Comminc Industries (CI) is a leader in delivering communications technology that powers global commerce and secures the world's most critical information. Its shares trade on the Canadian and U.S. national stock exchanges.
The company had been experiencing unprecedented growth, but then, in 2011, industry demand for the company's services and products declined dramatically due to an industry realignment, an economic downturn, and a tightening in global capital and product markets. By the end of 2013, the industry stabilized and the company began to enter a turnaround
period after significant downsizing.
In 20!3, employee morale was very low because of all the downsizing. Many employees were being actively recruited away from CI. Management decided to set up bonus programs for employees who stayed to see the company through the difficult times and back to profitability. Under one plan, every employee would receive a bonus in the first quarter that the company achieved enough profit to cover the bonus costs. In order to help achieve profitability, the CFO met with the managers of his divisions and established profitability targets and what he referred to as "roadmaps" that showed how these targets could be achieved. The roadmaps included statements that the profits could only be achieved through the release from the statement of financial position of excess provisions (that is, provisions for obsolete inventory and bad debts). The provisions had been overprovided for in earlier years in an effort to "manage" profits.
In 2014, the company came under scrutiny from the securities regulators. The government notified it of a criminal investigation into alleged accounting irregularities. In addition, there were several class action lawsuits outstanding against the company by shareholders alleging that CI had provided misleading information to them in the financial statements for 2012 and 2013. Once news of this was released, credit rating agencies significantly downgraded their ratings of CI’s securities. As a result of this negative activity, the company had not released its financial statements for 2014 and was now in breach of the stock exchange requirements to file financial statements. Although the stock exchanges had not done so, they now had the power to delist CI's shares.
The controller of CI must now finalize the financial statement’s and has come across the following information.