Adultery for Gain (Part II)

As I said, I don't know that the case involved adultery, but it easily might have. Here is our resolution of it. Comments welcome, of course: we constitute no magisterium in such things. Although these cases are meant for cultivating good judgment, they are intended, too, to be discussed.

(If you missed the post with the case, it's here.)

Recall, the point of this case here is to show that it's not fanciful to suppose that someone commits adultery for the sake of gain. (But perhaps you never thought that it was?)
----
Suggested Answer

The second possibility—that Johnson should do nothing—is excluded, on the grounds that his primary duty as an internal auditor is the protection of the assets of the bank, and that, however he came upon information that might impugn the objectivity of the senior loan officer in relation to a borrower, the intimate nature of that relationship requires that there be a review of whether the bank’s loan policy was adhered to in this case.

The fourth option—that Johnson approach the loan officer directly—is also excluded, on the grounds that the embarrassment and extreme emotions that such an encounter would likely arouse would make any reasonable outcome very problematic if not impossible.

This is apparently one of those cases in which an internal auditor is effectively required to act in such a way that he has to be prepared to lose his job. To the extent that he believes in the credibility of the rumors about a relationship between the president and this same officer, he should go to the chairman of the board (option 2). Otherwise, he should approach the bank president about the problem (option 1). He might even combine these options by first meeting with the chairman, telling him of his plan to tell the bank president, but also sharing with the chairman his concerns that his job might be threatened.

Reasoning

The profession of accounting is inherently altruistic, in the sense that an accountant, as a professional, has to be prepared to sacrifice in some circumstances his or her livelihood, for the sake of the interests of those who rely, directly or indirectly, on his or her work as an accountant.In this case, since Johnson is employed by a bank, he has to be prepared to sacrifice his job, for the sake of protecting the assets of the bank and its clients.

Johnson probably did go ‘over the top’ when he decided to hide out in the parking lot and observe his colleague’s inappropriate behavior. At the same time, he did this simply to confirm what he already had reason to suspect very strongly. In any case, there is no ‘exclusionary rule’ that would apply to what he saw. Even if he gained this information in a dubious way, once he knows about the senior loan officer’s conflict of interest, he is obliged to act effectively on this information.

In Real Life

In the actual case on which this scenario is based, the head of internal auditing decided to do nothing.

A few months later, the borrower/developer defaulted on his loans and sought to renegotiate. An independent forensic accountant was brought in to review the circumstances and discovered that the borrower had an insatiable appetite for investing in exchange-traded options with less than a week to expiration. Over the course of the two previous years, he had lost more than 10 million dollars in doing so, most of which came from the loan advances made by the bank’s senior loan officer in question. Since he had squandered so much money in this way, his development projects suffered from a near complete failure of quality control. This led ultimately to a bank foreclosure and millions in additional loans being outlaid, in order to bring the construction projects up to acceptable level of quality.

The borrower/developer had deliberately seduced the senior loan officer, precisely to obtain further loans from the bank. He had made an assessment from earlier meetings with her that she bordered on being an alcoholic, and that, if he could ply her with enough alcohol, he could easily seduce her—which he succeeded in doing and then exploiting to his benefit.

The loan officer lost her job, and the borrower/developer was prosecuted criminally. As for the head of internal audit--he lived for months in fear that his knowledge of the compromised relationship would be discovered. Eventually this was discovered, and as a consequence he lost his job; moreover, he spent an interminable amount of time in the months that followed giving depositions and testifying in court.

(c) Mark Cheffers and Michael Pakaluk
Forthcoming in Understanding Accounting Ethics, second edition (spring 2007)