Sarah Aukland is in a pinch. She needs money to pay for some unexpected medical expenses incurred by her family during the pandemic. Ms. Aukland is the chief financial officer (CFO) of a small manufacturing company. Because of her money issues, she looked for and found a higher paying job that she will start in a month. She hasn't informed her current employer. She is concerned that her year-end bonus may be affected if her boss learns of her plan to leave. She knows her behavior is less than honorable but she believes that she in entitled to the bonus. Her boss makes twice what she does! She is considering an opportunity to boost the bonus.

Ms. Aukland's bonus is based on a percentage of net income. Her company recently introduced a new product line that required substantial start-up costs. GAAP requires these costs to be expensed in the current accounting period but if the costs are classified as product cost, net income will be higher. By the time the auditors discover the misclassification, Ms. Aukland will be at her new job. If her new employer hears about it, she can just claim ignorance.

Required:

3. Explain how the misclassification could affect income taxes.

4. Review the Statement of Ethical Professional Practice shown in Exhibit 10.17 - is Ms. Aukland's misclassification of the start-up costs a violation of this statement?