A publicly traded corporation grants its CEO a bonus of $100,000 for every million dollars by which company annual net income exceeds $60 million, up to a specified maximum bonus. Last year, the company's reported net income was $65 million, so the CEO received a bonus of $500,000.
In performing your duties as an internal auditor, you discovered that company sales were overstated last year by $5 million. Operating expenses were not affected and the company's effective tax rate correctly was reported to be 40% of pretax profits.
When you told the CEO about this misstatement, he shouted in disgust that your proposed restatement of the company's prior-year earnings will "cost him his entire bonus." Is he correct?