MAA250 - Ethics for Financial Professionals - Avneet Case Study - Finance Assessment Answer

MAA250 Ethics for Financial Professionals Avneet Case Study Finance Assessment Answer

Assessment Task:

Avneet felt fortunate.  She had worked hard to earn her Bachelor of Commerce from Deakin.  Despite that effort it had taken several months to win her first role, but “persistence pays off” was the encouragement she received from her favourite Accounting tutor. Finally, she was offered a role as Assistant (to the) Accountant at Shady Oaks, an aged-care facility. The job ad mentioned periods of intensity, especially around the time when annual financial statements were being prepared, and passing through the audit. Another pressure time was completing the annual budget.  At her interview Avneet was asked “how well do you work under pressure”.  She responded with “I have completed so many assignments at Deakin that performance under pressure has become a way of life for me”.  The CEO (Jane) laughed, and the Senior Accountant (Hamid) nodded.  “This is going well”, thought Avneet. On her first day Hamid was stressed, “the auditor is coming in next week. We need to have the financial statements prepared by Thursday, ahead of review by the Board on Friday afternoon. I’ll need you to be working on the budget while I’m dealing with the auditor and J…”.  Hamid didn’t complete the sentence.  Avneet got to work. Avneet used the prior year’s budget as a template for the new one.  Five things stood out to her: 1. Revenue The facility had 80 clients. About half the clients lived in the “Fully Supported” wing, where medical professionals and carers were available 24 hours per day. Shady Oaks earned a fee from each client.  State regulations set the fee, which increased each year based on inflation. However, costs in the sector were increasing at a rate higher than the CPI. This was putting pressure on the business.  Regulations required all registered aged-care facilities to have at least 50% of clients cared for on a fully supported basis. The remaining clients lived in the “independent living” section of the facility, where they purchased a small unit. Each unit had a single bedroom, small kitchen, bathroom, and lounge room.  Care and medical support was available “on call”, whenever clients had a need. Independent living clients were charged a: • fixed annual management fee, which increased year-on-year • A service fee based on the: o time taken by care and medical services staff (at 200% of the “costs of employment” – based on staff salary, plus overtime, allowances and superannuation) o costs of medicines and supplies used in the care (200% of the purchase price), • In addition, each unit was charged with a “maintenance fee” to cover things like gardening and repairs. Units were sold when a client was transferred to the “Fully Supported” wing, left the facility, or died. The Independent Living contract signed by clients appointed Shady Oaks as the exclusive purchase agent, which gave the facility the right to market and sell units as they became available.  Shady Oaks earned a “purchase fee” of 2% of the purchase price of each unit, and a “sales fee” of 3% when each unit was sold.

2. Clients The waiting list to enter Shady Oaks was getting longer, for both the “Fully Supported” section and “Independent Living” units. Families were getting increasingly desperate when they applied. The Client Service team, which included sales and admission, heard some terribly sad stories. The Client Service team had mentioned the “Waiting List” project to Avneet. This had been contentious. Previously, it had been date-based where new places were offered to clients on a “time on the waiting list” basis. Some had suggested that a “needs-based” assessment was more in keeping with the Shady Oaks ethos, where clients were offered places according to medical need and family circumstances. When reviewing admissions data Avneet noticed that “needs-based” admissions were much shorter than “time-based” admissions.  She quickly saw that moving to a “needs-based” admissions policy would increase revenue for Shady Oaks.
 
3. Employees Employment costs were rising. Due to the ageing population, the demand for “front line” staff (medical and client care professionals) was increasing faster than supply, which was placing cost pressures on the business. The two other staffing classifications were:

• “second line” staff such as maintenance people, and kitchen and laundry hands; and

• “admin” staff” which included finance, and client service It was clear to Avneet that Shady Oaks needed to find a way to provide a high quality service while minimising staffing costs.
 
4. Maintenance Maintenance was important to Shady Oaks. Avneet had noticed a “Provision for Maintenance of $400,000” in the draft financial statements. On enquiry she was told that two years ago, specialists had come to Shady Oaks and identified that the lining of the air conditioning system was asbestos.  They were told asbestos became dangerous when it degraded and produced fibres.   At that time the asbestos was still “in tact” and presented no danger.  However, three-yearly checks were recommended. The specialists had told Shady Oaks that removing the asbestos and replacing it with a more appropriate lining could cost between $400,000 - $600,000, with the price likely to increase at double the rate of inflation as demand for the new materials was outstripping supply.
 
