please read issue describe in picture and answer the following question: Logitechunderstated potential warranty expenses by assuming customers would submit defective product claims within one quarter even though warranties extended for many years.Suppose instincttells you the assumption is reasonable and ethical because problems with electronic devices occur soon after purchase or not at all.What evidence might you compile to challengeyour instinct and satisfy auditors?

PART TWO Financial Tools FOCUS ON ETHICS in practice Earnings Shenanigans Near the end of each quarter, many publicly traded companies unveil per- on a new product in 2011 and, more wisdom to keep in mind when looking formance numbers in a Wall Street generally, understating likely expenses at financials: (i) weak accounting prac- ritual known as "earnings season." on product warranties in 2012/2013- tices typically signify bigger problems, Interest is high as media outlets race all just to meet earnings expectations. (ii) unintelligible information usually to report the announcements, analysts In October 2010, Logitech indicates shifty management, and pore over the figures, and investors launched "Revue"-a device for (iii) earnings often fall short of rosy streaming online media on a televi- trade on the implications. The most sion. Demand fell far short of expecta- forecasts because firms seldom oper- anticipated metric is normally earn- ate in predictable environments. The ings per share (EPS), which for each tions, resulting in well over 100,000 Sage of Omaha closed the newsletter firm is compared to the consensus unsold units by fourth quarter 2011. on a prophetic note: "Managers that forecast of market analysts. Firms Generally Accepted Accounting Prin- always promise to 'make the numbers' beating the forecast tend to enjoy onorciples (GAAP) require valuing such will at some point be tempted to inventory at market value if the firm jumps in share prices while those fall- make up the numbers." foresees slashing the sales price below ing short, by even a small amount, cost. Yet Logitech failed to fully mark Logitech understated potential tend to suffer price declines. down unsold Revues, thereby seri- Pressure to meet or beat market warranty expenses by assuming ously overstating 2011 operating customers would submit defective- expectations can push executives to income. On a broader scale, Logitech product claims within one quarter- unethical, and sometimes illegal, acts of also artificially boosted income in even though warranties extended for financial misrepresentation. In April 2012 and 2013 by understating the many years. Suppose instinct tells 2016, Logitech International S.A., a number of its products covered by you the assumption is reasonable leading producer of peripherals for warranties as well as the size of likely and ethical because problems with computers (like its famous mouse) and claims on defective devices. electronic devices occur soon after other electronics, agreed to a $7.5 mil- In his 2002 letter to shareholders, purchase or not at all. What evidence lion penalty to settle with the U.S. Secu- Berkshire Hathaway President, CEO, might you compile to challenge your rities and Exchange Commission (SEC) and Board Chairman Warren Buffett instincts and satisfy auditors? for fraudulently underreporting losses shared three enduring nuggets of 10179 "SEC Announced Financial Fraud Cases," U.S. Securities and Exchange Press Release 2016-74 (April 19, 2016). Two executives also lost their jobs and agreed to pay five-figure fines. Link: https://www.sec.govews/pressrelease/2016-74.html