Instruction: Read the following about ABC Corporation and answer the below below.

Question: . What action should be taken regarding the 2022 financial statements?

Background:

ABC Corporation has recently completed its 2022 10K filing (annual report to the SEC). The filing was made in a timely fashion. The auditors reviewed the filing with assistance from the internal auditors in areas considered well within the expertise and experience level of the internal audit staff. The CEO and CFO, in accordance with Sarbanes Oxley, have certified to the financials and the board of directors and audit committee are confident they asked all the right questions of the external auditors and internal audit staff. The external auditors have concurred with managements assessment of internal control requirements and complemented the company on its fine operations and controls. It was a good year for ABC in meeting profit targets and other financial goals. Pension accounting calculations have completed, deferred compensation for board and officers has been accounted for and communications have been sent to participating parties.

The CEO and CFO indicated in the 2022 earnings call with securities analysts that keen oversight by management and a close eye over costs enabled the company to attain its earnings targets. Financial controls are (and always have been) a key part of the companys strategy. Because of the companys financial performance bonus payouts were made to all employees. Management made these statements in large part to the close partnership that has been formed between the external and internal auditors. The SOX evaluation done each year required the two audit groups to work closely together to first, ensure that all aspects of controls relative to SOX were covered and second, to save costs in that both teams would not have to look at the same documents and talk to the same people on the same issues.

Current Situation February 15, 2023 In preparation for the first quarter 2023 10Q filing and the first quarter 2023 close, a senior accountant within the controllers area is looking at the spreadsheets supporting the capitalization of software costs (actual and budgeted) for the current quarter and actual costs for the previous year (2022). She notices a significant variance in expected capitalization of software costs for the current period (Q1 2023) compared to same period last year (Q1 2022) and asks her supervisor what may have caused the change. In reviewing the spread sheets, they discover four million dollars is still on the schedule for a software development project costs incurred in first quarter of 2021 that management later decided to halt in the third quarter of 2022 and write off.

The accountant and her supervisor realize that these costs should have been expensed in 2022 and bring this error to the attention of the controller. It is obvious to the controller that this error causes previously reported earnings for 2022 to be incorrectly stated. This error represents about 4% of earnings. The senior accountant reminds the controller that these spreadsheets were reviewed in detail for the yearend audit by the internal auditors and reviewed in summary by the external auditors and if there was a problem it should have been caught by one of the audit teams. The controller informs the CFO and the CEO. A special audit committee meeting was held and the committee makes it clear that decision needs to be made ASAP as to what to do. The external auditors say they relied to a great extent on the internal auditors, based on managements recommendation and managements assurance that information technology was a primary area of SOX review and clearly well controlled. The error is just under the external auditors materiality threshold, and they state if management can live with the error they probably can continue to support an unqualified opinion. The audit committee wants a recommendation from the CEO and CFO. The CEOs concern is that the company is considering additional financing either through equity and/or issuance of bonds. The drafting of financing documents is underway. The CFO wants a recommendation from the controller, internal audit director and external auditors whether to restate the 10K. Restating the 10K causes the calculation for bonuses to eliminate all payouts. This has a material effect on pension and deferred compensation calculations. A decision must be made quickly as work is underway on the first quarter 10Q and the aforementioned financing materials. The Audit Committee Chair has stated that somebody better get to work because if we do nothing, we will not only have an incorrect third quarter 2022 10Q and 10K out there, but we will be working on a bogus 2023 10Q and God knows what else!!