1. Identify legitimate business practices that corporate executives can use for the primary purpose of manipulating or “managing” their company’s reported operating results. Are such practices ethical? Defend your answer.
Some examples of legitimate business practices that executives can use to manage their company’s reported operating results include: offering customers extended payment terms at the end of the a period to accelerate sales, recording generous reserves in a good quarter to make it easier to meet earnings goals is a later quarter, accelerating or postponing discretionary expenses such as maintenance, advertising research and development and employee training, and pulling sales from a future period into the current period by offering price concessions or more favorable credit terms or it can be deferred by delaying delivery of goods at the end of the period. GAAP allows for earning management when the goal is to maximize generally accepted accounting practices for the benefit of the organization, but not when its purpose is to manipulate earnings in an attempt to commit fraud. If the purpose of the earning management is to benefit the organization and the stakeholders and it is done correctly without false intentions, I do not feel that it is unethical. However, in most cases earning management is really just a manipulation of the results in an attempt to make the company look better than it really is and basically to deceive the stakeholders. In this case, I strongly feel that it is unethical because it is done in an attempt to commit fraud.
2. Suppose that a company uses one or more of the practices that you identified in responding to the previous question. What implications, if any, do those practices have for the company’s independent auditors?
Manipulating earnings can be detrimental to a company and the auditors. Some implications that can occur for the auditor’s include: higher risk clients and...