Rick Penn and Joe Lopus are the plant managers for Pacific Lumber's particle board division. Pacific Lumber has adopted a just-in-time (JIT) management philosophy. Each plant combines wood chips with chemical adhesives to produce particle board to order, and all production is sold as soon as it is completed. Laura Green is Pacific Lumber's regional controller. All of Pacific Lumber's plants and divisions send Green their production and cost information. While reviewing the numbers of the two particle board plants, she is surprised that both plants estimate their ending work in process inventories at 80% complete, which is higher than usual. Green calls Lopus, whom she has known for some time. He admits that to ensure that their division met its profit goal and that both he and Penn would make their bonus (which is based on division profit), he and Penn agreed to inflate the percentage completion. Lopus explains, "Determining the percentage completion always requires judgment. Whatever the percentage completion, we'll finish the work in process inventory first thing next year."
Requirements
1. How would inflating the percentage completion of ending work in process inventory help Penn and Lopus get their bonus?
2. The particle board division is the largest of Pacific Lumber's divisions. If Green does not correct the percentage completion of this year's ending work in process inventory, how will the misstatement affect Pacific Lumber's financial statements?
3. Evaluate Lopus's justification, including the effect, if any, on next year's financial statements.
4. In considering what Green should do, answer the following questions:
a. What is the ethical question?
b. What are the options?
c. What are the possible consequences?
d. What should Green do?