FINANCE MINICASE: FIN - 02 BUSINESS ETHICS PROGRAM

TEACHING NOTES

The Curious Loan Approval

What Are the Relevant Facts? senior officers within the corporate banking
group?
1. Adam is a proficient financial analyst, as
evidenced by his credit analysis exam scores and
What Are the Ethical Issues?
the praise he receives from his supervisor.
1. Does Adam have a fiduciary duty to reveal Mary’s
2. Adam’s customer, Mitchell Foods, Inc., represents
potential conflict of interest in this transaction to
a large retail grocery chain requesting a $5 million
other officers within the bank?
short-term loan to finance inventory expansion.
2. Does Adam, as a junior financial analyst, have
3. Mitchell Foods finances its 35 retail outlets using
responsibility for improper documentation within
operating leases to achieve off-balance-sheet
the credit file, when the bank’s senior loan
financing.
committee members failed to notice Mitchell
4. Adam recognizes the need to adjust Mitchell Foods’ significant operating lease liability during
Foods’ leverage ratio to include the firm’s the credit committee meeting?
significant operating lease liability. Given this
adjustment, Mitchell Foods appears dangerously Who Are the Primary Stakeholders?
overleveraged; without the adjustment, the firm’s
• Adam
balance sheet understates the true amount of
leverage carried by the firm. • Mary
• The members of Farmwood National’s senior
5. Mary dismisses Adam’s concern regarding the credit committee
recognition of Mitchell Foods’ operating lease • The depositors and shareholders of Farmwood
liability, and she instructs him to remove any National Bank
explicit reference to this problem from the • The mortgage loan officers at Bay Street Savings
Mitchell Foods credit file. and Loan
6. Mary’s directive to Adam contradicts the bank’s • The president of Bay Street Savings and Loan
credit policy regarding the treatment of operating • The depositors and shareholders at Bay Street
lease liabilities. Savings and Loan
• The FDIC and, ultimately, all American taxpayers
7. The Mitchell Foods loan request is approved by
the bank’s credit committee with no discussion of What Are the Possible Alternatives?
the firm’s operating lease liability.
1. Adam could approach Mary, ask for more specific
8. After the loan is approved, Adam learns that reasons why she instructed him to ignore Mitchell
Mary’s personal mortgage loan request at Bay Foods’ operating leases in his credit analysis, and
Street Savings has been approved with extremely ask her to explain why this issue was not
favorable credit terms. mentioned during the credit committee meeting.
9. The president of Mitchell Foods is also the 2. Given Mary’s apparent conflict of interest in this
Chairman of the Board at Bay Street Savings. transaction, Adam could discuss Mary’s behavior
with the head of the corporate banking group, the
What Are the Ethical Issues? officer in charge of credit policy administration
1. How can Adam reconcile his duty to his boss and within the bank, or some other senior manager.
his duty to complete his financial analysis of 3. Adam could seek additional information before he
Mitchell Foods in conformity with the bank’s takes any action, perhaps by reviewing the written
credit policy? minutes of the credit committee meeting at which
2. Should Adam pursue this issue, even though the the Mitchell Foods loan was approved.
loan has already been approved by the bank? 4. Adam could accept Mary’s explanation, ignore the
3. Should Adam seek additional information from apparent conflict of interest, and do nothing.
Mary, or should he discuss the matter with other

1992 Arthur Andersen & Co, SC. All rights reserved. Page 1 of 2
ACCOUNTING MINICASE: ACCT – 17 BUSINESS ETHICS PROGRAM
TEACHING NOTES

What Are the Ethics of the Alternatives? • Questioning the class based on a “justice”
perspective (i.e., benefits and burdens):
• Questioning the class based on a “utilitarian”
perspective (i.e., costs and benefits): 1. Which course of action distributes the benefits
and burdens most fairly among the
1. Which possible alternative provides the
stakeholders? Which course of action results
greatest benefit to the greatest number of
in the most inequitable distribution of benefits
people? (Be sure to point out that because
and burdens?
Farmwood National and Bay Street Savings
are federally insured institutions, credit policy 2. What are the benefits and burdens associated
violations at either firm can have far-reaching with Adam’s revelation of details concerning
effects on depositors, future loan customers, Mary’s personal financial affairs with other
and taxpayers.) officers at the bank? Does Adam (or Mary)
share equally in the benefits and burdens
2. How can costs be measured in this case?
associated with this course of action, or do
Should this measure include the danger to
these particular stakeholders have a
Adam’s career or Mary’s career? How does
disproportionate burden in exchange for
the cost of a single violation of the bank’s
minimal benefit?
credit policy translate into the aggregate cost
of increasing risk within Farmwood National
What Are the Practical Constraints?
Bank and/or the entire banking industry?
1. As a junior financial analyst, Adam knows very
3. Do the benefits associated with absolute
little about the details of the credit committee
conformity to the bank’s credit policy offset
meeting at which the Mitchell Foods loan was
the costs of inflexible, bureaucratic lending
approved. The firm’s operating leases may be
standards?
immaterial to the credit decision, because they are
• Questioning the class based on a “rights” very short-term contracts or cancellable at the
perspective: option of the lessee.
1. What does each stakeholder have the right to 2. Mary is Adam’s mentor. If he violates her trust at
expect in this case? In particular, does Adam this juncture of his career, he may inadvertently
have the right to demand a clear explanation sabotage his own career with the bank
of the transaction from Mary? Does Mary 3. The loan has already been approved. It may be
have the right to demand loyalty and trust impossible for the bank to limit its loss exposure at
from her subordinate? Does she have the right this late date, regardless of the particular course of
to privacy in her personal life? Does the action that Adam decides to take.
bank’s credit committee have the right to
expect that individual loan officers will reveal What Actions Should Be Taken?
potential conflicts of interest when they bring
a credit request to the committee? 1. What actions should Adam take?
2. Are the rights of some of the stakeholders in 2. Which alternative would you choose if you were in
this case more important than the rights of his position? Why would you make that choice?
others? If so, whose rights are most important,
3. Are there any additional facts you would like to
and whose rights are least important? Why?
know about the case before you make a particular
3. Which alternative course of action violates the decision? If so, what are these facts, and why are
rights of the greatest number of stakeholders they important to your decision process?
in this case? (Be sure to include taxpayers as
4. Which ethical theories (utilitarian, rights, or
stakeholders.) Which course of action violates
justice) make the most sense to you as they relate
the rights of the fewest number of
to this situation? Why?
stakeholders?

1992 Arthur Andersen & Co, SC. All rights reserved. Page 2 of 2