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Essay on Ethics Case 6-4: Ethics Case report for Rate of Return

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The Damon Investment Company manages a mutual fund composed mostly of speculative stocks. You recently saw an ad claiming that investments in the funds have been earning a rate of return of 21%. This rate seemed quite high so you called a friend who works for one of Damon’s competitors. The friend told you that the 21% return figure was determined by dividing the two-year appreciation on investments in the fund by the average investment. In other words, $100 invested in the fund two years ago would have grown to $121 ($21 ÷ $100 = 21%).
Required:
Discuss the ethics of the 21% return claim made by the Damon Investment Company.

Step 1—The Facts:

• An ad placed by Damon Investment Company is claiming a 21% return on their mutual fund of speculative stocks.
• Based on a calculation by one of their competitors, this rate is based on a two year time period.
• In this case we are considering the time value of money in terms of growth where industry standards typically expect rates to be stated in annual terms.


Step 2—The Ethical Issue and the Stakeholders:
The ethical issue in this case relates to the idea that quoted rates are typically stated on an annual rate basis. The calculation of the 21% rate is misleading because it is not specified in the ad that this rate is earned over a two year period, and most people who read the ad will probably assume that what is being quoted is an annual or effective rate.

Stakeholders include anyone who reads the ad, any employee from Damon Investment Company, Damon’s competitors, and current and future customers or shareholders of Damon.


Step 3—Values:
Values include competence, integrity, objectivity, honesty, loyalty to the employer, responsibility to users of financial...


... middle of paper ...


...will have a better chance of bringing in new long-term customers because they have presented the information fairly and honestly.

Negative consequences:
• Damon may not receive as much interest from prospective customers to purchase this mutual fund.


Step 7—Decision:
In this case the most conservative course of action is to publish the ad with an effective annual rate which would match any available supporting documentation, such as published financial statements.

Only by following typical industry standards can Damon maintain their credibility and reputation in the marketplace which over time will be much more valuable to the company’s long-term sustainability. They will be able to attract more customers and have a better chance of keeping the ones they already have, as well as solidify their honesty and integrity in comparison to their competitors.



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