Ethic in Finance and Business Economics Case 1

Case 1

Facts of the case:

John Smith is the controller of a corporation whose stock is not listed on stock exchange.  The company has just received a patent on a product that is expected to yield substantial profits in a year or two.  However, the company is experiencing financial difficulties at this time; and because not enough working capital the company is on the edge of defaulting on a note held by its bank.

At the end of the most recent fiscal year, the company’s president instructed John Smith not to record several supplier’s invoices as a liability.  John Smith objected since the invoices represented valid liabilities.  However, the president was insisting that the invoices not be recorded until after year-end, at which time it was expected that additional financing could be obtained.  After several very determined objections – expressed to both the president and other members of senior management – Smith finally complied with the president’s instruction.

Guide questions in analyzing the case:

1. Did John Smith act in an ethical manner? Explain fully.
2. If the new product fails to yield substantial profits and the company becomes insolvent, can Smith’s actions be justified by the fact that he was following orders from a superior?

Sample format of presentation:

1. Identify the problem.
2. The available course of action with justifications.
3. Recommendation of the best alternative/course of action.
4. Conclusion with justification.

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