Employee stock options allow company executives to buy shares of their company at a specified price during a specified time period. They are given to executives as a form of noncash compensation. The option or “strike price” is normally equal to the market price of the stock on the day that the option is granted to the employee. The stock option is intended to motivate the executive to increase the stock price of the firm. If the stock rises, the investor is pleased. If the stock rises, the executive exercises the option, buys the stock from the company at the strike price, and then immediately sells those shares on the stock exchange at the current (higher) market price to obtain a capital gain. This is considered to be a win-win situation. Both the investor and the employee gain from the increase in the market price of the company’s stock. However, sometimes the stock price falls, and the current price is less than the strike price. Such stock options are referred to as “underwater” or “out of the money.” In such cases, companies will sometimes reprice the stock options to a price that is less than the current market price or cancel the under- water options and issue new options that are priced at the new current market price. Both repricing and backdating of stock options have effectively been curtailed as a result of SOX disclosure requirements. As a result, two new strategies are available. One is to “spring-load” the options by issuing them to employees just before good news is announced to investors. The other is to “bullet-dodge” by delaying the granting of stock options until after bad news has been released. An analysis of the ethics of repricing, backdating, spring-loading, and bullet- dodging is contained in the article “Ethics of Options Repricing and Backdating: Banishing Greed from Corporate Governance and Management.” In their article, which was published in the October 2007 issue of The CPA Journal, Raiborn, Massoud, Morris, and Pier present four ethical arguments. The theory of justice says that equals should be treated equally and unequals treated unequally in proportion to their inequalities. All investors are equal, and executive investors should be treated no differently from all other investors in the company. As such, preferential treatment through the backdating of stock options is inappropriate and unethical. Spring- loading and bullet-dodging are grounded on management’s inside knowledge of good and bad news that will have an impact on the company’s stock price. Their inside knowledge discriminates against all the other shareholders who do not know the good or bad news. Utilitarianism or consequentialism argues that the ethically correct decision must be of benefit to most shareholders in the long term. Backdating stock options benefits the executive at the expense of the other shareholders. It is not in the best interest of the majority of the shareholders of the company. Spring-loading and bullet-dodging are only in the short-term interests of a minority of the shareholders (i.e., executive shareholders) and not in the best long-term interests of all the other (majority) shareholders. From a deontological perspective, back- dating and repricing are akin to lies because the intention is to manipulate and deceive the other shareholders. Deontology does not accept that the end justifies the means. Furthermore, it does not allow exceptions to a rule. Spring-loading and backdating treat one category of shareholders (management) differently than the other cate- gory of shareholders (all the current and future shareholders). As such, it is unlikely that everyone in society would accept as a universal rule that management should be given preferential treatment. It is difficult to say that manipulating stock options, through any of these four tactics, is the sign of a virtuous person. Virtue ethics does not accept discrimination and prudential treatment of insiders as the mark of an ethical businessperson. The conclusion of the article by Raiborn et al. is that the repricing of stock options may be legal but it is certainly unethical. Their concluding paragraph reads, Stock options were designed as a way to provide pay for performance, not to reward poor performance by backward-looking repricing or backdating. Such activities under- mine the incentive justification for use of stock option plans. Executives deserve compensation packages that provide both short-run benefits and a long-run motivation to increase organizational value for all stakeholders. Compensation methods that cause the tone at the top to be perceived as a cacophony of greed should be banished from the orchestra. Questions 1. Do you think that stock options actually motivate employees to work for the long-term good of the company? 2. Do you think that stock options inadvertently encourage managers to engage in questionable accounting activities, such as earnings management, to artificially increase the company’s net income and thereby the value of the executives stock options? 3. Do you agree or disagree with the four ethical arguments summarized above and contained in more detail in the article by Raiborn et al.? Explain why. 4. Should a board of directors approve repricing or backdating stock options for outstanding executives whose cur- rent stock options are underwater due to uncontrollable economic factors and who will be lured away unless some incentives to stay are created? What other incentives might work?
