Read the Disclosure Strategy case (see attached) and respond to the following questions:
1. Why do corporations provide quarterly earnings announcements and host earnings conference calls, if not required to do so by the U.S. Securities & Exchange Commission (SEC)?
2. Describe the practice of selective disclosure and how it could be used to potentially mislead investors and other users of financial information.
3. Assess CEO Trey Prescott’s selective disclosure plan for LEXM Corporation’s third-quarter earnings release. Identify the benefits and risks of implementing this disclosure plan. Do the benefits outweigh the risks?
4. The IMA Statement of Ethical Professional Practices’ overarching ethical principles are honesty, fairness, objectivity, and responsibility. Nick is a CMA® (Certified Management Accountant) and a member of IMA, and he is required to abide by these ethical principles. If Nick decides to support and implement the CEO’s proposed selective disclosure strategy, how might he be violating each of the ethical principles?
5. How can CFO Nick Alexander resolve the ethical conflict in this case, when the individuals involved are held to different sets of ethical standards?
A CASE OF ETHICS
BY THOMAS D’ANGELO, DPS, CMA, CFM,
AND MARCO LAM, PH.D., CMA, CPA, CGFM
CASE WRITING COMPETITION
July 2021 / ST R AT E G I CF I N A N C E/ 49
50 / ST R AT E G I CF I N A N C E/ July 2021
icholas Alexander stared dejectedly at his
computer screen as it displayed the third
quarter’s financial statements for Logis-
tics Exchange Market (LEXM) Corpora-
tion. The immediate task at hand was
preparing for LEXM’s earnings
announcement and the conference call
that followed, a process that he had
become quite accustomed to. Still, he had
a sinking feeling that the public reporting of this quarter’s
results would be far more challenging than any thus far.
As CFO and one of the first employees hired in the early
stages of LEXM’s existence, Nick felt a deep responsibility
for its continued success and, in particular, its reputation as
a trustworthy and transparent discloser of financial infor-
mation. Although this was only its fifth year in operation,
the explosive growth in demand for its services and coinci-
dent increase in revenue allowed LEXM to complete one of
the “hottest” initial public offerings (IPOs) for a company
its size in recent memory. The $250 million raised provided
financial flexibility and the potential to exploit opportuni-
ties for additional growth through internal initiatives and
Unlike most companies that limit stock-based compen-
sation to corporate executives, the founders of LEXM sought
to hire individuals who were willing to accept lower salaries
in exchange for incentive compensation in the form of gen-
erous grants of stock options. This philosophy of linking
corporate and individual success had attracted extremely
capable and highly motivated employees who tended to
have a great deal of confidence in their abilities.
Now with the 180-day lockup period (during which
employees and other company insiders are prohibited from
selling stock) about to expire, there was more pressure than
ever to report strong results for the three-month period that
had just ended on September 30. For the moment, the
chance for hundreds of LEXM employees at all levels (Nick
included) to take advantage of this opportunity to sell their
stock and enjoy a more secure financial future hung in the
As he tried to focus on writing, Nick couldn’t help but
recall his heated discussion earlier that day with Trey
Prescott, LEXM’s charismatic but mercurial CEO. Although
they had a mostly cordial professional relationship, there
were times when the two executives differed vehemently
about their opinions on financial reporting strategy. The latest
disagreement centered on the extent of disclosure that would
be made at the upcoming earnings announcement date.
LEXM was founded five years ago by Prescott and a small
cadre of software engineers. Their lofty goal was to launch a
business-to-business platform that would revolutionize the
procurement of logistics services. Driven to capitalize on its
unique niche strategy, the company was able to opera-
tionalize its business plan in a relatively short period of
time and was soon open for business.
The IMA® Committee on Ethics and Raef
Lawson, Ph.D., CMA, CSCA, CPA, CFA, CAE,
IMA VP of research and professor-in-
residence, are proud to announce that
Thomas D’Angelo, DPS, CMA, CFM,
and Marco Lam, Ph.D., CMA, CPA,
CGFM, have won the Best Case Award in
the 15th annual Carl Menconi Case
Writing Competition for their case,
“Disclosure Strategy: A Case of Ethics
in Financial Reporting.”
