Assignment 3: Capstone Research Project
Due Week 10 and worth 440 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. an eight to ten (8-10) page paper in which you:
1. 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. 2. 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.
3. 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.
4. 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.
5. Research the reporting requirements for lease reporting under GAAP
and International Financial Reporting Standards (IFRS). Based on your
research, Determine 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.
6. Determine 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.
7. 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.
8. 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.
9. Examine the economic effect of restatement of the financial
statements on investors, employees, customers, and creditors. 10.
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, using Times New Roman font (size 12), with one-inch
margins on all sides; citations and references must follow APA or schoolspecific format.
