Jason Wertz paid $50,000 for a franchise that entitled him to market Success software programs in the countries of the European Union. Wertz intended to sell individual franchises for the major language groups of Western Europe-German, French, English, Spanish, and Italian. Naturally, investors considering buying a franchise from Wertz asked to see the financial statements of his business.
Believing the value of the franchise to be greater than $50,000, Wertz sought to capitalize his own franchise at $375,000. The law firm of St. Charles and LaDue helped Wertz form a corporation authorized to issue 500,000 common shares. Lawyers suggested the following chain of transactions:
1. A third party borrows $375,000 and purchases the franchise from Wertz.
2. Wertz pays the corporation $375,000 to acquire all its shares.
3. The corporation buys the franchise from the third party, who repays the loan.
In the final analysis, the third party is debt-free and out of the picture. Wertz owns all the corporation's shares, and the corporation owns the franchise. The corporation balance sheet lists a franchise acquired at a cost of $375,000. This balance sheet is Wertz's most valuable marketing tool.
Required
1. What is unethical about this situation?
2. Who can be harmed? How can they be harmed? What role does accounting play?