The competition is named in memory of Carl
Menconi, who held leadership positions in
IMA for many years and served as chair of
the IMA Committee on Ethics. The objective
of the competition is to develop and
distribute business ethics cases with
specific application to management
accounting and finance issues and that use
the IMA Statement of Ethical Professional
Practice as a reference or guidance tool.
The winning case and teaching notes are
available for use in a classroom or business
setting. IMA academic members can access
and download the teaching notes from the
Academic Teaching Notes library via the
IMA Educational Case Journal section of
IMA’s website: www.imanet.org/educators
© 2021 by IMA® (Institute of Management Accountants), Montvale, N.J., sfmagazine.com. Used with permission.
July 2021 / ST R AT E G I CF I N A N C E/ 51
Since its founding, the company has successfully
demonstrated its ability to harness the power and conven-
ience of the internet, employing its patented technology to
act as a seamless intermediary between providers and cor-
porate consumers of a wide variety of logistics services.
Revenue grew exponentially, attracting attention from
industry publications and then, ultimately, the financial
Nick was the 10th employee hired and has been the only
CFO the company has ever had. To Nick, the past five years
have been a whirlwind—the fast pace of a start-up com-
pany has been demanding yet exciting, and his contribution
to creating the financial infrastructure is unmistakable.
Nick quickly addressed LEXM’s initial cash flow chal-
lenges, taking the leadership role on raising capital, includ-
ing three rounds of equity financing prior to the IPO. As the
company’s finance chief, he received significant favorable
public recognition as LEXM surpassed its operational
expectations and successfully completed its IPO. This
brought Nick considerable pride and a sense of satisfaction
unmatched in his career to date.
Cash Flow Challenges
Nick felt the full weight of his responsibilities as CFO as he
considered his current situation. On the positive side, LEXM
had met analysts’ aggressive expectations for total revenue,
revenue growth, net income, and earnings per share during
the third quarter. On the negative side, analysts covering
LEXM had exerted pressure on the company to provide a
forecast of cash flows from operations, beginning with the
third quarter. In addition, they requested that LEXM include
a statement of cash flows with the company’s earnings
release, arguing that it would enhance disclosure and pres-
ent investors with a more comprehensive view of company
Unfortunately, the third-quarter statement of cash flows
prepared by Nick’s financial reporting team showed cash
flows from operations that were substantially below the
projections provided by the company. This was primarily
due to a sharp increase in accounts receivable, offset some-
what by a slower increase in accounts payable.
The increase in accounts receivable was caused by
growth in revenue and the granting of 60-day payment
terms for customers, which was necessary to compete
effectively in the industry. Also contributing to the cash
flow shortfall was the promise to pay suppliers within 10
days to entice them to provide top-quality inventory to
LEXM. As the business continued to grow, this unfavorable
cash flow dynamic would be exacerbated and would
require additional financing.
Nick knew that a divergence between net income and
cash flows from operations is often a cause for concern
when assessing the quality of earnings being reported.
Through his command of financial reporting, he knew that a
company’s management often chooses accounting methods
and estimates to make it easier to achieve performance tar-
gets, for example, exceeding prior year’s earnings, meeting
or beating analysts’ earnings targets, qualifying for bonus
compensation, and avoiding debt covenant violations.
Nick was aware that LEXM would have to answer ana-
lysts’ questions regarding the quality of its third-quarter
earnings. He believed operating cash flow performance
would likely be a focal point of LEXM’s earnings release, par-
ticularly since it was the first time the company would report
this metric. Nick was confident in his ability to articulate the
reasons that cash flows from operations lagged net income,
but that wasn’t the entire cause of his consternation.
Nick had met with Prescott earlier to review the financial
statements and discuss the strategy for reporting LEXM’s
third-quarter operating results. He led the meeting, cover-
ing performance highlights as well as the challenge to pro-
vide, for the first time, the statement of cash flows as a
component of the company’s earnings announcement.
Prescott, demonstrating his accounting acumen, quickly
focused his attention on the significant difference between
net income and cash flows from operations and the nega-
CODE OF ETHICS
The following code of ethics shall apply to all
employees of LEXM Corporation:
1. Be ethical in all business manners;
2. Comply with all applicable governmental
laws, rules, and regulations;
3. Provide reliable and accurate financial
4. Promptly report any employees found in
violation of the code of ethics to
52 / ST R AT E G I CF I N A N C E/ July 2021
tive variance of actual cash flows to forecast. Anticipating
Prescott’s concern, Nick presented a succinct analysis
explaining the variance that could accompany the earnings
release or otherwise be made available to investors and
Prescott listened, then shook his head slowly. He curtly
reminded Nick of the particular significance of this third
quarter and the consequences of not meeting expectations.
