Ethics: Deferred Taxes, Income Effects
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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 is uncomfortable with the ethics of it.
Answer the following questions in the Discussion Board:
- Why would Acme
have an explicit policy of selling plant assets before the temporary
differences reversed in the deferred tax liability account?
- What are the ethical implications of Acme’s “deferral” of income taxes?
- Who could be harmed by Acme’s ability to “defer” income taxes payable for several years, despite positive earnings?
- In a situation such as this, what are Ms. Delaney’s professional responsibilities as a CPA?
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Accounting for income taxes. Intermediate accounting (16th ed.). (p. 1107). New York, NY: John Wiley & Sons, Inc.