QUESTION ONE

Last week Oliver started evaluating the capital projects that have been proposed for investment this year. One proposal calls for CyberSystems to purchase Network Products, a company that manufactures circuit boards called network cards, which are required to achieve communication connectivity between personal computers. CyberSystems packages network cards with the software that it sells, but it currently purchases those circuit boards from another manufacturer. The proposal, which was submitted by Nadine Wilson, CyberSystems' CEO, suggests that the company might reduce costs and increase profit margins by producing the network cards in-house.

Oliver barely had time to scan the proposal when he was invited for a discussion to Mrs Wilson's office. The meeting was short and to the point. Mrs Wilson instructed Oliver to 'make the numbers for Network Products look good because we want to buy that company'. She also gave Oliver an evaluation of Network completed two years ago by an independent appraiser that suggests Network might not be worth the amount that CyberSystems is willing to pay. Mrs Wilson instructed Oliver to find a way to rebut the findings of the report.

Oliver was troubled by the meeting. His gut feeling was that something was wrong, but he had not yet had time to carefully examine the proposal. In fact, his evaluation was very cursory, and he was far from making a final decision about the acceptability of the proposed capital budgeting project. Oliver felt he needed much more information before he could make a final recommendation.

Oliver has spent the entire day examining the appraisal report provided by Mrs Wilson and trying to gather additional information about the proposed investment. The report contains some background information concerning Network's operations, but crucial financial data are missing. Further investigation into Network Products has produced little information. Oliver has discovered that the company's shares are closely held by a small group of investors. These investors own numerous businesses and contribute generously to the local university, which happens to be Mrs Wilson's university. In addition, Oliver's secretary has informed him that the gossip around the office suggests that Mrs Wilson and the owners of Network are old university buddies and that she might even have a stake in Network.

This morning, Mrs Wilson called Oliver and repeated her feelings concerning the purchase of Network. This time she said: 'We really want to purchase Network. Some people might not believe so, but it is a very good deal. It is your job to make the numbers work - that is why we pay you the big bucks.As a result of the conversation, Oliver has the impression that his job might be in jeopardy if he does not make the 'right 'decision. This added pressure has made Oliver very tense.

1.What is the ethical dilemma being faced by Oliver?

2.What should Oliver do when she is an professional accountant?

3.What factors are to be considered in the capital budgeting analysis, should rumours and innuendos also be considered?