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[14-36. Ethics and lCorporate Governance: Meeting Debt Covenants Companies routinely face debt covenants and occasionally these covenants are binding. That is, the com pany's financial
[14-36. Ethics and lCorporate Governance: Meeting Debt Covenants Companies routinely face debt covenants and occasionally these covenants are binding. That is, the com pany's financial statements indicate that the covenant has been violated or is close to being violated. Eli-\"lan agers have historically used various means to improve their reported numbers to avoid binding covenantsg including adjusting accounting accmalsg and making \"real" operating changes such as decreasing certain discretionary expenses or cutting back on capital expenditures. Required cal-low do accounting accrual adjustments affect covenants that require minimums for retained earnings or for certain ratios such as the current ratio? Are those effects permanent? III-low do real operating changes affect covenants that require minimums for retained earnings or for certain ratios such as the current ratio? Are those effects permanent? c.What consequences might arise if the company focuses on managing reported numbers to avoid vio- latin g debt covenants? 1What parties are aected by such schemes
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