Question

Scenario- You have been invited to attend a meeting where your immediate supervisor will be presenting a draft of detailed financial projections to the chief financial officer and a subsequent meeting with the company president. You've not been involved in the preparation of the analysis thus far but understand that you might have some tasks delegated to you after the meeting. In addition, you realize that the company is at a critical juncture from issues such as high attrition of the accounting staff, current economic conditions, and increased competition.

Your Role- You have recently been hired in the fairly small accounting department of a corporate business.The department is so small, in fact, that you may be called on at times for tasks ranging from simple bookkeeping, to preparation of financial statements and projections, and to perhaps even filling-in on the internal audit staff. One of your first responsibilities is to assist a senior level accountant with a detailed financial projection after input from the chief financial officer and the president of the company.

Key players-

senior accountant -We were up most of the night working on these projections. It was sure nice to have some help with the Excel. As you can see, we're projecting a return to positive cash flow by early next year. We need to refine some of the assumptions but hopefully we have explained the key factors adequately.

CFO-It looks like the two of you have done a great job in preparing the projections. We can go ahead and discuss them with the company's president. Just remember to not mention any issues about our accounts receivable and our allowance accounts. We need new bank financing and the less said about past issues the better!

company president- I'm glad the three of you are coordinating this exercise. That's one less item on my "to do" list. I've promised the loan officer at the bank that I'll have a package to them by early next week. I'm relying on you as a team to meet that deadline with a set of projections that is realistic and achievable.

You need to draft a summary of how you will handle the situation. Specific questions that should be addressed are as follows.

• Do you feel there might be an ethical issue present? For the moment, assume that no laws have been broken and only focus on any possible ethical issues.
• If you were going to report a suspected ethical issue, how would you do so? For instance, to whom would you report? Would you first discuss the matter with anyone in particular?
• Would the manner in which you respond vary depending on whether this corporation was privately held or publicly traded?
• Does the fact that you have only been recently hired play into your decisions?
• What possible sources of guidance might be available from a professional organization or your state’s regulatory body overseeing the accounting profession?
• Lastly, assume that you suspect that some state or federal laws may have been broken. In other words, the problems might be beyond just a possible ethical issue. Would this change your handling of the situation?

Answer 1

The case in question suggests a highly probable ethical issue present which may have far reaching consequences. The Company is in the process of obtaining loan from the Bank for which it needs to supply financial projections of the Company to the Bank.

It is clear that the Company has been performing poorly in terms of financial performance since the senior accountant says “We’re projecting a return to positive cash flow by early next year. We need to refine some of the assumptions”. This means the Company has been generating negative cash flows presently. Further, the CFO states “Just remember to not mention any issues about our accounts receivable and our allowance accounts”, which means the percentage of accounts receivable and allowance for bad debts is substantially high, so much that it might negatively affect the grant of loan by the Bank.

The key ethical issue here is “window dressing” of accounts and hiding relevant financial information, to achieve the objective of obtaining loan at favourable terms from the Bank. The people involved – the senior accountant and the CFO are well aware of the fact that they are misreporting the projections and hiding crucial accounts receivable and allowances information but they are willfully doing so. Further, the Company President says “I’ve promised the loan officer at the bank that I’ll have a package to them by early next week”. This is another ethical issue which is probable bribing the loan officer to obtain favourable loan terms for the Company. It is going against professional and ethical standards of behavior between a Company representative and a banker. The third probable ethical issue present in the Company is of oppression of lower level staff by senior officials in the accounting department. As can be seen that there is high attrition in the accounting department and also the department is not running in a formal manner, it can be easily assumed that the senior officials are observing oppressive practices against staff (more so, if the staff try to whistle-blow against them).

In such a situation, being a newcomer in the Company, it definitely is a precarious situation since the employment may be at risk and more importantly, the credibility of a new employee’s accusation is much less as against vintage senior officials, all of whom up in the hierarchy are involved in the malpractice. However, at the same time, the issue cannot be left unattended, since you are designated to be a part of the team which is window dressing the accounts, so you are also equally accountable when things blow up in the future (in fact, the blame may fall entirely on you since you are lowest in the hierarchy and responsible for assisting the senior accountant in preparation of accounts).

The first step in such a situation would be to make sure your doubts are real. So, you may ask your doubts from the senior accountant first, not accusingly but in a query format. If the senior accountant appears maligned, the CFO might also be judged in a similar fashion in one of the meetings. If it becomes sure they are involved in the malpractice, it is best to gather some proofs and report to the Human Resources department or to the whistle-blower hotline your Company provides for. In case of large publicly traded companies, ethical issues are attended to seriously and urgently and there are always formalized processes written down which should be followed in case such situation arises. You may read up relevant procedure to report the matter to the HR on the employee self-help page of the Company’s website. Further, it may help to read up from the Code of Professional Conduct issued by the American Institute of Certified Public Accountants (AICPA) to know what is counted unethical. Considering this, you should report the matter to the HR or the relevant authorities.

In case you suspect that state or federal law has been broken and the issue is not simply an ethical dilemma, you need to report to the legal department of your Company, since the issue will definitely crop up in the future. It is best to inform the legal department in time to safeguard yourself and for allowing time to the legal department to rescue the Company from disastrous situation well in time.