978-0077862213 Chapter 3 Solution Manual Part 3

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16. In October 2010 it was reported that Cheryl Eckard, a quality-assurance

manager at the pharmaceutical company Glaxo-SmithKline who had blown

the whistle on the safety of products made in its Puerto Rico plant, had been

fired as a result of what the company called a “redundancy” related to the

merger of Glaxo Wellcome and SmithKline Beecham a couple of years

before. Of course, the suspicion was that Eckard was fired because she

refused to go along in a cover-up of the quality assurance and compliance

problems at the plant. She had made recommendations to her superiors that

were ignored reportedly because the company was too busy preparing for an

FDA inspection they hoped would clear the way for approval to market two

new products, including the diabetes drug Avandamet, which was eventually

approved. Eckard had found that the manufacturing facility had a

contaminated water system, an air system that allowed products to be cross-

contaminated and pills of different strengths mixed in the same bottles,

among other problems.

Eckard filed a federal lawsuit against Glaxo under the U.S. False Claims Act.

She won $96 million as part of a $750 million penalty against Glaxo. Glaxo

agreed to pay millions in fines, penalties and settlements to resolve claims

that it knowingly made and sold adulterated drugs, including Paxil, a

popular antidepressant, with the intent to defraud and mislead.

How do you view whistleblowers that approach the government under the

False Claims Act and win large awards from the settlement? Are they just

out for the money? Should they profit from the wrongdoing of their

employer? Or, are they performing an important public service?

Ask the students if being ethical should be rewarded or not? Many may argue that being

ethical is its own intrinsic reward. In a society that often seems to reward the unethical

person and harm the ethical person, students may not see the dilemma in rewarding a

whistleblower. Harry Markopolos in his book No One Would Listen, tells the story of

being the Bernie Madoff whistleblower and notes that the SEC would not investigate his

17. It is a distinguishing mark of actions labeled whistleblowing that the agent

intends to force attention to a serious moral problem. How does this

statement relate to whistle-blowers who come forward under provisions of

the Dodd-Frank Financial Reform Act? Respond to the question by

considering the motivations to blow the whistle as discussed in this chapter.

A study by the Ethics Resource Center (ERC), Inside the Mind of a Whistleblower,

indicates that the top five reasons given by whistleblowers for coming forward are (1) the

belief that corrective action would take place (79 percent); (2) support of management

(75 percent); (3) support of coworkers (72 percent); (4) the fact that they could report

The 2010 passage of Dodd-Frank proposed additional incentives for whistleblowers

who provide information that aids in the recovery of over $1 million. The whistleblower

could receive 10 to 30 percent of that amount. The belief is that monetary incentives will

prompt observers of corporate misconduct to come forward, which could prevent future

scandals like those leading up to the 2007–2008 financial crisis. One major concern with

Under Dodd-Frank, whistleblowers who report violations of the securities laws are

supposed to be protected from being fired. These protections—which can include rein-

There are many unanswered questions about Dodd-Frank, including whether specific

18. Do you believe that the Dodd-Frank whistle-blower program that

incentivizes reporting fraud and other wrongdoings in return for a monetary

reward is ethical? Use the ethical reasoning methods discussed in Chapter 1

to answer the question.

One concern about the Dodd–Frank is that from an ethical perspective it may be

better for all involved—the whistleblower, the offending company, and the public—if the

whistleblower works with the company to fix the matter without getting the government

(and the press) involved. Another concern is that it may force the whistleblower to take a

more adverse position against the company and endure greater scrutiny and exposure

when they come forward. The confidentiality obligation of the employee is another

employee works within the accounting system. So far, concerns about upending

compliance programs by going public have not really been borne out. Those programs

still serve to encourage employees to report internally before going outside the company.

From an ethical perspective the Dodd-Frank reward may encourage the whistle-blowers

to act out of egoism, enlightened egoism, or act-utilitarianism (the ends justify the means)

19. Because of their access and knowledge, accountants are in an ideal position to

provide their clients and the SEC with early and invaluable assistance in

identifying the scope, participants, victims and ill-gotten gains associated

with corporate wrongdoing. Historically, when CPAs discovered attempted

or actual fraud, client confidentiality rules limited their ability to publicly

report their observations. With the advent of Dodd-Frank, accountants no

longer need to choose between doing the right thing and risking the loss of

their professional licenses. Explain how and under what circumstances Dodd-

Frank enables accountants to report their observations.

