Question

As the Chief Financial Officer (CFO) of ABC Inc., you discover a misstatement that overstated net income (i.e., profit) in the prior year’s financial statements. The misleading financial statements appear in the company’s annual report that was issued to banks and other creditors less than a month ago. After much thought about the consequences of telling the president about this misstatement, you gather your courage to inform her. The president suggests that you simply adjust this year’s financial statements since, “what the banks and creditors don’t know won’t hurt them.”

a. What are the ethical issues involved in this situation?
b. What would you as a CFO do in this situation?

Answer 1

a. The banks and creditors of the company are the stakeholders of the company, and as such, they are entitled to a true and fair representation of the profits and the financial position of the company through its financial statements. If there is a deliberate misstatement leading to overstate of profit and assets, it is a breach of trust on the part of the officials of the company. The interest coverage ratio is an important measure for the banks and other creditors. If profits are overstated, the said ratio would also be overstated, leading to a false scenario. Also, overstatement of profit would lead to a commensurate overstatement of the book value of the company.

b. As a CFO, I would issue a public notice as to the misstatements in the annual report, and make arrangements for issuance of a fresh one.