It’s no fun accepting a position for your dream job and then red flags are raised that make you wonder about the culture of the company. Those are the thoughts of Donna Mason on January 18, 2022, as she prepares for a meeting with her accounting supervisor, Cheryl Miles. Mason graduated summa cu laude from State University one year ago and recently passed the CPA Exam. She is working as a staff accountant at Harrison Industries in Provo, Utah. Mason is one of three staff accountants. She reports to Cheryl Miles who, in turn, reports to Kelly Lang, the chief accounting officer. Lang reports to the CEO, Ken Harrison, and the third generation of owner-CEOs of the privately held company. Harrison is also the chair of the board of directors, which has five of nine independent members.

Mason’s concern is that on January 15, 2022, she was approached by Miles and told to record an accrual for unpaid severance payments of $5 million to be included in the December 31, 2021, financial statements. When questioned, Miles told Mason that the company had exceeded projected earnings in 2021 but knew 2022 was going to be a down year. Mason still expressed her concern because it was an unusually high amount. Miles looked for another reason for the accrual and told Mason that the company planned to shut down the home appliance division in 2022 and the severance payments would be significant. This was the first Mason heard about a shutdown of any division, and she found it strange because the company’s operating income in all divisions had set record levels in fiscal year 2021. Moreover, the severance amounts are five times the annual payroll of the division.

The numbers below show the operating income levels and accruals for 2019 through 2021:

12/31/2019 12/31/2020 12/31/2021

Operating income $10 million $12 million $20 million (pre-adjusting entries)

Accrued bonus and severance $ 1 million $ 1.2 million ???

Mason took a firm stance at first and told Miles she needed some documentation to record the accrued severance liability. Miles instructed Mason to record the entry, that it wasn’t her job to question orders. Miles made it clear in no uncertain terms that questioning directions from one’s supervisor was a basis for termination. This occurred on January 15, 2022. Mason knew she had three days before the next meeting with Miles to consider her options. The first step she took was to contact her mentor, Steve Hahn, who explained the culture of the company is to go along to get along. Hahn quickly added that it was a rare occurrence for an employee to be asked to go along with something not right, so he advised Mason to do what Miles had asked. He seemed to be saying that if Miles asked her to record the severance payments, then it must be supportable. Page 329 Mason did a lot of independent checking of the company’s computer files between January 15 and January 18, 2022 and found no evidence of a planned shutdown of the division. In fact, the division’s income had risen on average by 5 percent a year for three straight years. The income level for 2021 was the highest—8 percent. It exceeded projections by 3 percent.

Mason is trying to build a strategy to convince Miles of why the severance accrual is not justified. She realizes that Miles could be under orders from Kelly Lang and/or Ken Harrison. She wonders whether it would be wise to approach them about her concerns. After all, they interviewed Mason for the accounting position and ultimately made the decision to offer her the job. Mason felt good about working for them and Harrison Industries because she thought organizational values and ethics were high, as is Mason’s. Now, she’s not so sure.

Questions

1. Discuss how the accrual of these expenses might be used to manage earnings.

2. What is at stake for the key parties? What are Mason’s ethical obligations to them?

3. Explain the rationalizations given by Miles to Mason and how it should affect the way Mason handles the matter.

4. What should Mason do and why?

Answer rating: 100% (QA)

Ans1 Recording the accrual of 5 million would mean inflating the wage expense for 2022 by 5 million ... View the full answer