You will assume the role of “ethics consultant.” You are expected to respond all of the discussion issues listed below and write a memo that presents your arguments and conclusions to the ethics committee members of the client firm.
1. Research has shown that managers use their accounting discretion to boost or depress earnings when needed (e.g., they underestimate bad debt expense to increase earnings). Can you identify conflicts of interest and pressures that could lead to such conduct? What stakeholders might be involved outside of management, what are their interests, and how might their interests be affected by earnings management?
2. Do you think that managing earnings within the boundaries of a given accounting standards is illegal? Is it unethical? Is there a difference? What kinds of questions would be helpful for managers to ask themselves when confronting an ethical dilemma such as this?
3. How would IFRS being principle-based rather than rule-based affect financial ratio comparison involving American and EU companies? Do you think that American and European managers would differ in their likelihood of engaging earnings management? Why?
4. How might business strategies that facilitate “doing good” be made consistent with the goal of increasing profitability?
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