Business Law Assignment: Legal Issues in Business Operations

This business law assignment addresses several key areas of legal concern in business operations. It begins by exploring the ways in which legitimate accounting practices and creative accounting can facilitate fraud, referencing the Enron case as a prime example. The assignment then analyzes the concept of earnings management, examining how pressures to meet Wall Street expectations can lead to manipulation and erosion of financial reporting quality. It delves into contract law, specifically non-competition clauses, discussing their legal enforceability, particularly in Florida, and the types of damages available for breach of such agreements. The assignment concludes by examining the formation of limited partnerships, outlining the duties, rights, and dissolution processes involved, and also highlights the legal ramifications of intellectual property (IP) contract infringements, using the case of a dispute between a Bangladeshi rock band and the filmmakers of the movie 'Murder' as an illustration.

Running head: BUSINESS LAW
BUSINESS LAW
Name of the Student
Name of the University
Author Note

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Question 1
The method of legitimate accounting facilitates fraud. The users are deceived of financial
statements by using the financial information’s legitimate disclosure in financial reports. As an
instance, fraudulent actions can be perpetrated by the accountants through the complex
procedures of accounting which understate expenses, overstate incomes or fails in reporting
financial information of significant nature in financial statements (washingtonpost.com 2019).
The frameworks and procedures of creative accounting can also facilitate fraud. The accounting
principle loopholes are capitalized by the creative accounting for disguising the financial
performance. Technically the creative accounting has been permitted, however, in general it has
been unapproved and often fraud is indicated by it. Some practices are entailed by the creative
accounting which requires omission and falsification in company’s financial report presentation.
Because of the applied pressure of the companies to its employees and managers for the
production result, commission of several business crimes is done. The managers cross the legal
and ethical lines due to the economic pressure. The pressure felt by the managers regarding the
earning of goals or reaching the figures of incentive bonus plan, is passed to the employees. The
drive of being successful or holding a good record of earning may lead several employees and
managers of committing the crimes on the corporation’s behalf (washingtonpost.com 2019).
As an example, Andrew Fastow, who was a bankrupt and collapsed company Enron’s
former CFO, in the month of January 2004, entered into a guilty plea in relation to the
commission of wire and securities fraud. Lea Fastow who was his wife was pleaded guilty for
the filing of false return of joint tax. Mr. Andrew Fastow was considered the mastermind for the
creation of the off-the-books partnership in which the substantial debt of Enron was transferred.

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The financial report of Enron resulted in making the company look healthier, because under the
existing accounting rule the entities’ debt including Mr Fastow and Ms. Fastow as the principals
and the officers need not to be reported on the financial statements of Enron. All the officers
including the Fastows were indicted have explained that they tried of meeting the statements of
projected earnings in order to preserve the value of the shareholder and the market share price. It
was admitted by Mr. Fastow that at that time he believed himself of being the Enron’s hero as he
thought that he was helping Enron and himself for making the numbers (Jennings 2014).
Question 2
Arthur Leavitt on September 28, 1998 in a seminar on Securities and Exchange
Commission held by the NYU Centre for Law and Business discussed about earnings
management. It has been stated by Arthur Leavitt that the earning management process over the
years has evolved into a best characterized game among the participants of the market (Levitt
1998). If the game has not been addressed soon then it may have consequences of adverse nature
on the financial reporting system of America. According to Arthur Leavitt, the motivation of
meeting the earning expectations of the Wall Street may override the business practices’
common sense (Levitt 1998). The participants are generally the corporate managers, analysts and
auditors. In order to satisfy the project and estimates of consensus earnings a wishful thinking
and a smooth path of earning is required which will make it a winning day over the faithful
representation. The managing may give way to the manipulation and also losing out of integrity
to illusion. Concern and frustration has grown in the corporate America for this trend (Levitt
1998). This process will result in the witnessing of an erosion of the earning quality and
therefore, will result in the witnessing of an erosion of the financial reporting quality. They know

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the difficulties of holding a line of good practices even when the competitors are operating in
between the gray area of outright fraud and legitimacy. A gray area is considered as an area
where perversion of accounting is made, corners are being cut by the managers and the reports of
earning reflects the management desires instead of company’s underlying financial performance
(Levitt 1998).
Question 3
PART A
In law of contract, a non-competition clause is considered as a clause where one party
agrees of not entering into or starting of a similar trade or profession for the purpose of
competing against the other party. It has been referred by some courts as the “restrictive
covenants” (Gallo and Adler 1992). Such clause is used for the purpose of prohibiting an
employee after the resignation or termination from working in a competitive firm or starting any
business and gaining competitive advantage by way of exploiting information which are
confidential. The non-competition clauses are allowed legally to an extent as per the jurisdiction,
like the California state of the United States validate the clause of non-competition only for
equity stakeholders in business interest sale but not for others.
Various non-compete agreement forms are recognized and enforced by most of the U.S.
States. However, the employee’s non-competition agreements are totally banned or prohibited in
the states of California, North Dakota, Oklahoma and Montana, except in certain circumstances
(Gallo and Adler 1992). For such reason, the agreement of non-competition is very popular
among the companies who have the employees of the allowed states. In Florida, the non-

