Ethical issues; underapptication of manufacturing overhead: manufacturer Tom Savin has recently been hired as a cost accountant by Offset Press Pty Ltd, a company that produces a line of offset printing presses and lithograph machines. During his first few months on the job. Savin discovered that Offset has been underapplying factory overhead to the work in process account, while overstating expenses through the general and administrative account. This practice has been going on since the start of the company, which is in its sixth year of operation. The effect in each year has been favourable, having a material impact on the company’s tax position. No internal audit function exists at Offset, and the external auditors have not yet discovered the underapplied factory overhead.
Prior to the sixth-year audit, Savin pointed out the practice and its effect to Mary Brown, the accounting manager, and asked her to let him make the necessary adjustments. Brown directed him not to make the adjustments but to wait until the external auditors had completed their work and see what they uncovered.
The sixth-year audit has now been completed, and the external auditors have once again failed to discover the underapplication of factory overhead. Savin again asks Brown if he can make the required adjustments and again is told not to make them. Sevin, however, believes that the adjustments should be made and that the external auditors should be informed of the situation.
Since there are no established policies at Offset Press for resolving ethical conflicts, Savin is considering one of the following three courses of action:
1. Follow Brown’s directive and do nothing further.
2. Attempt to convince Brown that she should make the proper adjustments, and advise the external auditors of her actions.
3. Tell the Audit Committee about the problem and give them the appropriate accounting data.
1. For each of the three courses of action that Tom Savin is considering, explain whether or not the action is appropriate.
2. Independent of your answer to requirement 1, assume that Tom Savin again approaches Mary Brown to make the necessary adjustments and is unsuccessful. Describe the steps that Tom Savin should take to resolve this situation.