Loan Agreement to Maintain Their Position as the Creditor Enhance

Question: What To Do If In Sharons Situation? Answer: Banks by practice include loan covenants in the loan agreement to maintain their position as the creditor and enhance the probability that the loan will be repaid by the borrower in full and on time(Wells, 2011). The covenant is a promise the borrower commits to assure the bank that the loan will be repaid. The type of loan covenant that Brady Industrial Products took out form the bank is affirmative loan covenant that is used to ensure that the business participates in activities that ensure the health and well-being of the business. Some of these activities may include paying all taxes involved in the business including employee-related taxes, maintain existing financial records and reports, and uphold insurance policies of the business(Chandler, 2014). Another promise may be to maintain its current legal standing(Carroll Buchholtz, 2014). The issue Brady Industrial Products is facing is serious because the bank could call its loan, stop any further lending to the business, and even seize any assets the company had posted as collateral, or even start legal proceedings to recover its money. The ethical issues involved in the case study including reporting a transaction in an inaccurate manner or fraudulent financial reporting, and disclosure. By recording the loan as a current receivable instead of the non-current receivable status it has qualifies the action as fraudulent financial reporting(Ferrell, Fraedrich, Ferrell, 2011). This is so because the figure is recorded in a manner that does not conform to the generally accepted accounting principles. Also, the failure to disclose the correct information to the creditor and investors alike and hence prevent them from making informed decisions qualifies as fraudulent financial reporting(Ferrell, Fraedrich, Ferrell, 2008). It is not ethical to keep the correct current ratio from the bank. Sharon, in this case should consider the moral and social implications of her actions should she decide to follow OSheas proposal, especially in terms of how the decision will affect other stakeholders in the business whether directly or indirectly(Ferrell, Fraedrich, Ferrell, 2011). Actions Available to Sharon When a loan covenant is not met, the firms financial statements will be affected negatively. The violation also mandates the bank to call the loan and demand a full payment. This provision is behind the 100% classification of the debt as current liabilities, a move that may portray a weaker financial position to creditors and investors(Carroll Buchholtz, 2014). Knowing the potential threat facing the organization, Sharon should negotiate with the bank and acquire a waiver from the bank for the particular violation of the loan covenant(Chandler, 2014). An audit in mid-September will indicate that a quarterly ratio may also not be met hence; the debt will need to be classified as current due to the possibility that the bank may recall the loan within that year. Consequently, negotiating with the bank to revise the loan agreement and adjust the required ratios to realistic figures that can be met by the company is the best option Sharon can take. Sharon could also consider Tims first suggestion of selling inventory and putting pressure on some individuals to pay up what they owe the company. The sole aim of this exercise is to raise the current assets considerably as a show of commitment towards repaying the loan even as she seeks a revision of the loan agreement and waiver from the bank for the violation of the loan covenant What To Do If In Sharons Situation Sharon realizes that there is not enough time left to raise the ratio of current assets to current liabilities to the figure that Brady Industrial Products had committed to. Hence, if I were Sharon I would contact the bank at once after the discovery of the violation. Waiting or using other means and failure to communicate with the bank on time has the potential to arouse suspicion about the dealings of the firm, a situation that gravely compounds the problem(Wells, 2011). Before approaching the bank, however, it is necessary to draft a plan that demonstrates how the company intends to correct the problem. This initiative will serve to assure the bank that the company remains committed to honoring its side of the agreement(Velesquez, 2007). The recovery plan that I would draft will include realistic financial projections related to the business strategy that I propose. The report will also detail how the loan covenant was not met and how the company intends to get back into complianc e. References Carroll, A. B., Buchholtz, A. K. (2014). Business and Society: Ethics, Sustainability, and Stakeholder Management. Boston, MA: Cengage Learning. Chandler, R. C. (2014). Business and corporate Integrity: Sustaining organizational compliance, ethics, and trust. Oxford: Praeger, ABC-CLIO. Ferrell, O. C., Fraedrich, J., Ferrell, L. (2008). Business and Ethics: Ethical Decision Making and Cases. Boston: Houghton Mifflin. Ferrell, O., Fraedrich, J., Ferrell, L. (2011). Business ethics: Ethical decison making and cases. Mason, OH: Cengage Learning. Velesquez, M. G. (2007). Business ethics, concept and cases. New Delhi: Pearson Education. Wells, M. J. (2011). Framework-based Approach to Teaching Principle-based Accounting Standards. Accounting Education, 20(4), 303-316.