What is unethical about this situation?. Note: This case is based on an actual situation.
Stan Sewell paid $50,000 to have a business which allowed him to market software applications in the countries of the European Union. Sewell planned to sell individual companies for the main language groups of Western Europe-German, French, English, Spanish, as well as Italian. Obviously, investors thinking about buying a company from Sewell asked to see the financial statements of his organization.
Supposing the price of the company to be $500,000, Sewell wanted to capitalize his own company at $500,000. The law company of St. Charles & LaDue assisted Sewell create a corporation chartered to issue 500,000 shares of common share with par value of $1 for each share. Lawyers recommended the following series of dealings:
- Sewell’s relative, Bob, borrows $500,000 from a bank and buys the company from Sewell.
- Sewell pays the corporation $500,000 to get all its shares.
- The corporation purchases the company from Cousin Bob.
- Cousin Bob repays the $500,000 loan to the bank.
In the bottom line, Cousin Bob is debt-free and away from the picture. Sewell has all the corporation’s shares, and the corporation has the franchise. The corporation’s balance sheet lists a franchise purchased for $500,000. This balance sheet is Sewell’s most effective marketing strategy.
- What is unethical about this situation?
- Who can be harmed? How can they be harmed? What role does accounting play?