BUSINESS ETHICS CASE

The Converge Company has several loans outstanding with a local bank. The debt agreements all contain a covenant stipulating that Converge must maintain a current ratio of at least 0.9. Martin San Jose, the company controller, estimates that the year-end current assets and current liabilities will be $4,200,000 and $4,800,000, respectively. These estimates provide a current ratio of only 0.875. Violation of the debt agreement will increase Converge's borrowing costs as the loans are renegotiated at higher rates.

Martin proposes to the company president that Converge purchase an inventory of $600,000 on credit before year-end. This will cause both current assets and current liabilities to increase by the same amount, but the current ratio will increase to 0.9. The extra $600,000 in inventory will be used over the latter part of next year. However, the purchase will cause warehousing costs and financing costs to increase.

Martin is concerned about the ethics of his proposal.

QUESTION: What are the practical constraints?