Ms. Hannah Morse is a councilor for the growing town of Evergreen. She has approached you, as a friend and a public accountant, with her concerns over the draft financial statements of Evergreen for their most recent year- end, March 31, 20X2. She is concerned by the dramatic increase in revenue shown in the financial statements for the town.
Her suspicions are based on her work on the town compensation committee over the past year. She informs you that the town controller had requested a raise, which had yielded a lot of discussion at the committee. He had indicated that his compensation had not kept up with his increased workload that had resulted from the growth that the town was experiencing. After considerable discussion, the compensation committee agreed to a modest raise to the base salary. In addition, to avoid falling behind again, it agreed to the controller’s request to pay a bonus based on town revenues. The bonus would be based on the towns consolidated revenue as it was the best figure to track the town’s growth. Each year the bonus would be paid on revenues in excess of 20X1’s level of revenue.
Ms. Morse believes that the apparent increase in revenue may not be legitimate but is not sure where to look to determine what has occurred. To assist you, she provides you with a copy of the draft annual report for the town. She also informs you that last year their auditor had informed the audit committee that Evergreen’s statements were conservative, high-quality financial statements.
Your review of the financial statements finds a substantial increase in property tax revenues and transfers from the provincial government. You find the following in the notes:
• Property taxes are recorded at their gross amount when the taxable event has occurred. Costs related to tax collection are recorded as expenses and not as a reduction in tax revenue.
• Government transfers from the province are recognized in Evergreen’s financial statements only when the province has also recognized the transfer.
Further, in the discussion accompanying the statements you also note the following:
• Town revenues: The major sources of revenue for the town are property taxes and government transfers from the province. Transfers from the province are received to help subsidize the town’s recreational pro-grams and to assist in the capital costs of constructing new streets. Substantial funds are received in advance of construction projects.
• Town expenses: The town incurred a number of expenses in the operation of the town. Several of these expenses were to encourage business to set up and stay in the town. The major components of this pro-gram were an advertising campaign and a rebate on property taxes.

Prepare your notes for your discussion with Ms. Morse on what you think may have happened. Also include any recommendations that you deem appropriate based on your preliminary review.

  • CreatedMarch 13, 2015
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