Discussion
(Ethical Issues-Compensation Plan) The executive officers of Rouse Corporation have a performance-based compensation plan. The performance criteria of this plan is linked to growth in earnings per share. When annual EPS growth is 12%, the Rouse executives earn 100% of the shares; if growth is 16%, they earn 125%. If EPS growth is lower than 8%, the executives receive no additional compensation.
In 2014, Joan Devers, the controller of Rouse, reviews year-end estimates of bad debt expense and warranty expense. She calculates the EPS growth at 15%. Kurt Adkins, a member of the executive group, remarks over lunch one day that the estimate of bad debt expense might be decreased, increasing EPS growth to 16.1%. Devers is not sure she should do this because she believes that the current estimate of bad debts is sound. On the other hand, she recognizes that a great deal of subjectivity is involved in the computation.
Answer the following questions (# your responses):
1. What, if any, is the ethical dilemma for Devers?
2. Should Devers's knowledge of the compensation plan be a factor that influences her estimate?
3. How should Devers respond to Adkins's request?
Read and reply to one student's response. This is an automatic assigned peer review. Your reply should be a based on your analysis of the student's response (min. 100 words). You may comment on why you agree or disagree with the response, what sort of evidence supports or refutes their position, or you may ask questions related to their response.