Pfau, Suzanne-DB2-ACCT 612

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ETHICAL DILEMMAS IN TAX MANAGEMENT AT HADDOC 1 Ethical Dilemmas in Tax Management: A Case Study of Inflated Rental Payments at Haddock Corporation Suzanne Pfau School of Business, Liberty University Author Note Suzanne Pfau I have no known conflict of interest to disclose. Correspondence concerning this article should be addressed to Suzanne Pfau. Email: sbpfau@liberty.edu

ETHICAL DILEMMAS IN TAX MANAGEMENT AT HADDOC 2 Abstract This abstract explores the intricate ethical and professional challenges encountered by tax professionals, focusing on the case of inflated rental payments at Haddock Corporation. John Haddock, the majority shareholder, benefits from these payments, leading to a conflict of interest that undermines transparency and fairness within the company. Upholding ethical standards, including adherence to biblical principles and compliance with tax regulations, is crucial for maintaining the integrity of tax management practices. Additionally, professional standards articulated in the AICPA Code of Professional Conduct and Statement(s) on Standards for Tax Services stress the significance of independence, integrity, and objectivity in the actions of tax professionals. The abstract underscores the imperative for tax professionals to prioritize honesty, integrity, and fairness to uphold ethical standards and preserve the tax system's integrity. Keywords : Ethical Conduct, Compliance, AICPA Code, Biblical Principles

ETHICAL DILEMMAS IN TAX MANAGEMENT AT HADDOC 3 Ethical Dilemmas in Tax Management: A Case Study of Inflated Rental Payments at Haddock Corporation John Haddock, holding 75 percent of Haddock Corporation's stock, with his wife, Marsha, owning the remaining 25 percent, is the majority shareholder. Assigned as a tax manager responsible for preparing the company's tax return, I uncovered a troubling practice: the company pays rent to John for a building co-owned with his son, John Jr. These rental payments significantly exceed standard rates for similar properties in the area. The partner handling the engagement dismisses the issue, citing its longstanding nature and lack of objection from the IRS. However, the ethical implications prompt questions about the legitimacy and responsibility of tax professionals in adhering to ethical standards. Tax professionals must prioritize ethical considerations over longstanding practices to maintain the integrity of their work. Would I sign the tax return? The inflated rental payments raise red flags regarding potential tax evasion. As a tax manager, I am accountable for ensuring the accuracy and ethical integrity of the tax return, and I would not sign it. If I were to approve such a return, it would undermine my professional integrity, as the excessive rental payments might be an attempt to decrease Haddock Corporation's taxable income artificially. Potential Ethics Issues Conflict of Interest As a significant shareholder, John Haddock benefits from inflated rental payments. This situation creates a conflict of interest, as John's financial gain may not align with the best interests of Haddock Corporation. "Objectivity is not the same as honesty, since the regulatory

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ETHICAL DILEMMAS IN TAX MANAGEMENT AT HADDOC 4 document emphasizes that 'A professional accountant should not allow bias or impartiality, conflicts of interest, pressure from others to change professional or business judgment'" (Chulpanovna et al., 2021, p. 2). Additionally, John's dual roles as both a shareholder and a recipient of excessive rent raise concerns about transparency and fairness in the company's financial dealings. Ethical Conduct The inflated rental payments violate the principles of fair dealing and honesty, which are fundamental to ethical conduct in tax management. Such actions erode trust with stakeholders and undermine the tax system's integrity. Tax professionals must uphold these principles to ensure transparency and maintain public confidence in the fairness of tax practices. According to Black, Burton, and Cieslewicz (2022), "The internal struggles individuals may have with their desires or commitment to ethical behavior are not normally observed, and even unethical behavior is difficult to identify given the many ways unethical conduct can be performed and unethical behavior's inherent secretive nature" (p. 947-948). Any deviation from these standards risks tarnishing the reputation of the individual tax professional and the company they represent. Compliance with Regulations Tax authorities may conduct audits, potentially resulting in penalties or fines for the company if it violates tax laws. Additionally, engaging in unethical or non-compliant tax practices can lead to reputational damage and loss of trust from investors and customers. Dularif and Rustiarini (2022) explain that non-compliant behavior, from a taxation perspective, involves activities aimed at reducing tax obligations, commonly referred to as tax avoidance and tax evasion. Therefore, Haddock Corporation must ensure its deductions align with market standards and adhere to applicable tax regulations to mitigate these risks.

