Financial And Ethical Implications Of A Civil Fraud Penalty On The Corporation

1163 Words 5 Pages
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.
Inventory write-downs are recorded by reducing the amount reported as inventory. Inventory write-downs include the operating expenses that the management team or the company has incurred. Failing to include the inventory write-downs in the financial statements is a violation and this could cause investors to overestimate earnings raising ethical concerns. Omitting inventory write-downs could also raise other financial and ethical issues like excessive compensation of corporate managers, concealment of fraud penalties and loss of confidence in the management by the shareholders. Financial statement fraud leads to a decrease in the market value of company stock of up to a thousand times the amount of the fraud (Jack, Levin, Craig, & Primis, 2002).
The IRS upon discovering the concealment of the transaction has labelled the treatment of the write-down as fraud. Companies have been using inventory write-downs to reduce their taxable income or even to hide the failures of managers. A civil fraud penalty by the

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