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