Question

Thank you in advance.

CA 24-12, p. 1457

CA24-12 ETHICS (Reporting of Subsequent Events) In June 2017, the board of directors for McElroy Enterprises Inc. authorized the sale of $10,000,000 of corporate bonds. Jennifer Grayson, treasurer for McElroy Enterprises Inc., is concerned about the date when the bonds are issued. The company really needs the cash, but she is worried that if the bonds are issued before the company's year-end (December 31, 2017) the additional liability will have an adverse effect on a number of important ratios. In July, she explains to company president William McElroy that if they delay issuing the bonds until after December 31 the bonds will not affect the ratios until December 31, 2018. They will have to report the issuance as a subsequent event which requires only footnote disclosure. Grayson expects that with expected improved financial performance in 2018, ratios should be better.
Instructions

(a) What are the ethical issues involved?

(b) Should McElroy agree to the delay?

Answer 1

(a) One ethical issue I discovered was that if there is a delay in the issuance of the bonds, the company would be painting inaccurate financial position, to people such as creditors, for the 2017 year because it would make the company appear more profitable, which is unethical. Inaccurate reporting for the years profitability of long term versus short term may leads the current and potential shareholders/stock to believe that the company is performing better than it really is. Such ethical issues will be inflating ratios and purposely misleading investors to believe that company is in a strong financial condition then it is. Ultimately, the company will paint inaccurate represent liabilities for the current year

(b) No, I do not think that McElroy should agree to the delay. He must stick to the original schedule because the company requires the cash to help improve its performance; thus should issue the bonds as authorized in 2017. The financial ratios may be lower than ideal if the bonds are issued immediately, the creditors and investors are served best when the performance of the company is at the highest possible level. If issuing the bonds will be beneficial to assist enhanced performance, McElroy should not do any delay in it's issuance