Question

Sam Parker is on the capital budgeting committee for his company, Parker Tile. Ed Rhodes is an engineer for the firm. Ed expresses his disappointment to Sam that a project that was given to him to review before submission looks extremely good on paper. "I really hoped that the cost projections wouldn't pan out," he tells his friend. "The technology used in this is pie in the sky kind of stuff. There are a hundred things that could go wrong. But the figures are very convincing. I haven't sent it on yet, though I probably should."

"You can keep it if it's really that bad," assures Sam. "Anyway, you can probably get it shot out of the water pretty easily, and not have the guy who submitted it mad at you for not turning it in. Just fix the numbers. If you figure, for instance, that a cost is only 50% likely to be that low, then double it. We do it all the time, informally. Best of all, the rank and file don't get to come to those sessions. Your engineering genius need never know. He'll just think someone else's project was even better than his."

Required:

1.   Who are the stakeholders in this situation?

2.   Is it ethical to adjust the figures to compensate for risk? Explain.

3.   Is it ethical to change the proposal before submitting it? Explain.

4. What would you do in this situation?

Answer 1

1.   Who are the stakeholders in this situation?

Solution: Everyone who is affected by the functions of the business or business performance is the stakeholders. In this case, even Sam Parker and Ed. Rhodes is the stakeholders but the investors in the form of equity shareholders and debenture holders who have given the money to the company for the investment perspective are the real stakeholders and as per ethics their interest must be retained by making an investment in good and stable projects.

2. Is it ethical to adjust the figures to compensate for risk? Explain.

Solution: No, it is not ethical at all. Figures should not be adjusted or manipulated to compensate the risk rather the proposal should be presented with all risk it bears so that there should be a proper ranking of projects and all projects submitted by different parties get a fair chance of selection. Lookin to the element of professionalism and objectivity, adjustment, and manipulation of figures is inappropriate.

3. Is it ethical to change the proposal before submitting it? Explain.

Solution: Yes, it is possible that a revised proposal with revised cash inflows and outflows after considering risk factors can be projected if earlier some parameters of risk were ignored. A new or revised proposal can be submitted. There is no harm in that. Giving true economic picture is the foundation for right selection of the project where the money, trust, and interest of the investors are involved.

4. What would you do in this situation?

Solution: I will present the proposal as it is submitted by the party without any manipulation or adjustment. Selection of right project is linked with the fate and future prospects of the company. Looking for personal and professional ethics, the project should be submitted with a true economic picture i.e. without conflict of interest and manipulation.