978-0136118671 Chapter 2 Solution Manual Part 2

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17. Upgrading the refinery. You are plant manager at a refinery that meets all environmental

regulations. However, the mayor of a nearby community is pressuring you to install new

technology that would reduce emissions below mandated levels. You respond that your plant is

more cost-efficient than some of your competitors because they bore the cost of installing the

new technology. Putting the equipment in your plant would erase this advantage and perhaps

result in a plant shutdown. However, the mayor, who has taken a course in Ethics as Rational

Choice, points out that your rationale is not generalizable. If all plants followed your example,

then keeping the old technology would no longer make your plant the most cost-efficient. How

should you respond?

Your reason for keeping the old equipment is that it makes your refinery more cost efficient than

You can respond, however, is that your real reason for keeping the old equipment is that you

want to be no less efficient than other refineries. This is the correct scope, because you would be

18. Ordinarily, an action that fails the generalization test would continue to fail if the scope

were broadened. This is because a rationale is less likely to be generalizable when it applies to

more people. However, there are exceptions. Can you think of one?

Exercise 14 provides an exception. If I enter a tournament only when I am certain I will win, my

19. In Exercise 7, does boarding early pass the utilitarian test?

If we consider only luggage storage, early boarding has no utilitarian effect. The aircraft has the

same limited space regardless of the boarding process. However, the boarding zones are

20.* The accidental bank robbery. Chris is a relief branch manager for Commerce Trust Bank.

His job is to fill in for regular branch managers while they are away. Today he is serving at a

bank with several inexperienced tellers. One of them, Carole, comes up $900 short at the end of

the day. She is in a panic, because reporting a $900 shortage to headquarters would result in

automatic termination of her job. On checking the transactions ledger, Chris finds that while

cashing a check, Carole misread $100 as $1,000 and paid out the larger amount. Fortunately,

the check holder is one of the bank’s best customers. However, when Chris telephones the

customer, he insists that he received only $100—even when Chris mentions that Carole would

lose her job if the money were not returned. Carole is in tears, but Chris must somehow

reconcile the ledger. His options are: (a) report the loss, (b) debit the customer’s account by

$900, (c) place the amount in a suspense account and let the regular manager resolve the issue

at a later time. Which option is likely to maximize utility? Hint. If (c) is selected, the regular

manager must select (a) or (b).

Carole’s job loss would incur substantial negative utility, while the customer’s loss of $900 to

which he was never entitled would cause much less harm. Given a choice, it is more utilitarian

to retrieve the $900 from the customer. The problem is that if Chris were to debit the customer’s

21. Back at the music shop. You are again browsing in the music shop that has a CD recording

of Arnold Schönberg’s Pierrot Lunaire on display (see Exercise 11). You were reluctant to steal it

last time, but another thought has occurred to you. The shop will never sell this recording,

because everyone else in the world hates this atonal stuff, and it can’t be returned to the

manufacturer. However, if you steal it, at least you will enjoy the music. Furthermore, as a

penny-pinching student you can make better use of the $12 on the price tag than the shop

owners. The rational thing to do is therefore to steal the CD, if you can get away with it. Is this

correct?

22.* Irrevocable election. Steve is in his second year at a CPA firm. A firm partner discovers

that Steve neglected to attach an irrevocable election form to one of last year’s tax returns. The

form is necessary for the client to avoid a substantial tax liability in subsequent years. The

partner reassures Steve that it is a fine point he would have not expected Steve to catch. The

client shouldn’t have to pay a higher tax due to their mistake, but there is a way to fix it. The

partner asks Steve to prepare the election form and attach it to their file copy of last year’s tax

return. Then he is to prepare this year’s tax return as though the election form were submitted

last year. There is no need to mention any of this to the client. If questions arise, they will show

the IRS the file copy of the form and suggest that the IRS lost it in processing. Does the partner’s

request pass the utilitarian test? Is it ethical?

