Discussion and 2 replies

Inc. magazine published an article by Jeffrey L. Seglin entitled “Would You Lie to Save Your Company?” It recounts the following true situation:

“A Chief Executive Officer (CEO) of a $20-million company that repairs aircraft engines received notice from a number of its customers that engines that it had recently repaired had failed, and that the company’s parts were to blame. The CEO had not yet determined whether his company’s parts were, in fact, the cause of the problem. The Federal Aviation Administration (FAA) had been notified and was investigating the matter.

What complicated the situation was that the company was in the midst of its year-end audit. As part of the audit, the CEO was required to sign a letter saying that he was not aware of any significant outstanding circumstances that could negatively impact the company—in accounting terms, of any contingencies. The auditor was not aware of the customer complaints or the FAA investigation.

The company relied heavily on short-term loans from eight banks. The CEO feared that if these lenders learned of the situation, they would pull their loans. The loss of these loans would force the company into bankruptcy, leaving hundreds of people without jobs. Prior to this problem, the company had a stellar performance record.”

Instructions

Answer the following questions.

Who are the stakeholders in this situation?

What are the CEO’s possible courses of action? What are the potential results of each course of action? (Take into account the two alternative outcomes: the FAA determines the company (1) was not at fault, and (2) was at fault.)

What would you do, and why?

Suppose the CEO decides to conceal the situation, and that during the next year the company is found to be at fault and is forced into bankruptcy. What losses are incurred by the stakeholders in this situation? Do you think the CEO should suffer legal consequences if he decides to conceal the situation?

Post by classmate 1

 

Who are the stakeholders in this situation?

The stakeholders include the CEO, the employees who work for the company, and the shareholders who have invested in the company.

What are the CEO’s possible courses of action? What are the potential results of each course of action? (Take into account the two alternative outcomes: the FAA determines the company (1) was not at fault, and (2) was at fault.)

The CEO could be up front and truthful about the situation. Given the recent year end audit, the banks will likely pull the loans if the company is found to be at fault. This scenario would likely lead to bankruptcy and the loss of hundreds of jobs. If the company was found to not be at fault, taking the truthful path would ultimately not have consequences on jobs and legal action against the company would not be necessary. Lying about the current situation could have detrimental consequences regardless of the outcome of the FAA findings; most likely resulting in the CEO’s termination and legal action against him.

What would you do, and why?

In my opinion, I would be up front about the recent failing of engine parts. I would take this course of action because of the legal ramifications of the opposite decision. Fraud due to the signature of the letter during the audit could result in significant legal penalties on the CEO. The truth may have larger scale ramifications on the company, but the legal ramifications outweigh the possible legal troubles.

Suppose the CEO decides to conceal the situation, and that during the next year the company is found to be at fault and is forced into bankruptcy. What losses are incurred by the stakeholders in this situation? Do you think the CEO should suffer legal consequences if he decides to conceal the situation?

Answering the latter, yes, the CEO should face legal consequences for covering up the situation during an end of year audit. The losses incurred by the stakeholders would include loss of jobs, loss of wages, and loss of shareholder profit. Those invested in the company would likely lose any value of their stock due to the result of bankruptcy. Employees would likely lose their jobs due to a closure of the company and immense layoffs.

Post by classmate 2

 

Who are the stakeholders in this situation?

There are several parties involved in this situation, including the CEO, customers, employees, banks, and auditors. The CEO is responsible for managing the company's overall performance and reputation, which is crucial for their job security. Customers who reported engine failures may suffer financial losses and reputational damage due to potential faulty repairs. The hundreds of employees working for the company are at risk of losing their jobs if the company goes bankrupt, putting their livelihoods in jeopardy. Eight banks that provided short-term loans to the company have a financial interest in its stability, and bankruptcy could result in significant losses. The auditor is responsible for ensuring the accuracy of the company's financial statements and may suffer damage to their professional reputation if they were not aware of customer complaints or the FAA investigation. 

What are the CEO’s possible courses of action? What are the potential results of each course of action? (Take into account the two alternative outcomes: the FAA determines the company (1) was not at fault, and (2) was at fault.) 

It is recommended to be transparent about any customer complaints and FAA investigations. If the FAA finds the company not at fault, there may be a temporary impact on the company's reputation, but it can recover. However, if the FAA finds the company at fault, it could significantly damage its reputation, leading to potential legal and financial consequences and difficulties in securing future business. On the other hand, concealing the situation and signing the audit letter may seem like a solution, but if the FAA finds the company at fault, it could result in severe consequences such as legal liabilities, lawsuits, loss of customer trust, and even bankruptcy. The CEO should weigh the risks and benefits of both options before making a decision. 

What would you do, and why?

In my opinion, it is recommended that the CEO acts with transparency and integrity in this situation. Concealing a potentially significant problem can have severe consequences for all stakeholders and lead to greater legal damage.

Suppose the CEO decides to conceal the situation, and that during the next year the company is found to be at fault and is forced into bankruptcy. What losses are incurred by the stakeholders in this situation? Do you think the CEO should suffer legal consequences if he decides to conceal the situation? 

If the CEO decides to hide the situation and the company is later found to be at fault, there could be significant losses incurred by stakeholders. Customers may experience financial losses from failed engine repairs and may lose trust in the company. Employees could face financial difficulties and potential unemployment if the company goes bankrupt. Banks may also face financial losses if the loans provided to the company cannot be repaid. The auditor's professional reputation could be negatively impacted if they were not aware of customer complaints or the FAA investigation. In terms of legal consequences, the CEO should face legal action for concealing information that materially impacts the company's financial condition because it is their job to act in the best interests of the company and comply with legal and ethical obligations.