Question

Business Ethics

Discussion #1 The Pressure to Overstate Stock Valuation You have been the Chief Financial Officer (CFO) for a large manufacturing company for 15 years. The Company’s fiscal year ends on December 31 and you are finishing the year-end accounts. You have recently been advised by the Chief Operating Officer (COO) of a significant level of slow moving inventory. The inventory in question is now more than nine months old and would normally have been written down some months previously. The shareholders are trying to sell the Company and the Chief Executive Officer (CEO), who is also the majority shareholder, has told you that it is not necessary to write down the inventory in the year-end accounts. You are sure that the CEO wants the financial statements to carry an inflated inventory valuation because he has found a prospective buyer for the Company. The CEO has mentioned to you that if the proposed deal is successful, all employees will keep their jobs and you will receive a substantial pay increase. What are the ethical implications of this scenario and how would you resolve them? What ethical theories support your answer?

Answer 1

The CEO here wants an inflated ending inventory figure since it will increase the gross profit of the income as well as the net income subsequently. This will lead to window dressing of accounts and show a rosy financial position of the business. Although the is may lead to short term increase in pay for the executives, it will have a long term impact on the employees professional future as well lead to company disclosing incorrect facts and figures in its financial statements which will certainly be questioned during audit or any whistle blowing activity. Inventory must be valued in the balance sheet at lower of cost of net realizable value. The inventory is already nine months old which means that selling it for more than cost is an arduous task. Hence, the valuation as per a prospective buyers rate cannot be considered. The CEO can instead sell the inventory for a higher cost as on date and record the revenue in the books to show a good profits for the firm rather than arbitrarily inflating the figures.