Non-vested Employees

CA20-7 ETHICS (Nonvested EmployeesâAn Ethical Dilemma) Thinken Technology recently merged with College Elec-tronix (CE), a computer graphics company. In performing a comprehensive audit of CEâs 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 CEâs 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, âCanât we eliminate the negative income effect of our pension dilemma simply by terminating the employment of nonvested employees before the end of our fiscal year?â

Instructions

How should Ott respond to Habbeâs remark about firing nonvested employees?