The Wall Street Journal reported, "For more than ten years, IBM has quietly turned to Merrill Lynch & Co. and others to execute a rare financial maneuver that propped up the results of IBM's big leasing business. The maneuver allowed IBM to book immediately all the revenue from a long-term computer lease-even though the actual dollars would flow in over the life of the lease. That didn't break any rules, but some accountants term it an end-run that many blue-chip companies would avoid. [IBM's external auditors] called the revenue booster troubling . . . and urged IBM to take immediate action to use the maneuver less." Later, the article states, "Questions about IBM's accounting could be awkward for the wounded computer giant [because] IBM long enjoyed a reputation as the epitome of financial conservatism, with triple-A-rated debt and the bluest of bluechip stocks."

REQUIRED:

a. Discuss how using an aggressive method to recognize revenue, like the one just described, might affect IBM's reputation as "the epitome of financial conservatism."

b. Discuss some of the economic consequences associated with the use of such a method, mentioning some of the benefits and costs affecting IBM and its management.

c. The article mentions later that IBM requires all employees to swear that they have read the IBM "Business Conduct Guidelines" manual that warns them against not only reporting information inaccurately but also organizing it in a way that is intended to mislead or misinform. Comment on whether this policy is consistent with the use of the aggressive revenue recognition method mentioned above.