The Ethics of Measurement The Baker Corpora- tion obtained most of the financing for its recent expansion by borrowing from the local bank. The bank loan is payable over ten years, and, because the bank was concerned that Baker might not maintain sufficient liquidity to meet current obliga- tions, one of the loan provisions is that Baker must maintain a current ratio of at least 2 to 1. If the ratio falls below this level, the bank loan immediately becomes due. The ratio is to be mea- sured on the last day of each month. On February 28, 2001, the current ratio falls short (current assets of $720,000 and current liabilities of $370,000). The next day, Mary, the president, is told that Baker Corporation may be in violation of the loan provisions. She angrily calls Tom, the financial vice president, into her office and demands to know what he is going to do about this. Tom is desperate, and the only alternative he can think of is to suggest writing checks for a total of $20,000 to pay accounts payable and backdate them to February 28.

Can this strategy work? What are the implications of backdating the checks? Will the financial statements then be misstated? Discuss the ethical implications of such an approach.