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9 pages/β‰ˆ2475 words
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5 Sources
Style:
APA
Subject:
Accounting, Finance, SPSS
Type:
Essay
Language:
English (U.S.)
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Topic:

Financial Statements and Restatements

Essay Instructions:

Assignment 3: Capstone Research Project
Due Week 10 and worth 330 points
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 at least five (5) quality academic resources in this assignment. Note: Wikipedia and similar websites do not qualify as academic resources

Essay Sample Content Preview:

Capstone research project
Name
Institution/ Affiliation
Financial statements are vital elements that provide critical information about a company financial health. Typically, financial statements are prepared based on the daily bookkeeping to help track the flow of funds and resources in an organization (Cheng et al., 2017). For instance, write-down inventory reduces the net income and the amount reported in the balance sheet for owners’ equity. Consequently, the information offered by the statements is vital as it help organization to benchmark as well as provide a feedback on the overall direction. Different stakeholders such as creditors, employers, government, shareholders and management depend on financial statements to make informed decisions. In the preparation of financial statements, most organizations use Internal Accounting Standards. Nevertheless, these standards do not provide for the discrete disclosures of write-downs in the income statement (Alali & Wang, 2017). For example, if the inventory write-downs are not included in the financial statements an investor might overvalue the performance of the organization leading to uninformed decision.
Usually, ethics in accounting focus on making better moral decisions in the preparation, presentation and disclosure of financial information. Inventory write-downs involve the reduction of an inventory value where the market values declines below the book value on the balance sheet. In normal operations business cannot avoid having stocked inventory unless it is operating under just- in-time approaches (Roscoe & Blome, 2019). As such an inventory lifespan gets to a point it is not sellable or it is entirely damaged or they are stolen. Under this circumstances, write-downs happens by either reducing the value of the inventory or removing the entirely. Inventory write-downs are an expense that reduces an organization net income and shareholders’ equity. Further, the inventory write-downs leads to decline on the value of inventory as well as the cost of goods available for sale at any particular period. In a nutshell, inventory write-downs affect both the income statement and the balance sheet. Usually, if the write-down is off insignificant value, it is accounted in the cost of goods sold; otherwise it is accounted in a separate impairment loss on the income statement where the stakeholders can access the impact of such items (Cheng et al., 2017). Failure to include the write-downs in the financial statements leads to inaccurate information to the stakeholders on the performance and financial position of the organization. As a result, the stakeholders may end up in making of uninformed decisions based on the provided data. For example, an organization income statement may portray a positive organization performance which might not be necessary true if the obsolete and damaged goods are omitted.
The civil tax fraud penalty applies to any underpayment of tax due to fraud. Normally, the penalty is computed based on the understatement (Lopresti, 2019). As partner in the accounting firm, part of the responsibility is update the chief financial officer on the impacts of internal revenue service (IRS) assessment. As the organization failed to expense or dis...
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