Jones Automotives granted employee stock options on January 2, 2015, to acquire 100,000 shares of common stock. The exercise price was $ 25 per share and the vesting period is four years. The estimated fair value of the options is $ 20 per share.
In 2015, Jones experienced a turnover rate of 1.25%. In 2014 and 2013, it experienced a turnover rate of 2% and 3%, respectively. Jones is using an expected forfeiture rate of 12% based on its turnover in 2013 to calculate the expense for employee stock options. The managers believe that 12% is the most accurate estimate given the current economic environment in the automotive industry as well as the nature of the current pool of employees.
Jones’ EPS for 2015 excluding consideration of these employee stock options is $ 2.75 per share. The cur-rent consensus analyst forecast of EPS for Jones Automotives is $ 2.15. Jones has 750,000 shares outstanding at the end of 2015.
You are the auditor for Jones Automotives. Will you sign off on the company’s 2015 financial statements to report its stock option expense as currently reported? Why or why not? If not, what case will you make to management to support your view?