Assume you are the partner in an accounting firm hired to perform the audit on a fortune 1000 company. Assume also that the initial public offering (IPO) of the company was approximately five (5) years ago and the company is concerned that, in less than five (5) years after the IPO, a restatement may be necessary. During your initial evaluation of the client, you discover the following information:
The client is currently undergoing a three (3) year income tax examination by the Internal Revenue Service (IRS). A significant issue involved in the IRS audit encompasses inventory write-downs on the tax returns that are not included in the financial statements. Because of the concealment of the transaction, the IRS is labeling the treatment of the write-down as fraud.
The company has a share-based compensation plan for top-level executives consisting of stock options. The value of the options exercised during the year was not expensed or disclosed in the financial statements.
The company has several operating and capital leases in place, and the CFO is considering leasing a substantial portion of the assets for future use. The current leases in place are arranged using special purpose entities (SPEs) and operating leases.
The company seeks to acquire a global partner, which will require IFRS reporting.
The company received correspondence from the Securities and Exchange Commission (SEC) requesting additional supplemental information regarding the financial statements submitted with the IPO.
Write an eight to ten (8-10) page paper in which you:
Evaluate any damaging financial and ethical repercussions of failure to include the inventory write-downs in the financial statements. Prepare a recommendation to the CFO, evaluating the negative impact of a civil fraud penalty on the corporation as a result of the IRS audit. In the recommendation, include essential internal control procedures to prevent fraudulent financial reporting from occurring, as well as the major obligation of the CEO and CFO to ensure compliance.
Examine the negative results on stakeholders and the financial statements of an IRS audit which generates additional tax and penalties or subsequent audits. Assume that the subsequent audit and / or additional tax and penalties result from the taxpayer’s use of an inventory reserve account, applying a 10 percent reduction to inventory over three (3) years.
Discuss the applicable federal tax laws, regulations, rulings, and court cases related to the inventory write-downs, and explain the specific relevance of each to the write-down.
Research the current generally accepted accounting principles (GAAP) regarding stock option accounting. Evaluate the current treatment of the company’s share-based compensation plan based on GAAP reporting. Contrast the financial benefits and risks of the share-based compensation stock option plan with the financial benefits and risks of a share-based stock-appreciation rights plan (SARS). Recommend to the CFO which plan the company should use, and provide the correct accounting treatment for each.
Research the reporting requirements for lease reporting under GAAP and International Financial Reporting Standards (IFRS). Based on your research, create a proposal for future lease transactions to the CFO. Within the proposal, discuss the use of off-the-balance sheet financing arrangements, capital leases, and operating leases, and indicate the related business and financial risks of each.
Create an argument for or against a single set of international accounting standards related to lease accounting based on the global market and cross border leases of assets. Examine the benefits and risks of your chosen position.
Examine the major implications of SAS 99 based on the factors you discovered during the initial evaluation of the company. Provide support for your rationale.
Analyze the potential for a material misstatement in the financial statements based on the issues identified in your initial evaluation. Make a recommendation to the CFO for the issuance of restated financial statement restatement. Identify at least three (3) significant issues that can result from the failure to issue restated financial statements.
Examine the economic effect of restatement of the financial statements on investors, employees, customers, and creditors.
Use five (5) quality academic resources in this assignment. Note: Wikipedia and other Websites do not qualify as academic resources.
Your assignment must follow these formatting requirements:
Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included
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An Audit of the Financial Statements of a Fortune 1000 Company
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An Audit of the Financial Statements of a Fortune 1000 Company
The Financial and Ethical Repercussions of non inclusion of Inventory Write-Downs in Financial Statements
The errors that are discovered in the previous financial statements often require companies to make financial restatements. The generally accepted accounting principles (GAAP) and the Sarbanes-Oxley Act, demand for financial restatement upon a proof of materiality. The inventory write-down to which the Fortune 1000 company in the case is under investigation is an example of an irregularity in the company’s financial statements, which warrants financial restatement. The failure by the Fortune 1000 company to include inventory write-downs on tax returns in the previous financial statements poses ethical and financial repercussions to the company.
According to (Skalak, Golden, Clayton & Pill, 2015) inventory write-downs must be charged on the company earnings and the same reflected in the income statement. Since the Fortune 1000 company failed in this respect, there was a possibility of overestimation of the company earnings persistence, which is a fraud that raises financial concerns. The overestimation of company earnings meant the company top executives were likely to be overcompensated, which negatively affects the company finances. In addition, it could lead to the loss of goodwill, credit rating, and investor confidence. The fraud penalties that come with lack of inclusion of inventory write-downs, the possible loss of investor confidence and goodwill, will negatively affect the company’s financial position. For example, (Meade, 2013) points that the restatement of financial statement of Enron led to drop in the company stock prices, reduced credit rating, losses in the following financial year, and finally a collapse of the company.
The ethical concerns inventory write-downs on tax returns that were not in the previous financial statements include the erosion of trust from the stakeholders and shareholders. There will be a reduction in the belief of the company accountants and auditors on their role as the custodians of the company finances. The failure to include inventory write-downs is unethical as the company will be deemed not to be acting in the best interests of the stakeholder interest. This could negatively affect the financial position of the company in the long-term. As partner in an accounting firm selected to audit the 1000 Fortune Company, I would recommend to the company CFO to put in place effective……………………………………………………………………………………………………
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