Prescott continued, noting all the employees and investors
who were depending on a strong quarterly performance as
the lockup on their shares and options would soon expire,
allowing them to realize the financial reward they had
worked so hard to attain.
Nick was, of course, acutely aware of the situation as his
opportunity for significant economic gain was also at risk.
He told Prescott that, in his opinion, being up front and
explaining the cash flow variance would show LEXM’s will-
ingness to be forthcoming in its financial reporting. It was a
unique opportunity to utilize the statement of cash flows—
in particular, its reconciliation of net income to cash flows
from operations—and emphasize its usefulness as an
enhancement to LEXM’s quarterly earnings information.
Prescott considered Nick’s recommendation briefly, then
angrily left the meeting without offering any comment,
saying only that they would reconvene in a few hours.
A Brazen Proposal
Two hours later, Prescott walked into Nick’s office smiling.
He sat in the chair opposite Nick’s desk and announced that
he had come up with a plan that would resolve the finan-
cial reporting issue. Prescott’s plan was straightforward:
LEXM wouldn’t include a statement of cash flows with its
earnings announcement and would simply continue to pro-
vide the same package of disclosure as during previous
quarters. The statement of cash flows would be disclosed
subsequent to the earnings announcement date as a com-
ponent of the company’s mandatory U.S. Securities &
Exchange Commission (SEC) filing. Any questions concern-
ing cash flow would be deferred until the SEC filing date,
with the explanation that the statement of cash flows
wasn’t finalized as of the earnings announcement date.
Prescott told Nick to remove the statement of cash flows
and any reference to cash flows from the earnings press
release. He stressed that LEXM must control the narrative
and interpretation of the company’s third-quarter financial
performance by focusing on the positive revenue and earn-
Although initially uneasy about Prescott’s strategy, Nick
decided to consider it objectively and prepare a measured
response. He knew that corporate earnings announcements
and analyst conference calls are strictly voluntary disclo-
sures with no SEC requirement regarding the timing, con-
tent, or audit of the information included. Disclosure
quality varies substantially among companies as they craft
their preferred communication, highlighting more favorable
performance metrics and selectively including or omitting
meaningful financial information.
Prescott’s plan was based on the latter, the selective
omission of the statement of cash flows as a component of
the earnings release, despite the fact that this information
was available. It also relied upon analysts and investors
being narrowly focused on LEXM meeting expectations for
earnings and top-line revenue growth.
Research has demonstrated that the responses to corporate
earnings announcements have been shown to be signifi-
cantly greater than that of the subsequent, yet more com-
prehensive, SEC filing (see Eli Amir and Joshua Livnat, “The
Economic Consequences of (Not) Issuing Preliminary Earn-
ings Announcement,” working paper, New York University,
October 2005, bit.ly/2REdYN4). Escalating growth in infor-
mation channels and the velocity with which financial
results are now circulated have likely intensified the market
response to new information.
Nick was keenly aware of the latest research and trends.
Prescott’s suggested use of selective disclosure would allow
LEXM to effectively delay the release of its cash flow infor-
mation because it didn’t completely support the company’s
favored account of its performance. By the time the SEC fil-
ing is finally made, it would be well after the market’s most
consequential reaction to the earnings announcement and
too late for investors who prefer to make timely portfolio
decisions using the most complete information available.
From an accounting perspective, this made sense. The
three primary financial statements—income statement, bal-
ance sheet, and statement of cash flows—are related and
measure different aspects of the same transactions affecting
a company. Cash flows from operations was designed to
reflect the cash effects of income-determining items, there-
fore serving as an effective cash-based comparative meas-
ure to earnings. The symmetry of accrual-based earnings
and cash-based cash flows from operations provides a use-
ful and comprehensive means with which to evaluate
financial performance. Omitting the statement of cash
flows would certainly impair the ability of users to evaluate
the quality of LEXM’s earnings.
