Ethical Dilemmas in Partnerships


How the transaction would have been recorded.

Drawings: Wrong $5,000  
Inventory   $5,000

Ethical aspects of the action

From the perspective of the income statement of the partnership, recording the transaction in the manner adopted by Mr. Wrong has the effect of reducing the profit to be shared by the two partners as the cost of goods sold would have been overstated. This would be completely unfair to Mr. Right who is subjected to a lower share in the profits while Mr. Wrong has already benefited from the transaction. Even assuming that Mr. Wrong was justified in taking the Antique piece as was their usual practice of taking small items from the business for personal use, it is still necessary that whatever is taken from the business is correctly recorded. Recording the transaction as an additional cost of goods sold erroneously states the value of sales while the fact is that no such sale ever took place. Moreover, $5,000 worth of antique is obviously high enough to fall within the definition of those small items that the partner may be allowed by their policy to take for personal use.

An important requirement for the sustenance any partnership is trust between the partners (Murphy, Laczniac& Wood, 2007).It is only when partners relate to each other on the basis of trust that their business relationship can endure. The other way of stating it is that partners should practice virtue ethics in relation of each other. Virtue ethics places a high premium on individual/corporate character. It is not clear from the facts that Mr. Wrong intended to misrepresent the transaction when he chose to show it as a cost of sales. In the event that Mr. Wrong actually had the intention of misstating the transaction, that action would be clearly against the aspect of virtue ethics that places a premium on character. It is not easy to characterize an action intended to deceive one’s partner as belonging to that of a person with good character.

Another aspect of virtue ethics relevant to the scenario is that virtues can be learned or practiced. Thus, it is possible for Mr. Wrong to learn the requisite virtues (Murphy, Laczniac& Wood, 2007). This is particularly true if in turns out that Mr. Wrong did not actually intend to mislead when he set out to record the transaction as a cost of goods sold as opposed to drawings chargeable to his capital. Mr. Wrong can learn to record those kinds of transactions through constant practice. Honesty can also be identified as an aspect of virtue ethics. In this respect, it would be unethical for Mr. Wrong to fail to disclose the true nature of a transaction whose implication on the financial statements is to reduce the profit available for sharing as between the partners.


It is Mr. White who seems right

At issue in the scenario is the profit sharing method that is equitable. The reasons as to why Mr. White is right would, therefore become apparent only after analyzing the two positions from the perspective of some ethical models. These models include teleological, deontological as well as virtue-based theories.

Under the teleological approach to ethics, moral goodness is assessed not from the behavior itself but from the consequences that may arise from that behavior. Teleological moral theories also view all human action as rationale given that people act towards some desired ends. In other words, teleological theories are goal directed (Ciulla, 2012). In the present case, the goal is to achieve a just method for sharing the additional profit of $ 60,000. Both partners, White and Black, want to maximize their respective shares of the additional income. Most teleological theories are, however, concerned with the optimum consequences for the greatest number of people and not just for any particular individual involved in an ethical dilemma. It may be necessary to assume for the present discussions that an optimum solution for the partnership as a whole equates to an optimum solution for the greatest number of people. Sharing the money in the ratio of 2:1 as suggested by Mr. White. The consequence of adopting this formula would only be to put the partners back in the position they would have been had the correct profit been identified in the first place. That Mr. White has withdrawn more money from the business does not affect the situation given that partnership accounting has a way of dealing with such situations without disadvantaging any partner.

Unlike teleology, deontology assesses ethical correctness on the extent to which behavior obeys some absolute moral rule (Ciulla, 2012). Thus, actors act in order to fulfill some moral duty or obligation. In the current scenario, the partners in the marketing business are already operating from a rule requiring that they share profits and losses in the ratio of 2:1 which also corresponds to their initial capital contributions. It is this ratio that should form the basis of all their sharing of profits and losses until such a time that they decide to change it. Both parties have a moral duty to enforce a moral duty that they themselves established. The assumption is that both parties were exercising their free will when they came up with that rule. They can still exercise that same free will to rectify the rule in the event that they feel it is unjust but this should not apply for the present scenario.

Lastly, the position can also find justification in virtue-based ethical theories. For instance, White and Black should resolve their differences in a manner that advances the interest of the partnership as opposed to their individual selfish demands (Ciulla, 2012). Though the position taken by White may have been informed by self interest, it is the one that most corresponds to the objects of the partnership.


GAAP Guidelines for Consolidating Entities

Following some of the scandals that were witnessed towards the end of the previous millennium, the Financial Accounting Standards Board (FASB) moved with speed to issue guidelines on how companies should consolidate entities. The first of these guidelines was Financial Accounting Standards Board (FASB) Interpretation No. 46 which is commonly known as FIN 46. It was issued in January 2003 and reissued in December the same year as FIN 46R. Of relevance is that FIN 46R introduced a new consolidation model to the one that was already in use. Prior to FIN 46R, the voting interest was the sole decision criterion upon which companies relied when considering whether to consolidate.  FIN 46R introduced another category such that a party participating in the majority of an entity’s economic activities is required to consolidate whether or not they also have a majority voting right. This new model is called risk and rewards model. Amendments were subsequently made to FIN 46R through Financial Statement No. 167, Amendments FASB Interpretation No. 46(R). Statement 167 was issued in June 2009. Under it, the test is whether the interest that a company has in an entity gives it control over its most significant activities as well as the right to receive benefits or obligation to absorb losses. The implication is to have many entities that were once off balance sheet consolidated by reporting companies.

Example of a company

Enron Corporation is an illustration of how companies can abuse weak consolidation rules. The rapid growth of Enron in the 1990s put a lot of pressure on its ability to finance many of the activities it was engaging in (Salter, 2008). As a solution, Enron entered into several arrangements with investors. GAAP rules at the time allowed Enron to either consolidate these arrangements in their entirety or merely to treat them as investments. The latter option proved more attractive to Enron as its books would appear good to financial analysts. This saw the company come up with several special purpose vehicles (SPEs).



Ciulla,J.B.(2012).Ethics and Effectiveness: The Nature of Good Leadership. In D.V. Day &           J.Antonakis (Eds.), The Nature of Leadership (pp.508-542).Thousand, Oaks, California:            SAGE.

Murphy, P.E., Laczniac, G.R., & Wood, G. (2007).  An ethical basis for relationship marketing:    a virtue ethics perspective. European Journal of Marketing, 41(1/2), 35-57.

Salter,M.S.(2008).Innovation Corrupted: The Origins and Legacy of Enron’s Collapse. New         York: Cengage.


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