IRCS: Valuing Ethics at the Expense of Inventory

Abstract

Lisa Martin, the newly promoted controller at International Retail Computer Solutions (IRCS), faces an ethical dilemma. According to her calculations, the company should record a substantial inventory impairment loss. However, top management at IRCS is concerned that Martin’s proposed inventory impairment adjustment will place the company in violation of an important debt covenant, which would allow the bank to call IRCS’s $10 million note. Should Martin insist on keeping her original inventory impairment adjustment? Or should she be a team player and revise the adjustment downward to prevent a debt covenant violation? As students respond to the case questions, they are exposed to a realistic scenario requiring them to think critically about the underlying accounting issues and to consider the ethical implications of Martin’s actions. In addition, the case requires them to apply an ethical framework (the AICPA’s Code of Professional Conduct) to determine the ethical course of action.

Keywords: ethics, inventory impairment, debt covenants, AICPA Code of Professional Conduct