Ethics of cash flow manipulation There is an interesting ethical issue behind the very reason that the statement of cash flows is thought by some people to have advantages over the income statement. The reason is that people are often mistrustful of the income statement because they feel its accrual accounting methods can be used to manipulate net profit as a measure of performance, and they think that the cash flow figures are more ‘real’. For example, a company might claim large revenues, not yet collected, that make its revenue higher (via the entry DR accounts receivable, CR revenue). However, if the cash has not been collected, the increase in accounts receivable will be deducted from net profit on the statement of cash flows, and the lack of ‘real’ cash inflow will be apparent because cash from operations will be lower than would be expected from the profit number. Therefore, it is thought the statement of cash flows’ cash from operations figure is more believable than net profit and will even, if it is very different from net profit, unmask manipulations of the net profit.

The ethical issue is that it is possible to manipulate the cash flow figures too. For example, a company might accelerate or delay receivables collections in order to change the cash flow figures – whether or not the net profit is also being manipulated. There may be a difference from manipulating net profit, however, because changing cash flow figures requires real actions that affect customers or suppliers or employees. Therefore, there are real consequences, such as irritating customers or having to offer inducements for early payment.

Nevertheless, it can be done.

It seems that most people would feel that altering the accruals just to make net profit better (or worse, or smoother) is ethically questionable, even if it is understandable because of the way management is evaluated and rewarded. But is altering the cash flow ethically questionable? Is there an ethical problem if management decides to put pressure on customers to accelerate collections and improve the company’s cash position?
It sounds like good management, not like manipulation.
Suggest two or three ways, not included already, in which operating, investing or financing cash flows could be altered from their normal levels. For each, discuss whether, or under what conditions, you would think there is an ethical problem with such an alteration.