The executive officers of Rouse Corporation have a performance-based compensatio

Question

The executive officers of Rouse Corporation have a performance-based compensation plan. The performance criteria of this plan is linked to growth in earnings per share. When annual EPS growth is 12%, the Rouse executives earn 100% of the shares; if growth is 16%, they earn 125%. If EPS growth is lower than 8%, the executives 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, a member of the executive group, remarks over lunch one day that the estimate of bad debt expense might be decreased, increasing EPS growth to 16.1%. Devers is not sure she should do this because she believes that the current estimate of bad debts is sound. On the other hand, she recognizes that a great deal of subjectivity is involved in the computation.

Instructions.

a-What, if any, is the ethical dilemma for Devers?

b-Should Devers’s knowledge of the compensation plan be a factor that influences her estimate?

c- How should Devers respond to Adkins’s request?

Explanation / Answer

a) The dilemma faced by Devers is that changing the estimates will benefit Adkins and the other executives of the company. The current stockholders’ will be forced into paying the bonuses because of the estimates being changed by Devers.

b) Devers result shouldn’t be based on the existence of the compensation plan. She should act as the accountant and do the right thing.

c) The request that Adkins makes should be rejected by Devers, and she should estimate the Bad Debt Expense at the true and right level.

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