Question

Wesley Corp. is a medium-sized wholesaler of automotive parts. It has 10 stockholders who have been paid a total of $1 million in cash dividends for 8 consecutive years. The board’s policy requires that, for this dividend to be declared, net cash provided by operating activities as reported in Wesley’s current year’s statement of cash flows must exceed $1 million. President and CEO Samuel Gunkle’s job is secure so long as he produces annual operating cash flows to support the usual dividend.

At the end of the current year, controller Gerald Rondelli presents president Samuel Gunkle with some disappointing news: The net cash provided by operating activities is calculated by the indirect method to be only $970,000. The president says to Gerald, “We must get that amount above $1 million. Isn’t there some way to increase operating cash flow by another $30,000?” Gerald answers, “These figures were prepared by my assistant. I’ll go back to my office and see what I cando.” The president replies, “I know you won’t let me down, Gerald.”Upon scrutiny of the statement of cash flows, Gerald concludes that he can get the operating cash flows above $1 million by reclassifying a $60,000, 2-year note payable listed in the financing activities section as “Proceeds from bank loan—$60,000.” He will report the note instead as “Increase in payables—$60,000” and treat it as an adjustment of net income in the operating activities section. He returns to the president, saying, “You can tell the board to declare their usual dividend. Our net cash provided by operating activities is $1,030,000.” “Good man, Gerald! I knew I could count on you,” exults the president.

(a)       Was there anything unethical about the president’s actions? Was there anything unethical about the controller’s actions?

Answer 1

Hello Buddy,

Coming to the question,

There is always something unethical taking place whenever the senior management tries to fudge the numbers or the data to be published. In the given case, the president's actions were definitely unethical as he used his power and influence on the controller to increase certain figures as per his requirement only because it affected the dividends to be received by parties having vested interests in the organization.

The controller also was unethical in carrying out his duties as the steps taken by him to please his seniors were factually incorrect and flawed. He didn't mind if he was mis reporting the firms figures but he wanted to acheive the specified figures given to him by his seniors.

I hope the above solution is what you were looking for. For any further queries or doubts in the solution, please feel free to drop a comment. Please do leave a positive feedback, Thank you :)