5. Finance Avneet noticed that Shady Oak’s long-standing banker provided an operating account and a longterm loan facility of $1 million, which was formally reviewed every three years. Every year the bank required audited financial statements. Every three months the bank required management reports with:

• Operating profit, prepared on a variable/fixed cost basis

• Liquidity position (i.e. Working Capital/Current Ratio)

• Debt:Asset position

Avneet noticed that Shady Oaks had several lease contracts with a specialist finance company.  Shady Oaks was increasingly relying on leasing as a way to purchase necessary equipment. ****** It hadn’t been easy but Avneet managed to frame a budget. Hamid had completed the financials, and the audit report was signed. It meant a lot to Avneet to have Hamid tell her she had performed brilliantly under pressure. As the end of the next financial year approached Avneet was preparing for a rerun of the previous year. This time she felt far more confident in her understanding of Shady Oaks and her ability to get the job done. It was Hamid who was a little less cheery. Two weeks out from the audit Hamid and Jane had clashed over the draft financials. From Avneet’s desk she could hear raised voices coming from Jane’s office.  Did Jane say “asbestos be damned”?  Did Avneet hear “current…non-current, who cares, they are all liabilities”?  When Hamid came out he said nothing. He picked up his car keys and mentioned something to her about “collecting the kids from school”.  As he was heading out the door he turned to her and said “good luck, you might need it”.  Or had she heard, “have a good weekend, enjoy it”. Jane sent Avneet an text on Sunday morning asking her to come into the office at 4pm for an “emergency meeting”. Avneet had her nephew’s birthday that afternoon, but promised to leave early and come into Shady Oaks.  Jane looked annoyed, and came right to the point, “Hamid has been dismissed. You know we have a tough challenge here, keeping our head above water and meeting the needs of 80 people who deserve some respect and dignity as they near the end of their lives. I know that family means a lot to you. The families of our clients are depending on us. Meeting our responsibilities to our clients and their families means that we have to operate as a team.  Hamid didn’t want to be a team player, so he had to go. You’ve been here for well over a year now and done fabulously well.  I’m wondering about promoting you to Senior Accountant and recruiting a junior to support you. I want you to go home and think about it. I need you back here at 8am tomorrow with your answer. Then we plan how to get through the financials and budgets”.  Avneet was shocked.  It was a huge responsibility she was being offered.  Or was it a huge opportunity? A few weeks before, Avneet had been contacted by Spiro, a friend from Deakin. Spiro was a high performing student who had gone to work in a tech start-up. Sadly the business had failed and Spiro was looking for his next opportunity. Avneet and Spiro chatted into the night. The next morning Spiro came into Shady Oaks with Avneet. Avneet met with Jane to propose her idea – instead of recruiting a junior accountant to support her, Avneet suggested that Jane appoint Spiro as Financial Controller, with responsibility for budgets and finance, with Avneet as Senior Accountant, with responsibility for accounting, audit and management reporting. Jane was uncomfortable. She didn’t know Spiro, but was confident about Avneet’s ability. However, when she considered the task and the time pressures, Jane felt like she had few options.  “Okay,” she said “let’s get to work and review progress at the end of each day”. Spiro and Avneet set to work. They decided to work together and use the annual financial statements process to build the budget. They decided to tackle a major financial issue each day. The first day was revenue. A year ago the Board decided to remain with the “time-based” admissions policy. Avneet moved ahead accounting for revenue on the existing policy. Jane told Spiro to add 20% to the next year’s budgeted revenue as the Board had decided to adopt the “needs-based” approach. Avneet had not heard about this change in policy. Jane told her it was a “recent decision”. Jane told Spiro to not finalise the revenue calculations until last, commenting that “to get the result we need we might have to revisit Independent Living fees to offset any losses from Fully Supported operations”.

