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APA
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Accounting, Finance, SPSS
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Research Paper
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English (U.S.)
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Topic:

Financial Statements, Inventory Write-Downs, and the Federal Tax Laws

Research Paper Instructions:

Scenario
You are the partner in an accounting firm hired to audit a Fortune 1000 company. The initial public offering (IPO) of the company was approximately five years ago and the company is concerned that, in fewer than five years after the IPO, a restatement may be necessary. During your initial evaluation of the client, you discover the following:
The client is undergoing a three-year income tax examination by the Internal Revenue Service. A significant issue in the IRS audit involves inventory write-downs on the tax returns that are not included in the financial statements. Because of the omission 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 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 a request from Securities and Exchange Commission (SEC) for additional supplemental information regarding the financial statements submitted with the IPO.
Instructions
Write a 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 impact of a civil fraud penalty on the corporation as a result of the IRS audit. 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 adverse effects on stakeholders and the financial statements of an IRS audit resulting in additional tax and penalties or subsequent audits. Assume that the subsequent audit and/or additional tax and penalties stem from the taxpayer’s use of an inventory reserve account, applying a 10 percent reduction to inventory over three 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 to 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 discovered during your 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 statements. Identify at least three 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 quality academic resources in this assignment from the Internet. Note: Wikipedia and similar websites do not qualify as academic resources.

Research Paper Sample Content Preview:

Capstone Research Project
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Capstone Research Project
The main aim of the financial statements is to provide general performance information of an organization or a company. Various stakeholders such as the management, employees, investors, and creditors use the financial statements information to make decisions. When preparing the financial statements, the organization uses International Accounting Standards (IAS). There are no separate disclosures of the write-downs that are expected to be in the income statement according to the IAS; however, write-down information should be availed to facilitate a sufficient understanding of the income statements. For instance, an investor may overestimate the earnings due to a lack of inventory write-downs that may bring about ethical issues (Schroeder et al., 2019). In addition, inventory write-down has many impacts on both the balance sheet and the income statement since they are normally treated as an expense that reduces the tax liability and net income. Retained earnings are reduced by reducing net income, which in turn reduces the shareholder's equity in the balance sheet. The balance sheet inventory asset value reduces to its Net Realizable Value (NRV). Reduction of the net income may bring about ethical issues to the shareholders due to a decrease in Earning Per Share (EPS) if the inventory write-downs are not disclosed.
As an accounting firm partner, I am mandated to inform the CFO of the negative Internal Revenue service assessment consequences. An observation by the IRS on including inventory write-downs to lower the tax payable, whereas there are no disclosures in the financial statements, is not allowable. In this case, underpayment of the taxes attracts a civil tax fraud penalty which is computed based on the understatement. Civil tax fraud can attract up to 75% of the penalty of underpayments (Levi, 2010). Once the interest is factored in, the accrued interest on the penalty can even exceed the tax amount that would be payable. Essential control procedures such as segregation of the duties, which involves different employees were performing other functions to reduce any possibility of fraud. Implementation of the whistleblower program, which encourages the employees to report any fraudulent activities observed without fear of action against the employees, especially on the established accounting practices and procedures, are part of the controls that will help in curbing fraudulent activities in the organizations. To ensure compliance, the CEO and the CFO should ensure that the preventive measures such as revenue matching with cash flows and instilling the right culture are all implemented.
According to the examination by the IRS, it's apparent that over the last three years, the company has been writing down some of the inventories by a margin of 10% due to loss or damage. The case can be referred to the criminal prosecution by IRS or instill a penalty to the company. The CFO and the CEO can also be prosecuted since they are liable for the omissions. If the accounts are further audited and the auditors discover more discrepancies, the investors as part of the stakeholde...
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