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Application of Ethical Decision-Making Model

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TO: Beverly Wald, CIA


DATE: September 14, 2012

SUBJECT: Application of Ethical Decision-Making Model

As you requested, I have analyzed the ethical dilemma that faces the company as a result of Sammie Markowitcz's actions. His insubordination resulted in improper recording of capital expenditures as inventory, therefore overstating assets and understating expenses in our balance sheet and our income statement, respectively. Relying on this information Second Bankers Hours & Trust Co. extended a $20 million loan, for which we might not have qualified, if the financial statements were presented fairly. The mistake should be fully disclosed to the financial institution, to allow them to reevaluate the terms of the loan, or possibly void the loan agreement completely.

Despite the company's new policy, Markowitz disobeyed direct orders and made a purchase of 1,000 motors in the 4th quarter. To further complicate the situation, he convinced the plant accountant to record the $1.5 million expenditure as an operating expense to conceal his actions. According to accounting principles, if the expenditure improves or adds value to the business and has a useful life over 1 year, this expenditure should be capitalized. Instead, the motors were recorded as an operating expense and placed into inventory. According to ASC 330-10-05-2, "An inventory has financial significance because revenues may be obtained from its sale, or from the sale of the goods or services in the production of which it is used." Recording the transaction as an operating expense will result in inaccurate balance sheet and income statement, and significantly decreased capital expenditures from investing activities. Based on the erred financial statements I.M. TekStil Manufacturing was able to obtain the $20 million loan. Due to deficiencies in company's internal controls, these mistakes were not uncovered until several months later, during an internal audit.

Markowitz acted under teleological philosophy of utilitarianism. This philosophy states that one has to choose the course of action that provides the greatest benefit for the majority of stakeholders involved. Markowitcz would be considered act-utilitarian, which means he examined a specific action, rather than the general rules governing the actions, to assess whether it will result in the greatest benefit. Based on this philosophy Markowitz might justify his actions by stating that his primary responsibility, as a plant manager, is to ensure that the plant production process operated efficiently. Further he might justify his actions, by stating that he had saved the company $1.5 million by purchasing the motors on sale from an overseas supplier.

Markowitz did not follow the policy, and his defiance can be addressed internally, however his actions affected third parties. One of the major stakeholders in this situation is the financial institution, which has the right to make the credit decision based on accurate financial information. Another stakeholder is Irv Milton, the president and the face of the company, whose reputation will suffer,



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