Paradis Corporation has paid cash dividends for eight years in a row. The board of directors' policy requires that, in order to declare a dividend, cash provided by operating activities as reported in Paradis' cash flow statement must exceed $1 million. President and CEO Phil Monat's job is secure as long as he produces annual operating cash flows to support the usual dividend.
At the end of the current year, controller Rick Kwan informs president Monat of some disappointing news. The net cash provided by operating activities is only $970,000. The president says to Rick, "We must get that amount above $1 million. Isn't there some way to increase this amount?" Rick answers, "These figures were prepared by my assistant. I'll go back to my office and see what I can do." The president replies, "I know you won't let me down, Rick."
After examining the cash flow statement carefully, Rick concludes that he can get the operating cash flows above $1 million by reclassifying interest paid from the operating activities section, where it has been classified in the past, to the financing activities section. The company is a publicly traded company reporting under
IFRS. He returns to the president, saying, "You can tell the board to declare its usual dividend. Our net cash flow provided by operating activities is $1.03 million." "Good man, Rick! I knew I could count on you," exclaims the president.
Instructions
(a) Should any other factors, besides cash provided by operating activities, be considered by the board in setting the dividend policy?
(b) Who are the stakeholders in this situation?
(c) Was there anything unethical about the president's actions? Was there anything unethical about the controller's actions?
(d) Are the board members or anyone else likely to discover the reclassification?
(e) Would your answers to parts (b) and (c) change if Paradis were a private company reporting under ASPE?