Sprint Corporation: Ethical Decisions and Tax Avoidance Strategies

By Verreault, Daniel A.; Yang, Simon et al. | Issues in Accounting Education, February 2004 | Go to article overview

Sprint Corporation: Ethical Decisions and Tax Avoidance Strategies


Verreault, Daniel A., Yang, Simon, Angel, Jack, Issues in Accounting Education


ABSTRACT: The case focuses on events surrounding Ernst & Young's tax shelter advice to senior executives of Sprint. The principal ethical lens used for analysis is Integrative Social Contracts Theory (ISCT). We believe that this is the first instance of ISCT applied specifically to a situation in accounting and to an ethical problem in a nonglobal context. Additionally, it is one of a small number of tax-oriented cases focusing on ethics. ISCT offers several benefits over the traditional models applied in ethical analysis (Mintz 1997). ISCT integrates implicit and explicit contracts among affected business communities that enable a detailed normative assessment of rich ethical problems in a realistic economic world. The use of ISCT in this particular case provides students, instructors, and practitioners with a model to aid in: (1) understanding the normative justification for business decisions, and (2) assessing the quality of ethical decision making in a complex business setting.

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PROLOGUE

On February 2, 2002 Sprint announced that William T. Esrey, Chairman and CEO, and President Ronald LeMay were leaving the company. On May 13, 2003, 38 percent of Sprint shareholders voted to fire Ernst & Young (hereafter E & Y) as Sprint's auditors. The complex links between these two events involve the quality of Board of Director oversight, the downward spiral in telecom valuations, conflicts of interest between E & Y and Sprint, and the decisions made by E & Y in creating and marketing aggressive tax shelters to Sprint executives. The focal point of this case is the role of E & Y and the substance of its tax shelter. We will explore the structure of the shelter, its promised results, and its relationship to relevant professional tax standards. We will use a particular ethical model to sharpen and structure the analysis. The model will take some effort to learn. However, knowledge of the model will improve your ability to analyze Sprint and will aid you in "go or no-go" ethical decisions in all areas of professional life. The tax aspect of the case is particularly appropriate. Grasso and Kaplan (1998, 98) note that "tax courses have historically placed little or no emphasis on integrating ethics into their content. Thus individuals who begin performing tax work may have the desire to maintain high ethical standards and yet feel unequipped to solve ethical dilemmas involving tax issues." This case will provide the needed guidance to tax students and professionals.

PART 1: ETHICAL ANALYSIS USING INTEGRATIVE SOCIAL CONTRACTS THEORY (ISCT)

Introduction

The purpose of this section is to strengthen your ability to analyze complex situations from an ethical point of view. The situations involved in ethical issues are often not all clear-cut. So you must ask yourself, given a certain situation, "How do I determine if an action is ethical?" You will be asked to make such determinations for a series of decisions made by E & Y, Sprint's Board of Directors, and Sprint's senior executives.

The case includes ethical elements relating to executive compensation levels, Board of Director oversight duties, several dimensions of potential and apparent conflicts of interest, and the role of professional tax practice standards in guiding tax-planning professionals. Part 2 describes Sprint's business situation and the key actions of its management team. Part 3 conveys the important facts surrounding E & Y's role in constructing and selling the tax shelter. Part 4 presents the case assignments.

In order to undertake ethical analysis, a person needs to consider: (1) his or her own ethical framework, (2) the various ethical evaluation methods available, and (3) the diverse authority to which different affected communities could appeal. ISCT is a particular methodology based on social contracts that helps in the analysis of the ethical dimensions of the Sprint case, and, more importantly, can serve as a useful decision aid in recognizing the ethical dimensions of decisions in all aspects of professional life. …

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