Let’s return to the example I gave in Module 1 Background Information section in which an industrial firm is confronted with the dilemma of whether it should include – on its balance sheet – a very costly liability for the clean-up of a hazardous waste pool that has accumulated over the past several years, this as a direct by-product of its operations. The company is in agreement that the cost of cleaning up the hazardous waste pool is a cost of doing business.
However, including this massive financial liability in the company’s financial statements now will have the effect of immediately decreasing the total value of the company. In turn, because the company’s worth will be deflated, the company’s current stockholders will be harmed financially because the company will have lost much of its current value.
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In contrast, if the company does not include the liability on its balance sheet, the company will clearly be overvalued, and will likely be viewed as dishonest in disclosure — and anyone buying stock (or ownership) in the company will also be unknowingly buying shares of a company that is overvalued (i.e., the balance sheet will be misleading, showing the company as having greater net value than it actually has).
Let’s assume that there are no accounting rules nor is there any clear guidance as to what this company should do. No matter what the company decides, innocent persons – whether its existing shareholders (if disclosure is made) or potential shareholders (if disclosure is not made – and is later required) will be seriously harmed as a result of either decision.
QUESTION 1>First and foremost, please describe the utilitarian implication of this situation. What do you think the company should do?
QUESTION 2>Of secondary interest (if you’d like to respond), what would deontological ethics require? And what would Immanuel Kant require?
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ScholarMatic: Explanation & Answer
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