CPA Ethics Business Partners Michael, who is a licensed CPA, provides tax services for a general...

CPA Ethics

Business Partners

Michael, who is a licensed CPA, provides tax services for a general partnership client XYZ Partners. The partnership has two partners. One partner Susan owns 70% share of the partnership, and the other partner Tim owns the remaining 30% share. Susan, the majority partner also engages Michael separately to provide individual tax preparation services. Michael has worked for the partnership and its majority partner for the past three years. One day Susan requests Michael's confidential advice and guidance regarding how to finance some large debts she has accumulated. Without hesitation, Michael provides Susan with some preliminary advice. However, Susan later sends Michael an e-mail suggesting that he come up with some "creative financing" regarding the partnership to help deal with this debt. Susan also reminds Michael not to share any of her problems with Tim, the minority partner. Susan's request troubles Michael and puts him in an awkward position: maintaining confidentiality of the information could jeopardize Michael's obligation to the minority partner.

What should Michael do?

Can someone please help me with this ethical dilemma?

Expert Solution

Answer

Creative financing can be defined as creating an innovative capital structure, and arranging extended loan and trade credit repayment terms, to achieve a level of financial leverage not ordinarily possible.

It is ethically incorrect for Michael to help Susan with this situation without involving the minority partner Tim into the matter because:

1. The task that he has been provided by Susan (Creative Financing) is although legally correct and justified but ethically unjustified as it is going to harm the company which will provide loans to XYZ Partners after looking at thier "Improved" accounts because of creative financing being done by the company.

2. There are chances that XYZ Ltd.'s condition would become worse because they would raise more laon because of improved leverage due to creative accounts being prepared. This might lead to complete winding up of the firm. Thus, not informing all the partners before taking such a drastic step is ethically and morally not justified on part of Michael.

3. As far as the parnership firm is concened, Michael is obligated to all the partners and not just the major partner. The blame later on would fall upon Michael too that he kept such crucial information from the minority partner. Although legally Michael would not face issues but morally he would later feel incorrect.

Rahul Sunny answered 6 months ago

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