The executive officers of Rouse Corporation have a performance-based compensation plan. The performance criteria of this plan are 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 2022, Gail 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.

Instructions

Answer the following questions.

a. What, if any, is the ethical dilemma for Devers?

b. Should Devers’ knowledge of the compensation plan be a factor that influences her estimate?

c. How should Devers respond to Adkins’ request?