Discuss any ethical issues raised by the following actions. Big Store's rate of return on assets (ROA) has fallen below analysts' expectations in recent years because the firm, a retailer, has added a significant number of new stores (increasing assets
in the denominator of ROA) prior to these stores generating earnings (ultimately increasing the numerator of ROA). Big Store decides to curtail the opening of new stores for two years in an effort to allow the earnings of new stores to catch up with the investments it made previously in store assets, thereby increasing its ROA. Management plans to restart the growth in stores after the two years.
Ethical issues confront Big Store's management when they make financial reporting decisions. Among the questions that Big Store's management might raise are: (1) Does the action violate a known law or regulation? and (2) Has the firm provided sufficient disclosure about the action for the users of financial statements to make their own judgments about the ethics of such actions? Big Store's actions are in accordance with within GAAP, and it should adequately discloses information about the choice There would be a long-term effect of the action because the rate of future growth could be adversely affected and analysts must take the change into account in projecting future earnings. One might argue that an ethical issue arises because management took an action for the primary purpose of increasing return on assets (ROA). Management purposefully managed, some would say distorted, return on assets (ROA) to make it and Big Store look better.
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