Corporate Finance – Do Numbers Lie? The Other Side of Financial Statement Analysis
If you were to enter the banking industry you may find yourself approving or not approving loans. The following is a good example of a common event you may encounter.
Company X is looking for a $100,000 to purchase new equipment. The finance manager for Company X recently presented financial reports. Upon further analysis of the statements you, the banker, noted some window dressing of the financial statement. In this case it seems Company X will delay payments to vendors in order to make their cash position look higher.
- Do you see this practice a matter of ethical and or legal concern?
- Do you think most all company’s “window dress” their data?
Please explain your decision to approve or disapprove Company x’s loan.
From the professor:
To answer this question think of the primary duties company officers owe to shareholders. That main duty is to “Improve shareholder value”. So here are some questions for you.
· Does management’s window dressing financial statement, to attract new investors, improves shareholder value?
· Is shareholder value improved through financial statement window dressing to obtain lower loan rates?
· Does a window dressing financial statement to lower tax rates (and payments) improve shareholder value?
From my life experience, I look at this to be the same as dating. On most of the dating web sites women state that they want an honest man. So I asked a woman I had begun dating where the honesty line is for women? You are not that tall, I told her, without heals. You look a lot better with make-up. Your hair is not that color naturally. And (well you get the idea). LOL
I was told by that woman that the things women do to attract men is not dishonest but simply a matter of packaging.
So the question here is: When managers window dresses financial statements what is packaging and what is dishonest? Who determines the line? How can a manager be honest about financial reporting and still fulfill his fiduciary duties? What should a manager do here?