Caleb Fernandez is the Managing Director of a large manufacturing and distribution company. The board of directors always placed great emphasis on the operating cycle of the business and paid great attention to the cash flows generated to sustain the company’s operations. Although no contractual arrangements existed, the company had regularly paid generous bonuses based on good operating results. Therefore, Caleb was particularly interested in the size of the increase in cash flow operations.
Just before the end of the current financial year, Caleb approached Khairul Zainuddin, the company’s accountant, to get some idea of how the cash flow position for the year would appear before the formal final accounts were prepared. Khairul indicated that the net cash flow from operations for the year would probably be negative. The company had not experience a negative cash flow from operations in its recent history. Khairul had been appointed as accountant at the beginning of the current financial year.
Caleb requested that he be given a copy of the draft statement of cash flows. After a careful analysis, he called Khairul into his office to discuss the statement of cash flows. Caleb remarked to Khairul that he had looked at the figures in the preliminary statement. He further elaborated on how important a good cash result for the year would be both him as a reflection of the company’s performance, and to Khairul, personally as his appointment would be reviewed in a few weeks. Khairul, however stated that there was little scope to do anything.
Caleb suggested that they delay payment on a large amount of trade creditors as the loss of discount is not that important. Besides that, he noted that the interest paid on long-term borrowings affected the net cash from operations. Therefore, he said that they should reclassify the interest expense as a cash outflow from financing activities. These adjustments to the accounts will give quite a satisfactory net cash flow from operations result. Shakespeare once said, ‘A rose by any other name smells, just as sweet’.
In this case, misinterpretation, justification, financial manipulation, fabrication, or no matter what other name is given to the unethical behaviour of misleading stakeholders into believing what is not there, the act still screams foul in a loud and clear echo. Caleb is seen as deliberately trying to push his views across to Khairul by urging him to relook the statement of cash flows. His unethical code of conduct has serious repercussion on the various stakeholders who rely on the financial statement in making their decisions.
The shareholders rely on the financial statement to decide on whether to invest in the particular company’s stocks. With deliberate misinterpretation of the statement of cash flows, the shareholders may be deceived into believing that the company has a healthy cash flow and is able to sustain itself. The current creditors’ cash flow may be affected when the company withholds payments. These creditors may be depending on the cash to fulfil other obligations. Therefore, by withholding the payment, the company is putting the creditors into jeopardy.
The future creditors too would be misled when giving the company credit terms in the hope that the company would be able to pay them at the agreed date. As the company currently is not cash-rich, these creditors would definitely be misled when giving them credit terms. The company would also be misleading bankers by providing a false assumption that all is well with the company’s financial health and the company has sufficient cash flow to support its operations. There would be a risk of default in loans when these bankers provide loans to the company.
The employees of the company too would not know the true scenario of their employer whereby they would be led to believe that the company has a stable and healthy financial performance. They would feel secured that their employer would be able to take care of their well being when in actual fact, the company does not have a healthy cash flow. There are various ethical issues involved in the case. According to Horngren, Sundem and Stratton (2002), an unethical act is one that violates the ethical standards of the profession.
The standards, however, leave much room for individual interpretation and judgement. When one action is clearly unethical and another alternative is clearly ethical, managers and accountants have no difficulty in choosing between them. Unfortunately, most ethical dilemmas are not that clear-cut. The most difficult ethical situations arise when there is strong pressure to take an action that is borderline or when two ethical standards conflict (Horngren, Sundem and Stratton, 2002).
When two accounting executives who exposed fraud and wrongdoing were among those named Persons of the Year by Time magazine last December, it sent a powerful message: Ethics is an issue of paramount importance gaining attention in the business community (Messmer, 2003). The financial scandals of 2002 have already led to increased action by legislators and associations, and many companies are beginning to develop a code of ethics for all employees (Smith, 2003).
A code of ethics is more than just a formal document outlining related policies. It is about integrating positive values throughout an organisation. Leaders ought to set the example in the company. Employees often model their own behaviour after executives, managers, and others who have succeeded in the company. Therefore, everyone at every level must adhere to the company’s guidelines. What seems like an insignificant action can have a ripple effect throughout all staff.
If senior management do not follow the highest ethical standards at all times, they should not be surprised when those who report to them fail to do so. Based on the case, Caleb Fernandez, who holds the post of the Managing Director of the company is clearly showing a bad example to his employee, Khairul. Caleb fails to set and follow ethical business conducts. To make matters worst, Caleb, subtly blackmails Khairul by emphasising the importance of a good cash result for both himself as well as Khairul.
Ethics should be viewed as a core value. Conducting oneself with integrity should be considered as important as bottom-line results. Ethical standards are to be applied any time a decision is made or an action is taken, not just during controversial situations. However, Caleb clearly violates this rule by putting his selfish reasoning above ethical conduct. Messmer (2003) asserts that the work environment must be one in which people feel they can deliver bad news to management without fear of repercussions.
He further states that in an ethics-driven company, staff members can report any type of wrongdoing-whether it is false information on an expense report or major financial fraud, and feel confident they would not suffer negative career consequences. However, in this case, it can be inferred that the work environment is most probably littered with various ethical issues. As the top most management himself, does not seem to feel the need to be transparent in reporting the financial performance, the employees would probably be taking his lead and doing the same in their individual practices.
Rules should be applied consistently. Research studies have found that most people equate ethics with how their employer treats them and their co-workers (Messmer, 2003). In fact, when employees feel they are treated fairly, they are less likely to engage in such activities as covering up problems by exaggerating or omitting key information, and they will approach their work with a greater sense of accountability and integrity.
However, in this case, it can be clearly seen that Khairul is almost pressured to do what the boss dictates whether or not his conscience allows him. With this, there is a clear conflict between ethical conduct and adhering to the boss’ instructions. By adhering to the boss’ instructions, Khairul too would indirectly play a role in misleading the stakeholders into believing that the company had a strong financial standing.