It is hard to argue that this scheme fails the utilitarian test, assuming that the client will in fact

treat the election as irrevocable. The client will pay no more taxes than necessary, the firm won’t

Submitting false tax forms, however, is a lie. Lying is ungeneralizable when the reason is simply

one’s personal benefit (see Exercise 1). Steve might argue that the rationale is not simply self

interest. Part of the reason for lying is to avoid penalizing a customer for his own mistake, and

23. Hard choice in Hondo. George is manager of an Ardnak Plastics plant in Hondo, Texas. It

employs several hundred persons, a large fraction of the local workforce. George’s boss, Bill,

telephones him from headquarters in El Paso with the news that the EPA will levy fines against

Ardnak for excessive smokestack emissions at the Hondo plant. However, Bill won’t approve

new scrubbers because the company can’t afford it. He points out that competitors have escaped

EPA fines even though their emissions are higher. Upon investigation, George learns that the

competitors avoid fines by scheduling their heavy emissions at night, when the EPA isn’t running

tests. Meanwhile, Bill has been in touch with the Mexican authorities and mentions to George

the possibility of relocating 15 miles south in Mexico, where environmental regulation is lax.

This would necessitate hiring Mexican workers and devastate the economy of Hondo. He tells

George that he must either avoid the fines or relocate. George therefore has three options: (a)

dump the pollution at night, (b) relocate, or (c) resign, in which case his successor will choose

(a) because it is the path of least resistance. Assuming that (a) is ungeneralizable, which of

these three options pass(es) the utilitarian test?

The utilitarian contest is between (b) and (c), because (a) is ungeneralizable. Choice (b) will

devastate Hondo’s economy but provide Mexican workers with jobs they wouldn’t have

George might protest that (c) is ungeneralizable because it leads to the ungeneralizable choice

(a). In fact, the utilitarian analysis of (c) presupposes that (a) will result. This is appropriate for

Let’s therefore apply the correct generalization test to (c). We note first that (a) is presumably

ungeneralizable because it is illegal. Breaking the law for personal benefit is ungeneralizable

because if it were universal practice, society would slide into anarchy and there would no law to

This is a tough call. Mexicans may start from on lower point on the concave utility curve and

It is arguable that option (b) is unethical due to obligations to such stakeholders as employees

24. Retirement fund recommendation. John is a portfolio analyst for Metropolitan City

Teachers’ Retirement Fund (MCTRF). His boss Mary has asked him to compare one of

MCTRF’s external growth stock portfolio managers, Bill Fredericks, against Growth Unlimited

(GU) and make a recommendation. Mary sees some impressive numbers in GU’s performance

over the last three years. In fact, John normally evaluates fund managers based on a three-year

record. However, this time he is considering a different approach. Bill Fredericks was actually

slightly ahead of GU last quarter. In addition, John and Bill have become close friends. Bill has

helped John with several projects apart from growth stock investing and has arranged for John

and his staff to attend some of Bill’s educational seminars without cost to MCTRF. Analyze

John’s decision from a virtue ethics perspective. Which recommendation(s) pass the

virtue ethics test?

There are at least two virtues at stake. One is friendship. If Bill is patronizing John simply for

what he can get in return, then there is no true friendship and therefore no friendship obligation.

The other virtue is John’s professionalism as a portfolio analyst. A portfolio analyst makes

Due to the conflict, virtue ethics has nothing to say about this decision, and either

25. Plant automation. George is a recent MBA who just joined a manufacturing firm’s Cedar

Valley plant as its only cost accountant. Cedar Valley is a town of 20,000 people, and the plant

is one of several owned by the firm. George’s boss Arthur tells him that management wants to

automate this particular plant with robots as a pilot project, to help judge whether the other

plants should be automated. Arthur admits that the community will be in an uproar due to the

loss of jobs. However, the firm can save some of the jobs through retraining. Once George

releases accounting information showing that the upgrade is necessary, the community will be

less likely to resist. George points out that the report he sent to headquarters last year found

that automation would not benefit the plant. Yet Arthur points out that the report was based on

cost assumptions, and these can be adjusted as necessary to make the bottom line come out

differently. After all, market prices fluctuate, and there is no solid proof that one cost estimate is

better than another. How does virtue ethics bear on this case?