> Two accounting students, Joan and Miguel, were studying for their final university accounting exam. “Miguel, what if they ask us whether the accounting profession should speak out about the shortcomings in financial statements?” “Like what, Joan? We know
> Look, Tim, I’ve been told that the competition for the audit of Diamond Health Services is really competitive, and you know what it would mean to the both of us to bring this one in. You would be a sure bet for the Executive Committee, and I would take o
> We have had Paige & Gentry as our auditors for many years, haven’t we, Jane? They have been here since I became president two years ago.” “Yes, Bob, I have been the CFO for seven years, and they were here before I came. Why do you ask?” “Well, they were
> Ted was the manager and Carl the partner on the audit of Smart Investments Limited, an investment company whose shares were traded on the NASDAQ exchange. They were discussing the issues to be debated at the upcoming Audit Committee meeting to finalize t
> “John, I have questions about that job you want me to do next week—the one where I am supposed to go and be part of that multidisciplinary team to study how the hospitals in Denver ought to be restructured for maximum efficiency and how they should be re
> Jane1 Ashley was a staff accountant at Viccio & Martin, an accounting firm located in Windsor, Ontario. Jane had been a co-op student while in college, and during her first work term with the firm, she had the privilege of being on several audits of vari
> Anne Distagne was the CEO of Linkage Construction Inc., which served as the general contractor for the construction of the air ducts for large shopping malls and other buildings. She prided herself on being able to manage her company effectively and in a
> Arthur sat back in his chair and looked at the other accountants who were working on their laptops. How had he gotten himself into this situation? It began last year when he was hired by Castor Gotlieb LLP, the largest of the midsize accounting firms in
> Following the pattern of many other countries, Canada converted from domestic generally accepted accounting principles to International Financial Reporting Standards (IFRS). The changeover occurred on January 1, 2011. As a result of the con- version to I
> On February 11, 2010, the leaders of the European Union (EU) agreed on a plan to bail out Greece, a country that had joined the EU in 1981 and was admitted to the European Monetary Union (EMU), allowing Greece to adopt the euro as its currency in 2001. G
> Numerous firms, including computer and communication companies, sell products that have multiple deliverables. For example, a telephone company may sell a customer a phone and a two-year unlimited long-distance telephone call package for a lump sum. How
> Parmalat Finanziaria S.p.A. and its subsidiaries manufacture food and drinks world- wide. Parmalat is one of the leading firms in the long-life milk, yogurt, and juices market. The company became the world’s seventh-largest supplier of dairy products and
> Mergers and acquisitions (M&A) are strategies that help companies to grow in size rapidly. However, some incredibly questionable M&A decisions were reported in the mining industry in 2012 and 2013, including the following: • The Canadian gold mining comp
> In mid-2011, Sino-Forest Corporation was a company with timber operations in China, including tree plantation (holding of timber for appreciation and/or harvesting), log and wood products trading, and manufacturing of wood products. Its shares were trade
> I am the assistant controller at a medium-sized, not-for-profit organization. I hired a new accounts-payable clerk three months ago—let’s call her Mary, which is not her real name—and then I fired her last week because she stole $16,583 from us by alteri
> I think I have a problem. I am a professional accountant and work for a not-for-profit organization that operates a summer camp. We have obtained a legal opinion stating that a portion of our camp fees could be considered a charitable donation with respe
> I am a professional accountant and hold the position of financial analyst, capital projects, with the Town of Pinecrest. In my position, I deal with, among others, developers and their lawyers with respect to development agreements, cost-sharing agreemen
> Excuse me, we are both professional accountants, and I need some advice. I have a full-time management position with a company. I was wondering if I would be in violation of our Professional Code of Ethics if I took on the role of an exotic dancer at nig
