Sample Capstone Project Paper on Audit on Fortune 1000 Company

The fact the company has for the last three years opted to write down its inventory for tax evasion purposes, then the company is liable for a number of ethical repercussions. First, during its initial public offering, the company opted to provide misleading information to investors. Based on this fact, once the issue is brought to public light the image of the company will be damaged. This might affect the company’s performance now and in the future. Second, for the last three years, the company opted to write down its inventory. Based on this fact, the IRS will definitely charge the company for this offense. Under that circumstance, the company will be guilty of civil fraud and it will be required to pay a civil fraud penalty for the same. Going by the current rate, the company may be fined up to 75 percent of the unpaid tax (Weil, Schipper, & Francis, 2014). This means that together with paying unpaid tax, the company will pay an extra fee of 75 percent of its unpaid tax as fine.

Third, the company may not be able to clean up its mess once everything is brought to light. On one hand, investors might not trust the company in the future for providing misleading information thereby they might not invest their money in the company’s stocks. Those that have already invested their money in the company’s stock might opt to sell their shares whereas those interested in doing so might be discouraged from doing so. In such an event the company might not be able to raise funds in the future from investors. On the other hand, creditors might lose confidence in the company, and in doing so, the company might not be able to access credit from creditors Pratt, & Kulsrud, 2011). In the worst scenario, IRS might scrutinize the company on regular basis to ensure that it does not repeat the same mistake in the future.

In order to prevent the above from occurring in the future, the CFO should do the following. First, the CFO should establish internal control procedures that would among other things report, process, initiate and record all transactions taking place in the company. Such control procedures would include establishing structures, processes of responsibility and authority in the company. Second, the CFO in collaboration with other individuals that play oversight roles in financial reporting processes should create and maintain a culture of honesty in the company, set the right tone and ethical standards in the company. Such practices would deter junior members from engaging in fraudulent practices. Third, once internal control measures have been established, the CFO should take the responsibility of communicating those measures to other employees in the company (Wahlen, Baginski, & Bradshaw, 2014). In the event CFO or anybody else does not communicate those measures to other employees, those measures might not be implemented in the company thereby desired results might not be achieved. Fourth, the CFO should enforce accountability among employees. In such a case, the CFO should ensure that employees are held to account for whatever they do in the company especially in the accounting department.

Negative results on stakeholders and financial statements

If it is established that the company has evaded tax for the three years in question, then the company will be required to pay the tax. At the same time, the company will be penalized for violating accounting practices. In such a case, financial statements for the company will be restated to reflect the tax and other changes in financial performance.  Assuming this takes place as well as applying 10 percent reduction to inventory for the three years, the company will have to pay tax for inventory that were not included into tax returns and pay fine for that tax as indicated earlier on.

As for stakeholders, investors will be the most affected people because their dividend earnings might reduce for some time. In the worst scenario, investors might be forced to forfeit their dividends for some time as the company tries to recover from the shock. In both cases, investors will lose money because they invested in the company expecting to earn dividends. Employees on their part might lose part of their salaries if company’s business will be affected adversely (Stice, & Stice, 2013). Those in top management especially will not receive shares as agreed previously. Creditors on their might be affected as the company tries to work hard to repay the money it owes them. Basically, almost every stakeholder will be affected negatively.

Applicable federal tax laws and regulations

Under section 471 of the internal revenue code taxpayers may write down their inventories under two circumstances. First, they may do so under some market conditions. Second, they may do so under some cost basis. The company in question ought to evaluate the two conditions to establish whether it may do so or not. It may as well evaluate what GAAP guidelines say about this issue. With regard to court cases and rulings, the company should consider the Thor power tool co. v. commissioner case to understand how it should handle inventory write downs (Sandretto, 2011).

Current GAAP on stock option accounting

Under the current GAAP, companies are supposed to disclose information relating to stock-based compensation programs. This means that any time companies opt to reward employees through this method they should disclose such information in their financial statements. Literally, they should expense stock options in their financial statements. Failing to do so as the company in question has done is against GAAP guidelines. Companies do not like this practice because in reality it decreases their earnings. The above notwithstanding, there is no particular method of expensing stock options. However, while doing this, companies should apply methods consistent with fair value measurement, base their practice on existing financial economic theories and specify substantive characteristics of the instruments they use in their practices (Petra, & Dorata, 2012).

