Question

As controller of a widely held public company, you are concerned with making the best decisions for the stockholders. At the end of its first year of operations, you are faced with the choice of method to value inventory. Specific identification is out of the question because the company sells a large quantity of diversified products. You are trying to decide between FIFO and LIFO. Inventory costs have increased 33% over the year, and therefore, you think LIFO will most accurately match these most recent costs with the revenues of the period. The chief executive officer has instructed you to do whatever it takes in all areas to report the highest income possible. Required Use the Ethical Decision Framework in Exhibit 1-9 to complete the following requirements:

1. Recognize an ethical dilemma: What ethical dilemma(s) do you face?

2. Analyze the key elements in the situation:

a. Who may benefit if you follow the chief executive officer's instructions? Who may be harmed?

b. How are they likely to benefit or be harmed?

c. What rights or claims may be violated?

d. What specific interests are in conflict? e. What are your responsibilities and obligations?

3. List alternatives and evaluate the impact of each on those affected:

As controller, what are your options in dealing with the ethical dilemma(s) you identified in (1) above?

4. Select the best alternative: Among the alternatives, which one would you select?

Answer 1

1. Ethical dilemmas faced in this situation are:

(i) There are conflicting accounting rules i.e. use of LIFO or FIFO to meet the CEO's requirement.

(ii) Possibility of a fraud to inflate revenues by taking advantage of the loophole in GAAP.

2. a. The CEO, yourself and the top management will be benefited.

All other stakeholders such as investors, government, creditors and employees will be at a disadvantage.

b. The top management can claim good financial results and you will save your job by following his requirements.

All other stakeholders such as investors, government, creditors and employees will be at a disadvantage when the fraud is revealed. This will cause financial losses to the investors due to reduction in share prices, employees may lose jobs and the government loses tax revenue.

c. Debtholders and liability claims may be violated since the liquidity position of the company is not what it is on paper.

3. The alternatives include:

1. Is the information presented likely going to harm the future prospects for the company and the investors alike?

2. Do the financial statements present a true and fair view as they are purpoted to be?

3. Is the information free from bias and is there a potential conflict of interest?

4. Is the information presented likely going to harm the future prospects for the company and the investors alike is the alternative to be selected. The information shown in the financials is likely going to cause greater concerns for the investors and the company when the alterations to the accounting methods are revelead either through a fraud or an IRS enquiry. This will reduce the stockholder value by a significant amount and may put the company's going concern principle in to jeopardy.