> I have a question that I need a bit of help on, but I am not sure where to turn, and I hope you may be able to help me out. I am the CFO of a charitable organization, it is a paid position and I am a professional accountant. We are currently presenting o
> I need your advice on an anonymous basis. I am a professional accountant employed by a company that imports bikes from China. Before I get into the issue, I wish to advise you that I really need this job, as I am a single mother of two teenagers, and job
> In July 2008, Virgin Mobile USA began a “Strip2Clothe” advertising campaign. There are millions of homeless teenagers in the United States, and Virgin Mobile’s website said that “someone out there needs clothes more than you.” Virgin Mobile invited teena
> Dear John: I really appreciate your willingness to give me your opinion as a fellow professional accountant on what I should do and on what I should advise the minority owner to do. Given that I was asked to help out Ruby, a family friend, and have found
> Albert Gable is a partner in a CPA firm located in a small midwestern city that has a population of approximately 65,000. Mr. Gable’s practice is primarily in the area of personal financial planning; however, he also performs an annual audit on the city’
> Motivated by several corporate scan- dals in which auditors failed to warn of disaster, professional accounting in the United Kingdom was under investigation for failing to act in the public interest. Then Carillion went bankrupt, and the role, function,
> On April 14, 2010, Russian investigators raided the Moscow offices of Hewlett Packard (HP). They did so at the request of German prosecutors who were examining whether HP had paid bribes totaling $10.9 million (€8 million) in bribes to win a $44.5 millio
> David Bazzetta learned in July 2001 at a corporate audit executive committee meeting in Stuttgart Germany that DaimlerChrysler “business units ‘continued to maintain secret bank accounts to bribe foreign government officials,’ though the company kn[e]w t
> Bribery charges often involve a company making illegal payments to government officials in order to land lucrative con- tracts. For example, in April 2010, German auto manufacturer Daimler AG made a $185 million settlement with the Securities Exchange Co
> Pierre Duhaime “retired” as CEO of SNC-Lavalin on March 26, 2012, a post that he had held since 2009 following over 20 years of employment at the company. He did so, because of his role in approving $56 million in payments in contravention of the company
> Lululemon Athletica, Inc., was founded by Chip Wilson in 1998 to sell yoga-inspired athletic clothing. The company’s target market was women who wanted stylish exercise apparel. In 2012, the Vancouver- based company, whose shares traded on both the Toro
> In 2015, Dr. William Campbell was awarded the Nobel Prize in Medicine for his work in discovering ivermectins while employed with Merck & Co. in the 1970s. The drug prevents onchocerciasis, called river blind- ness. In 1987, the World Health Organization
> Dan Price is the owner of Gravity Payments, a Seattle-based credit card company that he founded in 2004. In 2014, the company processed more than $65 billion of credit card transactions for more than 12,000 small and medium-sized businesses. In April 201
> Telus Corp., the second-largest wireless company in Canada, introduced an “adult content” service to their cell phone customers in 2007. Customers were charged $3 to $4 for downloads, and the company expected to make very large amounts of money based on
> On August 9, 2000, 6.5 million Firestone tires were recalled in the United States.1 One thousand five hundred and ninety- nine ATX, ATXII, and Wilderness AT tires installed on Ford Explorers were to be replaced at company cost due to evident defects, pub
> On January 6, 1992, the “growing controversy over the safety factor led the U.S. Food and Drug Administration to call for a moratorium on breast implants.”1 As January wore on, the crisis deepened until, on January 30, the Toronto Globe and Mail carried
> It was early on a Friday morning in London—7:15 a.m. on February 24, 1995, to be exact—that the phone call came for Peter Baring from Peter Norris. Baring’s family had been in banking since 1763. They enjoyed the patronage of the Queen of England and had
> Bankers Trust (BT) was one of the most powerful and profitable banks in the world in the early 1990s. Under the stewardship of chairman Charles Sanford Jr., it had transformed itself from a staid commercial bank into “a highly-tuned man
