Clair Coolage is the chief accountant for a sales company called Far Eastern Imports. The company has been highly successful and is trying to increase its capital base by attracting new investors. The company operates in an inflationary environment and has been using the LIFO inventory cost flow method to minimize its net earnings and thereby reduce its income taxes. Katie Bailey, the vice president of finance, asked Coolage to estimate the change in net earnings that would occur if the company switched to FIFO. After reviewing the company's books, Coolage estimated that pretax income would increase by $1,200,000 if the company adopted the FIFO cost flow method. However, the switch would result in approximately $400,000 of additional taxes. The overall effect would result in an increase of $800,000 in net earnings. Bailey told Coolage to avoid the additional taxes by preparing the tax return on a LIFO basis but to prepare a set of statements on a FIFO basis to be distributed to potential investors.

Additional Discussion

Bailey has professional authority over Coolage, and is asking her to do something unethical. Put yourself in Coolage's shoes - you have a steady, upper-level job with a prestigious company, you make a very nice salary and the company provides you with an excellent benefits package, and one of your bosses - the VP of Finance - asks you to misrepresent your company's financial position. What would you do?