Robin Peterson, the CEO of Teldar Incorporated, was reviewing the financial statements for the
Robin Peterson, the CEO of Teldar Incorporated, was reviewing the financial statements for the first three months of the year. He saw that sales and net income were lower than expected. Because the reported net income and the related EPS were below expectations, the price of the stock declined. Robin held a meeting with top management and expressed his concerns over the declining trend in sales and income. He stated the reduced profitability meant that they needed to formulate a plan to somehow increase the EPS. The vice president of marketing suggested that more advertising might help sales increase. Robin said spending more money on advertis-ing would not guarantee an increase in sales. Then he announced that the excess company cash would instead be used to buy back shares of outstanding common stock; this move would help increase the EPS because fewer shares would be outstanding. Robin reminded everyone that the yearly financial statements would be analyzed and the current year would be compared with results from previous years. He then stated that the treasury stock would reduce the total stockholders’ equity, which could then provide a stronger EPS so the current year would not look as bad. Finally, Robin reminded everyone that with fewer shares of stock outstanding, the DPS could be increased and that would help make Teldar’s stock more attractive. The CFO argued that buying back stock merely to increase performance measures such as EPS was manipulative and unethical, and financial analysts would easily see what Teldar was trying to do.
Why did the CEO want to repurchase shares of Teldar common stock? Would the repurchase of common stock really have any impact on the fnancial ratios?
Would an investor or fnancial analyst be able to see that fnancial performance measures were improved because of the stock repurchase? Are any ethical issues involved? Were the concerns expressed by the CFO valid? Do you have any other thoughts?
Question 2. You are the controller for Pro Clean Services, a company that provides janitorial services to large commercial customers. The company has been very successful during its first two years of operations, but to expand its customer base, the company is in need of additional capital to be used for equipment purchases. The two brothers who started the business, Adam and Tim Olson, invested their life savings in the business, so they have contacted a local bank about securing a loan for $175,000. The bank has asked for a set of financial statements, and Adam, being a businessperson, knows that the bank is going to be looking for a growth in earnings each year. Although the company’s earnings have increased, Adam would like the past year to look better than it does now. Adam stops by your office late in the afternoon on December 31 to find out when the financial statements will be ready. You explain that you still have to close out the end of the year but should have them ready by the end of the week. Adam tells you he is aware of a major contract Tim is working on that it will be signed on January 3 and asks you to delay the closing process a few days so the new contract can be included in this year’s operating results. You attempt to explain to Adam that you cannot do that, but you can tell he is not listening to you. Adam interrupts by saying, “I don’t know why you accountants get so worked up over a few days. Let me just say that it would be in your best interest to include this contract in the current year’s operating results.” Adam leaves your office in a hurry, and you hear him mutter under his breath as he turns the corner, “That accountant—who does he think he is trying to tell me how to run my business?”
What are the accounting issues related to Adam’s request?
What is the ethical issue involved in this case?
What would be the appropriate course of action for you to take?