Financial Reporting problems atMolex, Inc.

Case Summary:

In mid-July 2004,MolexInc.'s corporate finance group identified a problem with inventory that had affected results for several years. Profits on inventory sales betweenMolexsubsidiaries (but which had not been sold to an external customer by year-end) had not been excluded in computing the consolidated firm's earnings and inventory. Consequently, earnings, inventory and retained earnings were overstated. In their September management representation letter to the external auditors,Molex'sCFO and CEO chose not to mention the issue. When it subsequently surfaced and the auditors realized that management had withheld the information, they demanded that the CFO and possibly the CEO be replaced. Management responded that the amount of the error was not material and that it had not deliberately withheld information from the auditors. Yet the auditors were not satisfied and continued to demand that the CFO and probably the CEO be replaced.

Case Questions:

1. What was the financial reporting problem atMolex? How would the correction of the problem be recorded inMolex'sfinancial statements?
2. Why wereMolex'sauditors so concerned about the reporting problem atMolex? If you were a member of the board, would you agree with their concerns?