Ethics R5 p216 Q3 question, accounts, interest, purchase, provided

joehogue

Question 3 talks about acceptable methods of correcting trade errors. The answer provided in the textbook is only partly explanatory. It says that you must credit accounts with short term interest if cash was incorrectly used to purchase equities that were later removed. I get this. But beyond crediting interest, the answer also implies that the method utilized in the question to correct the problem (removing shares at the current market price) is wrong. What is the right way and the right price to make the correction?

lcai

It should be the original purchase price; this is the amount of cash that was taken out of the account to settle the trade. You would undo that trade by removing shares and putting back the initial cash, plus the interest that cash would have earned if it was never taken out in the first place.

Think about if you used the current market value, instead of the intial purchase price. Let's say the account accidentally was shown to have bought $10,000 worth of stock....which subsequently tanked to $7,500 MV. The only fair thing to do is credit the $10,000 plush the interest that is should have earned between the time the error was made and when it was corrected. If you instead put back $7,500+ short term interest you still shafted the client.