Ethics Case

19-3

Stock options

You are in your second year as an auditor with Dantly and Regis, a regional CPA firm. One of the firms long-time clients is Mayberry-Cleaver Industries, a national company involved in the manufacturing, marketing, and sales of hydraulic devices used in specialized manufacturing applications. Early in this years audit, you discover that Mayberry-Cleaver has changed its method of determining inventory from LIFO to FIFO. Your clients explanation is that FIFO is consistent with the method used by some other companies in the industry. Upon further investigation, you discover an executive stock option plan whose terms call for a significant increase in the shares available to executives if net income this year exceeds $44 million. Some quick calculations convince you that without the change in inventory methods, the target will not be reached; with the change, it will.

Required:

Do you perceive an ethical dilemma? What would be the likely impact of following the controllers suggestions? Who would benefit? Who would be injured?