Reference no: EM132755958
Problem - The executive of?cers of Free State Manufacturing have a performance-based compensation plan. The performance criteria of this plan is tied to growth in earnings per share as follows:
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EPS Growth Rate
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% of Performance-Based Shares Earned
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16% or better
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125%
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12-15%
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100%
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9-11%
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80%
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Less than 9%
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0%
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In 20Y6, Lori Oliver, the Controller of Free State, reviews year-end estimates of bad debt expense and warranty expense. Based on those estimates and other data, she calculates the company's EPS growth at 15%. After hearing this, Kurt Edwards, a member of the executive group, suggests that the estimate of bad debt expense could be decreased, increasing the EPS growth to 16.1%, Oliver is not sure if she should do this because she believes the current estimate of bad debt expense is sound. On the other hand, she recognizes that a signi?cant amount of subjectivity is involved in the determining the estimate.
1. What, if any, is the ethical dilemma for Oliver?
2. Should Oliver's knowledge of the compensation plan be a factor that influences her estimate? Why or why not?
3. How should Oliver respond to Edwards?