Ca16 2 Ethical Issues Compensation Plan The Executive Office

Ca16 2 Ethical Issuescompensation Plan The Executive Officers Of Ro

The executive officers of Rouse Corporation have a performance-based compensation plan linked to growth in earnings per share (EPS). When annual EPS growth reaches 12%, the executives earn 100% of their shares; if growth is 16%, they earn 125%. If EPS growth is below 8%, they receive no additional compensation. In 2014, Joan Devers, the controller of Rouse, reviews year-end estimates of bad debt expense and warranty expense. She calculates the EPS growth at 15%. Kurt Adkins, an executive, suggests lowering the bad debt estimate to increase EPS growth to 16.1%, which would boost their compensation. Devers questions whether she should adjust the estimate since she believes current bad debt estimates are sound but recognizes the subjectivity involved.

Paper For Above instruction

The ethical considerations surrounding financial reporting and managerial decision-making are of paramount importance in corporate governance. In the scenario involving Joan Devers at Rouse Corporation, there exists a clear ethical dilemma rooted in the potential for manipulating financial estimates to influence executive compensation. This situation highlights critical issues of honesty, integrity, and the broader responsibility to provide accurate financial information to stakeholders, including shareholders, regulators, and the public.

Ethical Dilemma Facing Devers

The primary ethical dilemma for Devers revolves around whether she should adjust her estimates of bad debt expense to artificially inflate the company's EPS growth, thereby increasing executive bonuses. The choice intersects with her duty to report financial results truthfully versus the pressure to support executive incentives. Artificially decreasing bad debt expenses would, in effect, overstated earnings, violating principles of transparency and honesty mandated by accounting standards and corporate ethical guidelines. Conversely, succumbing to such pressure could be viewed as a breach of ethical standards, undermining her professional integrity and possibly exposing her and the company to legal repercussions for financial misrepresentation.

Influence of Compensation Plan Knowledge on Estimates

Devers’s awareness of the compensation plan should not influence her estimates. Financial reporting standards emphasize that estimates must be based on objective, reasonable judgments that reflect economic realities and are free from bias aimed at personal or corporate benefit. Manipulating estimates to meet specific performance thresholds could distort financial statements, undermine stakeholder trust, and lead to improper incentives. According to the American Institute of Certified Public Accountants (AICPA), professional judgment must be exercised with independence and integrity, regardless of compensation structures or other incentives (AICPA, 2020). Therefore, her responsibility is to ensure estimates are fair and accurate, not influenced by subjective motives tied to compensation.

How Should Devers Respond to Adkins’s Request?

Devers should firmly adhere to ethical standards and professional judgment. Her response should be to explain that estimates of bad debt expense are inherently subjective but grounded in sound accounting principles and historical data. She should reaffirm her obligation to report accurate financial information and resist any pressure to alter estimates for personal or corporate gain. If necessary, she could escalate the issue to higher levels of management or the audit committee, emphasizing the importance of transparency and compliance with accounting regulations. Refusing to manipulate figures aligns with ethical principles of honesty, objectivity, and due professional care, which are essential for maintaining public trust and organizational integrity (Securities and Exchange Commission [SEC], 2021).

Broader Implications and Ethical Principles

This case underscores the importance of ethical conduct in accounting, especially when managerial incentives are tied to financial performance. According to the Code of Ethics for Professional Accountants (IFAC, 2018), professionals must act with integrity, objectivity, and professional competence. Manipulating estimates for personal gain can lead to a breakdown of ethical standards, damage reputation, and result in legal sanctions. Conversely, maintaining ethical integrity ensures that financial statements present a true and fair view of the company's financial position, fostering stakeholder confidence and supporting sound corporate governance practices.

Conclusion

Ultimately, Devers faces a significant ethical challenge regarding her role in financial reporting. Her obligation is to provide accurate, unbiased estimates based on sound judgment, not to support incentives that incentivize financial manipulation. Upholding ethical standards not only safeguards her professional integrity but also upholds the trustworthiness of the financial reporting process and contributes to good corporate governance and stakeholder confidence.

References

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• International Federation of Accountants (IFAC). (2018). Code of Ethics for Professional Accountants. IFAC.
• Securities and Exchange Commission (SEC). (2021). Principles of Ethical Conduct for Government Officers and Employees.
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