Writing Assignment 3: Capstone Research Project

Capstone Research Project
Student’s Name
Institutional Affiliation
Capstone Research Project
1 Evaluate any damaging financial and ethical repercussions of failure to include the inventory write-downs in the financial statements.
Inventory write-downs are the costs of operation that management or organization has incurred. They are documented through different forms of financial statements in a company. Investors might overestimate their earnings if they fail to include inventory write-downs in the different forms of financial statements, which is one of the ethical concerns in the operation of organizations. Moreover, the omission of inventory write-downs might raise ethical issues, such as loss of confidence among shareholders, a cover-up of the different consequences of fraud, and overcompensation of the top executives. Therefore, it is worth to mention that fraud of financial statements might cause reduction of value for the corporation’s stock.
IRS defines the treatment of a write-down as one of the forms of fraud, especially after the establishment of a cover-up on a transaction. Arguably, most corporations have applied inventory write-downs as a way of lessening taxable revenue and conceal the failures of top-level management. A civil fraud consequence by IRS results in seventy-five percent of unpaid federal tax as a result of financial fraud (Federal Tax Procedures, 2012). A portion of an underpayment of tax that has no any form of association with fraud might result in accuracy consequence. Furthermore, a company might suffer from devaluing of resources value, thus, making it less attractive to the different venture capitalists.
Accounting Information System (AIS) is one of the relevant techniques of gathering and recovering financial information to the relevant stakeholders in order to guide their decisions. Importantly, the process helps in detecting and addressing any form of fraudulent dealings in the business setting as a way of enhancing performance and profitability. According to Deliotte (2014), one of the major requirements in the audit process is separate disclosure of the relevant income statements for the inventory write-downs being low persistence. Besides, it is imperative to provide sufficient information that can facilitate a comprehensive understanding of the underlying issues and have an effect on the significant events in the auditing process.
One of the involved risks of failing to include inventory write-downs is that the investors might overestimate their proceeds persistence, which is one of the major ethical issues in the business environment. Moreover, such an incident might result in various financial and ethical problems, such as loss of brand values, goodwill, excessive compensation of the manager, loss of confidence among relevant stakeholders in the management team, and concealment of different forms of fraud penalties. In most cases, the accountants, who condone lesser full reports cause violation of the accounting standards. Besides, the workers breach trust and ethical standards of professional behavior.
2 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.
As one of the partners of the Practicing Firm, I would advise the CFO and CEO of the company to be aware of the repercussions of negative assessments of IRS. In the context of the company, it was apparent that inventory write-downs were unrealistic and only included in the tax returns for computation. However, the company failed to include the relevant figures in the income statement. Therefore, the IRS examination team could consult the frontline manager and the advisor of fraud technical. In such a case, the company would incur a civil fraud penalty of seventy-five percent of the owed tax that is attributable to fraud would be levied to the company. Besides, it would be possible to recover interest on the penalty amount.
Considerably, I would make recommendations on the implementation of internal controls to the CFO and CEO in order to prevent any form of fraud on the financial statement. For instance, I would recommend the need for matching revenues and cash flows as an appropriate way of creating the right culture in the organization. Besides, the CEO would need to introduce an effective whistleblower program to prevent any form of fraudulent dealings. Notably, it would be appropriate for the company to segregate the accounting function from the transaction. Performing workers as a way of enhancing nontolerance of frauds (Deloitte, 2014). Furthermore, I would recommend continued education and mentorship among the workers on the need for analyzing swings in liabilities and assets.
Internal controls are crucial aspects of the effective operation of an organization. It is one of the joint responsibilities among the CEO and CFO regarding the presentation on the financial statements. The two professionals sign different forms of financials before the auditors and board of directors as they are responsible for all the financial reports in a company. For this reason, I would strongly recommend the need for practicing internal controls to the CFO and CEO in order to prevent any form of financial frauds and breach of ethical standards. Just as indicated in the results of IRS assessment, the company had incurred a civil fraud and, thus, facing a risk of penalty. It would be important for the IRS examination team to collaborate with Fraud technical advisor and frontline manager to determine the repercussions of imposing a penalty.
A business environment with positive internal controls can help in preventing an occurrence of falsified financial reporting. It is important for the top management to address any inappropriate and unlawful actions that could result in devastating impacts in business. For this reason, it would be important to incorporate adequate supervision, authorization, physical protection of resources, and separate duties in the internal systems of control. Just as aforementioned, the CEO and CFO have a core obligation of enhancing the adequacy of internal controls and assess the underlying mechanisms. Accordingly, it is imperative to report all the issues that relate to the internal controls.
3 Examine the negative results on stakeholders and the financial statements of an IRS audit which generates additional tax and penalties or subsequent audits.
Federal tax regulations and relevant laws facilitate write-downs on inventory. In most cases, writing off a damaged, stolen, or unsellable inventory might affect tax bills. In accordance with federal tax laws, a company should determine inventory value through the different forms of IRS valuation strategies. The costs of inventory including allied expenses and transportation are aggregate. Besides, it is apparent that lower costs of market value could have an effect on inventory. If a company incurs a loss of inventor as a result of either theft or a tragedy, an organization could claim a write up as part of the costs of sold goods.
Besides, the case of “West Covina Motors, Inc. has a close connectedness to inventory write-downs. In the case, the IRS determined the failure of taxpayers in substantiating inventory write-downs and caused violation of IRC 471 through the use of inventory reserve account. The taxpayer in the case was using lower market value as the core valuation strategy of inventory. They write down valuation value in the years that decline started occurring even when the goods were not sold. However, the court ruled that the reduction was not permissible in tax computation.
4 Discussion of the applicable federal tax laws, regulations, rulings,...