For each case study below, read the case study and answer each question related to the case drawing on facts from the case and unit content of Business Ethics unit.
Case Study: Employees at Aker & Aker Accounting (30 marks) NOTE – This is the real case study from pre-Covid exam
Carla knew something was wrong when Jack got back to his desk. He had been with Aker & Aker Accounting (A&A) for 17 years, starting there right after graduation and progressing through the ranks. Jack was a strong supporter of the company and that was why Carla had been assigned to him. Carla had been with A&A for two years. She had graduated in the top 10% of her class and passed the CPA exam on the first try. She had chosen A&A over one of the “Big Five‟ firms because A&A was the biggest and best firm in Smallville, Ohio, where her husband, Frank managed a locally owned machine tools company. She and Frank had just purchased a new home when things started to turn strange with Jack, her boss.
“What’s the matter, Jack?” Carla asked.
“Well, you’ll hear about it sooner or later. I’ve been denied a partner’s position. Can you imagine that? I have been working 60-70hour weeks for the last 10 years, and all that management can say to me is “not at this time”, complained Jack.
Carla asked, “So what else did they say?”
Jack turned red and blurted out, “They said maybe in a few more years. I’ve done all that they’ve asked me to do. I’ve sacrificed a lot, and now they say a few more years. It‟s not fair.”
“What are you going to do?” Carla asked.
“I don’t know”, Jack said. “I just don’t know”.
Six months later, Carla noticed that Jack was behaving oddly. He came in late and left early. One Sunday Carla went into the office for some files and found Jack copying some of the software that A&A used in auditing and consulting. A couple of weeks later, at a dinner party, Carla overheard a conversation about Jack doing consulting work for some small firms. Monday morning, she asked him if what she had heard was true.
Jack responded, “Yes, Carla, it’s true. I have a few clients that I do work for on occasion.” “Don’t you think there’s a conflict of interest between you and A&A?” asked Carla.
“No”, said Jack. “You see these clients are not technically within the market area of A&A. Besides, I was counting on that promotion to help pay some extra bills. My oldest son decided to go to a private university, which is an extra $25,000 each year. Plus our medical plan at A&A doesn’t cover some of my medical problems. And you don’t want to know the cost. The only way I can afford to pay for these things is to do some extra work on the side.”
“But what if A&A finds out?” Carla asked. “Won’t they terminate you?”
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“I don’t want to think about that. Besides, if they don’t find out for another six months, I may be able to start my own company.”
“How?” asked Carla.
“Don’t be naïve Carla. You came in that Sunday. You know.”
Carla realised that Jack had been using A&A software for his own gain. “That’s stealing!” she said. “Stealing?” Jack’s voice grew calm. “Like when you use the office phone for personal long-distance calls? Like when you decided to volunteer to help out your church and copied all those things for them on the company machine? If I’m stealing, you’re a thief as well. But let’s not get into this discussion. I’m not hurting A&A and, who knows, maybe within the next year I’ll become a partner and can quit my night job.”
Carla backed off from the discussion and said nothing more. She couldn’t afford to antagonize her boss and risk bad performance ratings. She and frank had bills too. She also knew that she wouldn’t be able to get another job at the same pay if she quit. Moving to another town was not an option because of Frank’s business. She had no physical evidence to take to the partners, which meant that it would be her word against Jack’s, and he had 17 years of experience with the company.
1. What are the ethical issues in this case study? (8 marks)
Include your response here
2. Briefly discuss all of the stakeholders that can be impacted by the actions of A&A employees. (10 marks)
Include your response here
3. Assume that you are Carla. Discuss your options and what the consequences of each option might be. (8 marks)
Include your response here
4. Assume that you are Jack and did not get the promotion. Would you have reacted the same way (as he did in the case study) or differently? Discuss. (4 marks)
Include your response here
Case Study: Rameses International (20 marks)
NOTE – This is the real case study from T3 2020 exam
Jeanette was recently appointed CEO of Ramses International, which is a long established, family- run export house specialising in buying manufactured goods from Western Europe and the USA for re-sale in Africa and Middle East. Jeanette was previously Marketing Director of one of the Ramses international’s biggest suppliers. She is the first CEO appointed from outside the family.