Disclosure decisions of this magnitude aren’t made eas-
ily. Theoretically, companies will voluntarily disclose infor-
mation in their earnings announcements if they believe it
will facilitate positive investor valuation. Conversely, they
will withhold disclosure if they believe it will have the
opposite effect, as in the selective exclusion of the state-
ment of cash flows in Prescott’s disclosure plan.
Walking a Fine Line
Nick began to formulate his response to the CEO’s proposal.
Because the SEC didn’t require that a statement of cash
flows be included with an earnings release, LEXM certainly
had the discretion not to do so. And since no one restricted
by the lockup agreement could sell their shares until after
the third-quarter SEC filing, there could be no instances of
trading on inside information.
Nick surmised that the larger risk wasn’t running afoul
of SEC rules, but rather a reputational risk. At the insistence
of the equity analysts who cover LEXM’s stock, the com-
pany had provided a forecast of cash flows from operations.
July 2021 / ST R AT E G I CF I N A N C E/ 53
IMA STATEMENT OF
ETHICAL PROFESSIONAL PRACTICE
Members of IMA shall behave ethically. A commitment to ethical professional practice includes overarching principles
that express our values and standards that guide member conduct.
IMA’s overarching ethical principles include: honesty, fairness, objectivity, and responsibility. Members shall act in
accordance with these principles and shall encourage others within their organization to adhere to them.
IMA members have a responsibility to comply with and uphold the standards of competence, confidentiality, integrity,
and credibility. Failure to comply may result in disciplinary action.
1. Maintain an appropriate level of professional leadership and expertise by enhancing knowledge and skills.
2. Perform professional duties in accordance with relevant laws, regulations, and technical standards.
3. Provide decision support information and recommendations that are accurate, clear, concise, and timely. Rec-
ognize and help manage risk.
1. Keep information confidential except when disclosure is authorized or legally required.
2. Inform all relevant parties regarding appropriate use of confidential information. Monitor to ensure compliance.
3. Refrain from using confidential information for unethical or illegal advantage.
1. Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent con-
flicts of interest. Advise all parties of any potential conflicts of interest.
2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
3. Abstain from engaging in or supporting any activity that might discredit the profession.
4. Contribute to a positive ethical culture and place integrity of the profession above personal interests.
1. Communicate information fairly and objectively.
2. Provide all relevant information that could be reasonably be expected to influence an intended user’s under-
standing of the reports, analyses, or recommendations.
3. Report any delays or deficiencies in information, timeliness, processing, or internal controls in conformance
with organization policy and/or applicable law.
4. Communicate professional limitations or other constraints that would preclude responsible judgment or suc-
cessful performance of an activity.
Resolving Ethical Issues
In applying the Standards of Ethical Professional Practice, the member may encounter unethical issues or behavior. In
these situations, the member should not ignore them, but rather should actively seek resolution of the issue. In deter-
mining which steps to follow, the member should consider all risks involved and whether protections exist against
When faced with unethical issues, the member should follow the established policies of his or her organization,
including the use of an anonymous reporting system if available.
If the organization does not have established policies, the member should consider the following courses of action:
n The resolution process could include a discussion with the member’s immediate supervisor. If the supervisor
appears to be involved, the issue could be presented to the next level of management.
n IMA offers an anonymous helpline that the member may call to request how key elements of the IMA State-
ment of Ethical Professional Practice could be applied to the ethical issue.
n The member should consider consulting his or her own attorney to learn of any legal obligations, rights, and
risks concerning the issue.
If resolution efforts are not successful, the member may wish to consider disassociating from the organization.
54 / ST R AT E G I CF I N A N C E/ July 2021
The analysts would have a reasonable expectation that the
company would disclose the actual amount of cash flows
from operations with the third-quarter earnings announce-
ment. Providing a statement of cash flows as a component
of the earnings release would at least satisfy the demand for
information, regardless of performance.
Conversely, Nick believed that selectively withholding
disclosure of the statement of cash flows would, at a mini-
mum, raise questions as to why. He was doubtful that the
company could appease analysts by deferring any cash flow
discussion until the quarterly SEC filing. Under any circum-
stances, omission of a primary financial statement may
prompt ethical concerns. This concern would likely be
compounded when the statement of cash flows is finally
disclosed with the SEC filing. Wouldn’t there be suspicion
that the company purposely excluded the statement of cash
flows because it revealed negative cash flow performance
and an unfavorable variance to the company’s forecast?
