The Smart Dresser Company operates a chain of 35 clothing stores that have traditionally targeted baby boomers working in the business world. Two years ago, the board of directors of The Smart Dresser, experiencing declining sales and profits recognized that the demographics were changing and they needed to adapt to a more youthful shopper. The Smart Dresser Company is considering a large-scale remodeling of its stores and a change in its clothing line.

Before undertaking this change across the entire company, 2 of the 35 stores were remodeled as a test at the start of the year and the line of clothing was changed to appeal to the more youthful shopper.

Linda Perlman, assistant controller, and her team was asked to oversee the remodeling and change over in these 2 stores. They were also responsible for the financial reporting for the 2 stores. She and other management personnel are in line to get big bonuses if the 2 test stores show sales growth and increased profitability.

After completing the financial statements for the 2 stores at the end of the year and sending them into the headquarters Perlman, in one of her discussions with the test store managers, discovers that the ending inventory amounts included a sizable inventory of outdated goods (left over from two years ago) costed at the original cost. This should have been disposed of at a substantial discount and not counted in the ending inventory. If not disposed of, it should have been written down using the LCM requirement. Because this has not been done, the CGS amounts are understated and thus reported income is higher than it should be. The resulting adjustment, if made, will lower net income below the bonus threshold.

Perlman has a dilemma, if she leaves the financial statements as prepared she gets her bonus, if she does make the adjustment she loses her bonus. She discussed the situation with her team and the controller. The consensus of her colleagues was to ignore reporting this inventory as obsolete because reporting it would lower net income and jeopardize their bonuses. The controller said likewise. The controller stated that the Board is looking for success so no one will care that the bottom line is higher that it should be and it is only 2 stores of the 35 stores in the chain.

Required:

Please provide answers to the following questions in a Word document. You answer must explain the rationale for your answer. A yes or no answer without explanation will not be accepted.

1. According to the IMAs Statement of Ethical Professional Practice, would it be ethical for Perlman not to report the inventory as obsolete? If not, what principles of the IMA standards would be violated? If yes, what principles of the IMA standards would allow Linda to not disclose the problem?

2. Who will be relying on the financial statements prepared by Perlman?

3. How might Linda resolve any conflict with the Controller?