Wen Bai and her husband Jung were the owners of WJ Enterprises, Inc. They applied for a small business loan, and the bank requested the most recent business financial statements. When Wen compiled the statement of financial position, she noticed that the business assets and related owner’s equity were small. Accordingly, she told Jung that they should contribute some of their personal assets to the business so that the assets and equity would appear much larger and thus the bank would more likely agree to the business loan. Jung agreed that the statement of financial position would appear stronger with more assets and equity but his concern was with the income statement. The sales for the latest period were low, which resulted in a slight net loss because expenses were slightly higher than revenues. Jung reasoned that contributing assets would show a stronger statement of financial position but felt something had to be done to also improve the income statement. He then told Wen that their business could “sell” back some of the assets they had contributed and report higher sales on the income statement, which would result in net income rather than the actual net loss. Wen did not feel comfortable buying back assets from their business just to increase reported sales.
Discuss any ethical concerns you may have with Wen’s proposal. Discuss any ethical concerns you may have with Jung’s proposal. Do you think it is ethical for a business to “dress up” its financial statements when applying for a loan?