ATC 5-5 Ethical Dilemma How bad can it be? Alonzo Saunders owns a small training

Question

ATC 5-5 Ethical Dilemma How bad can it be? Alonzo Saunders owns a small training services company that is experiencing growing pains. The ny has grown rapidly by offering liberal credit terms to its customers. Although his competitor require payment for services within 30 days, Saunders permits his customers to delay payment for up to 90 days. Saunders's customers thereby have time to fully evaluate the training that employees receive before they must pay for that training. Saunders guarantees satisfaction. If a customer is unhappy, the customer does not have to pay. Saunders works with reputable companies, provides t quality training, and rarely encounters dissatisfied customers. The long collection period, however, has created a cash flow problem. Saunders has a $100,000 accounts receivable balance, but needs cash to pay current bills. He has recently negotiated a loan agreement with National Bank of Brighton County that should solve his cash flow problems. The loan agreement requires that Saunders pledge the accounts receivable as collateral for the loan. The bank agreed to loan Saunders 70 percent of the receivables balance, thereby giving him access to $70,000 cash. Saunders is satisfied with this arrangement because he estimates he needs approxi mately $60,000. On the day Saunders was to execute the loan agreement, he heard a rumor that his biggest customer was experiencing financial problems and might declare bankruptcy. The customer owed Saunders . Saunders promptly called the customer's chief accountant and learned "off the record" tht was negative and most the rumor was true. The accountant told Saunders that the company's net worth

Explanation / Answer

How the Income and assets might get affected by the decion not to act on the bankruptcy information -

In case Saunders decides not to act on bankruptcy information that he obtained “off the record”, and obtains the loan from the bank for $70,000, he will save on his current credit problem for a short period of time. He can buy this time to resolve his current working capital requirement as well as correcting his receivables days going forward. Also, in the meantime, he should plan to write off the receivables from that company to the tune of $45,000 or estimate the recoverable amount and then plan to write off the unrecoverable amount.

If Saunders understands that even though the information obtained by him is off the records, but obtaining loan or misrepresenting the fact that the loan is recoverable and not informing the concerned authorities will amount to misrepresentation and will have significant impact.

In order for fraud to occur, three conditions must be fulfilled/ satisfied i.e a satisfactory rational/reason by the person committing the fraud, incentives to commit fraud and the opportunity to do the fraud. Over here, Saunders have all the three factors to constitute a fraud so if he is not informing the bank about the insolvency position of a company which will result in taking loan against a bad receivable , it can constitute as fraud triangle.

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