What is the Right Answer?

For the past seven or so years, I have co-taught a CPA Ethics course with Ron Baker, titled Everyday Ethics: Doing Well by Doing Good (www.educationfoundation.org).

This has been, simultaneously, our most enjoyable yet challenging course. Enjoyable because the topic and conversations are impeccably complex, genuine, passionate, emotional, and oftentimes humorous. Challenging, because our colleagues frequently appear to fear the conversations they may actually desire.

I sense our colleagues silently desire conversations about right vs right and other complex socioeconomic topics because so many of them, towards the end of our 8 hour sessions, become alive with ideas, concepts, opinions, and thoughts. Yet, I also believe they fear these same conversations.

Why? Why do we as colleagues and fellow homosapiens hesitate to open up and express our core selves? This unique ability that we have to openly express our thoughts and opinions about alternative positions is glorious, yet seldom leveraged. Why?

Why so afraid? Why the hesitancy to explore feelings? Are people fearful of their inner selves? Are we concerned that our opinions and feelings won’t fit in with the norm? Are we that shallow? Do we not form opinions? What is it?

Ethics courses for professionals aren’t new, although emphasis (wrongly guided IMHO) that studying the rules of the road, like the DMV rule book, will make professionals more ethical in their behaviors has resurfaced in our post-accounting and business scandal era (Enron, WorldCom, Sub-Prime, etc.). {As an aside, the truth is that it is unlikely adults can learn ethical behaviors, although they can be reinforced – however regulators, bureaucrats, legislative bodies, journalists, and professors, live in fantasyland and continue their false beliefs that spending a day rereading yesterdays rules and regulations will change the behaviors of adults, like they can photoshop the stripes off a Zebra. But I digress.}

Ethics courses, like ours, {that actually discuss ethics, decision frameworks, philosophy, and methodologies} provide enrichment and reinforcement for those that are already prone to making the right and best decisions have value. My overall conclusion about the efficacy of prescribing courses designed to regurgitate rules and regulations that are already being followed isn’t an Ethics learning experience. Frequently participants mentally check out while their body more deeply contours their uncomfortable chair. Regulators’ hearts are in the right spot, yet their conclusions about how best to facilitate professionals behaving in a manner consistent with their duties and obligations is misguided.

Clearly we believe our approach to teaching/guiding ethics education for professionals is superior to the mind numbing and creative thought killing rote learning of arcane rules and regulations that is used by most courses and instructors. (We believe in choice and therefore understand that there are alternative paths professionals may follow, even if the learning experience fails) The objective for all, of course, is for all professionals to behave and operate in a manner consistent with the norms and expectations of standard setting bodies in particular, and society, as a whole.

As professionals and fellow citizens, I believe that the big box questions of differentiating right behaviors from wrong behaviors is both simple and straightforward. Stealing is wrong. Murder is wrong. Abusing the rights of others is wrong. Right vs Wrong is easy. What is difficult is Right vs Right decisions. When the matter to decide is complex and curvy. A case study might assist here and frankly, I would like your input as I think the following illuminates the types of questions and dilemmas that we, as professionals, handle on a regular basis. Of course the names are changed to “protect the innocent” but the facts are real.

Case Study

Joe and his father own collectively several investment properties scattered around the country. Like many investors, Joe expanded his real estate holdings as the market was going up and over several years, his portfolio of real estate investments expanded. Also during this time, Joe’s wages and income were rising rapidly and cash flows were strong.

Joe understood the concept of diversification relative to risk management and was strategic in deciding where and how to invest in real property. Joe diversified his risks in several way including geography (investments are located in several states), types (there are condos, single family residences, duplexes), and ownership (Joe didn’t own all of them outright. He joint ventured under shared ownership strategies with his father and with other qualified friends).

The general agreement would be for Joe, his father, and frequently two or more friends, to jointly purchase an investment property. To expedite acquisition of properties during the fast moving real estate times, one of the JV members would acquire an investment property from a title and loan perspective and then essentially contribute the property to the group and the group would share the income and expenses.

This process worked for several years and the amount of individual debt was relative to the overall pool and ownership percentages. This process was simple and each of the related JV owners understood their obligations, opportunities, rights, and responsibilities.

Fast forward to 2008, life changes. Markets have changed. Jobs are lost. JV partners begin facing personal challenges. For Joe, this means that his fellow partners begin abandoning their obligations and stop participating in capital calls. Ownership changes are easy to handle when partners opt out, but cash flow is another challenge.

Move to today. Today, Joe and his father own investment properties that are $600k upside down. It is important to note, that although these properties were and are leveraged, Joe and his group weren’t involved in cash out refinancings, sub-prime paper, and other overly aggressive and risky endeavors. Cash flow is running about $8k/month negative for Joe and his father (Joe’s part is about $5k/month).

Joe has learned of a mortgage relief company that represents they can reduce payments by modifying rates and terms (but not balances, per se) on 1st mortgages. If they were to reduce the mortgage rates as claimed, the monthly cash flow would improve by about $3k/month. Additionally for the some of the properties with 2nd mortgages on them, the mortgage relief company believes there is an opportunity to settle with the 2nds for 10-20% of face value. If this were to be achieved, Joe and is father save another $1k/month. The cost for their assistance is about $50k plus the settlement cost of the 2nds, call that another $20k. So, Joe and his father can invest upwards of $70k to restructure their debt holdings, improve cash flow, and reduce stress. If they save $4k/month in cash flow, it takes 18 months to earn back their investment (excluding time value of money and other finance concepts).

Additionally, Joe and his dad will have reduced their negative investment value by $200k, so after adjustment they are merely $400k upside down. Assuming that the underlying real estate values increase annually at 5%, it will take 8 to 10 years for the values to rise to adjusted original cost. Also, Joe and his father will still feed the negative cash flow to the tune of $50k/year, so it could take 12-15 years for values to gain enough to recoup their investment.

The question posited was, “what do you advise?”

Initial thoughts are:

Should Joe make the investment to reduce cash flows and carry the properties until such time as they no longer deem them a good investment?

Joe and his father still have strong personal cash flows (but nothing is guaranteed) and can fund the negative flows, should they just “buck it up” and “pay the man?”

Should Joe simply request rate/term reductions and not request the 2nd’s to take a haircut?

What about the (now former) JV partners that have simply unilaterally walked? Should Joe chase his friends for money?

Should Joe and his father take their credit lumps and walk away from these properties and reinvest in replacement properties enhancing ROI on future cash outlays? In other words, why pay the freight?

What about trying to reduce the overall debt on the properties by 400k or more – effectively suggesting that lenders would be better off with some retained value rather than eating the whole loss?

The phone is ringing and Joe is on the line. How do I respond to his question?


  1. Sadly, I believe too many people (professionals notwithstanding) are intellectually lazy. The have abdicated their responsibility to think on their own. All too often I run into people who just do not want to engage in any kind of intellectual stimulation. It is rather sad.

  2. Dan, think they can get a bailout?

Speak Your Mind


Time limit is exhausted. Please reload CAPTCHA.