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Ramses International had been very successful for many years, but has begun to suffer from increasing competition in its chosen markets, particularly from strong manufacturing companies expanding downstream to capture more from its suppliers.
Ramses had introduced a number of initiatives over the past three (3) years in order to try to respond to the challenges it has faced. These initiatives have included: seeking a wider range of products to re-sell from a boarder supply base (more suppliers); attempting to have closer collaborative agreements with major suppliers to minimise any potential conflict; and attempting to operate in more markets.
However, none of these initiatives has been particularly successful, and turnover has stagnated.
Jeanette has said that one of the problems which is affecting Ramses’ competitive position is that the underlying logic behind the initiatives appears to be finding ways of improving performance whilst maintaining the company’s existing business model and culture. However, Jeanette has argued that in order to respond to the changing environment, Ramses need to consider making some more fundamental changes to the company’s vision and strategy.
Jeanette arranged a board meeting to discuss Ramses’ future strategies and its strategic management process. The response of board members to the planned meeting and pursuing strategic change has been positive and constructive. However, Jeanette has added the following note of caution: ‘We need to remember that senior management teams within companies can often be good at analysing their company’s position, and identifying potential strategic options available to it. However, they are often much less successful in actually implementing the chosen strategies’.
1. As a board member for Rameses International, what would you identify as the key challenges being experienced by Jeanette as the CEO? Suggest at least four (4) strategies that the Rameses International executive team could pursue in order to make the company competitive again. Drawing on your learning from the unit, explain the benefits and disadvantages of each strategy. (10 marks)
Include your response here
2. Using evidence from the case study, explain which organizational culture you believe is being evidenced at Ramses International. Would you recommend changing the current organizational culture? Why or why not? Justify your recommendation using your learning from the unit to support your arguments. (10 marks)
Include your response here
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Case Study: Amex in China (30 marks)
NOTE – This is the real case study from T1 2020 exam
After graduating from college and working for a few years at a small tech firm, John got a job with Amex Corporation. The company sells high quality electronic goods that are extremely popular. Part of John’s job involves working with a team to oversee Amex’s contractors in China. Amex contracts with many supplier factories across Asia to build components for their products. John and his team have to ensure that shipments are timely. John’s team has innovative people, and they perform well with the company giving them responsibility, including solving major challenges that arise with these factories.
One day John was to visit the factory in the Shandong province of China. Shipments were falling behind schedule, and there seemed to be more accidents occurring there. John was to visit the factory and observe production to determine where the problems occurred. John looked forward to his first trip to China and to actually visit a supplier factory to learn more about the manufacturing process as well.
When John arrived at the airport, the managers of the supplier factory greeted him and took him over to the factory. John found all employees hard at work with one group of workers cleaning components using special chemicals. John noticed, to his surprise, that workers did not wear protective face masks, even though it was mandated and known to the supplier’s officials that those chemicals were harmful if inhaled. When John asked about this, he was told that face masks were recommended but not required because the chances of getting sick from the chemicals was low.
As John spent time at the factory, he noticed more things were wrong. He discovered employees, on average worked at least 12 hours per day, sometimes with no breaks. He knew company policy mandated an eight-hour work day. Sometimes employees would put in as much as 18-hour shifts. John spoke with one of the employees who told him on condition of anonymity that they were denied sick leave. Any perceived idleness on the employees’ part resulted in reduced pay. He also informed him there had been several suicides at the plant from overworked employees. When John asked the supervisor why the factory did not hire more workers, he replied they did not have the money for that.
When John returned to the United States, he wrote a list of recommendations for improving the factory. Later, that month his team met with the company’s top managers in the logistics department. They expressed concern about John’s findings but offered no recommendations on how to fix them. Afterwards John complained to members of his team. “Of course, they aren’t going to do anything” said Joyce, who had been working in the logistics department for 10 years. “Why should they? As long as the company gets their shipments, they aren’t going to disrupt the process by requiring major changes.”
Dawn who had only been working for six months chimed in. “But Joyce, they have to do something. From what John said, the workers have terrible working conditions.”
Joyce sighed. “Dawn you haven’t been in this business long enough to see how things work. The factory in Shandong really isn’t that bad compared to many other factories in China. It is not
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unusual for factory workers to work longer hours. Besides, you might think the employees there don’t make much for the amount that they work, but it is a lot better than what people get in other factories. For better pay people are willing to work in less than ideal conditions.”
