Discussion Assignment Instructions:
The student must then post 2 replies of at least 200 words. For each thread, students must support their assertions with at least 1 scholarly citation in APA format and at least one Bible verse. The integration of the Bible verse and the discussion content should be evident. Each reply must incorporate at least 1 scholarly citation in APA format. Any sources cited must have been published within the last five years. Acceptable sources include the textbook and scholarly sources from the library's databases. Need Assignment Help?
Aden:
The decisions made by the Chief Financial Officer (CFO) of Holman Electronics raise serious ethical concerns in financial reporting. The company's Days Sales Outstanding (DSO) increased significantly at the beginning of 20X2, reflecting poor collection performance. However, in the third quarter of 20X2, the DSO suddenly dropped. This decrease was not the result of improved business performance, but rather a manipulation of financial records. Channel partners were pressured by the CFO to convert their outstanding receivables into signed notes and then reclassified over $30 million of trade receivables as notes receivable. Because notes receivable was excluded from DSO calculations (Revsine et al., 2021), this artificially lowered the DSO figure. Critically, this reclassification was not disclosed in Holman's Form 10-Q filing.
Motive behind the CFO's Actions
It is likely that the CFO had various motivations:
1. Investor Confidence: A lower DSO often signals stronger financial health, which can attract investors and positively impact the company's stock price.
2. Appearance of Improved Financial Performance: By lowering the DSO, the CFO made it seem like Holman Electronics had improved its collections process and cash flow, although there was no real improvement.
3. Compensation Incentives: The CFO could have gained personally if their bonus or stock options depended on certain financial targets being met.
4. Meeting Loan Covenants or Regulatory Requirements: Companies often have to meet certain financial ratios to avoid loan defaults or regulatory penalties. Misstating financials can help them temporarily comply with these requirements.
5. Avoiding Negative Scrutiny: A high and rising DSO could signal trouble to analysts or creditors. Manipulating the number may have been an attempt to avoid questions or penalties.
This kind of action is misleading, unethical, and potentially illegal. It violates the principles of transparency and honesty in financial reporting.
1. Proverbs 11:1
"A false balance is an abomination to the Lord, but a just weight is his delight." (ESV, 2024)
By reclassifying receivables to manipulate a key financial metric without proper disclosure, the CFO engaged in misleading financial reporting practices. This mirrors the use of a "false balance," which Scripture says the Lord detests. On the other hand, truthful and transparent reporting represents a "just weight" that is pleasing to God.
2. Proverbs 10:9
"Whoever walks in integrity walks securely, but he who makes his ways crooked will be found out." (ESV, 2024)
The CFO's dishonest methods may offer short-term benefits, but Scripture makes it clear that such actions will eventually be uncovered. Maintaining honesty and strong moral principles in financial practices builds lasting trust and stability, whereas deceit inevitably leads to failure and consequences.
3. Proverbs 21:6
"The getting of treasures by a lying tongue is a fleeting vapor and a snare of death." (ESV, 2024)
Any financial gains resulting from the CFO's manipulation like boosted investor confidence or improved stock performance are short-lived. This kind of deception creates a trap that may result in legal, professional and spiritual consequences.
4. Proverbs 22:1
"A good name is to be chosen rather than great riches, and favor is better than silver or gold." (ESV, 2024)
The CFO's choice placed financial appearance above the company's reputation. This scripture teaches us that integrity and a good name are far more valuable than short-term financial benefits.
5. Proverbs 16:8
"Better is a little with righteousness than great revenues with injustice." (ESV, 2024)
Holman Electronics would have been better served by honestly reporting the high DSO figures rather than creating a false impression of improvement. God regards righteousness as more important than financial performance, especially when that performance is achieved through injustice.
Conclusion:
The CFO's conduct at Holman Electronics reflects a breakdown in ethical leadership and an intentional effort to mislead stakeholders. Whereas the manipulation might have met short-term objectives, it compromised the trustworthiness of the company's financial reporting and violated the ethical standards fundamental to responsible financial stewardship. The book of Proverbs provides clear guidance on honesty, integrity, and the repercussions of deceit. Financial professionals, particularly those in leadership roles, are called to uphold these values in every aspect of their work.
