Kelli Rice, president of LR Industries, wishes to issue a press release to bolster her company’s image and maybe even its stock price, which has been gradually falling. As controller, you have been asked to provide a list of 20 financial ratios and other operating statistics for LR Industries’ first-quarter financials and operations. Two days after you provide the data requested, Laurie Ellis, the public relations director of LR, asks you to prove the accuracy of the financial and operating data contained in the press release written by the president and edited by Laurie. In the news release, the president highlights the sales increase of 25% over last year’s first quarter and the positive change in the current ratio from 1.5:1 last year to 3:1 this year. She also emphasizes that production was up 50% over the prior year’s first quarter.
You note that the release contains only positive or improved ratios and none of the negative or deteriorated ratios. For instance, no mention is made that the debt to assets ratio has increased from 35% to 55%, that inventories are up 89%, and that although the current ratio improved, the current cash debt coverage fell from 0.15 to 0.05. Nor is there any mention that the reported profit for the quarter would have been a loss had not the estimated lives of LR plant and machinery been increased by 30%. Laurie emphasized, “The Pres. wants this release by early this afternoon.”
- Who are the stakeholders in this situation?
- Is there anything unethical in the president’s actions?
- Should you as controller remain silent? Does Laurie have any responsibility?