Reference no: EM131619559

Problem -

After years of steady growth in net income, The Performance Drug Company sustained a loss of $1.6 million in 2015. The loss was primarily due to $5 million in expenses related to a product recall. The company designs and produces health supplements and had to recall a product in 2015 because of potential health risks.

The company controller, Joe Mammoth, suggests the loss be included in the 2015 income statement as an extraordinary item. "If we report it as an extraordinary item, our income from continuing operations will actually show an increase from the prior year. Investors will appreciate the continued growth in ongoing profitability and will discount the one-time loss." Joe further notes that executive bonuses are tied to income from continuing operations, not net income.

The CEO asks Joe to justify this treatment. "I know we have had product recalls before and, of course, they do occur in our industry," Joe replies, "but we have never had a recall of this magnitude, and have upgraded our quality control procedures so this should never happen again."

Required: Discuss the ethical dilemma faced by Joe Mammoth and the CEO. Who are the stakeholders and how are they affected?