Joey Dulwich has recently been hired as a cost management specialist by Offset Press Company, a privately held company that produces a line of offset printing presses and lithograph machines. During his first few months on the job, Dulwich discovered that Offset has been underapplying factory overhead to the Work-in-Process Inventory account, while overstating expenses through the General and Administrative Expense 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 favorable, 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, Dulwich had pointed out the practice and its effect to Mary Brown, the corporate controller, and had 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. Dulwich again asked Brown if he could make the required adjustments and was again told not to make them. Dulwich, 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 Company for resolving ethical conflicts, Dulwich is considering one of the following three alternative courses of action:

• Follow Brown’s directive and do nothing further.

• Attempt to convince Brown to make the proper adjustments and to advise the external auditors of her actions.

• Tell the Audit Committee of the Board of Directors about the problem and give them the appropriate accounting data.

Required:

1. As a group, discuss the situation at Offset. For each of the three alternative courses of action that Dulwich is considering, discuss whether or not the action is appropriate.

2. Independent of your answer to requirement (1), assume that Dulwich again approaches Brown to make the necessary adjustments and is unsuccessful. Discuss the steps that Dulwich should take in proceeding to resolve this situation.