> Glen Grossmith is an outstanding family man, a frequent coach for his children’s teams, and a dedicated athlete who enjoys individual and team sports. One day, his boss at UBS Securities Canada Inc., Zoltan Horcsok, asked him to do a favor for a col- lea
> On December 20, 2002, New York’s attorney general, Eliot Spitzer, announced a $1.4 billion settlement ending a multi regulator probe of ten brokerages that alleged that “investors were duped into buying over- hyped sto
> Billionaire Raj Rajaratnam was arrested for insider trading on October 15, 2009, and marched in handcuffs from his New York apartment.1 Up to that point, he had enjoyed fame and fortune for founding the $7 billion Galleon Group of hedge funds and its env
> Jérôme Kerviel joined the French bank, Société Générale (SocGen), in 2000 at the age of twenty-three as part of its systems personnel in its back office. In 2005, he became a junior derivatives trader with an annual limit of €20 million, which is just un
> The discount airline Jetsgo Corporation began operations in June 2002. Within two and a half years, it grew to become Canada’s third-largest airline, moving approximately 17,000 passengers per day on its fleet of twenty-nine airplanes, fifteen of which w
> According to the Royal Ahold company profile, Ahold is a global family of local food retail and foodservice operators that operate under their own brand names. Our operations are located primarily in the United States and Europe. Our retail business cons
> In October 2009, PepsiCo Inc. launched, apologized, and then pulled an iPhone application called “AMP Up Before You Score,” designed to promote its Amp Energy drink. The drink’s target market is males between the ages of eighteen and twenty-four. Release
> Siemens AG is a 160-year-old German engineering and electronics giant. It is one of Europe’s largest conglomerates, with profits in 2007 of €3.9 billion on revenue of €72.4 billion, up €6 billion from its 2006 revenue. It has over 475,000 employees and o
> On March 19, 2003, the SEC filed accounting fraud charges in the Northern District of Alabama against HealthSouth Corporation and its CEO, Richard Scrushy. Scrushy was also charged with knowingly miscertifying the accuracy and completeness of the company
> Dennis Kozlowski was a dominant, larger-than-life CEO of Tyco International, Ltd, a multi-billion-dollar company whose shares are still traded on the New York Stock Exchange (Symbol: TYC). His stature was huge, and his appetite for excess knew no bounds.
> On June 20, 2005, “John Rigas, the 80-year old founder of Adelphia Communications Corp., was … sentenced to 15 years in prison and his son Timothy, the ex-finance chief, got 20 years for looting the com- pany and lying about its finances.”1 These were th
> By the late 1990s, Nortel Networks Corporation, headquartered in Brampton, Ontario, Canada, was one of the giants of the telecommunications industry. Seventy- five percent of North America’s Internet traffic was carried by Nortel equipment,1 which was ma
> Satyam Computer Services Ltd was founded in 1987 by B. Ramalinga Raju. By 2009, it was India’s fourth-largest information technology company with 53,000 employees, operating in sixty-six countries. It provided a variety of services, including computer sy
> Pierre Garvey, the CEO of Revel Information Technology, sat back in his chair and looked at his assistants. He frowned. “My son has been diagnosed with MLD,” he said. They all looked at him with shock. “Its proper name is metachromatic leuko dystrophy, a
> Walt Pavlo joined MCI in the spring of 1992. At that time, MCI was a growth company in the booming long-distance tele- communications industry that had 15% of the long-distance market, with revenues of $11 billion. In the 1990s, the major telecommunicati
> On November 17, 2005, Conrad Black and three other executives1 of Hollinger Inter- national, Inc., were charged with eleven counts of fraud with regard to payments allegedly disguised as “noncompete fees” or, in one case, a “management agreement breakup
> Tiger Woods, once probably the world’s greatest golfer, lost his number one ranking in October 2010, the same year that his marriage to Elin Nordegren blew up when she chased him out of the house and broke the windows of his vehicle with a 9 iron. His po
> In January 2006, the chair of Hewlett-Packard (HP), Patricia Dunn, hired a team of independent electronic-security experts to determine the source of leaked confidential details regarding HP’s long-term strategy. In September 2006, the press revealed tha
