Question

CA19-7 ETHICS (Deferred Taxes, Income Effects) Stephanie Delaney, CPA, is the newly hired director of corporate taxation for Acme Incorporated, which is a publicly traded corporation. Ms. Delaney’s first job with Acme was the review of the company’s accounting practices on deferred income taxes. In doing her review, she noted differences between tax and book depreciation methods that permitted Acme to realize a sizable deferred tax liability on its balance sheet. As a result, Acme paid very little in income taxes at that time. Delaney also discovered that Acme has an explicit policy of selling off plant assets before they reversed in the deferred tax liability account. This policy, coupled with the rapid expansion of its plant asset base, allowed Acme to “defer” all income taxes payable for several years, even though it always has reported positive earnings and an increasing EPS. Delaney checked with the legal department and found the policy to be legal, but she’s uncomfortable with the ethics of it. Instructions Answer the following questions. (a) Why would Acme have an explicit policy of selling plant assets before the temporary differences reversed in the deferred tax liability account? Accelerated depreciation method for tax commitments and straight-line method for their financial statements would be used by Acme. Following with short-term alterations that are inverted. The fiscal accounting income is taxed beyond the year. They may be obligated to pay if submitted early due to devaluation. Acme could sell the plant possessions in directive. The plant possessions sold with improvement to sales could be tax because it is a capital gains tax rate is positive. (b) What are the ethical implications of Acme’s “deferral” of income taxes? The ethical implications of Acme’s deferral of income taxes is like pawn off plant possessions impermanent modified to converse meaning inferior to income tax that may not be the Acme’s right accountability. Deferring of income taxes is not illegal but may be viewed a shady to investors. (c) Who could be harmed by Acme’s ability to “defer” income taxes payable for several years, despite positive earnings? The investors and other stakeholders such as creditors of the entity can potentially be harmed to some extent through the deferment of income taxes payable for several years. In later years, there is no guarantee that future earnings can support the aggregated payment of deferred income taxes payable. This action could hinder future cash flows and require that Acme utilize its plant assets bases which could take a significant length of time (Kieso, Weygandt, & Warfield, 2016). Further after taking such action the reconstruction of such a large asset base can be costly, and further impact cash flows and as a result investors and creditors. Payment of income taxes payable during a period of positive earnings would reduce the risks associated with their deferment for the company’s stakeholders. Among the many stakeholders of a company like Acme, the government, and the people it supports such as individual investors, creditors, and citizens, to which these taxes are owed could be negatively impacted or hindered by such action (Kieso, Weygandt, & Warfield, 2016). Governments are reliant upon the payment of taxes by companies to fund programs and provide aid to those in need which in past years can include public entities (Kieso, Weygandt, & Warfield, 2016). Therefore, the company may not realize that they are potentially negatively impacting themselves while also all those that rely upon the government for aid and support during times of loss and uncertainty. Deferment will also require that other entities and citizens pay more for the temporary differences that are of benefit to Acme. (d)In a situation such as this, what are Ms. Delaney’s professional responsibilities as a CPA? As indicated by the legal team the policy is legal. However, if she is uncomfortable with the ethics of the policy, she must communicate her worries to the management team at the highest level of the company such as members of the board or auditors. As a CPA she must she must practice objectivity and integrity and at the same time communicate any ethical concerns that she might have.

Answer 1