After a decade of consistent income growth, the Cranor Corporation sustained a before-tax loss of $8.4 million in 2011. The loss was primarily due to $10 million in expenses related to a product recall. Cranor manufactures medical equipment, including x-ray machines. The recall was attributable to a design flaw in the manufacturer of the company’s new line of machines.
The company controller, Jim Deitz, has suggested that the loss be included in the 2011 income statement as an extraordinary item. “If we report it as an extraordinary, our income from continuing operations will actually show an increase from the prior year. The stock market will appreciate the continued growth in ongoing profitability and will discount the one-time loss. And our bonuses are tied to income from continuing operations, not net income.”
The chief executive officer asked Jim to justify this treatment. “I know we have had product recalls before and, of course, they do occur in our industry, “Jim replied, “but we have never had a recall of this magnitude, and we fixed the design flaw and upgraded our quality control procedures.”
Discuss:
Discuss the ethical dilemma faced by Jim Deitz and the company’s chief executive officer.