Ethical dilemma 1: The creeping FD

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In 2008, ICAS Research published the report "What do you do now? Ethical Issues Encountered by Chartered Accountants" by Dr David Molyneaux containing 28 true life case studies of ethical dilemmas faced by accountants either in practice or business.

In recognition of this work, in 2009 the ICAS Technical Policy Board then published "Shades of Grey" containing a further series of case studies, one of which is reproduced below.

The views expressed in these respective case studies are those of the Ethics Committee and do not necessarily represent the views of the Council of ICAS.

This case study gives general guidance only and should not be relied on as appropriate or comprehensive in respect of any particular set of circumstances. It is recommended that users consider seeking their own professional advice.

The authors or the publisher can accept no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication.


You are the Financial Controller in a manufacturing business, Sundance & Cassidy Ltd, which like many businesses in the UK is beginning to feel the impact of the credit crunch.

The business is a large private company with 270 employees and has a turnover of £50 million. You prepare the quarterly management accounts and provide these to Robert, the Financial Director (FD), for his comments.

A few months ago you had noted that the balance sheet position was slightly below that required by the covenant over the company's long-term bank loan and you made Robert aware of this. He thanked you for your vigilance and for raising the issue but told you not to worry.  

A few days later, a set of quarterly management accounts was sent to the bank. Robert provided you with a set of accounts for the file. You noted that the stock figure on the balance sheet had been increased by £1,850,000. Without this adjustment the banking covenant would have been breached that particular quarter.

Whilst you trust Robert and have a good working relationship with him, you found the stock adjustment surprising as you had made all the usual checks to ensure that the cut-off and valuation procedures were properly adhered to. Such an adjustment had never been made in previous quarters. You thought about questioning Robert on this issue but as you have a great deal of respect for him and he is a very busy man, you decided not to say anything.  

At the end of the next quarter, the same thing happened again, although the adjustment on this occasion had risen to£2,770,000. This time you asked Robert why the stock adjustment was necessary. He advised you that, at the quarter-end the company held stock at external premises, which was not included in the stock count.

You found this strange as Robert has never mentioned this to you before and it would have been helpful if he had informed you of any stock held externally before you finalised the quarterly stock figures for the management accounts. However, you decided not to pursue this matter any further.  

At the end of the next quarter, things are even worse and you once again highlight to Robert that the company is failing to comply with the terms of the bank covenant. Robert tells you not to worry and a few days later you note that the set of accounts sent to the bank has again been altered to include a higher stock figure: this time an additional £5,500,000 has been added to the figure that you supplied which ensures that the company meets its banking covenant. You ask Robert to properly explain the stock adjustments which have been made in recent months but he tells you to:  

"Mind your own business and get on with your own job."  

He also informs you that if you ever question his judgment again then:  

"You won't have a job to go to!"  

What do you do now?  

Scenario Analysis

What are the readily identifiable ethical issues for your decision?  

For you personally  

Can you allow this situation to continue without seeking a full explanation from the FD? If you do not believe that you can raise the matter with him again, then who can you discuss it with within the organisation? Does the company have a policy for such matters? Is there another director that you could approach?  

For the Company

Is there a supportive environment for open discussion of practical dilemmas without a recriminatory, or 'blame', culture?  

Is the FD putting through these adjustments on his own behalf or is someone else exerting pressure on him to do so?  

Who are the key parties who can influence, or will be affected by, your decision?  

  • You
  • The FD
  • The other directors
  • The shareholders
  • The employees
  • Customers and suppliers
  • The bank.

What fundamental ethical principles for accountants are most applicable and is there an apparent conflict between them?  


Can you retain your integrity by ignoring this issue?

Have you already done enough by raising the issue with the FD? (he has warned you not to raise the issue with him again)

What will happen if the external auditors start to ask questions about the stock adjustments?  


The ability to be able to question senior personnel when there is something, which does not appear right.  

Professional competence and due care  




Professional behaviour

The need to display professional courage by getting to the bottom of the matter.  

Is there any further information (including legal obligations) or discussion that might be relevant?  

The possibility exists that the FD is telling the truth and that Sundance & Cassidy Ltd does have stock located at another company's premises. However, if this is the case then why is he not providing evidence to justify his stock adjustments?  

Is there a conflict between the 'Guardian' and 'Commercial' strands of an accountant's responsibilities?  

If the FD is falsifying the quarterly management accounts then he is bowing to the commercial pressure to ensure that Sundance & Cassidy Ltd is satisfying the funding conditions placed on it by the bank. If the bank covenant terms were breached, the bank could of course take action and the risk would be that Sundance and Cassidy Ltd might be put out of business if the funding package was withdrawn or not renewed. The requirements of the 'Guardian' role are for the accountant to ensure that the monthly management accounts are a fair representation of the company's financial performance and position.

Based on the information available, is there scope for an imaginative solution?  


Are there any other comments?  



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