Title: Ethical Issues Related to Earnings Management: An Instructional Case
Abstract: CASE OVER VIEWBernie Madoff, in describing how a client's secretary became involved in an embezzlement scheme, said Well, you know what happens is, starts out with taking a little bit, maybe a few hundred, a few thousand. You get comfortable with that, and before you know it, snowballs into something big. (Gino, Ordonez, and Welsh 2014). C. S. Lewis may have said best with Indeed the safest road to Hell is the gradual one - the gentle slope, soft underfoot, without sudden turning, without milestones, without signposts (Thinkexist.com). Welsh, Ordonez, Snyder, and Christian (2015) find that unethical behavior tends to grow over time in conjunction with the increase in magnitude of the unethical act. For accountants, earnings management may represent the slipperiest slope of accounting ethics.There are numerous instances where accountants are forced to make reporting decisions where there is no bright line right or wrong decision. Both Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards require accountants and auditors to use their judgment in making the appropriate financial reporting decision. Many accounting professionals would contend that a significant amount of earnings management, while not fraud, is unethical. While the reported financial results may fall into the category of acceptable principles and standards under both GAAP and IFRS, they result in a misleading picture of the firm's financial status. These actions may be taken to increase management compensation or mislead the firm's stakeholders. Consider the idea that accountants and auditors should hold themselves to a higher standard than it is acceptable within GAAP (IFRS) and ask whether the reported financial disclosures fairly portray the financial activities and status of the firmThis is a fictional case that focuses on management's concerns about meeting analysts' annual earnings forecasts. Rich Dailey is the President and Chief Executive Officer (CEO), and Joe Jones is the Chief Financial Officer (CFO) of Devon, Inc. This case begins by asking you to investigate and understand the differences between accrual and real earnings management. Throughout the discussion, you are asked to consider the ethical issues involved in accrual and real earnings management using tools designed to help you recognize and prevent ethical lapses in organizational decision-making.At the end of the case, you are asked to answer nine questions about the case from both an accounting and business ethics perspective. Note that several articles are recommended in the accompanying reference list, and reading and including them in your answers is part of the assignment. Note, while we provide the COVER (Mitchell and Yordy, 2010) ethical decision making model, this model is only one of many similar frameworks for this purpose. While we provide guidance to work through this specific decision, other approaches are available that help guide you through a variety of ethical dilemmas.The Case ScenarioJoe, I need to talk to you right now about our earnings projections for this quarter, said Rich Dailey, President and CEO of Devon, Inc., a publicly-held pharmaceutical company whose shares are traded on the New York Stock Exchange at $50.30 per share at the current time. Analysts' forecasts of earnings per share are $3.00, $3.35, $3.75, and $4.20 for each of the next four years. Analysts note that a significant portion of the growth is attributable to Devon, Inc.'s reinvestment of its earnings into the firm's advertising, and research and development departments. Devon, Inc. has a proud history of turning research and development projects into marketable and profitable products.Rich was speaking to Joe Jones, the CFO of the firm. What do you have in mind, Rich? asked Joe.I have just reviewed our internal projections for next year's earnings per share. Based on our analysis, appears that we will fall a penny short in next year's earnings per share. …
Publication Year: 2016
Publication Date: 2016-04-01
Language: en
Type: article
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Cited By Count: 2
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