Recently, the top management group of Silverado, which holds 40 percent of the outstanding shares of common stock, has learned that a major corporation is interested in acquiring Silverado. Silverado’s management is concerned that this corporation may make an attractive offer to the other shareholders and that management would be unable to prevent the takeover. If the acquisition occurs, this executive group is uncertain about continued employment in the new corporate structure. As a consequence, the management group is considering changes to several accounting policies and practices that, although not in accordance with generally accepted accounting principles, would make the company a less attractive acquisition. Management has told Kala Smith, Silverado’s controller, to implement some of these changes. Kala has also been informed that Silverado’s management does not intend to disclose these changes at once to anyone outside the immediate top management group.

1. Evaluate the changes that Silverado’s management is considering

2. What specific steps should Kala take to resolve the situation?

1. What should John do?

2. Describe how you would deal with his ethical dilemma (consider using the IMA code of ethics in your response).

If I can increase my reported profit by $2 million, the actual earnings per share will exceed analysts’ expectations, and stock prices will increase. The stock options that I am holding will become more valuable. The extra income will also make me eligible to receive a significant bonus. With a son headed to college, it would be good if I could cash in some of these options to help pay his expenses. However, my vice president of finance indicates that such an increase is unlikely. The projected profit for the fourth quarter will just about meet the expected earnings per share. There may be ways, though, that I can achieve the desired outcome. First, I can instruct all divisional managers that their preventive maintenance budgets are reduced by 25 percent for the fourth quarter. That should reduce maintenance expenses by approximately $1 million. Second, I can increase the estimated life of the existing equipment, producing a reduction of depreciation by another $500,000. Third, I can reduce the salary increases for those being promoted by 50 percent. And that should easily put us over the needed increase of $2 million.

1. Comment on the ethical content of the earnings management being considered by the manager.

2. Is there an ethical dilemma?

3. What is the right choice for the manager to make?

4. Is there any way to redesign the accounting reporting system to discourage the type of behavior the manager is contemplating?

The team has been meeting weekly for the last month. Gus insists on being part of all the team conversations in order to gather information, to make the final decision on any ideas or actions that the team develops, and to prepare a weekly report for Samson. He has also used this team as a forum to discuss issues and disputes about him and other members of Emery’s top management team. At last week’s meeting, Gus told the team that he thought a competitor might purchase the common stock of Emery, because he had overheard Samson talking about this on the telephone. As a result, most of Emery’s employees now informally discuss the sale of Emery’s common stock and how it will affect their jobs.

1. Is Gus Swanson’s discussion with the team about the prospective sale of Emery unethical?

2. What parts of the IMA code of ethical conduct support your position?