Danville Bottlers is a wholesale
beverage company. Danville uses the FIFO inventory method to determine
the cost of its ending inventory. Ending inventory quantities are
determined by a physical count. For the fiscal year-end June 30, 2013,
ending inventory was originally determined to be $3,265,000. However, on
July 17, 2013, John Howard, the company's controller, discovered an
error in the ending inventory count. He determined that the correct
ending inventory amount should be $2,600,000.
Danville is a privately owned
corporation with significant financing provided by a local bank. The
bank requires annual audited financial statements as a condition of the
loan. By July 17, the auditors had completed their review of the
financial statements which are scheduled to be issued on July 25. They
did not discover the inventory error.
John's first reaction was to
communicate his finding to the auditors and to revise the financial
statements before they are issued. However, he knows that his and his
fellow workers' profit-sharing plans are based on annual pretax earnings
and that if he revises the statements, everyone's profit sharing bonus
will be significantly reduced.
Why will bonuses be negatively affected? What is the effect on pretax earnings?
the error is not corrected in the current year and is discovered by the
auditors during the following year's audit, how will the error be
reported in the company's financial statements?
Discuss the ethical dilemma Howard faces.