THE MIDNIGHT JOURNAL ENTRY Harvard Case Solution & Analysis

The Midnight Journal Entry Case Study Solution

Facts in the Case

The case is about a company by the name of Electro Scientific Industries, Inc. (ESI) established in Oregon which is the second largest technology company which deals in making test and measurement of equipment. The company was formed in the year 1944 and as the technology advanced so did the company. The company increased its product line in the year 1960 and started manufacturing and developing laser technology. The main products which the company manufactured and developed are computers, cellular phones, electronic games, entertainment systems and other electronic devices.

Most of the clients of the company were the famous leading electronic firms such as AMD, Ericsson, Samsung, IBM, and Lucent and few others. The company operated from many establishments such as Portland, California and Oregon.

The ESI went public in the year 1983 on NASDAQ (National Associated of Securities Dealers Automated Quotations). The company’s performance had been improving from 1998 – 2001 until 2002 when the company suffered a loss which was the worst downturn in the electronics industry. The company had to divest several of its underperforming businesses and also had to shut down it's Escondido facility which was situated in Portland. It also made a merger with a firm which was located in the southern California to survive in these dire times.

Richard Okumoto who was raised in a Japanese-American family joined the company ESI as Chief Financial Officer in the early year of 2003. He was mostly raised by his mother who taught him to be always fair and honest throughout his life.His first task of the company was to prepare a financial statement for the year 2003. After going through the company’s adjusting journal entries, he learned a great deal about the company. He found out that the company has been performing unethical practices to show its revenue higher. Okumoto noticed that the accrued liabilities were shown very less between the two quarters of May 31st and August 31st in the year 2002. This caused the profits of the company to increase which showed that the performance has been in a good state.

After going deeper into the details regarding the accrued liabilities, the amount which was wiped was around $977,000. These were the costs which were associated with the retirement and severance benefits which were given to the employees who worked for the company. Most of the employees belonged to Japan, Korea and Taiwan. These false reports have caused the company to show earnings of $0.01 per share rather than a loss.

The employees were not even aware of the company cutting of its retirement and severance benefits. For a company to cut employees retirement and severance benefits, it is essential to get the consent of the employees. The employees can take action regarding this matter by taking thematter to the labour board to which they may expose ESI to litigation.

The contract of the employees regarding its retirement and severance benefits is that any person above the age of 60 would be entitled to the retirement allowance and would receive its one month pay per year of service. The workers who are terminated or any worker who died on its 60 years would also be entitled to the retirement and severance benefits. The overall working people of the age of 60 in ESI were 18 in Japan, 23 in Taiwan and 13 in Korea who mostly worked in the sales and other customer support services.

Okumoto decided to confront the ESI’s CEO James Dooley who told him that everything is clear to everyone and told Okumoto to get past this. He again confronted CEO and told him that not reporting the correct financial performance was violating GAAP (Generally Accepted Accounting Principle) in which the CEO enraged and got upset. Okumoto even suggests for hiring an independent auditor to the audit committee which they declined his request.

As per the MoFo (Morrison Foerster) who were ESI outside law firm, they clearly stated that it is illegal to cancel the employees’ retirement fund without their consent, and further added that it is not essential for a company to pay for retirement but on the other hand if it promises to pay then it must fulfil its promise and cannot remove this compensation at the company’s discretion.

After observing how the company had been conducting unethical and unfair practices to gain the upper hand, Okumoto remembered what his family had taught him throughout his childhood and thus decided to resign from the company as he cannot bear to see the employees get hurt.


THE MIDNIGHT JOURNAL ENTRY Harvard Case Solution & Analysis



Moral Issue on the Case

The moral issues which were represented in the case were that the company started to conduct unethical, unfair and unprofessional means to overcome the problems which occurred due to the downturn in the electronic industry. After analysing the case, the moral issue which was found in the case was the breach of the financial statement in which the company showed false accrued liabilities to show its overall net profit better. These false financial statements were violating the rules and policies of GAAP. The reason for showing fewer liabilities were generally meant to attract more investors and shareholders to the company...............

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