> Kelly Brown had been a member of the Board of Governors of the Wolfson General Hospital (WGH) for two years and had been asked to consider becoming the vice chair of the board. She had been a nurse before leaving to raise her family and now enjoyed parti
> The discussion between Don Chambers, the CEO, and Ron Smith, the CFO, was get- ting heated. Sales and margins were below expectations, and the stock market analysts had been behaving like sharks when other companies’ published quarterly or annual financi
> On September 30, 2004, Merck voluntarily withdrew its rheumatoid arthritis drug (Vioxx) from the market due to severe adverse effects observed in many of its users (Exhibit 1). As a result, Merck’s share price fell $11.48 (27%) in one d
> Johnson & Johnson (J & J) enjoyed a halo effect for many decades after their iconic precautionary recall of Tylenol capsules in 1982, which was greatly facilitated by the famous Johnson & Johnson Credo1 that stipulated patient well-being to be para- moun
> One of the world’s largest oil spills began on April 20, 2010, in BP’s Deepwater Hori- zon/Macondo well in the Gulf of Mexico. Although the world did not take significant notice until the next day, an estimated 62,000
> The NFL has known for some time that serious brain damage could be caused by the head trauma that is part of a normal football game. The sudden serious jarring of a football player’s head in normal tackling and blocking has been suspected for decades of
> The Kardell paper mill was established at the turn of the century on the Cherokee River in southeastern Ontario by the Kardell family. By 1985, the Kardell Paper Co. had outgrown its original mill and had encompassed several facilities in different locat
> In order to meet strong competition from Volkswagen as well as other foreign domes- tic subcompacts, Lee Iacocca, then president of Ford Motor Co., decided to introduce a new vehicle by 1970, to be known as the Pinto. The overall objective was to produce
> Antismoking advocates cheered in the summer of 1997 when the U.S. tobacco industry agreed to pay out more than U.S. $368.5 billion to settle lawsuits brought by forty states seeking compensation for cigarette-related Medicaid costs. Mississippi Attorney
> In June 2012, Jerry Sandusky was convicted of sexually abusing ten boys while he was an assistant football coach at Pennsylvani State University. His abuse of children went back almost fourteen years and was known by his superior, Joe Paterno, the head f
> In 1984, when he was eighteen years old, Cesar Correia murdered his father, killing him with a baseball bat. Cesar then dumped the body in the Assiniboine River. The body was eventually found, and Cesar confessed to the crime. He pleaded guilty to mansla
> Alex McAdams, the recently retired CEO of Athletic Shoes, was honored to be asked to join the Board of Consolidated Mines International Inc. Alex continues to sit on the Board of Athletic Shoes, as well as the Board of Pharma-Advantage, another publicly
> Adverse selection occurs when one party has an information advantage over the other party. In the case of insurance, people taking out insurance know more about their health and lifestyle than the insurance company. Therefore, in order to reduce informat
> Throughout 2009, the world was plagued with the H1N1 swine flu epidemic. The H1N1 influenza virus, which began in Mexico, spread rapidly. In June, the World Health Organization (WHO) declared it to be a global pandemic. Those who caught the virus suffere
> On October 1, 2012, IKEA apologized for removing women from the photographs in the IKEA catalogs that were shipped to Saudi Arabia. IKEA is a Swedish company that was founded in 1943. It is now the world’s largest furniture retailer with stores in over f
> Eric Hebborn (1934–1996) was an English painter and art forger. Hebborn attended the Royal Academy of Arts and then the British School at Rome, two of the most prestigious fine arts schools at the time. Underappreciated as an artist, he turned his hand t
> In the airline industry, passenger load capacity is the proportion of seats filled on each flight. The objective is to have all air- planes at full-load capacity on all flights. In October 2000, Jeffrey Lafond, a former Air Canada employee, joined WestJe
> On September 5, 2007, Steve Jobs, the CEO of Apple Inc., announced that the spectacularly successful iPhone would be reduced in price by $200 from $599, its introductory price of roughly two months earlier.1 Needless to say, he received hundreds of email
