Traction Tires is a large producer of automobile tires. During the current year, Traction was on pace to have record revenues and profits. However, towards the end of the current year, a string of accidents linked to Traction's tires resulted in numerous lawsuits and a product recall of Traction's Premiere line. Traction's President, Hal Marker, recently approached chief accountant Ronnie Williams about the inevitable losses next year and asked Ronnie to defer all possible revenue until next year and to accrue all possible expenses to the current year. "We have so much revenue to spare this year," Hal said, "but next year, we will need all the help we can get."
Required
a. What ethical issues are involved in this scenario?
b. If Hal gets his way, what accounting principles would be violated?
c. Some may say that Hal is simply managing his earnings like he manages all other aspects of his business. What is your opinion of "earnings management"?