Nick's is a sporting good disctributor. Nick's uses the FIFO inventory method to determine the cost of it's ending inventory. Ending inventory quantities are determined by a physical count. For the fiscal year-end December 31, 2013, ending inventory was originally determined to be $67 million. However, in early January of 2014, the company's controller discovered tha an error was made in the inventory count. The correct amount of ending inventory should be $87 million. The auditors did not discover the error and the financial statements are scheduled to be issued on February 26, 2014. Nick's is a public company. The controller's first reaction was to communicated her finding to the auditors and to revise the financial statements before they are issued. However, she knows that this was a very good year for the company with profits far exceeding analysits' expectations. If the error is not corrected this year, it will self-correct next year as long as 2014 ending inventory is correctly stated. This will help future 2014 profits. On the other hand, her fellow workers' profit sharing plans are based on annual pretax earnings and if she revises the statements, everyone's profit sharing bonus will be higher this year.

Required:

A. Is the controller correct by stating the error will self-correct next year as long as 2014 ending inventory is correctly stated? Explain.

B. If the error is not corrected in the current year, what will be the effect on 2013 and 2014 income before tax? Explain.

C. Discuss the ethical dillema the controller faces.