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Dan Murphy awoke at 5:45A.M., just like he did every workday morning. No matter that hewent to sleep only four hours ago. The Orange Bowl game had gone late into the evening,and the New Year’s Day party was so good, no one wanted to leave. At least Dan couldawake easily this morning. Some of his guests had lost a little control celebrating the firstday of the new year, and Dan was not a person who ever lost control.The drive to the office was easier than most days. Perhaps there were a great manyparties last night. All the better as it gave Dan time to think. The dawn of a new year, hislast year. Dan would turn 65 next December, and the company had a mandatory retirementpolicy. A good idea he thought, to get new blood in the organization. At least that’s what hethought on the climb up. From just another college graduate within the corporate staff, allthe way to the chief executive officer’s suite. It certainly is a magnificent view from the top.To be CEO of his own company. Well, not really, as it was the stockholders’company,but he had been CEO for the past eight years. Now he, too, must turn the reins over.“Must,”now that’s the operative word. He knew it was the best thing for the company.Turnover kept middle management aggressive, but he also knew that he wouldn’t leave if hehad a choice. So Dan resolved to make his last year the company’s best year ever.It was that thought that kept his attention, yet the focus of consideration and relatedmotivations supporting such a strategy changed as he continued to strategize. At first, Danthought that it would be a fine way to give something back to a company that had givenhim so much. His 43 years with the company had given him challenges that filled his lifewith meaning and satisfaction, provided him with a good living, and made him a manrespected and listened to in the business community. But the thought that the company wasalso forcing him to give all that up made his thoughts turn more inward.Of course, the company had done many things for him, but what of all the sacrifices hehad made? His whole heart and soul were tied to the company. In fact, one could hardlythink of Dan Murphy without thinking of the company, in much the same way as prominentcorporate leaders and their firms are intrinsically linked. But the company would still be herethis time next year, and what of him? Yes, he would leave the company strong, because byleaving it strong, it would strengthen his reputation as a great leader. His legacy would carryand sustain him over the years. But would it? One must also live in a manner consistent withsuch esteem.Being the CEO of a major company also has its creature comforts. Dan was accustomedto a certain style of living. How much will that suffer after the salary, bonuses, and stockoptions are no more?Arriving at the office by 7:30A.M., he left a note for his secretary that he was not to bedisturbed until 9A.M. He pulled out the compensation file and examined the incentiveclauses in his own contract. The contract was created by the compensation committee of theBoard of Directors. All of the committee members were outsiders, that is, not a part of thecompany’s management. This lends the appearance of independence, but most were CEOsof their own companies, and Dan knew that, by and large, CEOs take care of their own. Hissuspicions were confirmed. If the company’s financial results were the best ever this year,then so, too, would be his own personal compensation.Yet what if there were uncontrollable problems? The general economy appeared fairlystable. However, another oil shock, some more bank failures, or a list of other disasterscould turn things into a downward spiral quickly. Economies are easily influenced and con-sumer and corporate psychology can play a large part in determining outcomes. But even inapparently uncontrollable circumstances, Dan knew he could protect himself and the finan-cial fortunes of his company during the short term, which after all, was the only thing thatmattered.Upon further review of his compensation contract, Dan saw that a large portion of hisbonus and stock options was a function of operating income levels, earnings per share, andreturn on assets. So the trick was to maximize those items. If he did, the company wouldappear vibrant and poised for future growth at the time of his forced retirement, hereminded himself. Furthermore, his total compensation in the last year of his employmentwould reach record proportions. Additionally, since his pension is based on the average ofhis last three years’compensation, Dan will continue to reap the benefits of this year’s resultsfor hopefully a long time to come. And who says CEOs don’t think long term?Two remaining issues needed to be addressed. Those were (1) how to ensure a record-breaking year and (2) how to overcome any objections raised in attaining those results.Actually, the former was a relatively simple goal to achieve. Since accounting allows so manyalternatives in the way financial events are measured, Dan could just select a package ofalternatives, which would maximize the company’s