Question

You are an accountant working in the Budget Department for Phillips Brothers Printers (PBP). The President is planning a trip back east to visit several large brokerage firms and wants to present a two year financial budget projection for PBP, with the intent being to encourage favorable investment ratings for the company, which will increase trading and the stock price. You work day and night over the next two days to prepare the projection reports and deliver them to the President, who leaves for his trip the next morning. Later that week, you are reviewing your calculations for the projection reports and discover a significant error that inflated the projections. You check with the President's administrator and he informs you the President has already made his presentation at two of the five brokerage firms.

Answer the following questions: What are the implications if you don't tell the President of your error immediately?

What are the implications if you do tell the President of your error immediately?

Who are the stakeholders in this situation?

What are the ethical considerations, for both you and the President, in this situation.

Answer 1

Part 1)

In the given case, you should immediately inform the president of the error so discovered. If the president is not made aware of the error, he would continue to provide incorrect information (inflated projections) to the brokerage firms. While the brokerage firms may get impressed with the projections communicated to them and decide to assign a better rating, they are going to find the error sooner or the later. In such a case, they will reassign/modify their ratings which will have a negative impact on the company's reputation and goodwill in the long run which may lead to a sharp fall in its stock price. The brokerage firms will also have to provide the reason for changing the ratings (which is incorrect information provided by the president) which can have a severe adverse impact on investor trust and confidence in the company's management and business operations.

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Part 2)

If the president is made aware of the error immediately, he would be in a position to provide correct information to the remaining three brokerage firms. Additionally, he can report/communicate the error to the 2 brokerage firms to which he has already made the presentation. This would prevent any long term impact on the company's reputation. The rating will actually get assigned on the basis of correct projections which will impact the trading of company's shares and stock price accordingly.

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Part 3)

The stakeholders in this situation are the brokerage firms (which are going to assign the ratings), investors (who are going to make investments on the basis of such ratings), the president himself (who is involved in providing information to the brokerage firms and you (the accountant, who has collected the information and prepared the project reports).

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Part 4)

It is the responsibility of any corporation to provide correct financial information to its stakeholders. It would be against the principles of corporate ethics and governance if relevant information is concealed and the stakeholders are not provided with the correct facts and figures. As soon as the president becomes aware of the error, he should ask for revised projections from the accountant and communicate them to all the brokerage firms to ensure that the ratings are assigned on the basis of correct data/figures. In case he decides to continue with the incorrect projections, he could face severe consequences as soon the brokerage firms identify the error and revise their ratings. Similarly, you should report the error to the president without any fear of impact on your job/performance. Any negative impact on company's ratings as a result of false/incorrect projections can adversely affect the business operations, its management and employees (you also).