Cleveland Custom Cabinets is a specialty cabinet manufacturer for high$-$end homes in the Cleveland Heights and Shaker Heights areas. The company manufactures cabinets built to the specifications of homeowners and employs $125$ custom cabinetmakers and installers. There are $30$ administrative and sales staff members working for the company.

James Leroy owns Cleveland Custom Cabinets. His accounting manager is Marcus Sims, who reports to the director of finance. Sims manages $15$ accountants. The staff is responsible for keeping track of manufacturing costs by job and preparing internal and external financial reports. The internal reports are used by management for decision making. The external reports are used to support bank loan applications.

The company applies overhead to jobs based on direct labor hours. For $2022,$ it estimated total overhead to be $$4\mathrm{.}8$ million and $80,000$ direct labor hours. The cost of direct materials used during the first quarter of the year is $$600,000,$ and direct labor cost is $$400,000($based on $20,000$ hours worked$).$ The company$$s accounting system is old and does not provide actual overhead information until about four weeks after the close of a quarter. As a result, the applied overhead amount is used for quarterly reports.

On April $10,2022,$ Leroy came into Sims$$s office to pick up the quarterly report. He looked at it aghast. Leroy had planned to take the statements to the bank the next day and meet with the vice president to discuss a $$1$ million working capital loan. He knew the bank would be reluctant to grant the loan based on the income numbers in Exhibit $1.$ Without the money, Cleveland could have problems financing everyday operations.

Exhibit $1$

Cleveland Custom Cabinets

Net Income for the Quarter Ended March $31,2022$

Sales $ $6,400,000$

Cost of goods sold $4,800,000$

Gross margin $ $1,600,000$

Selling and administrative expenses $1,568,000$

Net income $ $32,000$

Leroy asked Sims to explain how net income could have gone from $14\mathrm{.}2$ percent of sales for the year ended December $31,2021,$ to $5\mathrm{.}0$ percent for March $31,2022.$ Sims pointed out that the estimated overhead cost had doubled for $2022$ compared to the actual cost for $2021.$ He explained to Leroy that rent had doubled and the cost of utilities skyrocketed. In addition, the custom$-$making machinery was wearing out more rapidly, so the company$$s repair and maintenance costs also doubled from $2021.$

Leroy wouldn$$t accept Sims$$s explanation. Instead, he told Sims that the quarterly income had to be at least the same percentage of sales as of December $31,2021.$ Sims looked confused and reminded Leroy that the external auditors would wrap up their audit on April $30.$ Leroy told Sims not to worry about the auditors. He would take care of them. Furthermore, $$as the sole owner of the company, there is no reason not to 'tweak$$ the numbers on a one$-$time basis. I own the board of directors, so no worries there.$$ He went on to say, $$Do it this one time and I won$$t ask you to do it again.$$ He then reminded Sims of his obligation to remain loyal to the company and its interests. Sims started to soften and asked Leroy just how he expected the tweaking to happen. Leroy flinched, held up his hands, and said, $$I$$ll leave the creative accounting to you.$$

Do you agree with Leroy$$s statement that it doesn$$t matter what the numbers look like because he is the sole owner? Even if it is true that Sims $$owns$$ the board of directors, what should be their role in this matter? What about the external auditors? Should Sims simply accept Leroy$$s statement that he would handle them?