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Chapter 2: Case 2-1 "The CEO Retires". Addres...

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Chapter 2: Case 2-1 "The CEO Retires". Address the "Required" questions in your main response with a minimum of one external reference (not including your textbook).,CASES CASE 2-1 THE CEO RETIRES Teaching Note: The CEO Retires (Teaching note prepared by the American Accounting Association) PURPOSE: This case is meant to illustrate that the accounting choices available can be used by management to manipulate the reported financial results of the company. CONTENT: The CEO of a company is entering the last year of his employment. For reasons of enhanced reputation, maximum compensation in his final year, and maximum compensation through the years via his pension, he has the incentive to manipulate the financial results of the company. Since this is his last year with the company, any long-term effects of the decisions he may make are not considered relevant. Furthermore, there are numerous directions the CEO can take: changing accounting estimates, deferring investing decisions, or changing accounting methods. After consideration of a variety of alternatives, the CEO meets with the CFO to get his response to the CEO?s proposed options. Decision Model a. Determine the Facts Work through the case, identifying essential facts, especially those included in the contents section above. Known facts should be listed first; then determine what one would want to know if possible. NOTE: Make the point to students that we never have all the facts; decisions are almost always made on incomplete information. b. Define the Ethical Issues (1) List all stakeholders - be sure that the class is thorough in this step -- the ethical issues will most likely arise out of conflicting interests between and among the stakeholders. the CEO, Dan Murphy the CFO, Mike Harrington the other members of top management the members of the Board of Directors the company?s auditors the company?s employees (i.e., if inventory builds, it may lead to later layoffs; a lack of repair work may create dangers in the workplace) the company?s customers (i.e., if inventory builds, it may lead to obsolescence; lack of repair work may lead to product quality problems) (2) List the ethical issues The CEO?s compensation vs. The integrity of the company?s financial statements The CFO?s loyalty to vs. The CFO?s responsibility his superior to his job The CFO?s loyalty to vs. The CFO?s responsibility his superior to protect the interests of the company and its employees Top management?s vs. Each individual?s desire responsibility to for promotion and represent the interests advancement of the shareholders The Board of Directors? vs. Rewarding the CEO for duty to provide over- a job well done sight on the behalf of the shareholders The auditor?s duty to vs. The auditor?s desire to ensure that the remain engaged as the financial statements auditor of the company present fairly the condition of the company (This list can be extended, but you should be sure that these issues are identified) c. Identify Major Principles, Rules, and Values (Here you will repeat some of the above, e.g. integrity, but you will translate others into ethical language, e.g., fairness, obligation, rights) Integrity (of the CEO and of the financial statements) Equity Fairness Credibility Protection of the business d. Specify the Alternatives Identify major options: encourage creative solutions that may be closer to win-win if possible. The CFO could support a favorable plan for the CEO The CFO could object to the proposals and refuse to sign off on them The CFO could object to the proposals and threaten to go to the Board if the CEO persists The CFO could communicate his concerns to the outside auditors Note: At this point, or even earlier, some students will have begun to take a position. The instructor should be aware of these positions and challenge students to be open to questioning their position, as well as to be open to similar questioning by others. You may want to return to this "position taking" in the discussion over Step g, the decision. e. Compare Norms, Principles, and Values with the Various Alternatives See how many of the class members will move to a decision at this point, based on the force or strength of a norm or principle. In some cases, a principle is so strong or the harm so egregious that some will decide now. For example, the concern for integrity of the financial statements may lead to strong resistance by the CFO to the CEO?s proposals. Regardless of whether a decision is reached, work through Steps f and g as if such steps were still required. f. Assess the Consequences Take two or three differing alternatives and examine the long- and short-range consequences. The CFO could support a favorable plan for the CEO The CEO benefits from enhanced retirement benefits (if the outside auditors sign off) The CFO may be rewarded by the CEO with increased salary or bonus The firm, including successor leaders and employees, may suffer from reduced earnings in the years following the CEO?s retirement The CFO may have problems with successor leaders if his agreement to the CEO?s plan is discovered The CFO?s integrity will be compromised The CFO could object to the proposals and refuse to sign off on them The CEO may drop his plans to enhance his retirement The CEO may threaten to penalize the CFO?s job security or income The CEO may take his plan to the Board without concurrence of the CFO The CFO?s integrity will be intact The CFO could object to the proposals and threaten to go to the Board if the CEO persists The CEO may drop his plans to enhance his retirement The CEO may threaten to penalize the CFO?s job security or income The CFO may stand fast or may capitulate and agree The CEO may persist and the CFO may go to the Board The Board may reject the CEO?s plans The Board may agree with the CEO The Board may seek the advice of the outside auditors The CFO?s integrity is intact The CFO could communicate his concerns to the outside auditors The outside auditors may agree with the CFO and indicate that they will refuse to issue an unqualified report The outside auditors may support the CEO?s plan The CFO will then have to drop the matter or decide whether to go to the Board The CFO?s integrity will be intact (There may be additional consequences to alternatives reviewed. There may also be other alternatives. The task now is to weigh or evaluate the consequences of the various alternatives. Some kind of numerical weighting, like a +3, -3 scale, can be used to determine comparative value of alternatives. Point out to the class the difficulty of assigning numerical values, but also note that we do compare, routinely, the significance of various consequences, although not always quantitatively.) (If a decision was not reached in Step e above, then no principle or value was determinative. Now the consequence with the highest numerical value should be the choice if it squares with one of the basic listed principles and values.) g. Make Your Decision Take a vote; insist that everyone choose. Examine the outcome and rationale for different positions, if there is time. TIME ALLOCATION A full discussion and analysis of the case will take approximately an hour. If you are interested in focusing on the identification of ethical issues at various points in the course, you could deal with the identification of stakeholders and defining of the ethical issues in 15-20 minutes.,why it still uder evaluation

 

Paper#8487 | Written in 18-Jul-2015

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