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:

  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, 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.
  6. 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.
  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 at least five (5) quality academic resources in this assignment. Note: Wikipedia and similar websites do not qualify as academic resources. You have access to Strayer University’s Online Library at or iCampus University Library Research page at

Your assignment must follow these formatting requirements:

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  • This course requires use of new Strayer Writing Standards (SWS).  The format is different than other Strayer University courses. Please  take a moment to review the SWS documentation for details.
  • Be  typed, double spaced, using Times New Roman font (size 12), with  one-inch margins on all sides; citations and references must follow SWS  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 in the required assignment  page length. 

The specific course learning outcomes associated with this assignment are:

  • Apply the proper accounting rules and make recommendations to ensure compliance with generally accepted accounting principles. 
  • Determine the appropriateness of decision making in terms of professional standards and ethics 
  • Apply advanced federal taxation concepts to business situations.
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