Loyalty is not an issue here, whether it be loyalty to company or to the community. Loyalty

Adjusting assumptions to reach a foregone conclusion is inconsistent with the norms of the

accounting profession, but strictly speaking, these norms are based on professional ethics rather

than virtue ethics. They are based on the profession’s promise and the public’s expectation of

26. Missing travel documentation. Tim, a CPA, works for an auditing firm and has been placed

in charge of an annual audit for Dalton Enterprises, a medium-sized firm with $20 million in

assets. Mr. Dalton micromanages the family-owned firm except the finance area, which he

leaves to his son Chauncy, recently appointed as VP of Finance. Chauncy’s duties include the

appointment of auditors. Past audit reports have never been circulated outside the firm. They

have been quite detailed, including all changes in general ledger accounts, because Mr. Dalton

uses the reports for administrative control purposes. Tim notices that travel expenses are

$20,000 higher this year, due to expenditures authorized by Chauncy. Most of these expenses

are undocumented, but the firm’s controller seems unconcerned. Tim finally raises the issue with

Chauncy, who questions why auditors would be skeptical of his honesty. He says that it is

typical of “bean counters” to focus on minor issues while ignoring possibilities for major

efficiency improvements. He ends the interview by asking, “What are we paying you guys for

anyhow?” How does virtue ethics relate to Tim’s decision as to what to put in the report?

The whole point of certified public accountancy is to provide independent and reliable reports on

finances. This provides transparency to investors and other interested parties. One might argue

Virtue ethics asks whether by sacrificing independence, Tim acts contrary to who he is as a

professional. He underwent rigorous training and examination to learn the norms of certified

27.* The good credit reference. Diversified Consolidated Corporation (DCC) is a supplier for

North Manufacturing. As a credit officer at DCC, Kathy is responsible for about $1 million in

credits to North. There are rumors that North is in deep trouble. The company has always paid

on time and even lists DCC as a credit reference. Nonetheless, Kathy decides that a visit with

North’s treasurer, Scott, is in order. They have developed a good working relationship over the

years, and after a few drinks at lunch, Scott levels with her. He confesses that although North’s

latest financial statements are technically correct, there has been a sudden reversal, and the

company is talking to bankruptcy attorneys. Scott is giving first priority to paying suppliers like

DCC, because supplier credit is their only hope for survival. In fact, Scott has just placed a

major order with DCC’s competitor Basic Products. If there is anything Kathy can do to

convince Basic to extend credit, North may get over this hump and bring business back

to DCC. Otherwise, North is probably headed for bankruptcy by the end of the quarter. Later

that day, Kathy receives a phone call from her friend Mike at Basic Products. Suppliers often

share credit information, and Mike asks about North. He has heard rumors, and he wants to

make sure all is well before he commits to a major order. He is relieved when Kathy tells him

that North continues to make its payments promptly. She asks him to hold the line a moment.

Her mind races as she thinks about whether to tell the rest of the story. How does virtue ethics

interact with the other conditions for rational choice in this case?

Kathy has conflicting loyalties due to her personal relationships with both Scott and Mike. Both

It is hard to identify a professional obligation either to warn Mike or not to do so. Giving a

North a second chance could bring higher expected utility than warning an important client,

28. Suppose that in Exercise 22, the partner thinks better of committing tax fraud. Instead, he

tells Steve that the firm will cover the portion of the client’s tax bill that results from Steve’s

mistake. However, it’s best that the client know nothing of this. Steve is therefore asked to send

the client a copy of the tax form he would have prepared to carry out the partner’s first plan,

rather than the form actually submitted to the IRS. The partner points out that his new plan

complies with tax law and benefits the client, so it can’t be unethical. Is he right?

29. What is the ethical choice in Exercise 20?

We concluded earlier that either (a) or (c) satisfies the utilitarian test, the latter if the regular

manager is likely to choose (b), and (a) otherwise. This is therefore the ethical choice unless (a)

or (c) violates another condition for rational choice. Virtue ethics plays no role here, because