Question

Thinken Technology recently merged with College Electronics (CE), a computer graphics company. In performing a comprehensive audit of CE's accounting system, Gerald Ott, internal audit manager for Thinken Technology, discovered that the new subsidiary did not record pension assets and liabilities, subject to GAAP. The net present value of CE's pension assets was $15.5 million, the vested benefit obligation was $12.9 million, and the projected benefit obligation was $17.4 million. Ott reported this audit finding to Julie Habbe, the newly appointed controller of CE. A few days later, Habbe called Ott for his advice on what to do. Habbe started her conversation by asking "Can't we eliminate the negative income effect of our pension dilemma simply by terminating the employment of non-vested employees before the end of our fiscal year?"
Answer the following question:

How should Ott respond to Habbe's remark about firing non-vested employees?

Answer 1

In this case Ott should explain the rational and make Habbe realize that firing the non-vested employees will not work as an alternative solution in such a situation. Ott should explain to Habbe that it will be unethical to terminate the non-vested employees simply for the purpose of reducing the company’s required pension obligation.

In fact Ott should suggest a better solution in which the company will have to look to determine different marketable ways in which its revenue can be increased and its net income can be increased and its expenses can be decreased. This will help to reduce the impact of the obligation or soften the blow of the obligation.