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Stakeholders and Misclassifiction

A company president asks the controller to recalculate the statement of cash flows to see if it is possible to meet the requirement for the board to declare a cash dividend. The Board requires that the annual operating cash flow (net cash provided by operating activities) exceed $ 1 million. The president tells the controller, "I know you won't let me down." The controller reclassifies a $ 60,000, 2-year note payable listed in the financing activities section as "proceeds from bank loan". He reports the note instead as "increase in payables" and treats it as an adjustment of net income in the operating activities section.

(a) Who are the stakeholders in this situation?

(b) Was there anything unethical about the president's actions? Was there anything unethical about the controller's actions?

(c) Are the Board members or anyone else likely to discover the misclassification?

Solution Preview

a) Who are the stakeholders in this situation?

The stakeholders are the board, the shareholders, the employees of the company, the banks, the creditors, the company president and the controller.

(b) Was there anything unethical about the president's actions? Was there anything unethical about the controller's actions?
It was unethical on the part of the president to ask the controller to artificially inflate the annual operating cash flow so that the total annual cash flow would be more than $1 million and so the Board could declare a dividend. The reason is that the funds are inadequate to declare dividend still the board will declare a dividend and pay it because of a ...

Solution Summary

Here is just a sample of what you will find in the solution:

"In fact the auditor's report cannot only damage the credibility of the company president and the controller, but the reason behind the manipulation may also be brought to the notice of the..."

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