Next day, they worked on employees. Jane mentioned that the money Shady Oaks would save on Hamid’s salary could be shared between them – Avneet gets an increase, Spiro gets a job, and Jane gets a 10% increase. There was also a need for an “efficiency gain” from staff. As most employees were paid under an industrial award there was little room for constraining cost increases. It meant that jobs had to go, to keep employee costs down. Jane told Spiro to strike Bert and Rose off the list of employees. Bert had been handyman at Shady Oaks for over 20 years. Everyone loved Bert who could always be relied on for a friendly chat or a wave. Bert described himself as a “battler” and that Shady Oaks had saved him from the “scrap heap”.  Just last week Bert had told Avneet he only needed “another five years” and he will have managed to pay off the debt on his (very modest) house.  Now on the “wrong side of 60” Bert was slowing down a bit, and not able to keep up with all the heavy demands of the job. Jane said that the team could not afford to “carry any passengers” and that if Bert could not “play his role” then he had to go. Rose was a single mum who had seen some difficult times. A victim of domestic violence, Rose had applied for over 100 jobs before coming to the facility. Rose often commented that “thanks to Shady Oaks” she was getting back on her feet. Only in her 20s Rose had a young son at home. “Sorry,” said Jane.  “We can’t afford to keep Rose on the books. If it comes down to Shady Oaks’ 80 clients or Rose, then the needs of the majority takes priority”. The next day Jane, Avneet and Spiro considered maintenance. Avneet remembered that it was over three years since the asbestos review and suggested that another inspection be included in the budget and that the provision in the financial statements should be increased in line with increased costs of remediation. However, Jane vetoed this idea, “there’s no point in moving ahead with this – we simply don’t have the money to do the work this year. Things might be better next year. In any case, we don’t have time to do the inspection before the financials and budgets have to be signed off”.  Avneet was uncomfortable, but suggested Shady Oaks still update the “Provision for Maintenance”. When Jane asked what an increase in the provision would do for the Income Statement and the Balance Sheet Avneet replied that expenses and liabilities would both increase.  “No way”, was Jane’s reply “increasing our liabilities is not an option at this time…I don’t want to be inviting any more questions from the Board or the bank than I have to”. It had been a tough week, but on Friday they had to consider financing. Avneet commented that some of Shady Oaks’ accounting policies were out of date. For example, she said “we should be distinguishing between Current and Non-Current Assets and Liabilities”.  “No”, was Jane’s reply, “Hamid was always talking about this. For a business with a significant investment in buildings and equipment we have a huge investment in non-current assets. This is not the time to be telegraphing the relationship between current assets and current liabilities”. Avneet asked about the long-term loan. She thought the review was due within six months, which would mean that the $1 million must be classified as a current liability.  “Merely a technical issue”, replied Jane. “The bank has a mortgage over Shady Oaks’ buildings which are worth over $3 million.  There’s no question they will renew the loan for another 3 years”. Avneet asked another question, “is the bank aware of how many leases we have with the finance company?”  Jane was getting irritable, “I have no idea. I haven’t asked them, and have no intention of telling them”.  Avneet felt she had to point out that accounting standards had changed and that leased assets now had to be reported as assets and liabilities on the balance sheet.  Jane exploded “assets and liabilities?  There’s no point, one cancels out the other. Keep them off the Balance Sheet.  What the bank doesn’t know won’t hurt them”. Avneet had one final concern, “what about the auditor”, she asked?  Jane had that one covered, “don’t worry about that.  My brother-in-law is the auditor. I think he can ‘see the big picture’ here”.

At the end of the day Jane invited Avneet into her office. “Look,” she said “I’m sorry to have spoken sharply to you. You know this is a tight situation. We have a responsibility to our clients – what will they do if they can’t stay at Shady Oaks? Then there are the employees. How many families depend on the wages they earn here? We have to pull every lever to keep the place open and operating”.  Avneet shifted uncomfortably in her seat.  “Yes, I care about our clients, and many of my colleagues have become friends” she conceded.  Jane seemed pleased, “that’s what I call a team player”, before adding “don’t forget you have a responsibility to Spiro now. You two are a partnership. On this team it is Avneet and Spiro.  No Avneet, no Spiro.  I hope you have a lovely weekend.  Next week will be a big week, but I know I can count on you, and Spiro”.
 

Question 1: What is an ethical issue in this case?  In answering this question, consider how you’ll frame the ethical issue through attending to the context, making clear the facts and assumptions of the case and identifying and exploring the issues in tension (that is, the tension between rationality and sensibility and between autonomy and equality). You must also identify a moral agent. Who is making an ethical decision in this case? These are just some of the questions. you can use to start formulating a response to this question. Don’t be bound by these questions, but use them as a prompt to your thinking.

Question 2: What are the ethical boundaries in this case – the norms, principles and values relevant to the case? In answering this question, you must identify the stakeholders, both those directly and those indirectly affected by the decision. What are the interests of the moral agent and the various stakeholders in this case? What are the competing ethical values and principles that underlie the ethical conflict? Use these questions to prompt your thinking. There are a host of other questions you could ask yourself as you prepare your response. Draw on the unit materials to help you explore this question.

Question 3: List alternative courses of action and the consequences of each possible course of action. In answering this question, you must determine what is accurate and trustworthy in the information you have available to you. Use your knowledge of the ethical lenses and normative theory to substantiate your suggestions for courses of action. Don’t forget to consider the consequences of each course of action.

Question 4: Identify the best course of action from the alternatives discussed in question 3 and justify that decision. What makes this the best possible ethical choice for this situation? In answering this question, outline how this choice is consistent with the norms, values and principles identified in question 2, and how you have corrected for bias. Describe how you would evaluate this decision. Drawing on unit materials and wider reading will help you respond fully to this question. Question 5: What are the responsibilities of a financial professional in this situation and in what ways have your responses so far demonstrated these responsibilities? In answering this question, you might draw on the literature you’ve read on being a professional and consider in whose interests financial professionals work. To whom do financial professionals have responsibility?
 

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