Management Incentives, Financial Statements, and Ethics
Alicia Perez was controller of the vascular products division of a major medical instruments company. On December 30,2012, Perez prepared a preliminary income statement and compared it with the 2012 budget:
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The top managers of each division had a bonus plan that paid each a $10 \%$ bonus if operating income exceeded budgeted income by more than $20 \%$. It was obvious to Perez that the vascular products division had easily exceeded the $$\$ 180,000$$ of operating income needed for a bonus. In fact, she wondered if it would not be desirable to reduce operating income this year-after all, the higher the income this year, the higher top management is likely to set the budget next year. Besides, if some of December's sales could just be held back and recorded in January, the division would have a running start on next year.
Perez had always been a team player, and she saw holding back sales as the best strategy for her team of managers. Therefore, she recorded only $$\$ 1,500,000$$ of sales in 2012 - the other $$\$ 100,000$$ was recorded as January 2013 sales. Operating income for 2012 then became $$\$ 250,000$$ and there was a head start of $$\$ 50,000$$ on 2013's operating income. Comment on the ethical implications of Perez's decision.