Ethics and the Manager,Rigging Standards Stacy Cummins,the new hired controller at Merced home Products,Inc was disturbed by what she had discovered about the standard costs at the Home Security Division.In looking over the past several years of quarterly income statements at the Home Security Division,she noticed that the first-quarter profits were poor,the second quarter profits were slightly better,the third -quarter profits was again slightly better and the fourth quarter always ended with a spectacular performance in which the Home Security Division managed to meet or exceed its target profit for the year.She also was concerned to find letters from the company's external auditors to the top management warning about unsual use of standard costs at the Home Security Division When Ms.Cummins ran across these letters,she asked the assistant controller,Gary Farber,if he new what was going on at the home security Division,Gary said that it was common knowledge in the company that the vice president in charge of the Home Security Division,Preston Lansing had rigged the standards at his division in order to produce the same quarterly income pattern every year.According to company policy,variances are taken directly to the income statement as an adjustment to cost of goods sold Favorable variances have effect of increasing net operating income and unfavorable variances have the effect of decreasing net operating income.Lansing had rigged the standards so that there were always large variances.Company policy was little vague about when these variances have to be reported on the divisional income statements.While the intent was clearly to recognize variances on the income statement in the period in which they arise,nothing in the company's accounting manuals actually explicitly required this.So for many years Lansing had followed a practice of saving up the the favorable variances and using them to create a nice smooth pattern of growing profits in the first three quarters followed by a big "Christmas present" of an extremely good fourth quarter.(Financial reporting regulations forbid carrying variances forward from year to the next on the annual audited financial statements,so all of the variances must appear on the divisional income statement by the end of the year). Ms.Cummins was concerned about these revelatioons and attempt to bring up the subject with the president of Merced Home Products but was told that"we all know what Lansing's doing,but as long as he continues to turn in such reports,don't bother him"When Ms.Cummins asked if the board of directors was aware of the situation,the president somewhat testily replies,"Of course they are aware" Required: 1.How did Preston Lansing probably "rig"the standard costs,are the standards set too high or too low?Explain. 2.Should Preston Lansing be permitted to continue his practice of managing reported profits? 3.What should Stacy Cummins do in this situation?