References:
Revsine, L., Collins, D., Mittelstaedt, F., & Soffer, L. (2021). Financial reporting and analysis (8th ed.). McGraw-Hill Education.
The Holy Bible, English Standard Version. (2024). Paul Avery.
Katherine:
The motive behind the Chief Financial Officers (CFO) actions was to successfully manipulate financial reporting with the intention of creating misleading insight into the company's financial performance. By persuading distributors into signing the notes receivable and redistributing $30 million from the accounts receivable into the notes receivable. This action taken by the CFO lowered the days sales outstanding ratio (DSO). This is an important analytical performance metric utilized by creditors and investors as when it is low it gives the impression that the company is receiving payments at a more efficient rate and appropriately managing their credit risk better than they actually are. Most likely, this derived from maintaining investor confidence, meeting various performance benchmarks, or protection of the company's image within the market. This action is a financial statement misrepresentation as it undermines accountability along with transparency as the CFO demonstrated they prioritize short-term appeal and appearance over long-term ethical integrity and stewardship. When financial statements are misleading it builds a company that is based on false information that can significantly harm the reputation of the company (Biehl et al., 2024). Revsine et al (2021) urges individuals to be "financial detectives" to spot when information is being manipulated and to aim for accuracy.
Proverbs continuously stresses principles such as diligence, honesty, and warns of the dangers of deceitful practices for personal gain. As Proverbs 11:1 states, "A false balance is an abomination to the Lord, but a just weight is his delight" (English Standard Version, Proverbs 11:1, 2016). This scripture has a direct correlation to manipulation when it comes to financial reporting, such as changing the accounts receivable. Holman's CFOs misrepresentation of financial metrics is equivalent to this concept as it misleads stakeholders. Additionally, proverbs 13:11 states, "Wealth gained hastily will dwindle, but whoever gathers little by little will increase it" (English Standard Version, Proverbs 13:11, 2016). The Chief Financial Officers quick attempt to resolve financial indicators for a temporary gain aligns with the purpose of this scripture as it warns against temporary and quick solutions rather it suggests looking at the future before eroding trust with stakeholders and damaging the reputation of the company. Proverbs 19:1 states, "Better is a poor person who walks in his integrity than one who is crooked in speech and is a fool" (English Standard Version, Proverbs 19:1, 2016). This scripture notes the importance of integrity in regards to financial gain. Holman would be better off by demonstrating weaker performance and to hold their truth and preserve their ethical stewardship rather than to create false data and mislead stakeholders. Proverbs 20:17 states, "Bread gained by deceit is sweet to a man, but afterward his mouth will be full of gravel" (English Standard Version, Proverbs 20:17, 2016). This correlates to the situation involving the CFO as it speaks against short-term satisfaction as they will eventually have negative consequences for those involved. It has the potential to harm an organization's reputation, lose investors' confidence, and face regulatory penalties. Lastly, Proverbs 28:6 states "Better is a poor man who walks in integrity than a rich man who is crooked in his ways" (English Standard Version, Proverbs 28:6, 2016). This scripture reinforces the principle of integrity as honest reporting is more valuable than building an organization on financial deception.
References:
- Biehl, H., Bleibtreu, C., & Stefani, U. (2024). The real effects of financial reporting: Evidence and suggestions for future research. Journal of International Accounting, Auditing and Taxation, 54, 100594.
- English Standard Version. (2016a). Bible gateway passage: Proverbs 11:1 - English standard version. Bible Gateway.
- English Standard Version . (2016b). Bible gateway passage: Proverbs 13:11 - English standard version. Bible Gateway.
- English Standard Version. (2016c). Bible gateway passage: Proverbs 19:1 - English standard version. Bible Gateway.
- English Standard Version. (2016d). Bible gateway passage: Proverbs 20:17 - English standard version. Bible Gateway.
- English Standard Version . (2016e). Bible gateway passage: Proverbs 28:6 - English standard version. Bible Gateway.
- Revsine, L., Collins, D., Johnson, W.B., Mittelstaedt, H.F., & Soffer, L.C. (2021). Financial reporting & analysis. New York, NY: McGraw-Hill Education.