Reference no: EM13849179

Shifting Future Expenses to the Current Period as a Special Charge A company might choose to accelerate discretionary expenses, such as repairs and maintenance, into the current period if the current year’s revenue is relatively high in relation to expected future revenue or future expenses are expected to be relatively high. The motivation to shift future expenses to the current period might be to smooth net income over time.

The delay in recording repairs and maintenance is a technique that McKee would probably categorize as appropriate, given the goal of providing smooth and predictable earnings. Recall that in the reported studies on earnings management, the idea of managing earnings through operating decisions was not perceived to be as big a problem as altering revenue amounts. However, the decision to delay needed repairs raises several ethical issues with respect to the company’s operating decisions because it creates a risk that assets such as machinery and equipment may break down prematurely. These are (1) the quality of product may suffer, leading to extra quality control and rework costs; (2) production slows and fails to meet deadlines, thereby risking customer goodwill; and (3) the costs to repair the machines can be greater than they would have been had maintenance been completed on a timely basis. Imagine, for example, that you fail to change the oil in you car that you fail to change the oil in your car on a regular basis. The result may be serious, costly repairs to engine later on.

What are some reasons a company might employ your selected method? Provide an example of how this particular fraudulent method might occur. What are the ethical considerations of your selection? Why is this method misleading to the stakeholders who count on the veracity of financial

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