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%).
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.
Values include competence, integrity, objectivity, honesty, loyalty to the employer, responsibility to users of financial statements.
NOTE: These are presented as though Damon Investment Company considered these alternatives prior to publishing the ad.
1. Publish the ad stating a 21% return, but not stating the time period over which this return was earned.
2. Publish the ad including an explanation that the 21% rate is earned over a two year period. This would still be somewhat misleading because they would not be following industry standards for stating rates. This could be presented adjacent to the 21% rate or in fine print at the end of the advertisement.
3. Publish an ad which correctly states the effective annual rate of the mutual fund.
Step 5—Evaluation of Alternatives in Terms of Values:
• Loyalty to the employer – while this is questionable over the long term, in the short term they would be attracting more leads with a possibility of converting to customers.
• Honesty – Damon could explain their rate which would align with the value of honesty, but because this presentation does not follow industry standards it...