Nick had worked very hard to establish the financial
reporting reputation of LEXM. The IPO alone required many
all-nighters to say nothing of working long days and week-
ends. Suddenly, LEXM was a public company with periodic
reporting demands, essential financing needs, and daily
contact with various stakeholders. While the CEO and
board of directors had the ultimate responsibility for the
corporation, Nick was the primary person for all matters
related to accounting and finance. If Prescott’s reporting
strategy failed, Nick would very likely be the one in the
Of course, no analysis of this situation would be com-
plete without consideration of the positive economic impact
on hundreds of LEXM employees, executives, and loyal early
investors who stood to gain financially from a smooth earn-
ings season. If LEXM’s stock price remained close to its cur-
rent level after the earnings announcement and subsequent
SEC filing, the wealth implications for those in a position to
sell stock would be potentially life changing. Nick knew that
many of his colleagues and friends were depending on him
to help them realize their dreams. If all went well, the years
of hard work and commitment would finally be rewarded,
and Nick himself would become a millionaire.
It seemed to Nick that the probable path of least resist-
ance would be to accept Prescott’s plan. It was certainly
feasible that LEXM’s successful revenue and earnings per-
formance could be the focus of the company’s disclosure,
especially if the earnings announcement were tailored to
deliver that specific message. It was also reasonable that the
company required additional time to construct its statement
of cash flows, especially since it had never previously pro-
vided this information.
Concurrent with the SEC filing, LEXM could post Nick’s
analysis of the cash flow discrepancy on the investors’ sec-
tion of its website so that analysts, investors, and the finan-
cial press would have a tool for easily understanding its
causes. LEXM would be in compliance with all SEC require-
ments, and the additional disclosure may just pass under
the radar. If the stock price held and selling could occur
after the lockup expired—well, that would be the best out-
come he could hope for.
While going along with Prescott’s plan may be the easiest
thing for Nick to do, his misgivings about the selective dis-
closure strategy persisted. Acknowledging that there was
nothing illegal about selective disclosure (in this case, the
omission of the statement of cash flows from LEXM’s
earnings release), he nevertheless felt uncomfortable
about purposefully withholding information that was
readily available. This was information that LEXM had
promised to provide and that Nick believed was relevant
to the many users of the company’s financial statements.
He didn’t want to jeopardize the relationships and trust he
had built with analysts and investors. Nick also had his
own future career and professional reputation to be con-
As Nick searched for tenable solutions to LEXM’s finan-
cial reporting challenge, he recognized that this situation
had presented him with a serious ethical conflict. For guid-
ance, he initially turned to LEXM’s Code of Ethics (see p. 51)
but found its provisions too general and imprecise to be of
much assistance. Nick knew that it wasn’t unusual for such
documents to be written with the intention of allowing
As he sought out something more useful, Nick recalled
his most recent experience with ethics training, a continu-
ing professional education (CPE) course offered by IMA®
(Institute of Management Accountants). As a CMA® (Certi-
fied Management Accountant), he was required to complete
30 hours of CPE annually, including at least two hours of
His latest ethics course still fresh in his mind, Nick
remembered that all IMA members were required to abide
by the IMA Statement of Ethical Professional Practice. He
accessed the Ethics Center on IMA’s website and read
through the IMA Statement (see p. 53). He began with the
overarching ethical principles of honesty, fairness, objectiv-
ity, and responsibility, before moving on to review the ethi-
cal standards of competence, confidentiality, integrity, and
credibility. Each standard has three to four underlying
tenets that provide further description and support. Nick
realized that the IMA Statement was sufficiently compre-
hensive to utilize as a framework with which to analyze,
and hopefully resolve, his ethical dilemma. SF
Thomas D’Angelo, DPS, CMA, CFM, is a financial executive who has
served in the roles of CFO, senior VP of finance, and chief accounting
officer, including as the founding VP of finance and controller for
Priceline.com. Thomas is also a university professor, most recently at
Western Carolina University, and a member of IMA. You can reach him
Marco Lam, Ph.D., CMA, CPA, CGFM, is an associate professor at
Western Carolina University. He’s also a member of IMA. You can
contact Marco at email@example.com.
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