Pressure to Overstate Stock Valuation You have been the Chief Financial Officer

Question

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.

1. What are the ethical implications of this scenario and how would you resolve them?

2. Are there any ethical theories that might support your answer?

Explanation / Answer

While making financial statement, we should follow the

Key fundamental principles

Facts of the case:

Here in this case CEO, who is also majority shareholder is pressuring the CFO for keeping the inflated stock valuation in the financial statement.

Possible course of actions:

Keeping the stock of the company inflated is against the principles of Integrity because integrity requires a CFO to not to keep any financial information in the financial statement which he believes is untrue.

Here in this case CFO requires to raise this issue with auditors and alerting them about slow moving stock and seeking their opinion.

If the issues still unresolved then he may have to disassociate himself from the conflict by the way of resigning.

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