Dodd-Frank contains provisions to encourage accountants and auditors to report

corporate wrongdoing to meet their public interest responsibilities. The whistleblower

provisions of Dodd-Frank exclude two categories of accountants from award eligibility

because of their preexisting legal duty to report securities violations:

1. Individuals with internal compliance or audit responsibilities at an entity,

including CPAs, who receive information about potential violations, cannot receive

whistleblower awards because it is part of their job responsibilities to report

suspicion of illegal acts to management. However, these individuals will not be

2. CPAs who receive information about potential violations of a client or its

directors or officers through an audit or other engagement required under the federal

securities laws are not eligible to receive whistleblower awards. The SEC included

The whistleblower exclusions do not apply to CPAs who report information about potential

violations regarding their own firms’ performance of audit services for a client. This is true

The issue of confidentiality is important in that it may appear that blowing the whistle on

one’s employer or client violates the ethical obligation of confidentiality. However, the

20. “Give me the ‘McFacts,’ ma’am, nothing but the McFacts!” So argued the

defense attorney for McDonald’s Corporation as she questioned Stella

Liebeck, an 81-year–old retired sales clerk, two years after her initial lawsuit

against McDonald’s claiming it served dangerously hot coffee. Liebeck had

bought a 49-cent cup of coffee at the drive-in window of an Albuquerque

McDonald’s, and while removing the lid to add cream and sugar, she spilled

the coffee and suffered third-degree burns of the groin, inner thighs, and

buttocks. Her suit claimed the coffee was “defective.” During the trial it was

determined that testing of coffee at other local restaurants found that none

came closer than 20 degrees to the temperature at which McDonald’s coffee

is poured, about 180 degrees. The jury decided in favor of Liebeck and

awarded her compensatory damages of $200,000, which they reduced to

$160,000 after determining that 20 percent of the fault belonged with Liebeck

for spilling the coffee. The jury then found that McDonald’s had engaged in

willful, reckless, malicious, or wanton conduct, the basis for punitive

damages. It awarded $2.7 million in punitive damages. That amount was

ultimately reduced by the presiding judge to $480,000. The parties then

settled out of court for an amount reported to be less than the $480,000.

For its part, McDonald’s had suggested that Liebeck may have contributed

to her injuries by holding the cup between her legs and not removing her

clothing immediately. The company also argued that Liebeck’s age may have

made the injuries worse than they might have been in a younger individual,

“since older skin is thinner and more vulnerable to injury.”

Who is to blame for the McSpill? Be sure to support your answer with a

discussion of personal responsibility, corporate accountability, and ethical

reasoning.

Some key facts of this case are whether McDonalds knew their coffee was too hot and

whether they had alternatives to taking this risk with peoples’ lives. They had been sued

and lost on coffee burns before but the judgments were small enough that improving their

Students should be asked about the difference between compensatory damages and

punitive damages, using the example of an elephant stepping on your foot. The elephant

might not crush or destroy your foot but you have to hit an elephant very hard with a big

Here is some of the evidence the jury heard during the trial1:

McDonald’s operations manual required the franchisee to hold its coffee at 180 to

190 degrees Fahrenheit.

Coffee at that temperature, if spilled, causes third-degree burns in three to seven

seconds.

The chairman of the department of mechanical engineering and biomechanical

engineering at the University of Texas testified that this risk of harm is

McDonald’s admitted it had known about the risk of serious burns from its

An expert witness for the company testified that the number of burns was

At least one juror later told the Wall Street Journal she thought the company

wasn’t taking the injuries seriously. To the corporate restaurant giant those 700

McDonald’s quality assurance manager testified that McDonald’s coffee, at the

McDonald’s admitted at trial that consumers were unaware of the extent of the

McDonald’s admitted it did not warn customers of the nature and extent of this

1 http://www.caoc.org/?pg=facts

In a story about the case published shortly after the verdict was delivered in 1994, one of

McDonalds’s was used as an example of the need to act responsibly when serving a

product to the public that had the potential for harm. In a sense the jury used a utilitarian