipts for Greyhound are received from April through October. These funds are usually invested in short-term, very liquid investments, such as stocks and bonds. Among the stocks purchased last year, was Servitronics, a company specializing in automatic vending equipment.

The company decided not to sell its Servitronics stock at the end of last year, and has purchased more of the stock this year. The company intends to continue to purchase stock until it holds enough to make a takeover bid for the company. The accountants have been instructed to continue to classify the investment as short-term until the takeover is accomplished, so that less attention will be directed to it. (Presently, Greyhound has no long-term investment in stock at all.)

a. Is it ethical for Greyhound to attempt to take over another company? Explain.
b. Is it ethical for Greyhound to leave its investment in the short-term investment
category? Explain.

4. Sact Creek Company’s most recent financial statements showed dismal performance. There was a net loss of $10,000 and the statement of cash flows showed a net cash decrease in all categories. The company president called all the managers together and asked them to do all they could to make sure the next quarter’s performance was better.

Ted Flay, manager of the manufacturing division, sold off old manufacturing equipment. He also reclassified several workers to part time (30 hours per week) and hired additional temporary workers to take up the slack. This saved the company money, since part-time workers do not have the same insurance and other benefits as full-time workers.

Will Smith, financial manager, immediately suspended payments on all accounts except those on which interest would accrue. He also instituted aggressive collection procedures.

a. Were Ted Flay’s actions ethical? Explain.
b. Were Will Smith’s actions ethical? Explain.
c. Were the company president’s actions ethical? Explain
Business Ethics

1. Is it ethical for a company to have a secret system like the one described? Explain.
Yes it is. Verifying the integrity of a potential vendor is ethical and so is maintaining such a system discreetly. Majority of the world’s verification systems that detect fraud, corrupt activities and identity verification are done secretly and this has proven to be a worthwhile tool in business. Having such a systems only becomes unethical if the any of the people who have access to it, including top management, begin to misuse the system. Using such a system to obtain information illegally or perform a crime is unethical.
2a. Is Mr. Carlson’s suggestion ethical? Explain.
It is unethical. The company seems to already have a blurry line when it comes to being ethical. They have released an untested product into the market and are already planning to transfer a large sum of money in the CEO’s absence. The board should accept the consequences of their complacency when handling the release of the product. On top of that, spending such a huge amount of money on a low return investment is might possibly damage the company permanently.
2b. Is it ethical to discontinue the cash dividend? Explain.
Legally, there is no contract binding a company to pay its common stockholders. Despite a company maintaining a steady dividend pay-out, the company can still cease paying dividends at will. Common stockholders should know that they are not entitled to a dividend, even when one has been declared and paid every year. Since there’s no binding contract requiring the payment of dividends, it is ethical to discontinue the payment. However, the potential losses to the company if it stops a longstanding cash dividend far outweigh any benefits the company can make from the purchase of the treasury bonds.

3a. Is it ethical for Greyhound to attempt to take over another company? Explain.
Taking over another company is legal and therefore ethical. The methods the company uses to perform a takeover are what may make it unethical. Having a stock portfolio of the company you intend to take over is legal and also ethical.
3b. Is it ethical for Greyhound to leave its investment in the short-term investment
category? Explain.
The investment in question is clearly a long term investment and therefore does not belong in the short-term investment section. Leaving it there is therefore unethical. If the company was not intent in buying Servitronics, leaving it the investment as a short term would be ethical.
4a. Were Ted Flay’s actions ethical? Explain.
They were unethical. It is in his power to reclassify the workers as part-time as much as this may demoralize the workers. However, denying workers insurance benefits they deserve and had come to rely on is unethical.
4b. Were Will Smith’s actions ethical? Explain.
Yes they were. His actions were not only legal, but they were done in the best interest of the company in order to stay afloat. Instigating tougher collection procedures is within their right to recover money from their debtors. Such actions are executed frequently by companies when undergoing financial crises.
4c. Were the company president’s actions ethical? Explain
Yes they were. It is his job to ensure that the company keeps making money and instructing his managers to do better is part of how he does it. The actions of his managers may be borderline unethical but oversight is ethical and is the President’s job. Placing the managers under too much pressure may, however, make them sacrifice the long term goals for the short term task.

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