ETHICAL DILEMMAS IN TAX MANAGEMENT AT HADDOC 5 AICPA Code of Professional Conduct Rule 101 – Independence According to Rule 101, a member in public practice must maintain independence when performing professional services. In this scenario, the questionable rental arrangement compromises the tax manager's independence, as John Haddock's financial interests directly influence the inflated payments. This lack of independence raises concerns about the tax manager's impartiality and objectivity in decision-making, potentially undermining the credibility of the tax return preparation. Tax professionals must maintain independence to ensure unbiased and ethical handling of their client's financial affairs. Rule 102 – Integrity and Objectivity Rule 102 mandates that members maintain integrity and objectivity in their professional activities. The inflated rental payments undermine the objectivity of the tax return, as they seem motivated by personal financial gain rather than a fair representation of the company's actual financial standing. This compromise in objectivity raises concerns about the integrity of the tax manager's actions and casts doubt on the accuracy of the tax return. Adhering to ethical standards is crucial for tax professionals to ensure transparency and trust in their financial reporting practices. Statement(s) on Standards for Tax Services Standard 1 – Tax Return Position Standard one emphasizes the need for tax professionals to take reasonable positions on tax returns. Inflating rental payments to reduce taxable income does not align with this standard, as it represents an aggressive position that may not withstand scrutiny. Such an approach risks triggering audits or investigations by tax authorities, potentially resulting in penalties or fines for

ETHICAL DILEMMAS IN TAX MANAGEMENT AT HADDOC 6 the company. Tax professionals must exercise caution and adhere to reasonable positions to ensure compliance with tax laws and regulations. Standard 2 – Knowledge of Error Standard two mandates that tax professionals promptly advise clients of errors and their consequences. Failing to address the inflated rental payments contradicts this standard, as it overlooks a significant error that could have severe consequences for Haddock Corporation. By neglecting to address this issue, the tax professional may subject the company to potential legal and financial risks, highlighting the importance of promptly notifying the client of any errors discovered. Biblical Principles The Bible encourages principles such as honesty, integrity, and fairness. Colossians 3:9-10 states, " Do not lie to each other, since you have taken off your old self with its practices 10 and have put on the new self, which is being renewed in knowledge in the image of its Creator" (Colossians 3:9-10 NIV - - Bible Gateway, n.d.). In the scenario context, the inflated rental payments create a false balance, deviating from fair and just practices. As a tax professional, adhering to biblical principles involves promoting honesty, transparency, and fairness in financial dealings, which would require addressing and rectifying the issue rather than overlooking it. By upholding these values, tax professionals demonstrate their commitment to ethical conduct and strive to honor God in their work. Conclusion In conclusion, the scenario involving inflated rental payments at Haddock Corporation underscores critical ethical and professional considerations for tax professionals. John Haddock's conflicting roles as a shareholder and beneficiary of the excessive rent raise transparency and

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ETHICAL DILEMMAS IN TAX MANAGEMENT AT HADDOC 7 fairness concerns, compromising ethical conduct. Prioritizing compliance with tax regulations is essential to protect the company's reputation while adhering to professional codes like Rules 101 and 102, which are vital for maintaining ethical standards and stakeholder trust. Tax professionals must prioritize honesty, integrity, and fairness aligned with biblical principles to uphold the tax system's integrity and financial practices.

ETHICAL DILEMMAS IN TAX MANAGEMENT AT HADDOC 8 References Black, E. L., Burton, F. G., & Cieslewicz, J. K. (2022). Improving ethics: Extending the theory of planned behavior to include moral disengagement. Journal of Business Ethics , 181 (4), 945-978. Chulpanovna, K. Z., Botiraliyevna, Y. M., & Turgunovich, M. A. (2021). Society interests, professional competence and ethical requirements for professional accountants. World Economics and Finance Bulletin , 4 , 3-5. Colossians 3:9-10 NIV - - Bible Gateway . (n.d.). Www.biblegateway.com. Retrieved February 7, 2024, from https://www.biblegateway.com/passage/?search=Colossians+3%3A9- 10+&version=NIV Dularif, M., & Rustiarini, N. W. (2022). Tax compliance and non-deterrence approach: a systematic review. International Journal of Sociology and Social Policy , 42 (11/12), 1080-1108.

ETHICAL DILEMMAS IN TAX MANAGEMENT AT HADDOC 9 Suzanne, job. You provided an interesting discussion of the ethics of this situation. Also, you provided sound sourcing. Your submission was well written and you did identify the relevant codes. Do remember use of the new coding system for the AICPA code of ethics. I have provided the link for the AICPA again below. The official solution is provided below, please let me know if you have questions. AICPA Code of Professional Conduct (See new codification system at http://www.aicpa.org/research/standards/codeofconduct/Pages/default.aspx A CPA must comply with all standards promulgated by bodies designated by the AICPA Council and conform to generally accepted accounting principles. Under Rule 102, all professional services by a CPA should be rendered with objectivity and integrity, avoiding any potential or existing conflicts of interest. In addition, a CPA should neither knowingly misrepresent facts nor subordinate his or her judgment to that of others in rendering any professional services. Under the Statements of Standards for Tax Services (SSTS), a CPA should have a good-faith belief that a recommended position has a realistic possibility of being sustained if challenged. In the instant case, the CPA must notify and advise the client promptly upon his or her knowledge of a prior or current tax return error(s) that has a significant effect upon the taxpayer's liability. The client must be notified and advised either orally or in writing. Once rental prices of the current area have been verified and compared against the amount paid by Haddock Corp., the CPA should take the appropriate actions. The CPA should consider whether to proceed with the preparation of the current year's return or resign from the engagement completely. He or she should not sign the tax return until the appropriate measures have been taken to correct the errors made in the current and prior returns.

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