1.American Accounting Association (AAA) is an ethical decision-making model, which consists of seven different steps for undertaking a decision depending on a scaffold of systematic evaluation and this leads to activities with greater justifications (Brennan & Kirwan, 2015). There are certain bases and ethical principles for this model, which constitute of honesty, integrity, accountability, truthfulness, fairness, care and loyalty for the family. The steps in this model in relation to the provided case are enumerated briefly as follows:
Facts of the case:
From the case study, it has been identified that Mr. Brent Allen is a senior director of Great Gold Limited (GGL), which is involved in mining and extracting gold. In addition, the individual is a director of Big Machine Limited (BML) as well. The case study highlights that GGL is involved in leasing a considerable amount of machinery from BML. Janelle Davis is observed to be one of the senior audit partners at Miller Yates Howarth (MYH), which is adjudged as the second biggest Australian accounting organisation. Janelle thinks that GGL is forced to lease machinery from BML due to Mr. Brent Allen, as the person is the director of both the organisations.
Ethical issues in the case:
From the provided case, the ethical issue that could be identified is the obligation of CGL to lease from BML due to the pressure from Mr. Brent Allen, although the machinery on lease is available from other sources. Thus, it could be stated Mr. Brent Allen might be utilising his power in encouraging GGL to lease from BML.
Norms, values and principles related to the case:
In this case, the norm is that if it is a business decision, in which GGL leases machinery from BML and the decision is not undertaken due to the pressure of Mr. Allen. The leased machinery from BML is highly effective in relation to the requirements of GGL as well as the leading cost (Chan, Chiu & Vasarhelyi, 2018). If Mr. Allen pressurises and enforces the sources, for enhancing the sales margin of BML, question arises in his fairness and integrity. Thus, the norms, values and principles associated with this case could be summarised as under:
- The third party allocation to render services to an organisation needs to be either bid-based or value-based (Knechel & Salterio, 2016).
- It is necessary for the director to reveal information regarding all the directorships held to the board of the organisation.
- In case, the board of the organisation raises objection against an individual for holding the director position in two interrelated businesses, the person needs to resign from one of the directorships (Leung et al., 2014).
Alternative courses of action:
The first option available to Janelle Davis is that she needs to accumulate evidence that despite of the availability of better options from other organisations and variations in cost implications, GGL is leasing machinery from BML. Another option is that Janelle could be engaged in open discussion by carrying all the evidence with Mr. Allen regarding the matter. In case, Mr Allen provides sound justification for such action that would help both BML and GGL, the issue would be over. Finally, if accuracy is found in judgement and discrepancy of Janelle, the notional loss in leasing from BML could be addressed and it could be considered as a violation of the ethical code of integrity and fairness on the part of Mr. Allen.
Best course of action:
Based on the critical evaluation of the above two options, the most effective alternative for Janelle is to move ahead for accumulating evidence along with obtaining adequate information on the contractual terms between BML and GGL. Secondly, Janelle is needed to verify the market rates of other firms having similar machinery before Mr. Allen is accused with the violation of ethical codes of integrity and fairness (Lodhia, 2015).
Consequences of each course of action:
If it is found that Mr. Allen favours BML and pressurises GGL for leasing from BML despite the availability of better alternatives, unfair trade practices could be reported against the individual. For the second option, in which Mr. Allen provides justification depending on a win-win contract and agreement for both the parties, the individual has the rights to provide recommendations to GGL regarding leasing from BML.
In order to undertake the decision, Janelle needs to obtain additional information, which is elucidated briefly as follows:
- Data of other rivals having similar machinery such as BML along with their implications of cost (Yee et al., 2017)
- Assessment of the skill sets of machinery for BML in contrast to those of the rivals
- The significance of leasing from BML over other rivals (Messier, Glover & Prawitt, 2015)
The above information would help in highlighting the ethical principles to source from BML along with identifying whether Mr. Allen is providing undue favour to BML for raising its profits.
The Managing Partner,
Miller Yates Howarth,
Subject: Strength of negligence case on the part of GGL
The report is prepared to draw the attention regarding the dissatisfaction level of the shareholders of GGL due to falling share price. As a result, GGL might charge MYH against any case of negligence and thus, the detailed evaluation of the case is described as follows:
Facts of the case:
The legal liability that the shareholders have issued occurs because of the fall in the share price of GGL. The share price of GGL has declined due in the fall in the gold price and damages against GGL.
According to this section, a contingent liability could be described as a current obligation, which arises due to past events; however, recognition is made (Simnett, Carson & Vanstraelen, 2016). The recognition is not made due to the fact it is that it is not likely that an outflow of resources related to economic benefits would be needed in settling the obligation and the amount of obligation could not be gauged with considerable reliability. If the conditions are not achieved, the disclosure of the liability might be made in the form of a footnote to the financial statements or it would not be reported at all in the financial statements (William Jr, Glover & Prawitt, 2016).
In this provided case study, the realisation of contingent liability is made in the past financial year. The reason is that the amount of obligation could be gauged and it is certain as well (Stewart, Kent & Routledge, 2015). However, the liability could be represented in the form of claim for damages, which occurred in the past. Such liability has caused GGL to cease its mining operations in the current financial year. Even though the claim has been made in the past, the shareholders have issued significant claims of damages in the accounts of the previous year at the previous yearly general meeting.
After critically assessing the above discussion, it could be found out that the shareholders have expressed concerns regarding the fall share price of CGL. This is because the return on investment of the shareholders is declining due to such falling share price. The fall in share price is due to the fall in the price of gold and damages claimed against MYH. It has been found out that the contingent liability is recognised in the previous financial year. However, the liability could be represented in the form of claim for damages, which occurred in the past. As a result, GGL might sue MYH for such negligence in order to ensure the trust of the shareholders.
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