The Pressure to Overstate Stock Valuation You have been the Chief Financial Offi

Question

The Pressure to Overstate Stock Valuation

You have been the Chief Financial Officer (CFO) for a large manufacturing company for 15 years. The Company’s year end is March 31 and you are finishing the year end accounts.

You have recently been advised by the Chief Operating Officer (COO) of a significant level of slow moving stock. The stock in question is now more than nine months old and would normally have been written down some months previously.

The shareholders are trying to sell the Company and the Chief Executive Officer (CEO), who is also the majority shareholder, has told you that it is not necessary to write down the stock in the year end accounts. You are sure that the CEO wants the financial statements to carry an inflated stock valuation because he has found a prospective buyer for the Company. The CEO has mentioned to you that if the proposed deal is successful, all employees will keep their jobs and you will receive a substantial pay increase.

What are the ethical implications of this scenario and how would you resolve them? Are there any ethical theories that might support your answer?

Explanation / Answer

In this scenario if we do not write down the stock in the year end accounts for the purpose of maintaining high price for the company it is unethical as it will be cheating the buyer . We need to look for alternatives where the stock gets cleared or can be utilised for some other purposes. Even if the employees will get benefited we should not do this unethical thing because if found out it will damage the whole reputation of the company and no buyer will come forward to buy it. Hence it is unethical to not write down the stock and we must not do it.There are many ethical theories which tells us to present each and every detail to the buyer so that they will not get cheated by making wrong assumptions and also we must never falsify records for the purpose of increasing cost of the company.

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