Unit 2: Written Assignment

BUS 5115
Business Law, Ethics and Social Responsibility
Term 3, 2020-2021

Case Study: Fantastic Development Inc.

MBA, University of the People.

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Case Description

Fantastic Development Inc is a company requesting a loan from the Coshocton

National Bank. Its financial statement submitted shows that the company is making a

significant profit and is qualified for the loan. However, it seems that Fantastic had cooked it

book after an auditor working for both bank and Fantastic, found out the false document of

the company. Jennifer Grace, an auditor of a CPA firm inquired about this discrepancy at

Fantastic. With her inquiry, Fantastic has decided to appoint another CPA firm for its audit

purpose. It seems Fantastic is acting unethically and wants to hide its fraudulent behaviors

from the bank and auditors.

Ethical Issues

Two major ethical issues have been identified in this case study. First, Fantastic

Development Inc. has potentially provided false financial statements to the bank where it has

increased the profitability. This document can probably get Financial Development a huge

amount of loan which the company may or may not pay back as per its actual financial

situation. Second, after the inquiry from Jenifer, the company has decided to hire an

alternative CPA firm for their audits. Here, the regular client of Fantastic development has

lost their work with Fantastic with the inquiry.

Stakeholders

The stakeholders identified in the case study are:

• Coshocton National Bank and its shareholders are the major stakeholders. With the

fraudulent financial statements, Financial Developments will probably get the loan,

however, according to the actual statements the company will not be able to pay the loan

back which will result in a loss in the bank.

BUS 5115 Business Law, Ethics and Social Responsibility

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• Fantastic Development is the second shareholder as it is applying for the loan. There are

possibilities that Fantastic Development may not payback for the loan and has the

chances to file bankruptcy which will eventually affect the loss of stocks among the

shareholders.

• Jenifer and its CPA firm are the third stakeholder as they are obliged to prepare and

present the facts being the auditor firm to the bank.

• Alternative CPA firms that will be hired by Fantastic might be the fourth stakeholder as

they would be unknown about the cooked financial statements of the company.

Possible Alternatives

Alternatives are possible to resolve ethical issues that have been identified. First,

Fantastic Developments can verify and present its accurate financial statements to the bank

including the company’s losses and challenges. This can ethically guide banks to sanction the

appropriate loan amount to the company. Secondly, rather than complaining bank about this

issue, Jenifer could also verify whether the statement presented by Financial developments is

true or not and submit the audit report to the bank. This can help prevent her professional

ethics and CPA firm standings. Besides, Jenifer can also report the issue to the board

committee of Fantastic Development to rectify and verify the possible fraud. The Sarbanes–

Oxley Act provides auditors to raise their voice outside the audit which could help Jenifer to

inform SEC for further investigation (Daniels Fund Ethics Initiative n.d.).

Anticipated constraints of the Alternatives

The possible constraints of the alternatives include:

• After presenting the true financial statements of Fantastic and acting ethically, the

bank may not provide commercial loans to the company.

BUS 5115 Business Law, Ethics and Social Responsibility

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• The accusation of Jenifer may not be true and Fantastic Development is actually

doing well in their profits resulting in unethical professionalism of Jenifer.

Recommendation

The case study shows the ethical dilemma between the three parties, bank, a company,

and audit firm. It is obvious that the company has conflict on interest indicated by possible

fraudulent document and appointment of alternative CPA firm. However, it is responsible of

auditing firms as independent bodies to verify and report unethical accounting practices.

Some of the recommendations include:

• Auditors should identify, verify, and report unethical accounting malpractices of

companies and ensure whether those malpractices are under legislative actions (Half

2018).

• Companies should have ethical management practices and build an environment inside

the company for good behaviours (Paine 1994).

• Organizational integrity is the alignment of the thoughts and behaviors of everyone within

the organization which demonstrates how it thinks, says, and behaves. Effective policies,

code of conducts, leadership and effective management should be implemented to

synchronize ethical integrity in an organization(Thornton 2016).

BUS 5115 Business Law, Ethics and Social Responsibility

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References

Daniels Fund Ethics Initiative (n.d.). "Arthur Andersen: An Accounting Confidence Crisis."

from https://danielsethics.mgt.unm.edu/pdf/Arthur%20Andersen%20Case.pdf.

Half, R. (2018). "Ethics in Accounting: How to Handle Common Dilemmas." from

https://www.roberthalf.com/blog/salaries-and-skills/ethical-issues-in-accounting-4-

pieces-of-advice.

Paine, L. S. (1994). "Managing for organizational integrity." Harvard Business Review 72(2):

106-117.

Thornton, L. F. (2016). "What Is Organizational Integrity?". from

https://leadingincontext.com/2016/07/27/whatisorganizationalintegrity/.

BUS 5115 Business Law, Ethics and Social Responsibility