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The Ethics Coach on Cash Deals, Transparency and More

Our ethics coach takes your questions about under-the-table payments, planned obsolescence and price transparency.
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Q: A potential vendor says they'll give us a lower price if we pay cash--but they ask that we don't report the payment on a 1099. They are considerably cheaper than their competition, but this lack of accountability feels risky and unethical. What do you recommend?

A: Can we get away with it? is not a good starting point for a business deal. There's a range of potential consequences to consider when you don't operate with integrity, from legal issues to the impact on employees and customers.

"A good bookkeeper or accountant is going to insist that you provide an IRS 1099 form to any service provider where your company has paid more than $600 in the course of a year," says Damion Robinson, an attorney with Van Vleck Turner & Zaller in West Hollywood, Calif. While it may go unnoticed in many cases, the requirement is to report these expenditures. "To be on the safe side, you should be issuing 1099s even if you are paying cash," Robinson adds.

Knowingly going along with under-the-table payments, whether or not the IRS finds out, means you and the vendor agree that illegal business practices are OK. That doesn't offer much reason to trust each other from the get-go. Over time, that could lead to quality or delivery issues that will affect customers. Also, your employees may find out and lose respect for you. All in all, a very expensive way to save money.

Q: Is planned obsolescence ethical? For example, making a product from steel instead of aluminum so that it rusts and breaks within two years, or requiring software updates that slow up a phone so customers have to buy the latest model to get back up to speed.

A: Planned obsolescence is the Dr. Jekyll and Mr. Hyde of the business world. Technological and product innovations improve lives and spur economic growth. But when products fail or become passé, it causes excessive consumerism and creates environmental problems. Intentionally using materials that will fail right after the warranty expires is unethical and exploits customers.

In our fast-paced technological climate, new solutions make obsolescence inevitable. The challenge for entrepreneurs is to look for solutions to emerging problems that balance ethical considerations and profit potential. Socially and ecologically minded entrepreneurs understand their impact on society. Other entrepreneurs might ask themselves whether the intended and unintended impact of a product's design creates value without undermining customer trust or the environment.

Q: We strive to be transparent in how we do business, but the price we charge for our software varies based on the customer's size, niche and negotiating power. What is the best way to be equitable and transparent without leaving tons of cash on the table?

A: Relating to customers with honesty, candor and integrity--all part of being transparent--doesn't mean you have to disclose everything that goes into your pricing strategy. "It is understood that all customers have differing needs and pay different prices relative to the value received and variables that include usage and timing," says Carl Famiglietti, managing partner of Tewksbury, Mass.-based accounting firm Moody, Famiglietti & Andronico. "This is not ethical inconsistency if all parties receive value and the enterprise's objective of being a sustained entity is in accordance with ethical principles."

As you think about how you want the principles of transparency and fairness to play into the way you manage your business, it may be useful for your team to do periodic self-checks to uncover potential issues. Some questions you might consider: How are you determining the value of the deal (for both the customer and the company), and what criteria are you using? Does your pricing and negotiation strategy favor certain types of customers over others? If so, how can you balance it out? Do you ask for customer feedback to make the process more equitable and incorporate best-practices research into negotiations? Self-checks will help keep your team focused on the principles that are most important to you.