Adultery for the Sake of Gain

Not ancient philosophy, but fun. Here's the case (based on an actual case). Tomorrow I'll post a resolution and how it turned out in real life.

I'm not aware that it involves adultery, but it easily could.

(Btw, I won't neglect posting something later on the Doctrine of the Mean. The fun does not exclude the serious--far from it.)

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The Case
Ralph Johnson is a CPA who is the head of internal audit of a mid-sized bank with about $500 million in loans. One evening he just happens to walk into a bar on the outskirts of town at 10 pm to meet someone, and, as he walks in—the bar is very crowded—a face catches his eye, and it is the face of a female senior loan officer his bank, Nancy Draper. He sees that she is having a fairly intimate drink with a major borrower, one of the largest developers in town.

Johnson freezes; he moves out of eyesight and is not quite sure what to do. The more he looks on at the scene, the more it seems obvious that this is not an ‘extended business meeting.’ He decides to go out to the parking lot, because he knows what Draper’s car looks like. His plan is to learn more by observing what happens next. Draper’s car is parked in a poorly lit back section of the parking lot. Johnson therefore moves his car into position among the shadows, where he can have a good view.

Not 15 minutes later, Draper and the major borrower come out, and, walking to her car, before they put the key in the door, they act in such a way that there can be no doubt at all as to the intimate relationship that exists between them. Johnson stays and observes until Draper drives off.


The Difficulty
The next day Johnson sees Draper at work and is not sure what to do. Draper’s relationship with the major borrower/developer is a serious violation of bank policy. However, Johnson is very concerned because he has heard rumors that Draper also has been intimate with the bank President—and Draper reports to the bank President. As head of internal audit, Johnson has the authority to initiate a review of the loan relationship, but this would look suspicious and strange. He could of course contrive to review “certain lending relationships that the bank has”—which would just ‘happen’ to include this particular loan relationship, picked ‘accidentally’ for extensive review. However, that path is effectively closed to him, since a fairly comprehensive review of that sort was just completed, and for him to initiate a new review at this time would be regarded as inappropriate and perhaps even as a kind of harassment.

What should Johnson do? What follows are various possible courses of action. Are there any that should be excluded? Of those that are permissible, which is best? How would you rank them?


One possibility: Johnson should make an appointment with the bank President. He should explain what he has seen, and he should recommend that the bank undertake a serious, objective review of its lending relationship with that borrower/developer—to be carried out by Internal Audit, or by whatever independent means the President decides (such as an outside consultant; another loan officer; or the president himself). Johnson recognizes that by taking this action he might precipitate his own dismissal, since the President might conclude that his observations of Draper constituted ‘spying’ and were completely inappropriate. Also, if the President still had affection for Draper, he might be more willing to believe that Johnson was the problem than that Draper acted badly.

Second possibility: Johnson should do nothing, on the grounds that he really should not have ‘observed’ the loan offer in the way that he did, and that his doing so has, arguably, created in his own mind a certain level of bias, and even paranoia, that has compromised any objectivity he might have had, to be in a position to deal with this issue as head of internal audit.

Third possibility: Johnson should go to the Chairman of the Board and explain the problem. Because the Chairman and the bank President have been good friends in the past, Draper regards this as a risky course—he might need to explain why he is going over the head of the President.

Fourth possibility: Johnson should deal with this directly and personally. He should approach the senior loan officer directly and say something like: “At the ____ Bar last night, I saw what seemed to be a serious violation of company policy, as regards your relationship with one of the bank’s major borrowers. As Head of Internal Audit, I must insist that you either break off this relationship, or resign from your position at the bank, or both.”

(c) Mark Cheffers and Michael Pakaluk
From Understanding Accounting Ethics, second edition (forthcoming Spring 2007)