Davis did not commit to recording the accruals because he wanted more time to think about the situation. Fortunately, Hodgins was called away on an urgent matter, bringing the meeting to an abrupt halt. Davis decided to speak to Gloria Olson, a fellow internal accountant who graduated with Davis from college. Olson also found the amount of accruals unusually high. Davis asked Olson what the projected operating income was for December 31, 2014 based on her recent calculations. Olson told him that it was determined to be $160 million. They briefly talked about the projected decline in operating income after five straight years of increases. Davis wondered whether the reason for this could be attributable to the shutdown of the division mentioned by Hodgins.
Questions Assume that Davis, Hodgins, Benson, Vines, and Olson are all CPAs and hold the certificate in management accounting (CMA).
1. Review the definitions of earnings management by Schipper, Healy and Wahlen, Dechow and Skinner, and McKee that are discussed. How would you characterize the proposed accrual for unpaid bonuses and severance payments from an earnings management perspective?
2. Place yourself in Ben Davis's shoes and consider the following in deciding whether to support Hodgins's position on the accrual: a. Who are the stakeholders in this case? b. What are the accounting issues of concern to you? c. What are ethical issues of concern to you with respect to your ethical and professional obligations and stakeholder interests?
3. Assume you meet with Hodgins and he instructs you in no uncertain terms to record the accrual. What would you do and why? Would whistleblowing be a consideration for you? Why or why not?