John spoke up. “Just because that’s normal in the culture doesn’t necessarily make it right. Many of these problems could be avoided if the factory ensured their workers wore appropriate safety gear and hired more employees.”
“The factory probably can’t hire more workers,” Joyce said. “Where are they going to get the money?”
“Well, maybe Amex should begin paying them more, “Dawn replied. “That would translate into higher wages and the ability to hire more staff.”
“You’ve got to be kidding!” Joyce said. “The whole reason why Amex is there in the first place is because labour costs are so cheap. Besides being able to keep costs low is the only way to price our products reasonably. Consumers want low priced products.”
“But consumers also care about how workers are treated, don’t they?” John asked. They might show some concern, “Joyce replied. “But if it’s between higher-priced products or better working conditions, I guarantee consumers will choose the latter.
1. Amex does not own the Chinese factory, are they still accountable for the working conditions in the factory? Explain with reasons, why or why not? (10 marks)
Include your response here
2. Identify and discuss at least two ethical issues in this case and suggest solutions that address these. Consider ethical standards of behaviour (based on theory). (10 marks)
Include your response here
3. Describe the approach taken by Joyce using the framework of cultural relativism. (10 marks)
Include your response here
Case Study: Ethical Leadership Challenges at Diamond Foods (30 marks)
NOTE – This is the real case study from T1 2021 exam
Diamond Foods, a nut and snack company, was founded in 1912 by a group of cooperative walnut growers, known as “Diamond of California.” Over the years, Diamond Foods grew mostly by acquiring other brands, including Pop Secret, Kettle Foods, and Harmony Foods. Today, the company is owned by Snyder’s-Lance, Inc. and is headquartered in Charlotte, North Carolina. In addition to Diamond, the Snyder’s-Lance, Inc. product line includes the brands Cape Cod, Lance,
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Tom’s, eatsmart, Stella D’oro, Krunchers!, Late July, Archway, O-Ke-Doke, Pretzel Crisps, and Jay’s. There are currently 6,400 full-time employees and numerous notable competitors such as Kellogg’s, USA., Frito-Lay, USA Inc., and Mondelez International, Inc.
Brian Driscoll was named President and CEO of Snyder’s-Lance, Inc. in June 2017. He had previously been President and CEO of Diamond Foods, a position he assumed after its former President and CFO were let go due to the scandal at Diamond in which financial reports were falsified. The scandal originated in 2005 under the management of the preceding President and CEO, Michael Mendes. His business philosophy was “Bigger Is Better,” which ultimately led to a corporate culture of poor judgment and fraud. As part of his growth strategy, he secured millions in loans to finance the acquisition of Pop Secret. He later attempted to purchase Pringles from Procter and Gamble (P&G). Had the merger been successful, Diamond Foods would have been the second largest distributor of snack foods in the United States following PepsiCo.
In 2011, Mark Roberts, an analyst with the Off Wall Street Consulting Group, raised questions about Diamond’s accounting practices. He accused Diamond of incorrectly reporting its payment to suppliers. Diamond would pay growers in September for walnuts that were delivered in Diamond’s fiscal year 2011 which had already ended in July. This significantly impacted Diamond’s financial statements, which, if done intentionally, would be illegal. Initially Diamond denied any wrongdoing, arguing that the payments were an advance on the future 2012 crop and had nothing to do with the previous year’s crops.
Growers refuted this claim, arguing that they were told that the payments were, in fact, for the previous year. Investigations revealed that these payments were made to inflate the fiscal 2011 results by shifting costs to the upcoming year. An internal investigation found that CEO Michael Mendes and CFO Steven Neil had systematically improperly accounted for growers’ payments in 2010, 2011, and 2012. They skewed Diamond’s financial results and reported an EPS (Earnings per share) of $2.61 when the correct number was $1.14. As a result, the CEO and CFO took home millions of dollars in additional compensation.
