Johnson’s CFO went ahead with the depreciation adjustment. The following year, the CFO and the chief of audit discussed Johnson’s still declining sales and revenues and their first quarter financials. The CFO proposes the following: “Look, we’re coming up on the spring season when the skateboard wheels peak. Why don’t we ship the wheels early to our regular customer, and we can have a second-quarter peak instead of waiting for the third quarter.” The chief of audit responds, “Well if the customer has not ordered the wheels, I am not sure we have a sale to book.” The CFO then explains, “We can make it part of a special promotion and make the credit terms favourable.” The chief of audit worries, “It feels like we are piecing together sales and revenues and not really meeting our numbers.”
The chief of audit’s concerns are valid and revolve around the ethical and financial implications of the CFO’s proposed actions. Here’s how the chief of audit can discuss these concerns with the CFO:
Transparency and Accuracy: The chief of audit should express concern about the transparency and accuracy of the proposed approach. Booking sales before customers have actually ordered the products, especially through special promotions and favorable credit terms, can be seen as misleading and unethical.
Integrity: Emphasize the importance of maintaining the company’s integrity in financial reporting. Piecing together sales and revenues in a way that deviates from standard accounting practices may undermine the trust of investors, stakeholders, and regulators.
Financial Reporting and Long-Term Consequences:
Short-Term vs. Long-Term: The chief of audit should point out that artificially boosting sales in the short term, especially through unconventional methods, may not address the underlying issue of declining sales. It could create a misleading picture of the company’s financial health, which could have negative long-term consequences.
Investor Trust: Misrepresenting financial data can erode investor trust and damage the company’s reputation. This can result in reduced access to capital, higher borrowing costs, and decreased investor confidence, all of which can harm the company in the long run.
Risk of Legal and Regulatory Issues:
Compliance with Accounting Standards: The CFO’s proposal may raise questions about the company’s compliance with accounting standards and regulations. It’s important to avoid actions that could lead to legal or regulatory issues, as these can be costly and damaging to the organization.
Exploring Sustainable Growth: Instead of trying to manipulate sales figures, suggest that the company explore sustainable ways to stimulate growth and address the declining sales issue. This might involve product development, marketing strategies, or diversification of offerings.
Open Communication: Encourage open communication with investors and stakeholders about the challenges the company is facing and the strategies being implemented to address them. Transparency can help build trust in the long term.
In summary, the chief of audit should express concerns about the ethical, financial, and long-term consequences of the CFO’s proposal. It’s important to prioritize transparency, accuracy, and integrity in financial reporting while seeking sustainable solutions to the company’s challenges. Avoiding shortcuts and unethical practices will contribute to the company’s credibility and reputation in the eyes of investors and stakeholders.