Never Flake Company, which operated in the northeastern part of the United States, provided a rust-prevention coating for the underside of new automobiles. The company advertised widely and offered its services through new car dealers. When a dealer sold a new car, the salesperson attempted to sell the rust-prevention coating as an option. The protective coating was supposed to make cars last longer in the severe northeastern winters. A key selling point was Never Flake’s warranty, which stated that it would repair any damage due to rust at no charge for as long as the buyer owned the car.

For several years, Never Flake had been very successful in generating enough cash to continue operations. But in 2005, the company suddenly declared bankruptcy. Company officials said that the firm had only $5.5 million in assets against liabilities of $32.9 million. Most of the liabilities represented potential claims under the company’s lifetime warranty. It seemed that owners were keeping their cars longer now than previously. Therefore, more damage was being attributed to rust. Discuss what accounting decisions could have helped Never Flake to survive under these circumstances.

Earnings Management and Fraudulent Financial Reporting