Wendy Brown and her husband Jeff 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 Wendy compiled the balance sheet, she noticed that the business’s assets and related stockholders’ equity were small. Accordingly, she told Jeff 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. Jeff agreed that the balance sheet 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. Jeff reasoned that contributing assets would show a stronger balance sheet but felt something had to be done to also improve the income statement. He then told Wendy 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. Wendy did not feel comfortable buying back assets from their business just to increase reported sales.
Discuss any ethical concerns you may have with Wendy’s proposal. Discuss any ethical concerns you may have with Jeff’s proposal. Do you think it is ethical for a business to “dress up” its financial statements when applying for a loan?