Under financial benefit, which involves rewarding employees using part of the money earned as profit, companies include these benefits in their financial statements. By so doing, companies declare lesser profits than they do under stock-based compensation plan. This explains why the company opted to use this method and to exclude the plan in its financial statements. One major risk of using stock-based compensation plan is that it provides inflated earnings that mislead investors. On the contrary, financial benefit program provides a true picture of the position of a company. Therefore, it directs decision making processes in a company in the right direction. Share-based stock appreciation right plan (SARS) on its part entitles employees a number of shares in the company in the event the stocks of the company appreciate during a specified period. Although this method may not necessarily require employees to pay any amount of money to the company to own shares, the method encourages top management team to work hard so that they can own shares in the company. By so doing, the method ensures the company improves its performance (Petra, & Dorata, 2012). Based on this fact, I would recommend the CFO to utilize SARS method rather than using stock-based compensation method that does not add value to the company. This method would encourage the company’s top management team to work hard to own shares in the company.


Reporting requirements for GAAP and IFRS

Ultimately, even if there are certain differences between IFRS and US GAAP guidelines, there are certain similarities between the two. Some people argue that the US GAAP guidelines are better than IFRS guidelines because these guidelines are more specific than IFRS guidelines. Looking at the two guidelines, however, it is clear that similarities outnumber differences (Weil, Schipper, & Francis, 2014).

Under the two guidelines, parties are supposed to specify the type of their leases. In terms of differences, the US GAAP guidelines require gains and losses resulting from operating leases to be amortized over the lease term if only minor parts of assets have been relinquished by the sellers. However, if more than minor parts of assets have been relinquished by the sellers, part or all of the gains and losses resulting from such leases should be recognized on the balance sheets immediately. IFRS on its part requires such gains and losses to be recognized immediately. With regard to capital leases, the above applies for GAAP, but IFRS requires gains and losses resulting from such leases to be deferred and amortized over the lease term (Pratt, & Kulsrud, 2011).

Given that the current leases in the company are treated as operating leases, I would recommend the CFO to embrace what the US GAAP guidelines advocate concerning these leases. By this I mean that I would advise the CFO to recognize gains and losses resulting from operating leases as soon as they are realized if the sellers would relinquish more than minor parts of the assets. If the seller does not relinquish such parts of the assets I would advise the CFO to amortize such gains and losses over the lease term. In so doing, I acknowledge the roles and risks that operating leases, capital leases and off-the-balance sheet financing methods play in businesses. Off-the-balance sheet financing methods are good, but they carry considerable risks. Literally, they behave the same way the company behaved in the last three years meaning that they will be noticed at some point. Operating leases on their part do not appear on balance sheets as liabilities, but they affect future profits when payments are paid towards leased properties. Capital leases on their part appear as assets, but in reality they are long-term assets acquired on loan (Bartoletti, 2012). Therefore, once payment is made towards them its financial effect is reflected on balance sheets.

Single set of international accounting standards

In all fairness, it would appear that a single set of international accounting standards relating to lease accounting would be a good thing. For me, this would stop multinational companies from conducting businesses the way they wish hoping to get away with it. Focusing attention on the case study at hand, it appears that the company intends to take advantage of differing accounting practices in GAAP and IFRS. By this I mean that once the company acquires a global partner, it is highly likely that it will extend its current practices to other parts of the world because leases would be treated differently. Assuming that the company wants to continue with its current practices, then it will switch its leases from operating to capital to fit its wishes. By so doing, the company will be required to defer gains and losses from such leases over the lease term (Wahlen, Baginski, & Bradshaw, 2014). This will not be different from what the company has been doing in the last three years.

In terms of benefits, a single set of international accounting standards would stop companies from engaging in unethical business practices. It would also ensure that similar accounting practices are observed in different parts of the world thereby there would be no difference conducting business in USA and in other parts of the world. In terms of risks, such standards might not be welcome in every part of the world. They might also be manipulated as the current ones (Tysiac, & Pastor, 2012).

