Ethical dilemma 18: Deal or no deal

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In 2008, ICAS Research published the report "What do you do now? Ethical Issues Encountered by Chartered Accountants" by Dr David Molyneaux containing 28 true life case studies of ethical dilemmas faced by accountants either in practice or business.

In recognition of this work, in 2009 the ICAS Technical Policy Board then published "Shades of Grey" containing a further series of case studies, one of which is reproduced below.

The views expressed in these respective case studies are those of the Ethics Committee and do not necessarily represent the views of the Council of ICAS.

This case study gives general guidance only and should not be relied on as appropriate or comprehensive in respect of any particular set of circumstances. It is recommended that users consider seeking their own professional advice.

The authors or the publisher can accept no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication.


You are a salaried corporate finance partner in a mid-tier accountancy firm, Hip Hop Ska & Co. The current economic climate is such that the number of deals taking place has fallen significantly and both current work and prospects in the pipeline are low - the M & A market has all but disappeared - you have never known it to be so inactive.

As a result of the economic conditions your firm is currently undertaking a cost review exercise and it is rumoured that the headcount - both staff and salaried partners - will be reduced significantly.

The mood in the office is apprehensive, as salaried partners and staff worry about their positions. Americana, the Managing Partner, has issued an edict encouraging partners and staff to work longer hours and chase all potential business opportunities.  

You have been working as an adviser to a significant non-audit, owner-managed business client of the firm, Nice and Easy Ltd. The company is large in size and, although like most businesses they are finding trading conditions difficult, they are managing to keep their head above the turbulent water.

However, a number of years ago the company branched into another area in which it set up a subsidiary company, Rhythm Blues & Punk Ltd. The subsidiary has performed steadily but the directors now feel that in order for this subsidiary to grow further it needs additional capital.

The directors have decided that providing additional capital at this point in time does not feature in their current strategic plans and have therefore decided to dispose of Rhythm Blues & Punk Ltd.

Whilst the directors appreciate that economic conditions are difficult and uncertain, they are very keen that the subsidiary is not sold at a "fire sale" price. If push comes to shove they would rather retain Rhythm Blues and Punk Ltd than sell it for significantly less that it is worth.

The subsidiary has now been on the market for several weeks attracting a fair degree of Interest from potential purchasers. In the last fortnight however, a frontrunner, Alternative Country Ltd, emerged and following appropriate due diligence, the deal is now nearing completion.

Your fees have been agreed in advance on a contingent fee basis, meaning that the fee for the transaction will be based on a percentage of the consideration achieved and you will receive no fee if the deal does not proceed.

In your mind this deal must be completed - you cannot afford to write off the amount of time you have now spent working on this transaction - successful completion and the associated fees attained will provide you with some time to get further prospective transactions in the pipeline and therefore safeguard your position at the firm at least in the short-term - that may be enough for you to ride out the current economic storm.  

On the day the deal is due to be completed, your Managing Partner summons you. He informs you that he has been very impressed by the manner in which you have led this assignment - all that is needed now, is for both parties, the buyer and seller to sign on the dotted line.

Ominously, however, Americana adds that this deal is now vital to the survival of the firm's corporate finance department - the firm has already seen a couple of mooted M& A transactions fall by the wayside in recent days - the firm just could not afford another one - it would not just be your job that would be on the line.  

You then leave for the meeting with your client with the words of your Managing Partner ringing in your ears "a deal must be done!"

On arrival at the meeting which you had hoped would be a straightforward crossing of the "t's" and dotting of the "i's" you are aghast to find out that at the 11th hour, the prospective buyer, Alternative Country Ltd, has substantially lowered their offer for your client's business, citing the downturn in the economy - they are a bit late, you think to yourself - and you wonder whether this has been a carefully orchestrated ploy to try and force your client's hand - the other prospective bidders have long since left the table.

You appreciate that if your client still wants to go ahead with this transaction then they will have to lower their expectations, however, your experience and skill as a corporate finance adviser tells you that Alternative Country Ltd's revised offer undervalues the target company.

Your first course of action is to try and get the purchaser to raise their offer back to their original intended amount - however unfortunately you are unsuccessful at negotiating an increase in the price on behalf of your client. The purchasers are adamant - this is a take it or leave it final offer.  

You update your client, at which point the directors ask you whether the prospective purchaser's offer represents a fair value for the subsidiary in the current economic climate, noting that they will go with your recommendation.

What do you do now? 

Scenario Analysis

What are the readily identifiable ethical issues for your decision?  

For you personally  

The purchaser has made a revised reduced offer for your client's subsidiary business.

You do not believe this to be a reasonable offer for the business but have you given sufficient consideration to the state of the economy when arriving at your valuation?  

There would appear to be considerable pressure on you and your firm for this deal to go through. Can you properly manage this pressure without it impacting on your professional judgment?

Who are the key parties who can influence, or will be affected by, your decision?

  • You
  • Potentially your family
  • Your fellow partners and staff
  • Your client
  • The prospective purchaser

What fundamental ethical principles for accountants are most applicable and is there an apparent conflict between them?  


The need to be open and honest with your client. Is the prospective purchaser's offer reasonable in the current economic climate?


How do you ignore the commercial pressures which you have been put under?  

Professional competence and due care  




Professional behaviour  

The need to disregard anything other than the task at hand which is advising your client on the proposed sale of their subsidiary company. Given the economic conditions, is the prospective purchaser's offer reasonable?

Is there any further information (including legal obligations) or discussion that might be relevant?  


Is there a conflict between the 'Guardian' and 'Commercial' strands of an accountant's responsibilities?  

The commercial pressure which you are under to force through the deal conflicts with the 'Guardian' role, which in this case requires you to act in the best interests of your client regardless of whether this may not appear to be in your or your firm's short-term best interests.  

Based on the information available, is there scope for an imaginative solution?

An approach could potentially be made to the other previously interested parties to see whether they would still be wiling to discuss a potential purchase.  

Are there any other comments?  

The case study highlights the dangers from both a firm and client perspective of agreeing to undertake an engagement on a contingent fee basis.


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