Discuss: the ethical considerations arising from this scenario. What would you advise?

In this scenario, goods in a credit purchase have been received, yet the business has not been charged
or been invoiced for this purchase. The owner now has an ethical dilemma------can either raise or not
raise this issue to the credit supplier.

If the business chooses not to raise the problem, there will be some benefits associated with the
decision. First, the business receives goods without paying for them, which means the cost price for
the inventory is zero in this case. Once these goods are sold to generate revenue, the corresponding
cost of sale expense is also zero, which leads to a significant increase in the business’s net profit
figure in this period and increases profitability. Furthermore, since the credit purchased has not been
invoiced, there would be no cash outflow in the short-term, which improves the business’s cash
position and liquidity. With more cash on hand, the business can use the money to meet other more
urgent needs, such as paying short-term debts or purchasing non-current assets.

However, there are costs of not raising the issue as well, which outweigh the short-term financial
benefits in this case. Once the issue is discovered by the supplier, there will be a damage in the
business’s relationship with their accounts payable. As a result, the supplier may remove the credit
facility from the business, thus the business can only purchase inventory by cash from now on, which
worsens the business’s liquidity. Even worse, the supplier may completely end the collaboration with
the business, which means now the business has to spend extra time and money to find a new supplier
and increases the expense for business. Moreover, if the news is spread, the business will have a
negative reputation as being dishonest. This means fewer customers since the business is not viewed
as trustworthy, which decreases the potential revenue from the sales. In addition, there will be fewer
employees as well since many employees tend to work for a more reputable business. As a result, the
business has to spend extra costs on hiring new employees, which leads to an increase in expenses.
Together, the loss of customers and employees results in a decrease in the business’s profitability.

In this scenario, it is better to be upfront and direct than to gain a financial benefit as it would be
unethical to keep something that does not belong to the business. This will ensure a good relationship
with the supplier and a positive reputation is maintained, and the business may even be rewarded for
their honesty.