Read the following case and answer the questions that follow Employees involved in the accounting and control functions of organizations often face ethical dilemmas. Typically, at some point in each of these dilemmas an employee must decide whether he or she will do the right thing. In the early 1986, several employees of Rocky Mount Undergarment Co., Inc. (RMUC), came face to face with an ethical dilemma. RMUC, a North Carolina based company, manufactured undergarment and other apparel products. Approximately one half of the company's sales were to three large merchandisers: K-Mart (29%), Wal-Mart (11%), and Sears (9%). RMUC enjoyed nearly 1300 workers in its production facilities and another forty individuals in its administrative functions. Between 1981 and 1984, RMUC realized steady growth in revenues and profits. In 1981, RMUC reported a net income of $1.5 million on net sales of $32 million. Unfortunately, RMUC failed to sustain its impressive profit trend in 1985 as reflected by the financial data presented for the firm in Exhibit 1. Disproportionately high production costs cut sharply into the company's profit margin during that year. These high production costs resulted from cost overruns on several large customer orders and from significant training and other startup costs linked to the opening of a new factory. A subsequent investigation by the Securities and Exchange Commission (SEC) revealed that the company's senior executive and another high ranking officer had refused to allow the firm to report its actual net income of $452,000 for 1985. To inflate the company's 1985 net income, these executives instructed three RMUC employees to overstate the firm's year-end inventory and thereby understate its cost of goods sold. Initially, the employees were reluctant to participate in the scheme. The two executives warned the employees that unless they cooperated, the company might cease operations and dismiss its employees. After much prodding, the three employees capitulated and began systematically overstating the firm's 1985year end inventory. RMUC, Inc. Selected Financial Data, 1981-1985 (000s omitted) 1985 1984 1983 1982 1981 Net Sales $39,505 $32,167 $25,697 $21,063 $17,851 Cost of Sales 32,415 24,199 19,700 16,590 4,358 Operating expenses 5,791 4,523 3,405 2,694 2,454 Net income 452 1,529 1,153 756 378 Total Assets 24,808 14,745 11,134 6,916 5,529 Stockholder's equity 11,263 6,999 3,510 3,469 2,714 Current assets 20,924 12,678 9,648 5,779 4,639 Accounts receivable 7,115 4,725 3,734 2,608 1,290 Inventory 12,158 7,507 5,694 2,869 3,045 Current liabilities 7,302 6,999 3,510 3,469 2,714 Following the two executives instructions, the three RMUC employees inflated quantity figures on selected count sheets by adding numerals to the accurate quantity figures per item which had previously recorded thereon during the physical inventory count. The three RMUC employees then multiplied the inflated quantity figures per item on the count sheets by actual unit cost per item and recorded the resulting false and inflated cost figures on the count sheets. While the three employees were overstating RMUC's inventory, the two company executives who set the scheme periodically telephoned them to check on their progress. At one point, the employees indicated that they were unwilling to continue falsifying RMUC's year-end inventory quantities. The employees manufactured more than $900,000 of bogus inventory. After checking the falsified inventory count sheets, the executives forwarded them to the independent audit firm. To further overstate RMUC's inventory on December 31, 1985, the company's senior executive instructed another RMUC employee to obtain a false confirmation letter from Strechlon Industries. The latter supplied RMUC with most of the elastic needed in its manufacturing process. At the time, RMUC had an agreement to purchase 50% of Strechlon common stock at net book value. On December 31, 1985, Strechlon has in its possession only a nominal amount of RMUC's inventory. Strechlon executive agreed to supply a confirmation letter to RMUC's independent auditors indicating that his firm held approximately $165,000 of RMUC inventory at the end of 1985. As a condition for providing the confirmation, the Strechlon executive insisted that RMUC prepare and forward to him a false shipping document to corroborate the existence of the fictitious inventory. After receiving this shipping document, the executive signed the false confirmation and mailed it to RMUC's independent audit firm. The fraudulent schemes engineered by RMUC's executives overstated the firm's December 31, 1985, inventory by approximately $1,076,000. The overstatement of inventory boosted RMUC's net income for 1985 by $600,000 more than the actual figure. Near the completion of the 1985 audit, RMUC's auditors asked the company's senior executives to sign a letter of representations. Among other items, this letter indicated that the executive was not aware of any irregularities (fraud) involving the company's financial statements. The letter also stated that RMUC's financial statements fairly reflected its financial condition as of the end of 1985 and its operating results for that year. Shortly after receiving the signed letter of representations, RMUC's audit firm issued an unqualified opinion on the firm's financial statements. Following the SEC's discovery of the fraudulent misrepresentations in RMUC's 1985 financial statements, the federal agency filed civil charges against the firm's two executives involved in the fraud. The SEC eventually settled these charges by obtaining a court order that prohibited the executives from engaging in any further violations of federal securities law. FOOTNOTE: Subsequent to the issuance of its financial statements for the year ended December 31, 1985, the company determined that inventory as reported was misstated. The accompanying financial statements have been restated to reflect correction of such misstatement. The significant effects of restatement were to reduce inventories $1,076,000, increase the cost of sales $1,140,000, increase operating expenses $40,000, and reduce net income $607,000 from the amount reported.

Questions How did RMUC's buyout option for Strechlon affect the quality of the evidence provided by the inventory confirmation letter, if all? Explain.