Q1. Ethical issue and ethical schools of thought in the depreciation adjustment
The ethical issue in this situation is the potential manipulation of financial statements through changing the depreciation formulas. By increasing the life of production machines, the CFO aims to lower depreciation expenses, which would artificially improve the financial performance and make the company appear more profitable than it actually is.
Several ethical schools of thought in business can be applied to analyze this situation:
Utilitarianism: This ethical school of thought focuses on maximizing overall happiness or utility for the greatest number of people. In this case, the CFO’s decision to adjust the depreciation formulas may bring short-term benefits by improving financial numbers. However, it could harm stakeholders, such as investors, who rely on accurate financial information to make informed decisions.
Virtue ethics: This ethical school emphasizes moral character and virtues. The CFO’s proposed action raises concerns about honesty, integrity, and transparency, which are key virtues in business ethics. Changing depreciation formulas to manipulate financial results goes against these virtues and could undermine trust in the company.
Duty ethics: This ethical school revolves around fulfilling one’s moral obligations and following ethical principles. The CFO has a duty to report accurate financial information to stakeholders, including investors. Manipulating depreciation formulas would breach this duty and violate ethical principles such as honesty and fairness.
Stakeholder theory: This ethical school considers the interests of all stakeholders affected by business decisions. The CFO’s proposal to adjust depreciation formulas to present better financial results may benefit shareholders in the short term. However, it could harm other stakeholders like employees, customers, and suppliers if it leads to misguided decision-making based on inaccurate financial information.
Q2. Ethical issues with the production head’s proposal
The production head’s proposal to switch to a new plastic that wears out more quickly raises several ethical issues:
Product quality and customer satisfaction: By knowingly offering a lower-quality product that wears out more quickly, the company may be compromising customer satisfaction and potentially deceiving customers who expect durable wheels. This raises concerns about honesty and fulfilling the company’s obligation to provide reliable and long-lasting products.
Environmental impact: Introducing a plastic that wears out more quickly would likely contribute to increased waste and environmental pollution. This raises concerns about sustainability and responsible environmental stewardship.
Long-term reputation and trust: Selling lower-quality products for short-term profit gains can damage the company’s long-term reputation and erode trust with customers. Building trust and maintaining a positive reputation are essential for sustainable business success.
Legal implications: Depending on the jurisdiction, selling products that do not meet industry standards or purposefully deceiving customers could potentially lead to legal consequences, such as consumer protection lawsuits or regulatory penalties.
Q3. Chief of audit’s concerns with the CFO’s proposal
The chief of audit has valid concerns about the CFO’s proposal to ship wheels early and book sales even if the customer has not ordered them:
Revenue recognition principles: Booking sales without confirmed customer orders violates revenue recognition principles, which require delivery or transfer of goods or services based on contractual agreements or customer acceptance.
Accurate financial reporting: Piecing together sales and revenues through special promotions and favorable credit terms can distort the true financial position of the company. It compromises the accuracy and reliability of financial reports, which are crucial for making informed business decisions.
Ethical implications: Manipulating sales and revenues can be seen as a form of financial manipulation or fraud, which undermines the company’s integrity and violates ethical principles such as honesty, transparency, and fairness.
Long-term consequences: Relying on such practices to meet short-term targets can create a vicious cycle where future targets become increasingly difficult to achieve without resorting to unethical practices repeatedly. This can damage the company’s reputation, stakeholder trust, and overall sustainability.
Q4. Situation with the CFO and chief of audit
In this situation, the CFO is exerting pressure on the chief of audit to make top-entry adjustments to make sales appear flat. The chief of audit is hesitant to refuse due to fear of retaliation, as the CFO has a track record of firing people who raise questions.
This scenario illustrates an abuse of power and a lack of ethical leadership within the organization. The CFO’s actions indicate a disregard for ethical conduct, transparency, and accountability. By pressuring the chief of audit to engage in unethical practices, such as manipulating financial records, the CFO is compromising the integrity of financial reporting.
The chief of audit feels trapped in a difficult position due to fear of losing their job and being unable to question the CFO’s actions despite recognizing their unethical nature. This highlights an unhealthy organizational culture that discourages open dialogue, ethical decision-making, and accountability.
This situation underscores the importance of fostering an ethical work environment where employees feel safe to voice concerns without fear of reprisal. Ethical leadership should prioritize integrity, transparency, and fostering a culture that encourages ethical behavior throughout all levels of the organization.
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