Question

3. High Tech, Inc., is a public company that produces laser and ink jet printers. Jorge is an accounting staff member who works for the company’s controller and is involved in preparing the annual report. One of High Tech’s competitors developed a superior color laser jet printer using a less costly production process. Jorge realizes that High Tech’s substantial inventory of color laser jet printers is effectively obsolete and will have to be written down to its net realizable value in accordance with U.S. GAAP. This means higher expenses and lower profits.

Jorge’s boss, the controller, is aware of the situation but the chief financial officer is not. In fact, the controller told the CFO that High Tech does not have any obsolete inventory. Both Jorge’s boss and the CFO receive bonuses tied to the company’s profits. The outside auditors are completing the audit and are unaware of the obsolete inventory.

How should Jorge handle this situation? Use the IMA’s Statement of Ethical Professional Practice shown in Figure 1.2 "IMA Statement of Ethical Professional Practice" as your guide. (1.4)

Answer 1

The situation faced here by Jorge is related to the credibility of the financial statements. As per the IMA statement of ethical professional practice every member is responsible for providing relevant information in the financial statements that may influence the understanding of the users of the financial statements. The information communicated must be fair and objective in nature and report all shortcomings of the business. In this case, while the controller is aware of the situation the CFO is not of the obsolete inventory. Jorge must communicate to the controller that he is violating the IMA's ethical standards and must not take undue advantage of the CFO's ignorance on the matter. Also, Jorge must not hesitate if need be, he can become a whistle blower and directly communicate to the CFO and the external auditors to get the inventory recorded correctly.