Jones Automotives granted employee stock options on January 2, 2018, to acquire 100,000 shares of common stock. The exercise price was $25 per share and the vesting period is 4 years. The estimated fair value of the options is $20 per share.
In 2018, Jones experienced a turnover rate of 1.25%. In 2017 and 2016. it experienced a turnover rate of 2% and 3%. respectively. Jones is using an expected forfeiture rate of 12% to calculate the expense for employee stock options. The managers believe that 12% is the most accurate estimate given the current economic environmental in the automotive industry as well as the nature of the current pool of employees.
Jones' EPS for 2018 excluding consideration of these employee stock options is $2.75 per share. The current consensus analyst forecast of EPS for Jones Automotive is $2.15. Jones has 750,000 shares outstanding at the end of 2018. You are the auditor for Jones Automotive's. Will you sign off on the company's 2018 financial statements to report its stock option expense as currently reported? Why or why not? If not. what case will you make to management to support your view?