Major implications of SAS 99

With regard to this issue, it would be important to start by acknowledging the fact that it is not the responsibility of an auditor to establish whether the matter at hand is a fraud or an error. All that the auditor is mandated to do is to collect evidences relating to the issue and leave the rest to the courts of law to determine whether the issue is a fraud or an error. Based on this understanding then, the implication of SAS 99 would be that the mandate of the auditor would be to collect evidence relating to material misstatement and present those materials to the relevant authorities (Tysiac, & Pastor, 2012). However, while doing this, the auditor should look at the manner in which the issue took place so that it can be easier for those mandated with making the final decision to make the final decision.

Potential material misstatement

With regard to the case study, two types of misstatement would be important to the auditor. The first type in this case would be misstatement arising out of fraudulent financial reporting. As for this misstatement, the auditor would be concerned with evaluating whether the issue arose intentionally or unintentionally. If the issue arose unintentionally probably the issue would be rectified without necessarily taking disciplinary action against the company. However, if the issue arose fraudulently/intentionally, then disciplinary action may be taken against the company to stop it from repeating the same in the future. The second type would relate to misstatement arising out of misappropriation of assets. As for this misstatement, the auditor would be interested at looking possible misappropriation of assets (Pratt, & Kulsrud, 2011). Given that the focus is on particular items, the focus would be limited to these assets because they are the ones causing problems in the financial statement.

Looking at the case study, it would appear that the non-disclosure of the share-based compensation plan was intentional. It would also appear that concealment of important information relating to inventory was also intentional. More importantly, it would appear that the company has for the last three years violated income tax law to safeguard its interests. Based on these facts, the CFO should compel the company to issue a restatement of its financial report (Sandretto, 2011). Failure to issue restated financial statements would result to the following three significant issues. First, the company might continue violating accounting practices. Second, investors might be duped to invest more money into the company hoping to earn more whereas the company is on the verge of collapsing. Third, creditors might be duped into lending more money or supply more goods to the company whereas the company is not able to pay for those goods and services.

Economic effects of restatement

If restatement is to be done, then this means that the profit declared in the past three years is likely to reduce. It also means that the value of company’s assets is likely to be affected as well. In both cases, the company’s assets and earning will be affected negatively. Assuming that earnings that were declared before have already been paid to investors then investors are likely to earn lower dividends now onwards until the issue is resolved. This means that investors might not get dividends for some time and if they get them, those dividends will automatically reduce. Creditors on their part will be affected in terms of the properties they have used to secure their credit to the company. They might also be forced to give the company more time to pay their dues. In this case, financial institutions might be forced to extend the period for loan repayment whereas suppliers might be forced to wait longer to receive payments from the company. Employees on their part might not be affected directly by this practice, but the top executive ones with share-based compensation plan will automatically be affected by restatement (Pratt, & Kulsrud, 2011). In a nutshell, the compensation plan might be nullified. This would mean that the company’s top executives would not be compensated through this plan. Customers do not have a direct link to restatement, but the practice will automatically affect the way the company does business. In so doing, customers might not get goods and services from the company.



Bartoletti, S. (2012). The missing piece in liquidity calculations. Journal of accountancy, 213(4), 34-37.

Petra, S., & Dorata, T. (2012). Restricted stock awards and taxes: what employees and employers should know. Journal of accountancy, 213(2), 44-48.

Pratt, J., & Kulsrud, W. (2011). Federal taxation 2012. Boston: Cengage learning.

Sandretto, M. J. (2011). Cases in financial reporting. Mason, Ohio: South-Western.

Stice, E., & Stice, J. (2013). Intermediate accounting. Mason, OH: South-Western, Cengage Learning.

Tysiac, K. & Pastor, J. (2012). Corporate governance best practices: 10 years after SOX. Journal of accountancy, 214(1), 24-26.

Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and validation. Mason, OH: South-Western, Cengage Learning.

Weil, R. L., Schipper, K., & Francis, J. (2014). Financial accounting: An introduction to concepts, methods, and uses. Mason, OH: South-Western, Cengage Learning.