Introduction The purpose of this report is to provide an overview of the current situation at Pierpoint Gold Company in regards to the

ethical issues involving profit smoothing and the use of hidden reserves to downsize the impact of the expected losses from damages. Outcomes will be presented, assessed and an appropriate action will be decided upon. Define Problem Pierpoint Gold Company has been smoothing profits by means of reserve accounts (Provision for Future Mine Expansion). Under AASB 137 and paragraph QC 17 of the IASB framework, the creation of this provision account does not comply with the standards. As a result of water contamination at the companys SA mine, the reserve accounts will be used to down size the expected losses from the damages. This action further raises issues involving compliance with paragraph QC 17 of the IASB framework.

Ethical Principles Involved (Aristotelian Perspective) Prudence The companys actions are an example of imprudence by excess through craftiness and guile as the creation of the provision account does not truly represent what it is intended for and that is for the purpose of future mine expansion. Justice The companys actions through reliance of secrecy in their reserve accounts are a cause for concern, as they violate the right of the public to information that is neutral and free from bias.

Stakeholders Involved: Board of Directors Mr Robson Myself Shareholders of Pierpoint Gold

Ethical Review Justice is the virtue which enables man to give to each one what is his rightful due. Pieper, J. (1955). Thus, the smoothing of profits and the use of the hidden reserves to downsize the expected environmental losses, would be seen as a violation of the virtues of justice. According to the IASB framework, paragraph QC 17 states that information must be both relevant and faithfully represented, and to be faithfully represented information must be neutral. It is evident that the above actions are unjust as withholding crucial information to shareholders can result in a number of consequences.

Firstly, shareholders may have initially invested in the company as it was seen to produce steady profits. But in actual fact without the smoothing, profits would be volatile and fluctuate from year to year. This may be detrimental to some shareholders as their real portfolio risk value may be adversely affected in the long run.

Secondly, through using the hidden reserves to downsize the losses from pollution, it is unjust for the shareholders who have consciously invested in the company under the assumption of their high environmental reputation. If provided the information of the extent of the damage, shareholders may have possibly not invested in the company, as the extent of the damage would not have constituted that of a company with high environmental standards.

Prudence involves differentiating what is right and wrong and acting upon judgement appropriately. Pieper, J. (1955). The vice of imprudence by excess is displayed in the case of profit smoothing and using the reserves to down-size the expected loss from damages. It is a good example of craftiness which is seen as unethical as the scheme relies on secrecy to achieve an end. This would be seen as unfair to shareholders as through the act of smoothing profits, it is possible for the investors to not be allowed to act in the most efficient manner in their investment decisions. Further the imprudence is exemplified as the creation of the provision account doesnt satisfy AASB 137 which states that, a provision shall be recognised when: an entity has a present obligation as a result of a past event. It is evident that there is no such relationship with an external party to make a sacrifice of future economic benefits with regard to mine expansion.

Consider Options Do nothing Have further discussions with the Senior Manager Report to the Board of Directors Reveal to Public

Investigate Outcomes Do nothing Doing nothing would mean me respecting the Senior Managers decision and trust that the judgement is correct. However by doing nothing, others from the company might learn of the situation and report to the board of directors or reveal this information to the public. This may result in the loss of my employment. Discuss with Senior Manager I can discuss with the Senior Manager to perhaps discuss the possibility of stopping the use of hidden reserves to smooth company profits and to not reduce the impact of damages through drawing from those hidden reserves. The manager may agree and may advise upper management on the issue and comply. I however can risk getting sacked for questioning judgement. Report to Board of Directors I could refer my concerns to the Board. The Board will then decide on actions to be taken, and whether they look past the ethical issues or not are beyond my control. Reveal to public In the event that the Board do nothing, I could reveal the unethical practices to the media. This could result in the loss of my employment and repercussions for my future career. Further by whistle blowing, the reputation of the Company, the Senior Manager and the Board may be adversely affected.

Decide On Action Reveal to the public I have chosen this as revealing to the public (media) means that the shareholders are treated equitably for the past inequitable profit smoothing and will mean that full information of the extent of the damages will be disclosed. This overall will result in compliance with AASB and IASB frameworks. The end result is that justice is restored and actions hence forth will be prudent. Evaluate Results Costs Possible for the Senior Manager to lose his job, possible legal consequences Company gains a bad reputation Possible for my own job loss

Benefits Compliance with standards, thus equity in market place is restored. Shareholders rights are restored

Bibliography AASB 137 Provisions, Contingent Liabilities, and Contingent Assets Pieper, J. (1955). The Four Cardinal Virtues Prudence Justice Fortitude Temperance. Pantheon Books Inc. Paragraph QC 17 of the IASB framework