Question

1. Ethics in business: Toffee and More Ltd manufactures several varieties of candy. An action has been brought against the entity by a customer who broke a tooth while eating one of the entity’s fudge bars. The managing director of Toffee and More Ltd, Sweet Tooth, has suggested that this should not be reported as a contingent liability because the entity might win the case, and any mention of this in the financial statements could encourage more lawsuits and increase the entity’s liability.

Required: a. Who are the stakeholders in this situation? b. Who would be potentially harmed or disadvantaged by non-disclosure of the contingent liability? c. Are the managing director’s actions ethical? Refer to at least two ethical theories in your answer.

Answer 1

a. The stakeholders in the situtation are:

(i) Shareholders

(ii) Legal community

(iii) employees

(iv) government

(v) customers

b. The shareholders and those users who use the financial statements to invest in the shares of the company will be more particularly disadvantaged by the non disclosure of the contingent liability. The reason being when the company omits to disclose of contingent liability atleast a foot note, the shareholders will not be able to assess the future economic outflow of money and hence will presume that the company does not have any obligations. They will invest in the company based on the current financial position and the reality can be very different in the future if the company looses the case

c. The ethical considerations here are that the managing director does not have any purview of the future of the company and the consequences it may face apart from just customers when the other stakeholders know of the company's non disclosure of an important legal case. The ethical theories most appropriate to this situation are utiitarianism and deontological ethics. A utiitarianism approach is one where in the consequences of the decision are taken into consideration and the company's interest are put ahead of self interest. In this case the MD must have more realistic view of the company's future rather than simply think of a individualistic gain. Deontological ethics are to ensure that the actions ensure fairness and doing what is right by thinking of others.