Allied Bancshares, a Houston-based group of banks, reported a string of 31 quarterly earnings increases. In an interview with three Goldman Sachs security analysts, one of the bank's senior officers explained that the bank intentionally overstates its bad debt expense in good quarters and understates it in poor quarters. In this manner, the fluctuations in earnings from one quarter to the next can be smoothed out. The bank's auditors have written clean opinions on the bank's financial statements over this time period, and this strategy maximizes the bonuses paid to the bank's executives. In addition, presumably it is in the best interest of the bank's shareholders, partly because it helps the bank maintain its legal reserve requirements.
Is it ethical for companies like Allied Bancshares to intentionally overstate expenses in some periods and understate them in others to achieve consistent increases in reported net income across time?