1)An employee in the accounting department of public company XYZ overheard the following conversation between the Chief Executive Officer (CEO) and the Non-executive director (NED) who is also the uncle of the Chief Executive Officer:

CEO: I am worried that if this drop in profits is disclosed in the next annual report, there will be problems with the shareholders.

NED: We could figure out a way of making them look better.

CEO: How? I do not see how it is possible.

NED: We could change the figures slightly higher than last year's figures by including the returns on sales of our shoes division.

CEO: But the sales don't go through until September.

NED: The sales will eventually go through, we need the sales to be recorded on the books now.

CEO: But would not that be illegal?

NED: I do not see why it should be illegal. We are not manipulating sales figures we are only changing the timing when those sales are recorded.

CEO: Sounds good, let us do it.

Write the board of directors a brief summary of the corporate governance problems that can be deduced from the above.