Vishnu Mohan is the dynamic, pushy managing director of a fast growing retail sales chain. He has struck a deal with the board of directors for receiving a part of his pay as a percentage of the company’s net profits. Although the company is doing well, the growth of sales and profits has been modest. Vishnu Mohan realised that his pay has become less compared to that of his peers drawing pay but without profit sharing. It was then that he called the chief finance officer Sarita Gohil. He told her that the chairman had expressed anxiety about profitability levels of the company in view of the need to raise funds from banks for the proposed expansion plans. He wondered how they could reach a more attractive profit figure.
Sarita knewthat pushing up profitswill be an artificial move.But shejoinedthe firmrecentlyand wanted to make a good impression on the boss. She also thought that the feelings of the chairman can be hardlyignored consideringhisinterest in the expansionplans.She alsoknewthat an increase in the company’s turnover will help her in eventually migrating to a blue chip company.
How should Sarita deal with the situation?
1. Sarita should recognize that she is playing with fire and politely explain to the MD that all significant manipulations are expressly barred by Accounting Standards prescribed by ICAI. Banks will definitely see through such gimmicks when they do due diligence before making fresh advances.
2. Sarita knowsthere areways to increase profitabilitysuch as loweringdepreciation,refusing to write off bad receivables, and reducing payables under pretext of fresh negotiation etc. Such adjustments, she thinks, will meet the urgent need of enhanced profits and advance her career prospects.
3. Sarita thinks that manipulations described above will not be easily detectable by shareholders and as such would not invite any problem.
4. Sarita may actually suggest these steps to the MD and seek his informal clearance.
1. This is the only right course of action. A sensible MD would understand. Anyway, MD cannot compel CFO to massage the accounts. CFO has to sign the accounting statements first, before they go to MD.
2. Remember that ethics is a beautiful discipline that operates right from the stage of contemplation of an action. Mere thought about a course of action attracts ethical principles. Sarita should be clear that such profit enhancement works against the interest of shareholders because it colours the true and fair picture of the operations. Shareholders cannot take correct decision based on such accounts. Also MD walks away with increased incentives without increased profitability thus hurting the shareholders.
It is legitimate to pursue career goals but not at the price of befooling stakeholders such as shareholders and lenders. That is bad corporate governance.
3. Sarita is living in a make believe world if she thinks that such manipulation will not be recognised by shareholders. Auditors, especially external auditors, would definitely detect some of this window dressing. That will reflect in audit report and shareholders particularly the smarter lot will smell a rat. This is ‘Dumb World’ hypothesis (belief that people are foolish) and no mature manager should proceed on that basis.
4. In this choice, the evil thought expresses itself. Once proposed, the MD will quickly agree in self-interest and then Sarita will lose the path to the fire exit so to say. She cannot then extricate herself from the ensuing complications. Even if in one year she can get away with this, the next year also MD may like to walk farther down the same road thus aggravating her problem. Remember, MD has strong incentive to do so.