Complete Modules 1-5
Requirement 1-1: What ideas do you think the management team might suggest to generate additional operating income in the months of November and December? Specifically, think about business actions they could take, or financial reporting choices they could make, to generate additional operating income.3 Consider management’s likely actions and choices under three different scenarios: (a) Management always behaves ethically, and would never take actions or make financial reporting choices that violate U.S. GAAP. (b) Management is willing to bend (but not break) U.S. GAAP. Actions that bend (but do not break) U.S. GAAP ‘‘are often viewed as aggressive if the tactics push the envelope and stretch the flexibility of GAAP beyond its intended limits … [however] without objective evidence, it’s difficult to distinguish between legitimate choices made within GAAP and earnings management’’ (Ortega and Grant 2003, 52). (c) Management is willing to act unethically, and would consider violating U.S. GAAP
Requirement 2-1: In your own words, describe ‘‘earnings management’’ and the difference between ‘‘real’’ and ‘‘accrual’’ earnings management. If earnings management benefits management through increased bonuses, then does it harm any other stakeholders? If so, how? Requirement 2-2: For each idea the management team proposed to increase earnings, identify whether it is a real earnings management technique or an accrual earnings management technique. Requirement 2-3: Which idea(s) do you believe comply with U.S. GAAP? Requirement 2-4: Describe how action taken for each idea will result in an increase to U.S. GAAP operating income in the current period. Requirement 2-5: Discuss the impact of each idea on TED’s future operational and financial performance (i.e., in the next fiscal year and beyond). Requirement 2-6: Evaluate each idea using the following scale:6 1 ¼ Ethical practice. 2 ¼ Questionable practice. I would not say anything to management, but it makes me uncomfortable. 3 ¼ Minor infraction. Management should not engage in the practice again if the idea is implemented. 4 ¼ Serious infraction. Management should be severely punished if the idea is implemented. 5 ¼ Totally unethical. Management should be fired if the idea is implemented. Requirement 2-7: Instead of the current 2016 results, assume that TED-Europe’s financial performance far exceeded management’s stretch goal. In this case, would it be ethical to utilize earnings management techniques to reduce operating income (e.g., reschedule the routine maintenance on non-production machinery that is traditionally performed in January to December of the current year)? Explain. What impact would this type of earnings management have on future financial performance? Why might management be incentivized to engage in incomedecreasing earnings management? Requirement 2-8: Should management’s bonuses drive their business decision-making? Their financial reporting choices?