This questionnaire includes short descriptions of several earnings management practices. Please indicate your judgment as to the acceptability of these practices using the following scale:

1 - Ethical practice.

2 - Questionable practice. I would not say anything to the manager, but it makes me uncomfortable.

3 - Minor infraction. The manager should be warned not to engage in that practice again.

4 - Serious infraction. The manager should be severely reprimanded.

5 - Totally unethical. The manager should be fired.

(Assume that the division is part of a $1.5 billion (sales) corporation, which has a January-December fiscal year. The division has annual sales of approximately $150 million, with annual before-tax operating profit of approximately $18 million.) For each question (or part of a question) circle the number that best describes your judgment regarding the practice. Answer each question separately. (Assume the incidents are independent.) All individual responses are confidential

1. The divisions buildings were scheduled to be painted in 2008. Since the divisions profit was way ahead of budget in 2007, however, the general manager (GM) decided to have the work done in 2007. Amount $225,000.

2a. (2) The GM ordered all division employees to defer all discretionary expenditures (e.g., travel, advertising, hiring, maintenance) into the next accounting period so that his division could make its budgeted profit targets. Expected amount of the deferral: $225,000. The expense was postponed from February and March until April in order to make the first quarter target.

2b. (3) The GM ordered all division employees to defer all discretionary expenditures (e.g., travel, advertising, hiring, maintenance) into the next accounting period so that his division could make its budgeted profit targets. Expected amount of the deferral: $225,000. The expense was postponed from November and December until January in order to make the annual target.

3. (4) On December 15, a clerk in the division placed an order for $4,500 worth of office supplies, and the supplies were delivered on December 29. This order was a mistake because the division GM had ordered that no discretionary expenses be incurred for the remainder of the fiscal year, and the supplies were not urgently needed. The companys accounting policy manual states that office supplies are to be recorded as an expense when delivered. The division GM learned what had happened, however, and to correct the mistake, he ordered the accounting department not to record the invoice until February.

4a. (5) In September, the GM realized that the division would need strong performance in the last quarter of the year in order to reach its budget targets. The GM decided to implement a sales program offering liberal payment terms to pull some sales that would normally occur next year into the current year; customers accepting delivery in the 4th quarter would not have to pay the invoice for 120 days.

4b. (6) In September, the GM realized that the division would need strong performance in the last quarter of the year in order to reach its budget targets. The GM ordered manufacturing to work overtime in December so that everything possible could be shipped by the end of the year.

4c. (7) In September, the GM realized that the division would need strong performance in the last quarter of the year in order to reach its budget targets. The GM sold some excess assets and realized a profit of $40,000

5a. (8) At the beginning of December 2007, the GM realized that the division would exceed its budgeted profit targets for the year. The GM ordered the divisions controller to prepay some expenses (e.g., hotel rooms, exhibit expense) for a major trade show to be held in March 2008 and to book them as a 2007 expense. Amount $90,000.

5b. (9) At the beginning of December 2007, the GM realized that the division would exceed its budgeted profit targets for the year. The GM ordered the divisions controller to develop the rationale for increasing the reserve for inventory obsolescence. By taking a pessimistic view of future market prospects, the controller was able to identify $1,050,000 worth of finished goods that conservative accounting would say should be fully reserved (i.e., written-off), even though the GM was fairly confident the inventory would still be sold at a later date at close to full price.

6a. (10) The next year, the division described in Question 5b (9) sold 70% of the written-off inventory, and a customer had indicated some interest in buying the rest of the inventory the following year. The GM ordered the division controller to prepare the rationale for reducing the reserve for obsolescence by $315,000 (i.e., writing up the previously written-off goods to full cost). The GMs motivation for recapturing the profit was to be able to continue working on some important product development projects that might have had to be delayed due to budget constraints.

6b. (11) The next year, the division described in Question 5b (9) sold 70% of the written-off inventory, and a customer had indicated some interest in buying the rest of the inventory the following year. The GM ordered the division controller to prepare the rationale for reducing the reserve for obsolescence by $315,000 (i.e., writing up the previously written-off goods to full cost). The GMs motivation for recapturing the profit was to make budgeted profit targets.

7. (12) In July 2007 the GM noticed that scrap costs in the plant were running way ahead of plan. So that senior management would not become alarmed, the GM ordered the division controller to bury most of the scrap costs in other expense accounts where they would not be noticed. Over the remainder of the year, the controller buried approximately $90,000 of scrap costs. Effect on net income: zero.

8a. (13) In November 2007, the division was straining to meet budget. The GM called the engagement partner of a consulting firm that was doing some work for the division and asked that the firm not send an invoice for work done until next year. The partner agreed. The estimated cost of work done but not invoiced was $45,000.

8b. (14) In November 2007, the division was straining to meet budget. The GM called the engagement partner of a consulting firm that was doing some work for the division and asked that the firm not send an invoice for work done until next year. The partner agreed. The estimated cost of work done but not invoiced was $750,000.