You are Chief Financial Officer of Camp Industries. Camp is the defendant in a $44 million class action suit. The company's legal counsel informally advises you that chances are remote that the company will emerge victorious in the lawsuit. Counsel feels the company will probably lose $30 million. You recall that a loss contingency should be accrued if a loss is probable and the amount can reasonably be estimated. A colleague points out that, in practice, accrual of a loss contingency for unsettled litigation is rare. After all, disclosure that management feels it is probable that the company will lose a specified dollar amount would be welcome ammunition for the opposing legal counsel. He suggests that a loss not be recorded until after the ultimate settlement has been reached.
Analyze the ethical dilemma and provide a recommendation as follows:
Determine the facts of the situation.
Identify the ethical dilemma and all possible stakeholders.
Identify all the values related to the situation and explain how each of the values is impacted.
Describe the alternative courses of action.
Evaluate the courses of action specified in step 4 in terms of their consistency with the values identified in step 3.
Identify the consequences of each possible course of action.
Suggested draft response:
Camp Industries is deciding whether to accrue a loss contingency that is "probable" and therefore required by GAAP but is concerned that doing so would signal to the claimant in the law suit that they are conceding in the case. In an effort to not influence the court decision, the CFO does not want to accrue for the loss (just explain the loss contingency in a footnote). So, the decision is not to "hide" the case but not to accrue a particular dollar amount and thereby put the company at a disadvantage in the lawsuit (since they can claim that as a minimum settlement amount).
THE ETHICAL ISSUE AND STAKEHOLDERS
The dilemma is whether to act in a way to minimum the damage from the lawsuit or to follow proper GAAP by accruing the most likely amount. The ...
The response has introduction, options, consequences for options and a recommendation in about 300 words (one page).