The executive officers of Welsh Inc. have a performance based compensation plan. The performance criterion of this plan is linked to growth in earnings per share. When annual EPS growth is 10%, the executives of Welsh will earn 100% of the shares; if growth is 15%, they earn 125%. If EPS growth, however, is lower than 8%, the executives receive no additional compensation. In 2020, Shelly Prince, the financial controller of Welsh, reviews year end estimates of bad debt expense and warranty expense. She calculates EPS growth of 10%. A member of the executive mentioned to her that the estimate of bad debt expense might be decreased, increasing EPS growth to 15%. Shelly is not sure she should include this because she believes that the current bad debt expense is sound. She does recognize though, that a great deal of subjectivity was involved in its computation. Instructions i. What, if any, is the ethical dilemma facing Shelly Prince? ii. Should Shelly’s knowledge of the compensation plan influence her estimate? iii. How should Shelly respond to the executive’s request?
The executive officers of Welsh Inc. have a performance based compensation plan.
The performance criterion of this plan is linked to growth in earnings per share. When
annual EPS growth is 10%, the executives of Welsh will earn 100% of the shares; if
growth is 15%, they earn 125%. If EPS growth, however, is lower than 8%, the
executives receive no additional compensation.
In 2020, Shelly Prince, the financial controller of Welsh, reviews year end estimates
of
member of the executive mentioned to her that the estimate of bad debt expense
might be decreased, increasing EPS growth to 15%. Shelly is not sure she should
include this because she believes that the current bad debt expense is sound. She does
recognize though, that a great deal of subjectivity was involved in its computation.
Instructions
i. What, if any, is the ethical dilemma facing Shelly Prince?
ii. Should Shelly’s knowledge of the compensation plan influence her estimate?
iii. How should Shelly respond to the executive’s request?
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