Please see the attached file.
I would advice the CTO to disclose the truth and absorb the cost involved. My advice is primarily based on three factors. They are
a. Ethics in business and responsibility of the CTO to the society.
b. The Company is a promising company with huge growth prospects.
c. The CTO cannot be 100% sure that no one can discover the truth. There is a saying which says that 'The greatest problem with intelligent people, is that, they think only they are intelligent'. Somebody can always find out the truth at a latter date. May be the lead engineer might shift job to a competitive company after some time and he may reveal it to his new company or to regulators etc. The risk of future discovery is always there.
Now we have to know what is business ethics and social responsibility.
Business Ethics(BE) is a form of the art of applied ethics that examines ethical principles and moral or ethical problems that can arise in a business ...
The solution answers the question(s) below.