Reference no: EM13746267

To the extent that hiding information from people dependent on it or otherwise misleading them is wrong on deontological grounds, it follows that there is a mandate favoring transparency.

On the other hand, it can be argued that secrecy or even providing misleading information can be justified under, for example, competitive or national security circumstances. Prohibitions against corporate espionage highlight the assumption that informational privacy is to be protected. In any event, it's difficult to make a case for a level of transparency that goes beyond what people need to make a decision.

Continuing this internal dialogue, secrecy and misleading information usually have time limits, so any pain from bad news is merely being postponed. And, let's face it, a lot of wishful thinking is behind the aggressive approach to reporting that concerns us. Companies want to look good to their investors, lenders, suppliers, and customers. So they "butter up" balance sheets and operating statements, hoping that the future bears out what are often only empty promises.

Consider this actual example:

An industrial supply company is facing an annual review from its banker, wanting to at least maintain its current line of credit or even increase it in order to support some expansion plans. To satisfy this banker, it's clear that some improvement in the company's financial position is in order. Under consideration:

1. Delay payments to suppliers in order to improve cash position. Defer timely vehicle and equipment replacements to reduce depreciation expense and preserve cash. Solicit advance sales from regular customers - delivery and payment requirements set back 90 days - leading to increases in current revenue/accounts receivable, but no reduction in inventory or delivery expense.
2. Avoid the gimmickry involved in these steps and prepare plans to reduce expense and improve sales to be presented to its banker in its account review.

• How would you determine which is the more acceptable path in this situation?
• Would it matter if the company had been put on WTAC (watch this account closely) status in the previous year, such that an adverse review would probably lead to more severe terms and requirements, perhaps to the bank "pulling the plug"?

In considering these questions, do some research (citations, please) and give some thought to just what is meant by the concept and how it is interpreted or applied in some organizations.