Question

Read this following ethical dilemma:

“We must get it,” Courtney Lowell, president of Industrial Fasteners, roared. “Without it, we’re in big trouble.” The “it” Mr. Lowell referred to is the renewal of a $14 million loan with Community First Bank. The big trouble he fears is the lack of funds necessary to repay the existing debt and few, if any, prospects for raising the funds elsewhere. Mr. Lowell had just hung up the phone after a conversation with a bank vice-president in which it was made clear that this year’s statement of cash flows must look better than last year’s. Mr. Lowell knows that improvements are not on course to happen. In fact, cash flow projections were dismal. Later that day, Tim Cratchet, assistant controller, was summoned to Mr. Lowell’s office. “Cratchet,” Lowell barked, “I’ve looked at our accounts receivable. I think we can generate quite a bit of cash by selling or factoring most of those receivables. I know it will cost us more than if we collect them ourselves, but it sure will make our cash flow picture look better.”

Address these following question:

1. Do you see any ethical issues with regard to factoring the accounts receivable? Explain your response.

2. Do you believe that these practices should be allowed? Why or Why not?

Answer 1

1. Yes there are clear ethical issues with regards to factoring of the accounts receivables in this case as it will be misinforming or misleading the bank with regards to the actual liquidity of the company. Increase in accounts receivables reduces the cash flow from operations and Industrial Fasteners’ cash flow projections as well as liquidity projections for this year are not very positive, rather it is dismal. At the projected levels of cash flow and liquidity Community First Bank will not get the $14 million loan renewed. By getting its accounts receivables factored the company is trying to mislead the bank with regards to its actual liquidity and actual cash flows that the company will generate this year. This is unethical.

2. No, these practices should not be allowed. As discussed above Industrial Fasteners’ approach is unethical and the intention is to mislead and misinform the bank. Values like honesty, integrity and objectivity is being compromised in such a practice and hence should not be allowed at all.