Introduction
This report is a critical analysis of an ethical dilemma in the workplace. It will include the evaluation of the facts of the case in order to establish the fundamental issues and matters at stake. From there, a review of the fundamental theories of the situation will be conducted. This will culminate in the identification of the different approaches and views. Afterward, there will be the application of the theories to the facts of the case in order to conclude with recommendations on how to deal with the issues at hand. This will include the review of important theories of ethics including absolutism and relativism. These concepts will be applied to the case and used as basis to present a recommendation to the company and its leaders.
Facts of the Case
This research will be based on Case 3 of the options in the course. The case is about a company that encourages accountants to utilise innovative ways and methods to reduce the tax burden of the company. This obviously leads to the utilisation of various methods to create tax avoidance schemes and processes.
However, at the moment, they have found a loophole of tax avoidance which is perfectly legal. The main challenge is that the loophole is legal and follows the letter of the law. Actions that do not conform to the best interest of society is considered to be in bad faith. This means that the act of the accountants will reduce the tax burden but it will not be in good faith. It follows that the company will be haunted if the company comes under a moral scrutiny.
A moral or ethical dilemma is always difficult because it involves stakeholders. A stakeholder is an entity that affects or is affected by the operations of a company. There is the need for an act of a company to be critiqued in order to identify its implications and impacts on the stakeholders. In this case, the main issues include:
The accountants who came up with the method have their selfish motives;
The company directors also desire to increase return on investments as such, they endorse the tax avoidance system that is in bad faith;
Shareholders seek to maximise their wealth as such, they will find this tax avoidance scheme to be appropriate.
Government agency is tasked with the duty of collecting taxes, but it seems they are not going to make enough money if the company carries out this tax avoidance process;
Tax laws must be enforced by an appropriate authority and in cases of enforcement, the company under review might come under some kind of strain;
Taxes develop a country and if a company is using unfair practices to reduce its tax burdens, it is not acting as a good corporate citizen in the country;
There are some pressure groups, journalists and other players who might take up a moral role of acting as a watchdog. Such entities might rise
The role of proper leadership in the company is to find a proper solution to an ethical dilemma by taking a moral position on a subject. This must be done by utilising the values of a given society and applying it in the best way and manner possible. Thus, it pays to examine and review some theories relating to ethics in a society within which a company operates.
Theories of Ethics
According to certain economists like Milton Friedman, the reason why companies exist is to make profits for the shareholders. This is deeply rooted in Protestant Capitalist theories which support the free markets and argue for government to only focus on maintaining law and order and also allow people to pursue their desires and aspirations through commercial entities. This fundamental premise implies that any business venture which is legal can be pursued to the fullest by a company in the quest for gaining as much profits as possible.
Thus in Anglo-American commercial jurisdictions and in most Eurocentric countries, there is an idea of capitalism and this is based on a system of free interest. However due to the fact that democracy has increased and governments are now required to be responsible and sensitive to the needs of other people, a system of ethics have evolved to limit the level of capitalist greed in society. Ethics include a series of morals and codes that limit the action of businesses in order to ensure that businesses do not harm society at large or stakeholders who are connected to the company in various ways and forms.
There are several approaches and concepts that determine ethics. The deepest and most far-reaching division in ethics are:
Absolute ethics and
Relativist ethics
Absolute ethics are discussed by the philosopher, Immanuel Kant as ethics that are duty based and must be followed irrespective of the results or consequences. In absolute ethics, rules are fixed and must be obeyed at all times and in all circumstances. The individual or business is bound by the need to follow the rules and not bend them.
Absolute ethics are duty-based. These are known as deontological ethics. It is a duty and requirement for anyone and everyone to obey the rules and not shift from it. As such, everyone is held to a standard that is based on the rules of society. Irrespective of the circumstances and the consequences a particular moral ordeal, there is the need to honour the rules and not relax it or make exceptions.
Relativist ethics are called teleological ethics or consequential ethics because it asserts that there is nothing right or wrong. Under relativist ethics, what is right is what will lead to the best and most appropriate results for a person taking a moral or ethical decision. This means that ethics are flexible and must be evaluated and analysed on the basis of what will result from a particular decision or choice.
Relativist ethics assert that the end justifies the means. Therefore, any action or ethical dilemma will have to evaluated and analysed closely for a proper decision or choice to be made that will meet the best interest of stakeholders at a given point in time.
Another view of relativist ethics is also based on a utilitarian perspective. To this end, what is right is defined as something that gives the greatest number of happiness and pleasure to the greatest number of people and causes the least pain to the smallest number of people. Therefore, a person must figure out what is right by examining and reviewing the consequences of a given choice by measuring it against the specific standard of creating the greatest happiness at the lowest cost – in terms of suffering. Thus, people must seek to do what is best for the majority and reduce the impacts of negativity on the minority.
Application of Ethical Theory to the Case
Based on the facts of the case, what is right and what is desirable by the managers of the company under review is not clear-cut. Utilising the two different approaches to ethics, there is bound to be two different perceptions and views on what is right and what is wrong in relation to accountants finding a dubious approach to reduce taxes. Thus, the scenario can be analysed on the basis of the two lenses and approaches to ethics.
