Question - Your have a long time client, Poliakon, Inc. that has been in the manufacturing industry for 50 years. The owner Bruce Poliakon has become increasingly dissatisfied with the business climate and tax structure. He has consistently asked you about ways to minimize the tax burden on his company. You have given him sound, legal advice for many years. In your year-end review of the financial statements of the company you noticed some transactions that seemed a bit odd. You noticed a significant amount of cost of goods sold that were not associated with recorded sales. When you asked about this, Bruce told you that he had joined an organization that connects business in various industries for the purpose if exchanging services. When Poliakon, Inc. sells products to one of the member companies no payment is received. The member receives "points" in an account that can then be exchanged for products or services from one of the other member companies. Bruce tells you the concept is called bartering widely used across the country. The bartering company (parent company) told him it is completely legal and keeps accurate records of how much each company puts into the bartering account and spends from the bartering account. All required federal and state notifications have been made by the parent company.
You question whether these transactions have been properly recorded and tell Bruce you need to do some research before you release the financial statements.
Directions:
1. Research the related GAAP and FASB code to draft a memo to the client file with your findings listing all appropriate citations. Memo format is attached.
2. Draft a client letter to Bruce communicating you findings and any corrections that need to be made for the financial statements to be in accordance with GAAP and FASB code.
Note: There is no fraudulent intent by your client. The issue here is procedural not ethical. You may want to cite an ethical foundation to support your recommendations, but there is nothing illegal going on.