THE IMPACT OF A BONUS INCENTIVE SCHEME ON THE FINANCIAL STATEMENTS

Lucia works as an accountant for a motor vehicle engine parts manufacturer called Vroom Ltd, owned by an international car firm. Her manager, Freda Chuse, is paid a bonus depending on the profitability of the company. If Vroom Ltd makes $1 million profit, Freda receives a bonus of $20000 that increases progressively to $30000 for a $3 million profit. If the profit of Vroom Ltd exceeds $3 million, Fred, receives the maximum bonus of $30000. Vroom Ltd currently receives a grant from the government of $100000 per year to employ and train apprentice mechanics. At the end of May, it appears that Vroom Ltd will make a profit of approximately $3.5 million for the year ending 30 June 2019. Freda approached Lucia and said that if the company made too much profit then the government may stop paying Vroom Ltd the grant for training apprentice mechanics, and it would lose the $100 000 tax-free cash inflow. Freda instructed Lucia to find ways of deferring recognition of as much revenue as possible until the following financial year, for which the forecasts for the industry were quite poor, and to accrue as many expenses as possible at the end of the current accounting period when it came to making the end-of-period adjustments. Although Lucia was not happy with this instruction, she did not want to risk her own opportunities for promotion by upsetting her manager. Required

(a) Who are the stakeholders in this situation? (b) Why do you believe Freda asked Lucia to do this?

(c) What are the ethical issues involved?

(d) Can Lucia defer revenues and accrue as many expenses as possible and still be ethical?