Reference no: EM132818267

"You can't write up assets," said Harry Smith, Internal Audit Director of Mason International Inc., to his boss, Jim Watson, Vice-President and Chief Financial Officer. "Nonsense," said Jim, " can do this as part of a quasi-reorganization of our company." For the past three years, Mason International, a farm equipment manufacturing firm, has experienced a downturn in its profits as a result of stiff completion with overseas firms and a slowdown in the North American economy. The company is hoping to turn a profit by modernizing its property, plant and equipment. This will require Mason International to raise a lot of money. Management is very optimistic as to the future of the company and they anticipate the economy will rebound and enters a significant growth period.

• Over the past few months, Jim has tried to raise funds from various financial institutions, but they are unwilling to lend capital. The reason they give is that the company's net book value of fixed assets on the balance sheet, based on historic cost, is not large enough to sustain major funding. Jim attempted to explain to bankers and investors that these assets are more valuable than their recorded amounts, especially since the company used accelerated amortization methods and tended to underestimate the useful lives of assets. Jim also believes that the company's land and buildings are substantially undervalued because of rising real estate prices over the past several years.
• Jim's proposed solution to raise funds is a simple one: first, declare a large dividend to company shareholders that result in Retained Earnings having a large debit balance. Then, write up the fixed assets of Mason International to an amount that is equal to the deficit in the Retained Earnings account.

Instructions

Problem 1: Adopt the role of the internal auditor and discuss the financial reporting issues. Mason is thinking of going public. Present your discussion in the form of:

a) Overview

b) Analysis

c) Conclusion and recommendation