Question

The management team of Positive Perception Ltd was faced with a financial crisis. The entity was in breach of a loan agreement and had to repay a major loan at short notice. To raise the necessary cash, one of Positive Perception Ltd’s successful subsidiaries (a company owned by another company) was sold. While this solved the liquidity and solvency problems, it reduced future earning potential. As chief accountant, you have been asked to provide a list of 20 financial ratios along with some other operating statistics relative to Positive Perception Ltd’s first-quarter financial data and operations. Two days after you provide the ratios and data requested, you are asked by the public relations officer to prove the accuracy of the financial and operating data contained in the press release. In the press release, the managing director highlights the sales increase of 25% over last year’s first quarter and the positive change in the current ratio from 1.5:1 last year to 3:1 this year. The managing director also emphasises that production was up 50% over the previous year’s first quarter. You note that the release 788 Financial Accounting: Reporting, analysis and decision making — 5th edition contains only positive or improved ratios and none of the negative or deteriorated ratios. For instance, the profit margin, which showed slight improvement from 6% to 7%, was reported but the interest cover, which had declined, was excluded. None of the ratios used profit from continuing operations, which was considerably lower. For instance, the profit margin from continuing operations was only 3%. The public relations office emphasises: ‘The managing director wants this release by early this afternoon’.

Required: (a) Who are the stakeholders in this situation? (b) Is there anything unethical in the management team’s actions? (c) Should you as chief accountant remain silent? Does the accountant or public relations officer have any responsibility? (d) If you do not want to remain silent, who should you speak or write to?

Answer 1

(a)

The stakeholders in this case are:

• Management team, Positive perception Ltd.
• Chief accountant, public relations director.

• You, as controller of Singletary Industries.

• Stockholders of Positive perception Ltd

• Potential investors in Positive perception Ltd

• Any readers of the press release.

(b)   

The president's press release is deceptive and incomplete and to that extent his actions are unethical.

(c)

As controller you should at least inform Cheif accountant, the public relations director, about the biased content of the release. She should be aware that the information she is about to release, while factually accurate, is deceptive and incomplete. Both the controller and the public relations director (if she agrees) have the responsibility to inform the president of the bias of the about to be released information.