In recent years, many firms have been forced to restate the earnings previously reported in public financial reports. A number of these restatements have been linked to attempts by top management to manipulate the reported accounting information for the purpose of achieving higher compensation. For example, some firms accelerated the recognition of revenue (in a manner not consistent with GAAP) so that the profit on sales could be reported in an earlier, rather than a more appropriate later, period. These reporting anomalies often required manual intervention in the firm’s normal reporting policies.
a. Discuss which elements in the management control system might cause the manipulative behavior described.
b. Is the described behavior ethical? Discuss.