As a result of the modernisation efforts of Lee & Razak Bhd (“the Company”), the directors are of the view that the Company requires a further significant injection of working capital since the Company has committed itself to producing and fulfilling future orders for goods of an international quality.

The current lending policies of the Company’s banker requires borrowers to demonstrate a good stream of projected future cash flows, as well as a level of profitability which would indicate that repayments would be made in a timely manner. However, the current projected future cash flows of the Company would not satisfy the bank’s criteria for lending. Meanwhile, the directors of the Company informed the bank:

“Our company is in an excellent financial position. Our latest cash flow projections and financial results will meet your criteria for lending. Our chief accountant, Mr. Anwar will forward the necessary relevant reports to show you our current position.”

Mr. Anwar, the Chief Accountant joined the Company recently and has stated openly that he cannot afford to lose his job due to existing high personal commitments. Meanwhile, the directors are actively involved in managing the level of profits of the Company as they have vested interests to do so. Furthermore, they feel strongly that such efforts on their part would not pose any conflict of interest with the public interest and accounting ethics. They are of the view that ethical behaviour and codes of ethics are irrelevant and not important in managing the Company as compared to managing their profits.

You are required to write a report which include the following:

Critically evaluate whether a practice like the nature and incentives for ‘management of earnings’ can be deemed ethically acceptable.