Accepting an engagement to compile a financial projection for a nonissuer most likely would be inappropriate if the projection were to be distributed to:
A. A bank with which the entity is negotiating for a loan.
B. A labor union with which the entity is negotiating a contract.
C. The principal stockholder, to the exclusion of the other stockholders.
D. All stockholders of record as of the report date.
The correct answer and explanation is:
The correct answer is C. The principal stockholder, to the exclusion of the other stockholders.
A financial projection is typically an estimate of future financial performance based on certain assumptions. When preparing such projections, it is crucial to consider the potential audience and the context in which the projection will be used.
In this case, it would be inappropriate to provide a financial projection exclusively to the principal stockholder because this creates a conflict of interest and an unequal distribution of information. Financial projections are usually used to inform various stakeholders, such as investors, creditors, and other relevant parties, to make informed decisions. By limiting access to only the principal stockholder, the entity could be seen as favoring one group over others, which is problematic from both a legal and ethical standpoint.
If the projection were only given to one stockholder, it could potentially influence decisions that affect all shareholders, creating a scenario where not all investors have access to the same information. In fairness and transparency, such projections should be made available to all stockholders to ensure that everyone has equal opportunity to evaluate the company’s future prospects and make informed decisions. This is particularly important in situations where stockholder decisions could influence the direction of the company, such as when the company is negotiating major contracts or financing options.
On the other hand, distributing projections to a bank (A), a labor union (B), or all stockholders (D) does not present the same concerns. The bank is typically interested in understanding the financial health of the business when negotiating loans, the labor union is evaluating the financial position of the company during contract negotiations, and all stockholders have a right to access such information to make informed decisions regarding their investments.