The “improved” EPS resulting from the accounting fraud was, in part, an attempt to follow Mendes’ aggressive philosophy and acquire Pringles from P&G. Diamond needed to improve financial performance at any cost in order to meet conditions laid down in the loan covenants and seal the deal. One of those conditions required higher performance standards for factors that affected management compensation. Higher reported earnings would allow for greater compensation. The improper accounting of earnings was an attempt by management to deceive the lenders about Diamond’s true earnings. Another ethical concern raised at this time was the fact that Diamond’s CFO had a seat on the company’s Board of Directors, which created an overlooked conflict of interest that could have easily led to a lack of oversight by the board.
Subsequently, the company was investigated for criminal fraud, and a new audit was undertaken. This also disrupted the Pringle acquisition process. In addition, Diamond had difficulty meeting the financial report filing deadlines. The fraud resulted from lack of quality controls and from the inability or unwillingness of top management to set proper ethical standards, thus encouraging more unethical behavior by employees. For example, after payment irregularities were discovered, Diamond’s management denied the claims and insisted that the system worked to “optimize cash flow for the growers.”
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Stock prices dropped to a six-year low of $12.50. The lower stock price was the result of restated historical financial results as well as of the current year’s performance. The restated financial results removed a previously reported $56.5 million in profits due to the accounting fraud. The price decline was also impacted on rumors that billionaire investor and activist, David Einhorn, was shorting the stock. The combination increased investor uncertainty about Diamond’s future profitability, and the Pringle deal with P&G was lost.
Following an external investigation, Mendes and Neil were placed on administrative leave. Mendes subsequently resigned, and Neil was let go. Mendes did not receive promised insurance benefits as his resignation was considered a violation of his duty as CEO. He was required to pay back the 6,665 shares of Diamond’s common stock that he received from fiscal year 2010 and also reimburse the company for his 2010 and 2011 bonuses, which totaled $2,743,400. This amount was taken from his Retirement Restoration Plan, but he still received a payment of $2,696,000.
After restating its profits, the company still faced risks of litigation, regulatory proceedings, government enforcement, and insurance claims. The Securities and Exchange Commission levied a $5 million fine as settlement of the fraud allegations and charged Neil for falsifying walnut costs and Mendes for his role in the misleading financial statements. Mendes forfeited $4 million in bonuses and benefits and also paid a penalty of $125,000. Though it was not proven Mendes participated in the scheme, regulatory authorities believed he should have known about Diamond’s incorrect financial statements. Neil initially fought the SEC charges but settled by paying $125,000 civil penalty. Investors filed lawsuits against Diamond because of the misrepresentation of its financial standing; a $100 million settlement was made by Diamond Foods.
When Brian Driscoll took over Diamond, he outlined his strategic plan to advance the company past its ethical mistakes. It began with improved internal controls of financial statements. Six new directors were appointed to strengthen the board. A forward-looking statement of risks was issued, which identified problems that may arise in the future. It included the Company’s Code of Conduct and Ethics Policy, and a statement about top management’s responsibility in setting the proper tone for the organization.
He replaced the CFO and installed new company financial reporting processes in which managerial approval was needed for material and nonroutine transactions. Ethics training, led by the CFO, reinforced proper accounting procedures and training for employees. It led to a better understanding of financial reporting integrity and ethical expectations. He modified the walnut cost estimation policy and added inputs each quarter, which had to be reviewed and signed off by cross- functional management. His efforts fostered better documentation and oversight of accounting procedures and better supplier communication. A Grower Advisory Board was introduced to receive input from the growers and enhance communication between growers and the company.
The controls on accounts payable and invoice processing were revised. A third-party report known as “Internal Control-Integrated Framework” evaluated the effectiveness of its internal controls. The reporting controls were implemented, and this improved communication, which allowed better transparency. These new controls enabled the company to escape bankruptcy and restore shareholder confidence, which ultimately led to the Snyder’s-Lance, Inc. merger.
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MMM343: Business Ethics T3 2021 SAMPLE EXAM
Question 1: Describe the organizational culture of the company under CEO Michael Mendes drawing on theories of ethics. (10 marks)
Include your response here
Question 2: Identify all the stakeholders who were affected by the accounting fraud at Diamond Foods and discuss the impact on each one of them. (10 marks)
Include your response here
Question 3. Describe how the steps taken by Driscoll as the new CEO will prevent accounting frauds in the future. (10 marks)
Include your response here
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