Mendoza is considering investing in IBM. However, he is captivated by IBM's growth. IBM had made a remarkable change from a struggling company to a leading company in the personal computer market. Mendoza has asked for your advice as to whether or not the growth is genuine. He suspects there might have been some fraudulent or ethical actions taken by IBM to increase its income.

After a brief look at the recent history and performance of IBM, you decide to look more closely at the financial statements. As you review the financial statements, you begin to have some concerns about the true nature of IBM's growth. Certain accounting procedures cause you to have doubt as to whether the growth came from IBM's core business operations or from carefully planned accounting adjustments that seem to be unethical. As you proceed in your investigations, you pay particular attention to the following areas.

Pensions IBM changed its pension plan to a cash balance plan. The returns of this plan exceeded the amount recognized as an expense. Accounting rules require the company to add the excess returns to earnings, but the gains cannot be spent on anything other than pension benefits. IBM increased its earnings per share by making this adjustment. Stock Repurchases Since 1995 IBM has spent a lot of money making stock repurchases. A stock repurchase may be beneficial to a company by increasing earnings per share, because there will be fewer shareholders across which to spread the earnings.

You conclude that the financial statements were in accordance with generally accepted accounting principles (GAAP), and you are confident that all accounting rules were followed. However, you have to explain to Mendoza whether the behavior was ethical. What would you tell him?