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competition agreement’s enforceability is considered quite common. The courts of Florida rarely
refuse the enforceability of non-competition agreement because of the geographic scope or
length. Moreover, under the Florida law the courts are required to do ‘blue pencil’ a non-
competition agreement of impermissibly lengthy or broad nature for the purpose of making it
reasonable within § 542.335 of the Fla. Stat (Gallo and Adler 1992). Therefore it can be
understood that the provision of non-competition between Xavier and SMEC would be held
enforceable as the South Miami Engineering Company is a Florida based company which
performs a specific test and they signed a non-competition agreement with Xavier regarding non-
performance of or of providing any similar service within Florida (Gallo and Adler 1992).
PART B
There are few damages to which the injured party is entitled against the breach of non-
competition agreement, which are,
Compensatory Damages: Damages which are designed for putting the plaintiff in such
positions which he could have been if the full performance of the contract was made.
Consequential or Special Damages: Foreseeable damages which are resulted from the
special circumstances and facts which arises outside the contract. These damages need to be
within the contemplation of the parties at the time of the occurrence of the breach (Gallo and
Adler 1992).
Punitive Damages: Damages which are designed for the punishment of the defendant and
for deterring him and the others from the engagement of them in any similar behaviour in future.

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Nominal Damages: Awards which are intended for signifying that even no occurrence of
actual damages has resulted from the contract’s breach by the defendant but the plaintiff was
wronged by the defendant.
Liquidated Damages: Damages for the breach of contract which has been mentioned
specifically in such contract (Gallo and Adler 1992).
Therefore it can be understood that the SMEC might be entitled to certain damages for
the breach of the provisions of non-competitive agreement, which are, compensatory damages,
consequential damages, punitive damages, nominal damages and liquidated damages.
Question 4
In this case the development company needs to form a Limited partnership. A limited
partnership is a business that is unincorporated which needs to have at least a number of one
partners in general and at least one limited partner. The general partners of a limited partnership
exercise managerial or operational control over the business (Jennings 2014). The liability of the
limited partner is limited to the extent of the capital contribution he or she made. The limited
partner is not authorized to exercise any managerial or operational control over the business. The
following are the duties of a partnership which are the duty of loyalty, duty of care and duty of
obedience. There are various partnership rights in a limited partnership which are, right of
sharing in management, right of sharing profit, right to compensation, right to the property of the
partnership, right of inspecting books and right to accounting. A partnership can be dissolved by
the actions of the partner, by the operation of law or by the court’s action (Jennings 2014). At the
time of forming a company several IP contracts need to be signed by the partners and
infringement of such contract may lead to the constitution of legal suits and proceedings. If any

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IP clause is violated by any of the partner or by the company or any other entity then the injured
party may seek legal remedies. In this scenario the case between the Bangladeshi rock band
‘Miles’ and the music director Anu Malik and producer Mahesh Bhatt of the movie ‘Murder’
may be addressed where an order of injunction was passed by the Calcutta High Court
(www.wto.org 2019).

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Reference
Gallo, T. and Adler, J., 1992. Non-compete agreements in Alabama, Florida, South Carolina and
Tennessee. Robins, Kaplan, Miller & Ciresi LLP (undated). Gibbons, R., and K.
Murphy,“Optimal incentive contracts in the presence of career concerns: Theory and evidence,”
Journal of Political Economy, 100, pp.468-506.
[3506672_1759546303_Attachmentforassignmentquestio]
Jennings, M.M., 2014. Business: Its legal, ethical, and global environment. Nelson Education
[book provided by student on July 16 on the portal]
Levitt, A., 1998. Remarks by Chairman Arthur Levitt, Securities and Exchange Commission,
The “Numbers Game”, NYU Center for Law and Business, New York, NY, September 28, 1998.
Securities and Exchange Commission.
[3506676_1233300032_question2case...ArthurLeavittT]
Washingtonpost.com (2019). Crisis at Refco Raises Questions About Accounting. [online]
washingtonpost.com. Available at:
http://www.washingtonpost.com/wp-dyn/content/article/2005/10/14/AR2005101402043.html
[Accessed 21 Jul. 2019]. [3506673_1246042467_caseforquestion1..CrisisatRefc]
www.wto.org (2019). WTO | Managing the Challenges of WTO Participation: Case Study.
[online] Wto.org. Available at:
https://www.wto.org/english/res_e/booksp_e/casestudies_e/case3_e.htm [Accessed 19 Jul. 2019]
[link given on the requirement file]