978-1133188797 Solution Manual Gibson_Ch02_SM_13e Part 2

subject Type Homework Help
subject Pages 9
subject Words 2606
subject Authors Charles H. Gibson

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35
CASES
CASE 2-1 THE CEO RETIRES
Teaching Note: The CEO Retires (Teaching note prepared by the American
Accounting Association)
PURPOSE: This case is meant to illustrate that the accounting choices available can be
used by management to manipulate the reported financial results of the company.
CONTENT: The CEO of a company is entering the last year of his employment. For
reasons of enhanced reputation, maximum compensation in his final year, and
maximum compensation through the years via his pension, he has the incentive to
manipulate the financial results of the company. Since this is his last year with the
company, any long-term effects of the decisions he may make are not considered
relevant. Furthermore, there are numerous directions the CEO can take: changing
accounting estimates, deferring investing decisions, or changing accounting methods.
After consideration of a variety of alternatives, the CEO meets with the CFO to get his
response to the CEO’s proposed options.
Decision Model
a. Determine the Facts
Work through the case, identifying essential facts, especially those included in the
contents section above.
Known facts should be listed first; then determine what one would want to know if
possible. NOTE: Make the point to students that we never have all the facts; decisions
are almost always made on incomplete information.
b. Define the Ethical Issues
(1) List all stakeholders - be sure that the class is thorough in this step -- the
ethical issues will most likely arise out of conflicting interests between and
among the stakeholders.
the CEO, Dan Murphy
the CFO, Mike Harrington
the other members of top management
the members of the Board of Directors
the company’s auditors
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the company’s employees (i.e., if inventory builds, it may lead to later layoffs;
a lack of repair work may create dangers in the workplace)
the company’s customers (i.e., if inventory builds, it may lead to
(2) List the ethical issues
The CEO’s compensation
vs.
The integrity of the company’s
financial statements
The CFO’s loyalty to his superior
vs.
The CFO’s responsibility to his
job
The CFO’s loyalty to his superior
vs.
The CFO’s responsibility to
protect the interests of the
company and its employees
Top management’s responsibility
to represent the interests of the
shareholders
vs.
Each individual’s desire for
promotion and advancement
The Board of Director’s duty to
provide oversight on the behalf of
the shareholders
vs.
Rewarding the CEO for a job
well done
The auditor’s duty to ensure that
the financial statements present
fairly the condition of the
company
vs.
The auditor’s desire to remain
engaged a the auditor of the
company
c. Identify Major Principles, Rules, and Values
(Here you will repeat some of the above, e.g. integrity, but you will translate others
into ethical language, e.g., fairness, obligation, rights)
Equity
Fairness
Credibility
Protection of the business
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d. Specify the Alternatives
possible.
The CFO could object to the proposals and refuse to sign off on them
CEO persists
The CFO could communicate his concerns to the outside auditors
Note: At this point, or even earlier, some students will have begun to take a position.
e. Compare Norms, Principles, and Values with the Various Alternatives
See how many of the class members will move to a decision at this point, based on
the force or strength of a norm or principle. In some cases, a principle is so strong
For example, the concern for integrity of the financial statements may lead to
steps were still required.
f. Assess the Consequences
consequences.
The CFO could support a favorable plan for the CEO
auditors sign off)
The firm, including successor leaders and employees, may suffer from
reduced earnings in the years following the CEO’s retirement.
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the CEO’s plan is discovered.
The CFO’s integrity will be compromised.
The CEO may threaten to penalize the CFO’s job security or income.
The CFO’s integrity will be intact.
The CFO could object to the proposals and threaten to go to the Board if the CEO
persists
The Board may agree with the CEO.
The CFO’s integrity is intact.
The CFO could communicate his concerns to the outside auditors.
to issue an unqualified report.
The outside auditors may support the CEO’s plan.
The CFO will then have to drop the matter or decide whether to go to the
Board.
The CFO’s integrity will be intact.
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quantitatively.)
(If a decision was not reached in Step (e) above, then no principle or value was
determinative. Now the consequence with the highest numerical value should be
g. Make Your Decision
Take a vote; insist that everyone choose.
TIME ALLOCATION
A full discussion and analysis of the case will take approximately an hour. If you are
issues in 15-20 minutes.
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CASE 2-2 THE DANGEROUS MORALITY OF MANAGING EARNINGS
b. "It seems many managers are convinced that if a practice is not explicitly
unethical practice."
d. 1. On average, the respondents viewed management of short-term earnings by
accounting methods as significantly less acceptable than accomplishing the
less acceptable than reducing earnings.
3. Materiality matters. Short-term earnings management is judged less
5. The method of managing earnings has an effect.
e. Management does not have the ability to manage earnings in the long run by
influencing financial accounting.
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CASE 2-3 FIRM COMMITMENT?
a. Yes. SFAC No. 6, "Elements of Financial Statements:" "Liabilities are probable
b. The airlines had millions and millions of miles accumulated in unused miles.
Thousands of these accounts are inactive and will never accumulate adequate
c. 1. A contingent liability is dependent upon the occurrence or non-occurrence of
one or more future events to confirm the liability.
2. Yes. In practical terms, the unused miles represent a contingent liability. The
3. Recommend that the contingent liability be recorded and the accounting policy
be disclosed.
Most airlines use the incremental method to account for their frequent flier
awards. Once a program member accumulates the required number of miles
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CASE 2-4 MULTIPLE COUNTRY ENFORCEMENT
in more than one country.)
a. The Netherlands company sold securities in the United States.
Netherlands company selling securities in the Netherlands.
CASE 2-5 MATERIALITY: IN PRACTICE
auditors to give careful consideration to planning materiality decisions.
c. It is difficult to design procedures to detect misstatements that could be
quantitatively material. Although difficult to design these procedures, a number of
court cases involving financial statements.
e. It is difficult to determine materiality as it relates to control weaknesses. But the
materiality concept must be considered when reviewing for control weaknesses.
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CASE 2-6 MANAGEMENT’S RESPONSIBILITY
b. The accountant (auditor) expresses an opinion on the financial statements based
on the audit. The audit is to be conducted in accordance with generally accepted
auditing standards.
(auditor).
Another factor is that the accountant (auditor) is perceived as having the ability to
pay, either directly, or by way of insurance.
internal control systems.
CASE 2-7 SAFE HARBOR
a. Management is in an ideal position to project financial results. Users of financial
reports will likely be aided in making decisions by the forward-looking statements
of management.
financial statements.
Abusive litigation is probably of little benefit to investors, since the lion’s share of
recoveries under the litigation may go to the attorneys who brought the suit than to
the investors.
CASE 2-8 ENFORCEMENT
under the Sarbanes-Oxley Act of 2002).
a. “The order bars Mr. Morris from association with a registered accounting firm and
revokes the firm’s registration.” He could possibly work for a non registered
accounting firm. He could also work in industry.
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Goldberger and Postelnik were only censured. There were no restrictions on
where they could work.
Certification is granted by individual states. All three may have subsequent
CASE 2-9 NOTIFY THE SEC
a. Form 8-K.
Note: Comments from the Administrative Proceeding
Legal Background
respond to the company’s disclosure about the director’s resignation, and the company
is required to file any letter written by the director to the company in response to the
company’s disclosure. Absent such a disagreement, the company must report the
resignation, but need not provide the reasons…”
“HP executives understood that, in the event a director resigned over a disagreement
with the company on a matter relating to its operations, policies, or practices, the
company would need to report to the Commission (and thereby disclose to investors)
the circumstances of the disagreement…”
Exchange Act and Rule 13a-11 thereunder.”

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