Classical Notes Inc. manufactures and sells classical sheet music. Over the last several years, interest in classical music has decreased and, as a result, Classical Notes has reported annual losses over this period. However, recent scientific evidence that classical music stimulates brain development has sparked renewed interest in classical music, resulting in the company reporting an operating profit of $80,000 in the most recent year. This is the first operating profit reported by the company in 5 years. At the end of the current fiscal year, Classical Notes has recognized $4,000,000 of deferred tax assets, net of a $1,000,000 valuation allowance, which primarily consists of operating loss carryforwards that will expire evenly over the next 10 years.

As the recently hired accountant for Classical Notes, you are in charge of preparing the income tax accrual for the current year. You are particularly concerned with the amount of the valuation allowance (which was decreased from $1.9 million to $1 million in the current year) and have requesteda meeting with the CEO concerning this matter. During the meeting, you inform the CEO that you think the valuation allowance is too small and should be increased by at least $500,000. You have based your conclusions on the fact that the company has reported historical operating losses in 4 of the last 5 years. Furthermore, the current operating profit was due largely to a one-time surge in demand for classical music, and all economic analyses expect this demand to level off within the next year. Therefore, you do not think the company will have sufficient future taxable income to use the operating loss carryforwards.

The CEO is extremely upset at your recommendation. She informs you that the company's fortunes have finally turned around, and the demand for classical music will continue to grow despite what the experts say. Furthermore, if the valuation allowance is increased, it would cause the company to report a net loss for the year and send the wrong signal to the market. After a heated exchange, the CEO tells you that the amount of the valuation allowance is a judgment call, and as the experienced leader of the company, it is her judgment that the valuation allowance is appropriate. She then instructs you to drop the matter and leave the major decisions to her.

Question: What is your response?