Note: This case is based on a real situation.
George Campbell paid $50,000 for a franchise that entitled him to market Success Associates software programs in the countries of the European Union. Campbell 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 Campbell asked to see the financial statements of his business.
Believing the value of the franchise to be greater than $50,000, Campbell sought to capitalize his own franchise at $500,000. The law firm of McDonald & LaDue helped Campbell form a corporation chartered to issue 500,000 common shares. Attorneys suggested the following chain of transactions:
a. A third party borrows $500,000 and purchases the franchise from Campbell.
b. Campbell pays the corporation $500,000 to acquire all its shares.
c. 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. Campbell owns all the corporation's shares, and the corporation owns the franchise. The corporation's balance sheet lists a franchise acquired at a cost of $500,000. This balance sheet is Campbell's most valuable marketing tool.
Requirements
1. What is unethical about this situation?
2. Who can be harmed in this situation? How can they be harmed? What role does accounting play here?