Anne Distagne was the CEO of Linkage Construction Inc., which served as the general contractor for the construction of the air ducts for large shopping malls and other buildings. She prided herself on being able to manage her company effectively and in an orderly
manner. For years there had been a steady 22–25 percent growth in sales, profits, and earnings per share,
which she wanted to continue because it facilitated dealing with banks to raise expansion capital. Unfortunately for Sue Fault, the chief financial officer,
the situation has changed. “Sue, we’ve got a problem. You know my policy of
steady growth—well, we’ve done too well this year. Our profit is too high: it’s up to a 35 percent gain over last year. What we’ve got to do is bring it down this year and save a little for next year. Otherwise, it will look like we’re off our well-managed path. I will look like I didn’t have a handle on our activity. Who knows, we may attract a takeover artist. Or we may come up short on profit next year.” “What can we do to get back on track? I’ve heard we could declare that some of our construction jobs are not as far along as we originally thought, so we would only have to include a lower percentage of expected profits on each job in our profit this year. Also, let’s take the
$124,000 in R&D costs we incurred to fabricate a more flexible ducting system for jobs A305 and B244 out of the
job costs in inventory and expense them right away.” “Now listen, Sue, don’t give me any static about being a qualified accountant and subject to the rules of your profession. You are employed by Linkage Construction and I am your boss, so get on with it. Let
me know what the revised figures are as soon as possible.”
Questions
1. Who are the stakeholders involved in this decision?
2. What are the ethical issues involved?
3. What should Sue do?
To answer these questions, let's examine the situation and break it down step by step.
1. Who are the stakeholders involved in this decision?
In this scenario, there are several stakeholders involved:
- Anne Distagne: The CEO of Linkage Construction Inc., who wants to lower the profit to maintain the appearance of steady growth and avoid attracting takeover artists.
- Sue Fault: The CFO of Linkage Construction Inc., who is being instructed by Anne to manipulate the company's financial figures.
- Shareholders: As owners of the company, they have a stake in the financial well-being and transparency of the company.
- Employees: The actions taken by Anne and Sue may affect the stability and reputation of the company, which can have implications for the employees' job security and future prospects.
- Banks and lenders: The company's financial position may impact its ability to raise capital for expansion and loans.
2. What are the ethical issues involved?
There are several ethical concerns involved in this scenario:
- Misrepresentation of financial figures: Manipulating profit figures to present a false picture of the company's performance is unethical and can mislead stakeholders, including the shareholders, employees, and lenders.
- Violation of accounting standards and professional ethics: Sue, as a qualified accountant, is bound by professional rules and standards. Manipulating financial figures goes against these ethical principles and can damage the trust placed in the accounting profession.
- Potential harm to stakeholders: By artificially lowering the profit figures, Anne and Sue are potentially compromising the financial stability of the company, which can have adverse consequences for shareholders, employees, and lenders.
3. What should Sue do?
Sue finds herself in a challenging situation as she is being instructed by her boss to engage in unethical practices. In this scenario, Sue should:
- Consider professional and ethical responsibilities: Sue should remind herself of her professional obligations and ethical responsibilities as an accountant. This includes adhering to accounting principles, maintaining the integrity of financial statements, and providing accurate and reliable information to stakeholders.
- Communicate concerns to Anne: Sue should approach Anne and express her concerns about the unethical nature of the proposed actions. She should emphasize the potential legal and reputational risks associated with manipulating financial figures.
- Seek advice and support: If the conversation with Anne does not yield positive results, Sue should consult with a supervisor, a board member, or an attorney to discuss her concerns and seek guidance on how to navigate this situation while upholding ethical standards.
- Consider reporting the matter: If all internal avenues have been exhausted, Sue may need to consider reporting the unethical behavior to a relevant regulatory authority or seek legal advice to protect herself and the interests of the stakeholders.
It is important to note that the above suggestions are based on ethical principles and professional standards. Each situation can be complex, and Sue should consider seeking professional advice specific to her jurisdiction and company policies.