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The executive officers of the Fancy Expensive Wine Corporation have a performance-based compensation plan. The performance criteria of this plan is linked to growth in earnings per share. When annual EPS growth is 12%, the Fancy Expensive Wine Corporation executives earn 100% of the shares; if growth is 16%, they earn 125%. If EPS growth is lower than 8%, the executives receive no additional compensation. In 2012, Nancy Noseup, the controller of the Fancy Expensive Wine Corporation, reviews year-end estimates of bad debt expense and warranty expense. She calculates the EPS growth at 15%. Peter Peters, a member of the executive group, remarks over lunch one day that the estimate of bad debt expense might be decreased, increasing EPS growth to 16.1%. Nancy Noseup is not sure she should do this because she believes that the current estimate of bad debts is sound. On the other hand, she recognizes that a great deal of subjectivity is involved in the computation. a. What, if any, is the ethical dilemma for Nancy Noseup? Do you think Nancy Noseup’s knowledge of the compensation plan be a factor that influences her estimate? c. How should Nancy Noseup respond to Peter Peters’ request?
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