Question

EXERCISE 1-4 Ethics and the Manager 

Richmond, Inc., operates a chain of 44 department stores. Two years ago, the board of directors of Richmond approved a large-scale remodeling of its stores to attract a more upscale clientele. Before finalizing these plans, two stores were remodeled as a test. Linda Perlman, assistant controller, was asked to oversee the financial reporting for these test stores, and she and other management personnel were offered bonuses based on the sales growth and profitability of these stores. While completing the financial reports, Perlman discovered a sizable inventory of outdated goods that should have been discounted for sale or returned to the manufacturer. She discussedt situat he tory as ion with her management colleagues; the consensus was to ignore reporting this inven obsolete because reporting it would diminish the financial results and their bonuses. 

Required: 

 1. According to the IMA's Statement of Ethical Professional Practice, would it be ethical for Perlman not to report the inventory as obsolete? Would it be easy for Perlman to take the ethical action in this situation? 

2. (CMA, adapted)

Answer 1

1:
No
Failure to report the obsolete nature of the inventory would violate the IMA's Statement of Ethical Professional Practice as follows:

Competence
Perform duties in accordance with relevant technical standards. Generally accepted accounting principles (GAAP) require the write-down of obsolete inventory.Prepare decision support information that is accurate.

Integrity
Mitigate actual conflicts of interest and avoid apparent conflicts of interest.Refrain from engaging in any conduct that would prejudice carrying out duties ethically.Abstain from activities that would discredit the profession.

Members of the management team, of which Perlman is a part, are responsible for both operations and recording the results of operations. Because the team will benefit from a bonus, increasing earnings by ignoring the obsolete inventory is clearly a conflict of interest. Furthermore, such behavior is a discredit to the profession.

Credibility
Communicate information fairly and objectively.
Disclose all relevant information.
Hiding the obsolete inventory impairs the objectivity and relevance of financial statements.

2:
No
As discussed above, the ethical course of action would be for Perlman to insist on writing down the obsolete inventory. This would not, however, be an easy thing to do. Apart from adversely affecting her own compensation, the ethical action may anger her colleagues and make her very unpopular. Taking the ethical action would require considerable courage and self-assurance.