Toomer's Energy Drinks: Fueling Earnings Management?

Abstract

ABSTRACTCompanies around the world commonly engage in earnings management. Some earnings management techniques comply with U.S. GAAP and do not violate financial reporting standards (e.g., real earnings management techniques such as postponing research and development expenditures), other techniques clearly cross the line (e.g., misclassifying repair and maintenance expenses as capital expenditures), and some fall into a gray area (e.g., adjusting the allowance for bad debt). This case exposes students to an ethical dilemma that involves earnings management: toward the end of its fiscal year, the executive management team at Toomer's Energy Drinks' European division realize that they will fall just short of a short-term financial performance target, and consider ways in which they can manage earnings to generate sufficient performance to meet the target. The case exposes students to ways in which companies manage earnings, and encourages students to think critically about the extent to which these techniques are ethical by requiring them to apply the IMA's Statement of Ethical Professional Practice and the AICPA's Code of Professional Conduct to a realistic scenario.