Discussion and 2 replies

Pendleton Automotive Corp. is a medium-sized wholesaler of automotive parts. It has 10 stockholders who have been paid a total of $1 million in cash dividends for 8 consecutive years. The board’s policy requires that, for this dividend to be declared, net cash provided by operating activities as reported in Pendleton Automotive’s current year’s statement of cash flows must exceed $1 million. President and CEO Hans Pfizer’s job is secure so long as he produces annual operating cash flows to support the usual dividend.

At the end of the current year, controller Kurt Nolte presents president Hans Pfizer with some disappointing news: The net cash provided by operating activities is calculated by the indirect method to be only $970,000. The president says to Kurt, “We must get that amount above $1 million. Isn’t there some way to increase operating cash flow by another $30,000?” Kurt answers, “These figures were prepared by my assistant. I’ll go back to my office and see what I can do.” The president replies, “I know you won’t let me down, Kurt.”

Upon close scrutiny of the statement of cash flows, Kurt concludes that he can get the operating cash flows above $1 million by reclassifying the proceeds from the $60,000, 2-year note payable listed in the financing activities section as “Proceeds from bank loan—$60,000.” He will report the note instead as “Increase in payables—$60,000” and treat it as an adjustment to net income in the operating activities section. He returns to the president, saying, “You can tell the board to declare their usual dividend. Our net cash flow provided by operating activities is $1,030,000.” “Good man, Kurt! I knew I could count on you,” exults the president.

Instructions

Who are the stakeholders in this situation?

Was there anything unethical about the president’s actions? Was there anything unethical about the controller’s actions?

Are the board members or anyone else likely to discover the misclassification?

Post by classmate 1

 

1. Who are the stakeholders in this situation?

The stakeholders in this situation are listen as follows: 10 stockholders, President and CEO Hans Pfizer, The Pendleton Automotive Corp board, controller Kurt Nolte, and the bank all have a hold and interest in the company's results. 

1. Was there anything unethical about the president's actions? Was there anything unethical about the controller's actions?
   
   My interpretation of the reading was that the president put in a wink wink conversation to the controller. Like hey, fix this, "I can count on you." The controller reworded and reclassified the note payable, a debt, into an "increase in payables" which equates to cash not spent, which is what increased their cash flow over their intended 1 million mark. Both situations unethical and the latter unlawful. 
   
   
2. Are the board members or anyone else likely to discover the misclassification?
   
   It's possible that someone will catch the misclassification. Their $1 million mark determined if the dividends were to be paid out of not - there essentially is $60,000 worth of debt that is being miscounted for that will have to be paid. This was a long term liability, so it was not needing to be paid in less than a year. There would have to be knowledge of previous balance sheets and debt to be able to spot the change (Kimmel, et al., 2022).

References

Kimmel, P., Weygandt, J., Mitchell, J. (2022). Accounting: Tools for business decision making, (8th edition). Wiley

Post by classmate 2

 

Who are the stakeholders in this situation?

The stakeholders in this situation include the CEO/president, the controller, the stockholders, and the employees at Pendleton Automotive Corp.

Was there anything unethical about the president’s actions? Was there anything unethical about the controller’s actions?

The president’s actions pose an ethical dilemma due to the fact that he is asking the operator to increase operating cash flow to exceed or meet the one million requirement. The CEO is looking out for his own job security by asking the controller to change the net operating cash flow; he is ignoring the fact that altering the numbers can have consequences on the business, if audited. The controller’s action is also unethical and potentially illegal because they are changing a “debt” to an increase in cash payable.

Are the board members or anyone else likely to discover the misclassification?

Board members, employees of the accounting department, or external auditors may catch the misclassification. The misclassification occurred on a two-year note payable and is therefore a long-term liability. This misclassification may be found when reviewing the numbers in the future; the CEO and controller would need to answer for the misclassification at that time and could result in termination.