A software company has consistently met the earnings expectations of Wall Street for 13 quarters. Its CEO promises this trend will continue through the remaining three quarters of fiscal year 2023 based on the firm’s ability to generate new software. In looking at the firm’s financials for the prior four years, you notice a trend that the percentage of capitalization of R&D costs has increased each year as follows:

Year	2019	2020	2021	2022
Percentage of R&D expense capitalized	2%	12%	22%	29%
R&D Expense as a Percentage of Sales	18%	18%	15%	12%

For the prior four-year sales revenue and gross profit margin have remained flat, neither increasing or decreasing.

1. What warning signs exist at this firm and what schemes may the warning signs indicate?

2. How would these schemes impact the financial statements?

3. What other information could you look for that might address the risk that the warning signs indicate?