Reference no: EM132452971

Problem - You are the CFO of a listed property development company based in Sydney. The company relies extensively on borrowed funds to finance its property deals. The company's lenders have imposed minimum working capital ratio constraints (the working capital ratio also known as the current ratio is current assets/current liabilities) on the company. The company's working capital ratio must not fall below two times; otherwise the company will be in default. Because the company has a bad record with its lenders and has been in default before, its senior lenders have warned that if the company defaults again, it will step in and place the company in bankruptcy. You and most staff will lose their jobs, plus many small contractors to whom the company owes money will not get paid. Losing your job would be particularly hard on you as you and your wife have just taken on a very large mortgage ($2,000,000) to buy a home in Sydney. Finding a new job will be time consuming and you may not get such a well-paying job again.

It is now well into July. Balance date June 30 has passed, and you are informed by your staff that the company's current ratio will fall below the required 2.0 at 30 June because of lower than expected sales of property in June. You know that sales of property occurred on 20 July (i.e. 20 days after year end). Customer enquiries about these properties had not even occurred before June 30. However, these sales, if accrued as revenue at 30 June would raise the working capital ratio above the required 2.0 hurdle. The sales are rock solid now (in July) so all you are doing is moving them (by three weeks) from one year to the previous year to save the company from default. You think: "It's only a book-keeping entry after all, so why not?"

Required - What should you do? Discuss the ethical implications of (a) accruing the sales as at 30 June; (b) not shifting the sales to the previous year.