Question

Co. A was founded in Baltimore, MD in 1923. In 1924, Co. A began to manufacture sugar cookies. The company continued to grow, expand its manufacturing operations until, in 1945, Co. A "went public" and sold its stock on the NYSE for $10/per share. The value of the stock has increased to a value of $100/per share in 2012. In 2011, Co. A stated in its annual financial report to stockholders that its 2011 profit was $5 million, when in fact its profit was only $3 million. This error was a typo, and not an intentional fraudulent act. The new CEO has discovered this falsification and is concerned about ethical and legal implications. What is the ethical dilemma? Explain possible consequence of the problem and suggest alternative resolutions to the case.

Answer 1

The ethical dilemma that the CEO faces is the next step that he should take to correct the mistake. There are two actions that he can take

• Do nothing
• Inform the public about the mistake

In case if he chooses to do nothing, there are deeper challenges than the ones we can see on the surface. One of the key challenge is that he will begin a culture of dishonesty and lack of transparency among the shareholders. However, in addition to this, let’s say the profit in 2012 is $7 million, the incremental growth will look smaller in 2011-2012 than it could have looked otherwise. This is a missed opportunity. Obviously a growth from $3 million to $7 million looks much better than a growth from $5 million to $7 million. So he may hamper the overall growth rate by protecting the mistake that the company made.

In case if the CEO chooses to divulge the mistake to the public, there may be certain section of the public who will consider the previous mistake to be an intentional one. This could make certain section of the shareholders to lose interest in the company and divest their shares. This could result in drop of share price and will impact the company negatively. This means that the company could eventually end up struggling at the market place. However, there is also a probability that a large section of the shareholder community will welcome their admittance of mistake and transparency. In the long run that could be beneficial.