Martha wants to prove to the bank that the institution is financially viable. In order to make tracking easier and more accountable, Martha demands that there be a lot of invoices lost. If the organization loses an invoice, it can manipulate financial statements and statistics. Martha demands that the amount due be reduced to reduce the obligation, increase income and maximize gross profit. The institution is able to report greater margins even though it has suffered a loss less than $100,000 on a $500,000 total. However, declining payables allow the institution to realize a lower loss. Finally, the owner wants the receivables to be increased by delaying cancellation until next quarter.
In order to show the stability of cash flow and its strong sales turnover, the owner asked for an exaggerated statement on accounts receivable. The equity ratio, equity to debt ratio, and the value of high-value accounts receivables increase. It means that the company can meet its loan and debt obligations within the financial year. Mather would like to see the account receivable canceled. This would enable Mather to show that the institution’s inflows are greater than its outflows. By removing the cancellation, the institution is able to show to the bank its high level of working capital. In other words, it can prove to the bank its financial viability by showing that its current assets outweigh its current liabilities. Delaying cancellation until a future fiscal year increases the institution’s ability to recover from the negative inflows and to grow. With this favorable track, the institution can also encourage stakeholders and shareholders.
This situation presents a major ethical dilemma. The CFO falsifies financial information in order to present the illusion that the company’s finances are stable, while the reality is it is actually struggling. Martha asks the CFO for a false financial statement and to misrepresent company inflows to prove that Martha can pay off her loan obligations. The code of ethics encourages professional to be accountable, honest, and have high levels of integrity. A second ethical issue is to show that the corporation is making profits despite suffering losses. To hide its financial insolvency and underperformance, the corporation will use false reports. It wants to convince other stakeholders that the institution is financially sound due to its positive equity ratio and excellent margins. It has poor financial performance in all aspects.
Trustworthy individuals are financial officers who communicate information about the financial state of an institution to multiple stakeholders. Therefore, forging income statements’ account receivables or payables in the first place is against the finance and accountant professional codes of ethics. Wolf (2016) stresses honesty and accountability. I have a moral responsibility to ensure financial transparency and honesty. This is why I forge the income statement’s account receivables and payables. My commitment to truth and honesty is also compromised by proving that an organization is making a profit while it is in pain. When preparing financial statements (e.g. balance sheets or cash flow statements) such as trade balances and cash balances, the CFO must ensure reliability by using accurate numbers and relevant components.
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