earnings and return on assets. Somealternatives may result in changing an accounting method, but since the new auditing stand-ards were issued, his company could still receive an unqualified opinion from his auditors,with only a passing reference to any accounting changes in the auditor’s opinion and itseffects disclosed in the footnotes. As long as the alternative was allowed by generallyaccepted accounting principles, and the justification for the change was reasonable, the audi-tors should not object. If there were objections, Dan could always threaten to change audi-tors. But still the best avenue to pursue would be a change in accounting estimates, sincethose changes did not even need to be explicitly disclosed.So Dan began to mull over what changes in estimates or methods he could employ inorder to maximize his firm’s financial appearance. In the area of accounting estimates, Dancould lower the rate of estimated default on his accounts receivable, thus lowering bad debtexpense. The estimated useful lives of his plant and equipment could be extended, thus low-ering depreciation expense. In arguing that quality improvements have been implemented inthe manufacturing process, the warranty expense on the products sold could also be low-ered. In examining pension expense, he noted that the assumed rate of return on pensionassets was at a modest 6.5%, so if that rate could be increased, the corresponding pensionexpense could be reduced.Other possibilities occurred to Dan. Perhaps items normally expensed, such as repairs,could be capitalized. Those repairs that could not be capitalized could simply be deferred.The company could also defer short-term expenses for the training of staff. Since researchand development costs must now be fully expensed as incurred; a reduction in those expen-ditures would increase net income. Return on assets would be increased by not acquiringany new fixed assets. Production levels for inventory could be increased, thus spreading fixedcosts over a greater number of units and reducing the total average cost per unit. Therefore,gross profit per unit will increase. Inventory levels would be a little bloated, but that shouldbe easily handled by Dan’s successor.The prior examples are subtle changes that could be made. As a last resort, a change inaccounting methods could be employed. This would require explicit footnote disclosure anda comment in the auditor’s report, but if it came to that, it would still be tolerable. Examplesof such changes would be to switch from accelerated to straight-line depreciation or tochange from LIFO to FIFO.How to make changes to the financial results of the company appeared easier than hefirst thought. Now back to the other potential problem of“getting away with it.”At firstthought, Dan considered the degree of resistance by the other members of top management.Mike Harrington, Dan’s chief financial officer, would have to review any accountingchanges that he suggested. Since Dan had brought Mike up the organization with him, Dandidn’t foresee any strong resistance from Mike. As for the others, Dan believed he had twothings going for him. One was their ambition. Dan knew that they all coveted his job, and aclear successor to Dan had yet to be chosen. Dan would only make a recommendation to thepromotion committee of the Board of Directors, but everyone knew his recommendationcarried a great deal of weight. Therefore, resistance to any accounting changes by any indi-vidual would surely end his or her hope to succeed him as CEO. Secondly, although not aslucrative as Dan’s, their bonus package is tied to the exact same accounting numbers. So anyactions taken by Dan to increase his compensation will also increase theirs.Dan was actually beginning to enjoy this situation, even considering it one of his finalchallenges. Dan realized that any changes he implemented would have the tendency toreverse themselves over time. That would undoubtedly hurt the company’s performancedown the road, but all of his potential successors were in their mid-to-late 50s, so therewould be plenty of time for them to turn things around in the years ahead. Besides, anynear-term reversals would merely enhance his reputation as an excellent corporate leader, asproblems would arise after his departure.At that moment, his secretary called to inform him that Mike Harrington wanted to seehim. Mike was just the man Dan wanted to see.
Please write report Please identify 3 Accounting Principles or Concepts that were not followed, and for which the CEO violated (the traditional accounting principles and concepts are found on pages 10 to 18 of chapter 1).
Your report should be written in this order:
1. Identify and define the ethical issues (10%)
2. Identify the 3 traditional accounting principles/concepts that were not followed (60%)
3. What are some of the consequences of not following the traditional accounting principles and concepts (how will external users be harmed?) (30%)
Please used the Time New Roman font, 12 font size, and double lined. Please, no plagiarism, and check for proper grammar before submission.
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