statement of cash flows to see if it is possible to meet the requirement for
the board to declare a cash dividend. The Board requires that the annual
operating cash flow (net cash provided by operating activities) exceed $ 1
million. The president tells the controller, “I know you won’t let me
down.” The controller reclassifies a $ 60,000, 2-year note payable listed
in the financing activities section as “proceeds from bank loan”. He
reports the note instead as “increase in payables” and treats it as
an adjustment of net income in the operating activities section.
(a) Who are the stakeholders in this situation?
(b) Was there anything unethical about the president’s
actions? Was there anything unethical about the controller’s actions?
(c) Are the Board members or anyone else likely to discover
the misclassification?