Analysis of the Case under Absolute Ethics
Under Kantian ethics, the right thing to do is clear and direct. It states here that the tax avoidance scheme is dubious and it is against the spirit of the law. That means it is in bad faith and potentially illegal. Thus, by implication, the whole scheme is wrong and against the law. As such, it is wrong and illegal for the method to be applied.
Directors are paid by shareholders to use the resources of the company and steer the company in the right direction to ensure that the needs of all stakeholders are met and honoured. The directors of the company under review have a direct obligation to ensure that they follow the rules and put the resources of the company to the best use. As such, they are bound by corporate laws and the basic laws of honesty as well as the agency convention to put the best interest of the company at hand. It is a duty they accepted upon themselves when they decided to be directors. Thus, a director will have to do everything required by law. And this means paying a fair tax and presenting clear and total amounts of money they earn and paying a fair tax on it.
The duty of directors is independent and unnegotiable when considered in the context of absolute ethics. This is clear and if directors spend time to examine and evaluate the rules or seek advice, they will know it and as such, under absolute ethics, directors have absolute no excuse to breach the law or do things contrary to the best interest of the company.
Therefore, Kantian ethics make it clear and direct that there must be an obedience of the law of the land. The right solution to this problem under absolute ethics is for the directors to hire a private tax practitioner to review the practices presented by their in-house accountants. They will have to go to the bottom of the case and find the facts about whether the practice is legal or illegal. This comes with only one truth – and there is nothing in-between. Thus, the right thing to do is to get an independent opinion. If that is to be done, the third-party tax practitioners must consult the tax authorities and ask them whether the proposed act is going to be legal or illegal. Once that is done, the solution must be presented and the tax avoidance system can be either accepted or rejected.
Analysis of the Case under Relativist Ethics
In relativist ethics, there is no clear answer to any question. What is right is what will bring the highest levels of happiness to those involved. And who are those involved? The stakeholders who affect or are affected by the proposed accounting practice. These include the accountants who have a selfish motive of maximising their remuneration or salaries, the directors who are likely to be given bonuses if the accounts show higher levels of retained profits, the shareholders who want more dividends and higher growth of their stocks. As well as employees who will get more income and more revenue if the act works out and the company retains more profits.
On the other hand of the equation are those who stand to lose if the act is really illegal. This includes the directors who could be fired by the company or in some cases, face criminal charges. There are the accountants who could lose their jobs and professional accreditation if it is discovered they recommended a criminal system of tax evasion. Then there are the tax authorities who are going to collect less taxes for the state and the state at large which will not get money to fund its many projects as required by the law of the land.
Thus, relativist and consequential ethics seeks to strike a balance between two opposing sides of the equation on the cost and the benefits of using the system to avoid taxes. This will inevitably means there is the need to examine the facts and circumstances and this will mean there must be the coverage of some important things including:
The specific legal provision and related provisions that could be extended to detect and punish companies that use this particular tax avoidance loophole;
The possibility of detection of this practice if it is carried out. This could be high, but the managers must know what can be done to potentially make it less conspicuous;
An understanding of the possible penalties that could come up if the accounting practice is ever detected. As well as how a possible sanction from the accounting scheme matches up with the tax savings;
An evaluation of the impact of any detection on the continuous operation of the company;
An assessment of the tax burden paid by the company and its level of perceived fairness;
An assessment of corporate social responsibility packages the company has and how it benefits the society in relation to what the government does for the people.
Thus, there are many situations and circumstances that could be taken into account in this case. This must be evaluated and measured in order to identify whether the proposed act is appropriate or not.
In the practical sense, the directors of the company will have to hire a private accounting firm that has the ability to audit tax payment systems. This should be a company that has helped other companies to cut down and formulate good tax planning measures. They will have to be hired to do a private audit where the pointers in 1 – 6 above will be considered. This audit must give them a summary of recommendations on what the implications of the action would be and how it will affect stakeholders.
The company will have to examine and review the different variables relating to results and consequences. Then from there, they would have to use the Mendelow matrix to match the level of power of the different classes of stakeholders and their level of interest. This should focus on the tax authorities, state prosecutors and what implications could follow. From there, the directors can decide what to do. In my personal view, if the tax authorities are not too rigid and there is no risk of political change in the next future, they should go ahead and use the method. If it will not affect the survival of the company or jeopardise the long-term interest of shareholders or directly criminalise the accountants and directors, then it might be worth risking short-term profits and reputational loss for lower taxes. For Milton Friedman said, “the corporate social responsibility of a company is to make profits for the shareholders”
Recommendations
Since no company is supposed to pay more tax than what is required of them, it is widely acceptable to use tax avoidance schemes that are legal to reduce the tax burden. Companies in the free world have a duty to their shareholders to reduce their tax burden in order to make capitalism and free enterprise attractive. Therefore, it is conclusive that the managers of the company in question must use a consequentialist or utilitarian approach to evaluate this case and draw a conclusion on whether to use the tax avoidance method or scheme.
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