> Deutsche Bank (DB) is the largest bank in Germany and world’s sixth-largest investment bank.1 Unfortunately, the bank suffered from lackluster leadership, a poor organizational culture, and a complicated governance structure that result
> In 2006, Mercedes-Benz introduced Blue- TEC, an advanced system to trap and neutralize harmful emissions and particulates that allowed Mercedes to market “clean diesel” cars. VW and Audi made agreements to share the technology to enable all three compani
> In January 2002, the Boston Globe began a series of articles reporting that Fr. John Geoghan had been transferred from one parish to another in the Archdiocese of Boston, even though senior church officials knew that he was a pedophile. There was outrage
> On a fateful day in 2001, a GM engineer realized during preproduction testing of the Saturn Ion that there was a defect that caused the small car’s engine to stall with- out warning.1 This switch was approved in 2002 by an engineer, Raymond DiGeorgio, wh
> Should executives and directors be sent to jail for the acts of their corporation's employees?
> Why didn’t some corporations protect women employees from sexual abuse before 2017–2019?
> How can corporations ensure that their employees behave ethically?
> Why is it important for the clients of professional accountants to be ethical?
> Why might ethical corporate behavior lead to higher profitability?
> On any given day, a bank may have either a surplus or a deficiency of cash. When this occurs, banks tend to lend to and borrow from other banks at a negotiated rate of interest. These interbank loans could be as short as one day and as long as several mo
> What could professional accountants have done to prevent the development of the credibility gap and the expectations gap?
> Why are we more concerned now than our parents were about fair treatment of employees?
> Why have concerns over pollution become so important for management and directors?
> Should organizations that have a risk-taking culture, such as the one developed by Stan O’Neil at Merrill Lynch, enjoy the gains and suffer the losses, without recourse to government bailouts?
> Should the CEOs who refused to have their firms invest in mortgage-backed securities in the early years because the risks were too great receive bonuses in the latter years because their firms did not incur any mortgage-backed security losses? How would
> Should CEOs who made large bonuses by having their firms invest in mortgage-backed securities in the early years have to repay those bonuses in the later years when the firm records losses on those same securities?
> The government bailout of the financial community included taking an equity interest in publicly traded companies such as American International Group (AIG). Is it right for the government to become an investor in publicly traded companies?
> How much should the exiting CEOs of Fannie Mae and Freddie Mac have received when they were replaced in September 2008?
> Identify and explain five examples where executives or directors faced moral hazards and did not deal with them ethically.
> How could ethical considerations improve unbridled self-interest in ethical decision making?
> Wal-Mart has a brand image that triggers strong reactions in North America, particularly from people whose businesses have been damaged by the company’s over- powering competition with low prices and vast selection and by those who value the small-busine
> How could increased regulation improve the exercise of unbridled self-interest in decision making?
> What were the three most important ethical failures that contributed to the subprime lending fiasco?
> Does the Dodd-Frank Act go far enough, or are some important issues not addressed?
> Should members and executives in investment firms be forced to be members of a profession with entrance exams and with adherence to a professional code such as is the case for professional accountants or lawyers?
> Given that the marketplace for securities is global, and that the risks involved can affect people worldwide, should there be a global regulatory regime to protect investors? If so, should it be based on the regulations of one country? Should enforcement
> The global economic crisis was caused by the meltdown in the U.S. housing market. Should the U.S. government bear some of the responsibility of bailing out the economies of all countries that were harmed by this crisis?
> Are the criticisms that mark-to-market (M2M) accounting rules contributed to the economic crisis valid?
