Consider the following conversation between Keri Swasey, manager of a division that produces riding lawn mowers, and her controller, Stoney Lawson, a CMA and CPA:

KERI: Stoney, we have a real problem. Our operating cash is too low, and we are in desperate need of a loan. As you know, our financial position is marginal, and we need to show as much income as possibleand our assets need bolstering as well.

STONEY: I understand the problem, but I don't see what can be done at this point. This is the last week of the fiscal year, and it looks as if we'll report income just slightly above break even.

KERI: I know all this. What we need is some creative accounting. I have an idea that might help us, and I wanted to see if you would go along with it. We have 600 partially finished mowers in process, about 20 percent complete. That compares with the 3,000 units that we completed and sold during the year. When you computed the per-unit cost, you used 3,120 equivalent units, giving us a manufacturing cost of RM1,500 per unit. That per-unit cost gives us cost of goods sold equal to RM4.5 million and ending work in process worth RM180,000. The presence of the work in process gives us a chance to improve our financial position. If we report the units in work in process as 80 percent complete, this will increase our equivalent units to 3,480. This, in turn, will decrease our unit cost to about RM1,345 and cost of goods sold to RM4.035 million. The value of our work in process will increase to RM645,600. With those financial stats, the loan would be a cinch.

STONEY: Keri, I don't know. What you're suggesting is risky. It wouldn't take much auditing skill to catch this one.

KERI: You don't have to worry about that. The auditors won't be here for at least six to eight more weeks. By that time, we can have those partially completed units completed and sold. I can bury the labor cost by having some of our more loyal workers work overtime for some bonuses. The overtime will never be reported. And, as you know, bonuses come out of the corporate budget and are assigned to overheadnext year's overhead. Stoney, this will work. If we look good and get the loan to boot, corporate headquarters will treat us well. If we don't do this, we could lose our jobs.

Required:

1. Should Stoney agree to Kerit's proposal? Why or why not? To assist in deciding,

review the standards of ethical conduct for management accountants.

Do any apply?

2. Assume that Stoney refuses to cooperate and that Keri accepts this decision and

drops the matter. Does Stoney have any obligation to report the divisional manager's

behavior to a superior? Explain.

3. Assume that Stoney refuses to cooperate. However, Keri insists that the changes be

made. Now what should Stoney do? What would you do?

4. Suppose that Stoney is 63 years old and that his prospects for employment elsewhere

are bleak. Assume again that Keri insists that the changes should be made. Stoney

also knows that Keri's superior, the owner of the company, is her father-in-law.

Under these circumstances, would your recommendations for Stoney differ? If you

were Stoney, what would you do?