- 5 Marks
Question
The board of directors of Nyamekye Plc, a company listed on the Ghana Stock Exchange, needs a significant capital injection to finance a capital-intensive project to consolidate the company’s market share, failure of which will result in a loss of 25% of its market share. The management of the company has approached National Commercial Bank (NCB) for a loan facility to undertake the project.
However, the bank’s current lending policies require borrowers to demonstrate good projected cash flow, as well as a level of profitability which would indicate that repayments would be made. Unfortunately, the current projected statement of cash flow does not satisfy NCB’s criteria for lending. The directors have told the bank that the company is in an excellent financial position and that the financial results and statement of cash flow projections will meet the criteria, and that the chief accountant will forward a report to this effect shortly. The chief accountant has just recently joined Nyamekye Plc and has openly indicated that she cannot afford to lose her job because of her financial commitments and family concerns.
Required:
Discuss the professional and potential ethical conflicts which may arise in the above scenario and the ethical principles which would guide how a professional accountant should act in this situation.
Answer
The chief accountant of Nyamekye Plc faces significant ethical and professional conflicts due to the pressure from the board of directors to manipulate financial statements to meet the lending criteria of the National Commercial Bank (NCB). These conflicts include:
- Integrity:
- The chief accountant has an ethical obligation to ensure that the financial statements and cash flow projections are accurate and truthful. Altering the cash flow projections to meet the bank’s criteria would violate the principle of integrity by presenting false or misleading information to the bank.
- Objectivity:
- The chief accountant must maintain objectivity and resist the pressure from the directors to manipulate the financial statements. Allowing personal concerns, such as job security or financial commitments, to influence her judgment would compromise her professional objectivity.
- Professional Competence and Due Care:
- The accountant is expected to demonstrate professional competence by applying her knowledge of accounting standards and practices accurately. Providing inaccurate or overly optimistic cash flow projections would breach her duty of due care and may lead to financial losses for the bank if the loan is granted on false pretenses.
- Confidentiality:
- The accountant must balance her ethical responsibility to the company with her duty to provide transparent and truthful financial information to external stakeholders, such as the bank. In this case, there is a conflict between the company’s interests and the need to present accurate financial information.
- Potential Conflicts of Interest:
- The accountant may be tempted to comply with the directors’ demands due to her personal financial commitments and fear of losing her job. However, acting in this way would create a conflict of interest between her ethical obligations and her personal circumstances. The ethical principle of independence requires her to prioritize the truthfulness and accuracy of the financial reports over her personal situation.
Ethical Guidance:
The professional accountant should be guided by the following ethical principles:
- Integrity and Objectivity: The accountant must ensure that all financial reports are accurate and truthful, and must avoid being influenced by pressure from the company’s directors.
- Professional Competence and Due Care: She must provide an accurate assessment of the company’s financial position and refuse to engage in creative accounting or manipulation of cash flow projections.
- Professional Behavior: The accountant should act in a manner that upholds the reputation of the profession and should report any unethical behavior to the company’s internal audit committee or governance body if necessary.
Conclusion:
The chief accountant must adhere to ethical principles and resist the pressure to misrepresent financial information. She should inform the board of directors of her professional obligations and ensure that the financial reports and cash flow projections accurately reflect the company’s position, even if it means jeopardizing the loan application.
- Tags: Cash Flow, Ethics, Financial Reporting, Professional Issues
- Level: Level 3
- Topic: Regulatory Framework and Ethics
- Series: NOV 2016
- Uploader: Theophilus