Ethical Obligations and Decision Making in Accounting, 4/e 1
Case 2-2 FDA Liability Concerns (a GVV case)
Gregory and Alex started a small business based on a secret-recipe salad dressing that got rave
reviews. Gregory runs the business end and makes all final operational decisions. Alex runs the
creative side of the business.
Alex’s salad dressing was a jalapeno vinaigrette that went great with barbeque or burgers. He got
so many requests for the recipe and a local restaurant asked to use it as the house special, that
Alex decided to bottle and market the dressing to the big box stores. Whole Foods and Trader
Joe’s carried the dressing; sales were increasing every month. As the business grew, Gregory and
Alex hired Michael, a college friend and CPA, to be the CFO of the company.
At the next quarterly meeting of the officers, Alex wanted an update on the FDA processes and
the latest inspection. He was concerned whether Michael understood the importance of full
compliance.
“Michael,” Alex said, “the FDA inspector and I had a discussion while he was here. He wanted
to make sure I understood the processes and the liabilities of the company if foodborne bacteria
are traced to our products. Are we doing everything by the book and reserving some liabilities
for any future recalls?”
Ethical Obligations and Decision Making in Accounting, 4/e 2
“The reserve will not cover the entire expense of a recall,” Michael said. “It will be too
expensive to do a total recall and will cause a huge loss for the quarter. In the next six months,
we will need to renew a bank loan; a loss will hurt our renewal loan rate and terms. You know I
have been working to get the company primed to go public as well.”
Alex offered that he didn’t care about going public. He didn’t start the business to be profitable.
Gregory, on the other hand, indicated he thought going public was a great idea and would
provide needed funds on a continuous basis.
Alex told Michael that he needed to see all the FDA inspection reports. He asked, “What is the
FDA requiring to be done to address the issue of listeria?”
Questions
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Alex knows what the right thing to do is. As Alex prepares for a meeting on the inspection
reports the next day, he focuses on influencing the positions of Michael and Gregory, both of
whom will be involved in the meeting. Put yourself in Alex’s position and answer the following
questions.
1. What are the main arguments you are trying to counter? That is, what are the
reasons and rationalizations you need to address?
Michael is using cost-benefit analysis and does not consider the cost of losing the brand’s
reputation. Gregory by remaining silent is agreeing with Michael. Alex needs to try to
estimate the cost of loss of reputation to possibly show that the cost-benefit analysis
including the total costs of recall, shut down, cleaning, training and restocking is more
than the cost of complying with FDA requirements. For example, the FDA can close
2. What is at stake for the key parties, including those who disagree with you?
Alex has his reputation and his salad dressing recipe at stake. He is committed to
producing quality products and maintaining the reputation of the company. He is
(morally) tied to the reputation of the company he has helped develop and wants the
company to continue developing new and zesty dressing. Alex is reasoning at stage 6: He
knows it is illegal to sell tainted food; he is aware of the social contract that restaurants
have with society; he doesn’t care about costs and benefits emphasizing instead the rights
of the consuming public to be safe and ensured of eating healthy products.
3. What levers can you use to influence those who disagree with you?
Alex can use the reputation of the company, the quality of the products, and the mission
of company. He can use the ethical reasoning of virtues, deontology, and rule
utilitarianism. He can emphasize integrity, transparency, commitment to mission and
quality, and citizenship with complying with FDA.
4. What is your most powerful and persuasive response to the reasons and
rationalizations you need to address? To whom should the argument be made?
When and in what context?
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Gregory may reason that he wants to get as much money as possible and get his
investment out from the company. In wanting to get out of the company now, Gregory
may think that Michael is right to do a cost benefit analysis on meeting FDA inspections.
Gregory and Michael are looking at the short-term of keeping expenses low until the IPO
is done. They may also be rationalizing that the expenses to meet the FDA requirements
and the fines and penalties are immaterial compared to the profits to be made from IPO,
and that this is an isolated incident.